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HEDGE FUNDS Alternative Investments, Types of Hedge Funds, and Hedge Fund Strategies

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Page 1: Hedge Funds

HEDGE FUNDSAlternative Investments, Types of Hedge Funds, and Hedge Fund Strategies

Page 2: Hedge Funds

ALTERNATIVE INVESTMENTSAlternative investment universe: traditional asset classes used in non-traditional strategiesAlternative investment universe: non-traditional asset classes

Alternative investment markets encompass:HedgefundsVenture CapitalPrivate EquityReal Estate

Page 3: Hedge Funds

ALTERNATIVE INVESTMENTSAlternative investments carry:

• Additional diversification, premium yields for taking on different risks (liquidity risk, information risk)

• Improved risk/return characteristics• Alternative Asset managers possess flexibility to make investment

decisions «skill based» strategies• Focus on absolute returns instead of relative returns: performing well in

any market situation

Page 4: Hedge Funds

HEDGE FUNDSNo standard definition• Ability to short the market, to leverage the portfolio to multiply gains, and to hold high concentrations of

positions• No industry-wide classifications of hedge fund strategies, each major industry group has its own

classification system

Attractions• Expectation of strong returns (historical data)• Low correlations to traditional asset classes and ability to provide diversification• Absolute returns / Traditional managers that have relative return orientation

Misconceptions• All hedge funds are risky investments: many funds have low degree of risk inherent in their strategies.• Hedge Funds are illiquid: not necessarily the case

Page 5: Hedge Funds

STRUCTURAL ORGANIZATIONStructural Organization-Role of a Prime Broker-Other differences: fee structures, lock in period, redemption windows & side pockets

Key Participants and Roles-Investment Managers, Board of Directors, Administrator, Transfer Agent

Page 6: Hedge Funds

TYPES OF HEDGE FUNDS

Page 7: Hedge Funds

HEDGE FUND STRATEGIESMarket Trend (Directional / Tactical) Strategies• Global Macro• Managed Futures/CTAs• Emerging Markets• Equity Long/short• Short Bias

Page 8: Hedge Funds

HEDGE FUND STRATEGIESGlobal Macro: Aims to from changes in global economies, typically brought about by shifts in government policy which impact interest rates, in turn affecting currency, stock, and bond markets. Participates in all major markets using leverage and derivatives.

- Highest returns, most volatile, & high correlation to stocks and bonds.Market Trend: Managed futures are investments that allow the investor to access the world's futures markets through commodity trading advisors (CTAs). Highly specialized and focus on expertise. Futures and currencies – global basis.

-Reduced volatility, low correlation with traditional assetsEmerging Markets: Equity or fixed income, usually no shorting.

Page 9: Hedge Funds

HEDGE FUND STRATEGIESEquity Long / Short: involves share based investing on both the long and short side of the market across a range of sectors, categories and regions. Represents largest amount of hedge fund assets. Highly correlated with market.Short Bias: Short sale of over-valued securities, by either selling borrowed stock or using derivatives to create synthetic shorts. Some of these dedicated short funds are among the first to foresee corporate collapses. Skilled at scrutinizing company fundamentals and financial statements.Event Driven StrategiesDistressed Securities Merger / Risk Arbitrage

Arbitrage StrategiesMarket NeutralConvertible ArbitrageFixed Income ArbitrageEquity ArbitrageMortgage Arbitrage

European AIFsQualified Investment Alternative Investment Fund (QIAIF)Retail Investment Alternative Investment Fund (RIAIF)Common Contractual Fund (CCF)TrustSpecialized Investment Fund (SIF)

Page 10: Hedge Funds

WHERE ASSETS ARE MANAGEDNew York still big wig..

Push for Miami?“Hospitable and tax-free environment”“Access to Europeans”

Thanks politicians.

Each One is DifferentIII Capital ManagementRWC Partners – UK BasedSkyBridge CapitalScout Ventures

Page 11: Hedge Funds

WHAT HAS BEEN HAPPENINGThe highs set in 2011 have been

surpassed

Push to L Cap

Page 12: Hedge Funds

EXAMPLELet’s take Bridgewater Associates and break down who they are.

The firm serves institutional clients including pension funds, endowments, foundations, foreign governments and central banks.Focuses on economic trends, such as inflation, currency exchange rates, and U.S. gross domestic product.

The company divides its investments into two basic categories: (1) Beta investments, whose returns are generated through passive management and standard market risk, and (2) Alpha investments, whose goal is to generate higher returns that are uncorrelated to the general market and are actively managed

Page 13: Hedge Funds

Pure Alpha: Launched in 1989. Designed to balance risk among a variety of non-correlated assets through active management. It includes 30 or 40 simultaneous trading positions and has an average annualized return of 18%. Only lost money 3 of last 20 years.All Weather: Launched in 1996 and highlighted low fees, global inflation-linked bonds and global fixed-income investments. High, risk adjusted returns. In April 2009, after the collapse of Lehman Brothers, the fund moved into "safe portfolio" mode which included nominal and inflation-linked bonds and gold instead of equities, emerging market debt, and commodities. Pure Alpha Major Markets: At the time, it was the largest hedge fund launch (2011) with 7.5 billion to invest. An investment vehicle similar to the company's Pure Alpha fund but with enhanced liquidity by focusing on the major markets such as European bonds

Page 14: Hedge Funds

3 Billion vs 150 B buyback

Bill Ackman, a hedge fund manager was shorting Herbalife saying that it was a Ponzi scheme and Carl had the

opposite view and was buying the stock.

Can you imagine making nearly a billion dollar bet that a stock is over valued?

1.

2.

Page 15: Hedge Funds

LONG TERM CAPITAL MANAGEMENT

“Twenty years ago, one bond-trading hedge fund grew from launch to over $100 billion in assets in less than three years. It saw yearly returns of over 40 percent. But by 1998, that firm was primed to expose America’s largest banks to more than $1 trillion in default risks. The demise of the firm, Long-Term Capital Management (LTCM), was swift and sudden. In less than one year, LTCM had lost $4.4 billion of its $4.7 billion in capital.”

• Almost collapsed financial system• Positions at peak were over 1 Trillion• Experts, aren’t always the biggest experts

Page 16: Hedge Funds

BENEFITS SUMMARY1. High level of expertise, tactical allocation2. Lack of attention on your part, if need be3. Tax efficiency 4. Lock In Periods, stay your course5. Prestige

Page 17: Hedge Funds

HEDGE FUNDSAlternative Investments, Types of Hedge Funds, and Hedge Fund Strategies By Chance Owen