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Investing in Hedge Funds & Fund Managers

Hedge Funds Investing

The first hedge fund was created in the US during 1949 by Alfred W.Jones. Since then investing through a hedge fund has become very popular worldwide, especially during and after the 90s decade. Today, there are about 8,500 hedge funds in the world and their total assets are estimated about 1.5 trillion USD.

Lipper Hedge Funds Composite Index

Hedge fund investors have historically enjoyed higher returns than the average investors of common stocks. This can be justified by comparing the historical performance of the Lipper Hedge Funds Composite Index, during the last 10 years, to the US popular Index S & P 500. The Lipper Hedge Funds Composite 'track' changes in the performance of a certain number of hedge funds.

What is Lipper at Wikipedia

Thomson Reuters

Funds of Funds Hedge FundsHedge Fund Managers & Management Fees

A hedge fund consist two roles: the manager (general partner) and the investors (limited partners). Actually, a manager can also be a limited partner, as he may invest his own money in the hedge fund. Usually, the manager of a hedge fund is a prominent person in the community with special skills and many contacts. The management fee paid is charged to investors (limited partners). Usually, the annuity fees are equal to 1% of the total assets of the hedge fund. Additionally, the management fee may include also a certain proportion of the Fund’s annual total profits.

Investor Input -Two types of Hedge Funds 

Hedge funds are divided into two main categories: Open and Closed hedge funds. Open hedge funds are available to any investor, who is willing to acquire a stake by covering the minimum entrance amount. Closed hedge funds offer limited access to common investors, and actually the selection of investors is made directly by the top manager.

Investor Stake Liquidation / Output

Investors (limited partners) are provided with the option to liquidate their participation at any time by returning their stakes back to the fund. Stakes are purchased from others limited partners while the pricing is based upon the current book value of their stakes.

Advantages of Investing in a Hedge Fund

The fund managers are usually people with vast experience and connections in all areas of business and world governance. The huge size of a hedge fund is opening doors to all investment areas worldwide. Hedge funds are enjoying privileges such as low trading fees, tax breaks and inside information. Another important advantage of a hedge fund is that it can benefit from both a bull or bear market. This is possible by utilizing financial instruments such as CFDs, Options, Futures, CDs, Short-Selling, etc. 

Main Categories of Hedge Funds

The hedge funds are categorized according to their chosen investment strategy. Consequently, every fund differ in terms of potential return, risk and value fluctuations.

Here are the main Hedge Fund Categories:

1) Aggressive Growth Hedge FundsHedge Funds with high return expectations and high exposure to risk. These funds are using high capital leverage and risk coverage through derivatives (Options, Futures, CDs, Short-Selling etc).

2) Distressed Securities Hedge FundsHedge Funds of this category, buy shares, and loans of companies that face bankruptcy. They can buy cheap and expect to make a huge profit after some time.

3) Emerging Markets Hedge FundsHedge Funds which invest in emerging markets are usually enjoying high returns but sometimes they are not able to diversificate their portfolio risk, as these markets do not allow (hedging) using derivatives. Consequently these Funds are exposed to significant higher levels of investment risk.

4) Fund of Funds: Funds that invest in other hedge funds (presented and discussed below).

5) Income Hedge Funds: These are Hedge Funds investing in government bonds and which aim to maintain a low risk profile. Returns are also low, and this type of funds is the choice of risk-averse investors like pension funds.

6) Macro Hedge Funds: These Funds are seeking capital gains from trading macroeconomic changes and macroeconomic indicators. Using derivatives, even tiny changes (i.e. a change in US interest rates or inflation) may be transformed into huge profits.

7) Opportunistic Hedge Funds: This type of Hedge Funds is using a wide selection of investing strategies to exploit opportunities in many different markets. Tools and Capital Leverage are widely used.

8) Value Hedge Funds: These Hedge Funds are investing in stock-market shares that are traded far below their true value (i.e. real estate stocks). These Funds focus on long-run returns.

'Fund of the Funds' as the Best Investing Choice

A Fund of Funds is operating like an ‘investment umbrella’, acquiring small or large stakes in other hedge funds. The great advantage of a Fund of Funds is the maximum diversification of risk that can be achieved. Diversification criteria are including many aspects (industry, country, currency) and that is why this type of Hedge Funds are the best choice for every investor, and especially to those investors with a low risk-tolerance profile (i.e. pension funds or insurance funds).

Evaluating and Selecting Hedge Fund

Hedge Fund Investors are using some common benchmarks / indicators in order to evaluate and choose a Hedge Fund:
1. Market beta: The Market Beta index measures the correlation of changes in the performance of a hedge fund portfolio relative to the general market return. If the index tends to 1 then the fund is called an Index Fund. It is called Index Fund because it is expected to follow closely the up / down fluctuations of a particular index.
2. Size beta: The index measures the exposure of a fund in small capitalization companies. Statistically small capitalization stocks pay higher returns but they are exposing Funds to higher risk.
3. Value beta: The index measures the exposure of a fund to companies with financial problems negotiating with large deviations from the true value.
4. Momentum beta: The index measures the exposure of a fund to equity and other securities that have risen significantly recently, following the rule "Follow the trend".
5. Furthermore, an investor should consult thoroughly the historical performance and the CV of the management of the hedge fund, before makes his final choice. It is strongly recommended for investors to avoid placement in hedge funds with little or unknown background managers. Avoid those Funds even if management fees are extremely low.

 


Hedge Funds Links & Managers 

Links to top Hedge Funds around the world:  

      1. Angelo Gordon, Manager: John Angelo and Michael Gordon
      2. AQR Capital Management, LLC, Manager: Clifford Asness
      3. Appaloosa Management, Manager: David Tepper and Jack Walton
      4. Avenue Capital, Manager: Marc Lasry, Sonia Gardner
      5. The Blackstone Group | Kailix Advisors, Manager: J Tomlinson, Bruce Amlicke
      6. Blue Ridge Capital, Manager: John Griffin
      7. BP Capital Management, Manager: T Boone Pickens
      8. Cerberus Capital Management LP, Manager: Steve Feinberg
      9. Citadel Investment Group LLC, Manager: Ken Griffin
      10. Clarium Capital Management, Manager: Peter Thiel
      11. Farallon Capital Management Partners LP, Manager: Thomas Steyer
      12. Fortis Investments, Manager: Wes Edens
      13. Goldman Sachs Asset Management, Manager: Eric Schwartz, Peter Kraus
      14. Highbridge Capital Management LLC /JP Morgan, Manager: Glen Dubin
      15. Ospraie Management, Manager: Dwight Anderson
      16. Renaissance Technologies, Manager: James Simmons
      17. Soros Fund Management LLC, Manager: George Soros
      18. Man Group / AHL, Manager: Tim Wong
      19. RAB Capital, Manager: Philip Richards
      20. Children's Investment Fund Management TCI, Manager: Chris Hohn
      21. Thames River Capital, Manager: Charlier Porter

Investing in Hedge Funds

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