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Hedge fund

Transcript of Hedge Fund Ppt


Concept of hedge fund

A hedge fund is a fund which invest in

almost any opportunity in any market where it foresees impressive gains at reduced risk

Hedge FundsAlfred W. Jonesis credited with the creation

of the first hedge fund in 1949 Estimated to be a $2.5 trillion industry and growing every year approximately 10,000 active hedge funds This accounts for about 1% of the combined global equity and bond market

Hedge Funds in IndiaReputed names in the global hedge funds

sector such as Renaissance Technologies, Old Lane, DE Shaw and Och-Ziff Capital Management has already made its foray into the Indian market. Securities and Exchange Board of India (SEBI) intends to provide a broad-based, registered and regulated platform to these entities, depending on their individual track records.

Theory of Hedge FundsArbitrage in

expectations Short positions exposure matches long positions Short finances long Market neutral investment

Expected Return Long Position Spread Short Position

Market Exposure

Basis of Hedge Fund ReturnsManager skill in identifying opportunities Not derived from passive long position Focused on imperfect market sectors Depend critically upon special skills and


Defining Hedge FundsFreedom from ICA (1940) of SEC controls on: short-selling cross-holding incentive compensation derivatives positions

Defining Hedge FundsLimitations on: number of U.S. investors (99 maximum) solicitation of U.S. investors public advertising and disclosure Information problems:no public performance records data vendors only maintain live fund data

Manager Compensation Fixed fee 1% to 2% Incentive fee 10% to 30% [20% typical] of

positive return High water mark provision

Manager StylesEvent-Driven Market Trend/Timing Opportunistic Short Sellers Sector Funds Global Macro Fund of Funds Derivatives

Investing Multi-Strategy

Event-DrivenDistressed Securities bankruptcy reorganization equity and debt Risk Arbitrage position in acquired and acquirer trade on collars and other options hedge with derivatives

Market Trend/TimingTiming U.S. Markets exploit technical analysis Timing Global Marketsseek country opportunities

Opportunistic InvestingLargest Category of Hedge Fund Valueliquidation value, book value, out-of-favor

Growthfuture earnings potential

Short-Term Hold active trading to exploit opportunity

Short SellersSeeks overvalued equities to short may hedge market exposure or may not

Global MacroCurrency speculation with futures instruments Forecast influence of global macro trends on

liquid instruments Deals at macro level

Fund of Funds Select multiple managers Use track records for choice Promote diversification major issue, since good funds are closed to small investors.

Commodities/ Options/ FuturesSpeculate in commodities markets

Strategies of hedge fundShort-selling: Sale of a security that you do not

own, with the anticipation of purchasing it in the future, at a reduced cost. Arbitrage: Simultaneous buying and selling of a financial instrument in different markets to profit from the difference between the prices investing in anticipation of a specific event merger transaction, hostile takeover, spin-off, exiting of bankruptcy proceedings, etc.Leverage: Borrowing money for investment


Strategies of hedge fund cont.investing in deeply discounted

securities - of companies about to enter or exit financial distress or bankruptcy, often below liquidation value. Hedging: Buying/selling a security to offset a potential loss on an investment

Investors class in hedge fundPension fund Insurance companies Private companies High net-worth individual individual

Benefits of a Hedge FundProvides an investment portfolio with lower

levels of risk and can deliver returns uncorrelated with the performance of the stock market. Delivers more stable returns under most market conditions due to the fund-of-fund managers ability and understanding of the various hedge strategies. Significantly reduces individual fund and manager risk. Eliminates the need for time-consuming due diligence otherwise required for making hedge fund investment decisions.

Benefits of a Hedge Fund of Funds contd.Allows for easier administration of widely

diversified investments across a large variety of hedge funds. Allows access to a broader spectrum of leading hedge funds that may otherwise be unavailable due to high minimum investment requirements. Is an ideal way to gain access to a wide variety of hedge fund strategies, managed by many of the worlds premier investment professionals, for a relatively modest investment.

Contemporary issuesEconomic issues Hiked fees (fixed + performance based) Manipulations/malpractices Raja rajratnam scandal