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INVESTMENTS
Part 1 of 3
Things you should know about Hedge Funds
- What are Hedge Funds?
- What Issues Should be Considered When Evaluating Particular Hedge Fund Products?
In recent times Hedges Funds has been gathering a lot of attention in the various Asian markets. It is estimated that in 2003 there are over 8,100 hedge funds globally with about USD$820 Billion invested (Van Hedge Fund Advisors International). This figure is estimated to grow by USD$4 Trillion by 2010 by Platinum Capital Management Limited. However, very few investors really understand the nature of Hedge Funds, the types of hedge funds, which ones are good and how they potentially fit into their investment portfolio. In additions some investors has been basing their hedge funds investments on performance and not on fundamentals.
Investors should consider hedge funds as an alternative way to manage traditional asset classes. However, hedge funds should not be considered an alternative asset class as it is difficult to place them into strategic asset allocation optimisation exercises. The reason is that there are no consistent return patterns across hedge fund styles and the manager’s performance are varied. Although they invest into traditional assets types they are managed in an unconventional style. This means that the excessive returns may be based on the skill of the manager.
So what is a ‘Hedge Fund’? The first hedge fund was established in 1949 and set up by Alfred W Jones. The intention of this hedge fund was to eliminate or manage risks of holding long stocks by shorting other stocks. This meant that Mr Jones was now stock picking instead of trying to time the market.
The definition of a Hedge Fund by the US Security Exchange Commission (SEC) is a ….
"Hedge fund" is a general, non-legal term that was originally used to describe a type of private and unregistered investment pool that employed sophisticated hedging and arbitrage techniques to trade in the corporate equity markets. Hedge funds have traditionally been limited to sophisticated, wealthy investors. Over time, the activities of hedge funds broadened into other financial instruments and activities. Today, the term "hedge fund" refers not so much to hedging techniques, which hedge funds may or may not employ, as it does to their status as private and unregistered investment pools.
Hedge funds are similar to mutual funds in that they both are pooled investment vehicles that accept investors’ money and generally invest it on a collective basis. Hedge funds differ significantly from mutual funds, however, because hedge funds are not required to register under the federal securities laws. They are not required to register because they generally only accept financially sophisticated investors and do not publicly offer their securities. In addition, some, but not all, types of hedge funds are limited to no more than 100 investors.
Hedge funds also are not subject to the numerous regulations that apply to mutual funds for the protection of investors—such as regulations requiring a certain degree of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations to assure fairness in the pricing of fund shares, disclosure regulations, regulations limiting the use of leverage, and more. This freedom from regulation permits hedge funds to engage in leverage and other sophisticated investment techniques to a much greater extent than mutual funds. Although hedge funds are not subject to registration and all of the regulations that apply to mutual funds, hedge funds are subject to the antifraud provisions of the federal securities laws.
U.S. Securities and Exchange Commission
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