HEDGE

FUNDS
An Overview

Upendra Badhai (BIF-056)

Lakshmi Raghu (BIF-015)
Definition

Private investment pools designed to zig when the

market zags

Investment vehicles that are organized so as to

avoid the application of most securities laws
nvestopedia defines
“An aggressively managed portfolio of
investments that uses advanced investment
strategies such as leveraged, long, short and
derivative positions in both domestic and
international markets with the goal of
generating high returns”
 Alternative
Investments
Alternative Asset Class Forecasted Demanded
Growth
Hedge Funds High
Private Equity Moderate
Venture Capital, BuyOuts Moderate

ABS/MBS Increasing
Property Moderate
Emerging Markets Moderate
Commodities Increasing
Characteristics
Ability to deliver non-market correlated
returns

Huge variety of hedge fund investment

styles, many uncorrelated with each
other, provides investors with a wide
choice of hedge fund strategies to meet
their investment objectives

Generally available only to HNIs and

Characteristics
Broadly defined by their structural characteristics rather than their hedged
nature

Benefit by heavily weighting hedge fund managers’ remuneration towards

performance incentives, thus attracting the best brains in the investment
business. In addition, hedge fund managers usually have their own money
invested in their fund

Lock in period for min of 1 year – Little liquid

Take advantage of market inefficiencies

Focus on absolute performance

Great flexibility reg. asset classes, markets,

trading styles, and instruments

Infrequent liquidity and redemption dates

High minimum investment level

Some Facts
Minimal governmental regulation

Performance is derived not primarily from the returns of the underlying

markets (beta) but predominantly from managers. skill (alpha)

Most funds also have a “high water mark” that is intended to protect
investors by requiring the manager to offset any losses with
subsequent gains before incentive fees are paid
Some Facts
Hedge fund fees are high---they typically involve a management fee of 1% of assets and an
incentive fee of 20% of profits

Less transparency

Alfred W Jones, the reporter for Fortune Magazine created the first hedge fund in 1949
Risks Involved
Market Risk

Strategy Risk

Liquidity Risk

Leverage

Company Risk
SOURCE: Harcourt
SOURCE: Harcourt
 Hedge Funds had
outperformed
securities not only on
a return basis but also
on risk adjusted
performance basis

SOURCE: Harcourt,
Barclay
Typical structure
Master feeder
structure
Global Top Fund of
Hedge Funds

Source: The Hedge fund journal, 2010

Global Top Hedge Funds
(In terms of Growth)

Source: BarclayHedge, Morningstar, Jan

2010
US Top Hedge Funds
Organization AUM ($ Billion) Rank
JP Morgan AM 54 1
Bridgewater Associates 45 2
Paulson & Co 32 3
Soros Fund Management 27.5 4
Och-Ziff Capital 24 5
D E Shaw Group 23.6 6

Source: The Hedge fund journal, 2010

Europe’s Top Hedge
Funds
Organization AUM ($ Billion) Rank
Brevan Howard 31.54 1
Man Investments 24.30 2
Black Rock 21.66 3
BlueCrest Capital 20.50 4
Lansdowne Partners 14.30 5

Source: The Hedge fund journal, 2010

 Asia’s Top Hedge Funds
Organization AUM ($ Billion) Rank
Sparx Group (Tokyo) 4.146 1
Platinum (Sydney) 3.981 2
Artradis (Singapore) 2.87 3

Source: The Hedge fund journal, 2010

 Leading Women in
Hedge Funds

ELENA VICTORIA TERRI BECKS TANYA

AMBROSIAD ASTON-DUFF BEDER
OU PRESIDENT &
MD, Angelo CEO FOUNDER,
FOUNDER & Gordon Campbell & SBCC Group,
CEO Europe, Co, Newyork
IKOS, Cyprus London Baltimore
AUM: --
AUM: $ 1.5 AUM: $ 21 AUM: --
Billion Billion
Hedge Fund- Strategies
1. Emerging Markets

Attractive because of the potential for very high returns. This is due to the overall fast growth of an
emerging market compared to that of a more advanced market. Examples include Brazil, China, India, and
Russia

Risk involved in emerging markets is much higher due to political instability,less liquidity, and currency
volatility
2. Short Selling

Selling shares without owning them, hoping to

buy them back at a future date at a lower
price in the expectation that their price will
drop

The manager borrows securities from a prime

broker and immediately sells them on the
market and later repurchases them

Arbitrage using short sales -example

3. Macro
Aims to profit from changes in global
economies, typically brought about by shifts in
government policy that impact interest rates,
in turn affecting currency, stock, and bond
markets

4. Aggressive Growth
Primarily equity-based strategy whereby the
manager invests in companies, with smaller or
micro cap stocks, characterized by low or no
dividends, but expected to experience strong
& rapid growth in EPS or generally high P/E
6. Market Timing
Predicts the short-term movements of various
markets (or market segments) and based on
those predictions, moves capital from one
asset class to another in order to capture
market gains and avoid market losses. The
most typical asset classes are mutual funds
and money market funds

Unpredictability of market movements and the

difficulty of timing entry and exit from markets
add to the volatility of this strategy
7. Special Situations

Invests in event-driven situations such as

mergers, hostile takeovers, reorganizations, or
leveraged buyouts, bankruptcies, and
liquidations.

Profit from the spread between the current

market value and anticipated value following
the event.
8. Value

Equity-based strategy whereby the manager

invests in securities perceived to be selling at
deep discounts to their intrinsic or potential
worth

Manager takes long positions in stocks that he

believes are undervalued, can take short
positions in stocks he believes are overvalued.
9. Funds of Hedge Funds:

Invests in other hedge funds rather than

directly investing in securities such as stocks,
bonds,etc. These underlying hedge funds may
follow a variety of investment strategies

Exhibit lower risk than single-manager hedge

funds.
10. Income

Primary focus on yield or current income

rather than solely on capital gains

11. Market Neutral

Invests similar amounts of capital in securities

both long and short, generally in the same
sectors of the market, maintaining a portfolio
with low net market exposure
In a Nutshell..
Superior risk-adjusted returns in bear and bull
markets
Access to some of the best talent in financial
markets
Highly sophisticated, unbiased investing
Transparency and regulation are improving due
to increasing institutionalization

The Future of Hedge Funds..

HFs will become mainstream investments:
THANK YOU