HEDGE FUNDS

AM | @MackinlayEuruni

. Hedge funds @UBS Wealth Management: "Hedge funds are subject to fewer regulatory restrictions than traditional investment funds; thus, they can entail risks that are difficult to capture using standard risk measurements" [see].

. Five common hedge fund strategies. [1] Long/Short Equity: This is the oldest and currently the largest category of hedge funds. Equity hedge funds look for undervalued (to buy) or overvalued equities (to sell) in certain regions or market segments, and seek to realize a profit when these investments revert to fair value. [2] Relative value. An arbitrage strategy detects price differences in the same types of instruments on different markets and attempts to exploit this spread. [3] Event-driven: Managers following this type of strategy seek to generate profits from upcoming corporate transactions such as mergers or takeovers. [4] Global macro. Managers of these hedge funds look for macro-economic trends, such as changes in interest or exchange rates, and for ways of benefiting from them. [5] Commodity trading advisors (CTA): This category of hedge fund deals mainly in futures (standardized, listed forward transactions) in financial instruments, currencies and commodities. Fund managers often use sophisticated computer programs to identify price patterns.

. Fees. Management Fee: Almost all hedge funds charge a management fee. The fee is typically between one and two percent of the asset under management per year. It is typically assessed many times a year to help cover the cost of running a hedge fund. For example, if a fund assesses a management fee 10 times a year, you will take out (asset value under management less liability)*(0.02)/(10) in management fee every time the fee is assessed. Some hedges, however, only charge clients as much as they use toward covering operational expenses. Performance Fee: This is also known as an incentive fee. Like the management fee, almost all hedge funds assess a performance fee as a component of their fee structure. Typically, this fee is 20 percent of returns. For example, if a one-billion dollar fund gained 30 percent a year and charges a 20 percent performance fee, then this fee amounts to ($1 billion)*(30%)*(20%)=$60 million dollars. As you can see, this is the most exciting fee in the hedge fund industry. Hedge funds with good records and high returns may charge substantially more [see].

. Dow Jones Credit Suisse Core Hedge Fund Indexes. Designed to represent the liquid, investable hedge fund universe, the Dow Jones Credit Suisse Core Hedge Fund Index is the first index to reflect the performance of managed accounts and other regulated fund structures sourced from across a range of platforms [see]. Interesting chart: bearish hedge funds performed much better during the 2008 bear market! (Note: there is a long disclaimer about risks at the end of this paper).

. Increasing regulations. Some hedge funds cease to operate with investors funds, and become family offices ("Hedge Funds Turning into Family Offices to Evade Dodd-Frank Regulations"). This is the case, I believe, of legendary hedge fund investor George Soros.

. Feature. Bridgewater Associates, run by Ray Dalio. Flight-to-safety! [QUESTION: HOW DID RAY DALIO PLAY THE FLIGHT-TO-SAFETY IN EUROPEAN SOVEREIGN BONDS DURING 2011?]

Resources. Hedge Fund Research; UBS-ETF HFRX Global Hedge Fund Index SF-A; Financial Times; Bloomberg.
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