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HEDGE FUNDS

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Page 1: Hedge funds

HEDGE

FUNDS

Page 2: Hedge funds

WHAT IS HEDGING?

Simplistic definition to get started:

An investment made in order to

reduce the risk, of adverse price movements in a security,

by taking an offsetting position in a related security, such as

an option or a short sale.

Page 3: Hedge funds

TRIVIA!

The use of the term "hedge" in the US originally was coined by the agriculture industry. Farmers were the first "hedgers" by selling crops

or cattle yet to be harvested at a price for future delivery.

In doing so, they locked in a price today and were "not exposed" to future market fluctuations.

In essence, they "hedged" their market exposure for the period of time it took them to harvest and deliver their product.

Page 4: Hedge funds

GOAL OF THE FUND

The primary aim of most hedge funds is to

Reduce volatility and risk while attempting to preserve capital, and deliver positive returns under all market conditions.

Page 5: Hedge funds

HISTORIC HEDGING

Historically the hedging strategy centered around this logic: Equities on the "long side" outperformed up

markets. At the same time, the equities on the "short side" did not create a drag on performance, and possibly even added to the portfolio’s return since there are always stocks that lose value, even in a bull market.

In a market correction, the short portfolio would outperform the long portfolio, or at least "hedge" or reduce the slide in the long portfolio’s value.

Page 6: Hedge funds

ORGANISATIONAL STRUCTURE : HEDGE FUNDS

Page 7: Hedge funds

TYPES OF HEDGE FUNDS

Long-Short Funds: Take both long and short positions in securities in hopes of using superior stock picking strategies to outperform the general market.

Market-Neutral Funds: A sub-type of a long-short fund, however fund managers attempt to hedge against general market movements (thus the name "market neutral").

Event-Driven Funds: An attempt to capture gains from market events, such as mergers, natural disasters or political turmoil.

Macro Funds: Take directional bets on the market as a whole, either long or short, based upon research and/or the fund's philosophy.

Page 8: Hedge funds

HOW IS HEDGE FUND DIFFERENT FROM MUTUAL FUNDS

Hedge funds traditionally reserved for clients with initial minimum investment of $1 million. Mutual fund companies beginning to offer hedge fund products to wider client base

There are 5 key differences between them based on:

1. Performance Evaluation2. Level of regulatory control3. Basis for Remuneration of Management4. Portfolio Protection5. Dependence on Markets

Page 9: Hedge funds

DIFFERENCES

Performance Evaluation: Mutual funds are measured on relative

performance compared to a relevant index or to other mutual funds in their sector

Hedge funds are expected to deliver absolute returns under all circumstances, even when the relative indices are down

Level of Regulation: Unlike hedge funds, mutual funds are highly

regulated, restricting the use of short selling and derivatives. Makes it difficult to outperform market, or protect assets in downturn.

Page 10: Hedge funds

DIFFERENCES

Remuneration for Management Mutual Fund managers are paid based on a % of

AUM. Hedge funds pay managers performance-related incentive fees plus a fixed fee

Portfolio Protection Mutual funds are not able to effectively protect

portfolios against declining markets other than by going into cash or by shorting a limited amount of stock index futures

Hedge funds are often able to protect against declining markets by using various hedging strategies, and can generate positive returns even in declining markets.

Page 11: Hedge funds

DIFFRENCES

Dependence on Markets The future performance of mutual funds depends

on the direction of the equity markets. The future performance of many hedge fund

strategies tends to be highly predictable and not dependent on the direction of the equity markets.

Page 12: Hedge funds

FACTS ABOUT HEDGE FUND INDUSTRY

Estimated to be a $2 trillion dollar industry, with about 10,000 active hedge funds.

Includes a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage.

Most hedge funds are highly specialized, relying on the specific expertise of the manager or management team.

not dependent on the direction of the bond or equity markets unlike conventional equity or mutual funds (unit trusts).

Hedge fund managers are generally highly professional, disciplined and diligent.

Page 13: Hedge funds

TOP HEDGE FUNDS OF 2013

Page 14: Hedge funds

CONCLUSION

Hedge funds have a definite place in

portfolios for both return enhancement and diversification. They do have some drawbacks that should be seriously considered during the portfolio construction process, but carefully selected hedge funds, or even hedge-fund-like strategies, are a great addition to any portfolio.