4.HF As Asset Class

HEDGE FUNDS AS AN ASSET CLASS
-Jeet
R.Shah M.Com , CFP CM
Absolute return investment strategies and funds are commonly known as hedge funds.
www.veerconsultancy.com
Jeet R.Shah
Overall Objectives of Alternative Investments

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Preservation of captial Wealth accumulation/growth Management of risk and volatility Enhanced returns Low correlation/diversification Access to strategies unavailable to traditional managers
Jeet R.Shah
Traditional versus Hedge Funds

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Jeet R.Shah
Hedge Fund Strategy Characteristics

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Jeet R.Shah
Hedge Fund Strategy Characteristics

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Jeet R.Shah
HEDGE FUND DISTINCTIONS
1. Investment Strategies
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Traditional investment advisors are limited in their investment options, whereas alternative investment advisors are opportunistic. Alternative investment managers can take larger position sizes, invest across asset classes and security types, and employ strategies whose returns generally come from the exploitation of market inefficiencies, not market movements. Alternative investment strategies are also dynamic by nature. Fund managers can use leverage and sell securities short to vary market exposure actively. Alternative investment returns are therefore a product of how the manager invests, not just where the manager invests.
www.veerconsultancy.com Jeet R.Shah
2.Return Objectives
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The concept of absolute versus relative returns is central to the alternative investment sector. Unlike traditional investment managers driven by index weightings, nontraditional managers invest for absolute returns, not returns relative to the broad market. Most of the returns from alternative investment strategies come from the skill of the manager rather than the returns of an asset class.
3. Minimum Investment Requirements

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For the most part, due to the limited number of clients who can be invested in a fund, the minimum investments steadily increase as the years go by. A managers initial minimum may be as low as $250,000 or $500,000, but can quickly increase by a multiple. There is no shortage of tier 1 investment managers who have minimum requirements in excess of $10 million. As institutions play an increasing role in the alternative investment arena, fund managers often are induced to take on as clients institutions rather than private individuals who, in most cases, allocate substantially smaller amounts.
4. Coinvestment Opportunities
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Hedge fund managers tend to invest a significant portion of their own capital in their partnerships, thereby reinforcing their commitment to their funds performance. This aspect differs greatly from the world of traditional investment advisors where, for regulatory reasons, managers often are discouraged from purchasing their own proprietary product.
5. Liquidity
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Unlike managed accounts or mutual funds, alternative investment vehicles may typically require a lock-up of 12 months before withdrawals are permitted. Some offshore funds offer liquidity as frequently as weekly, but certain onshore long-term investment pools may require commitments of up to 4 years. It is important to make sure that the funds liquidity constraints are in keeping with industry norms for the strategy employed.
6. Access and Transparency

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The limited partnership format provides the manager with flexibility to deliver returns that would not be possible through other formats, but it also obscures a clients ability to monitor investment activities. Furthermore, many managers are hesitant to allow clients to second-guess their judgment in short-term increments. Without special considerations, it can be exceedingly difficult to monitor whether a manager is diverging from the stated strategy, inappropriately using derivatives or leverage, or engaging in other unacceptable behavior.
Unique Return and Risk-Reduction Opportunities of Hedge Fund Strategies

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Hedge funds are not necessarily riskier than many traditional stocks and bond investments. Hedge funds can add benefits to establish traditional asset portfolios through: 1. Enhanced risk-adjusted returns 2. Diversification/low correlation to traditional investments 3. Access to investment strategies cannot get elsewhere 4. Access to some of the top asset managers in the world
Jeet R.Shah
IDENTIFICATION OF MANAGERS
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Because of restrictions on advertising, identifying potential hedge funds with which to invest is challenging. The most common way to select funds is to consult one or more of several commercially available directories or databases. The challenge then becomes one of narrowing the field to a manageable number that deserve further attention. At this point, investors can apply set criteria and come up with a list of items to investigate in greater detail. However, it is critical to keep in mind that these resources are useful only as a starting point because of several limitations to the kind of data they contain and the quality of that data.
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The principal flaw of databases is that they tend to offer little more than purely quantitative and historical information. More specifically, data integrity can be problematic due to the different sources these databases rely on to get their information. For instance, a comparison of the leading hedge fund databases will uncover substantial disparities in managers historical performances. Last, many managers are reluctant to allow information about their funds to be published. According to SEC officials, publication of such information, even by an unaffiliated firm, may constitute unlawful advertisement.
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The result is that some of the best firms remain unlisted and essentially invisible to the general public; thus they can be accessed only (if they are even open to additional funds) through a direct introduction. Nevertheless, with these limitations in mind, the process of identifying managers essentially involves developing a set of screening criteria to apply to a broad universe of funds contained in a directory or database.
Jeet R.Shah
EVALUATION OF MANAGERS
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The four main elements of a successful evaluation process are: 1. Collection and analysis of partnership documents 2. Quantitative analysis of returns 3. Background and reference checks 4. On-site interviews
Jeet R.Shah
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1.Analysis of Disclosures The limited partnership structure of most hedge funds provides investment flexibility, but also poses significant challenges to the due diligence process. It is crucial for family office professionals to develop the unique tools necessary for evaluating funds based on their investment strategies , personnel, and general business plans If the family office chooses not to develop this expertise in-house, engaging an alternative investment professional should be considered the price of entry to these investments.
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2.Quantitative Analysis Sophisticated computer programs often are used in the manager evaluation process. Analysis of the returns provides data that can be used to compare various strategies and managers based on risk/return measures as well as the correlation of returns. However, quantitative analysis should not be used as a crutch in place of sound qualitative analysis. The simplicity of transforming art into science provides investors with a false sense of security. Further, the utility of statistical analysis is completely dependent on the extrapolation of trends, and relying solely on this type of analysis is not prudent. Understanding the strategy and the people employing it is of far greater value when assessing the investment risk involved.
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3.Background Checks Most managers will provide a list of professional and client references when asked. Of course, investment managers will provide only the names of references who will speak positively of them. Reference checks can be helpful, but often it is necessary to go further. It may be more valuable to tap into a network of information resources that includes other investment managers, consultants, brokers, bankers, auditors, attorneys, and investors. Another helpful tool can be the selective use of professional private investigators. Market investigators can search for criminal or civil complaints and financial or personal problems that could interfere with the best interests of the investors.
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4.Interviews Manager interviews are an essential part of the evaluation process. By devoting the necessary resources (time and money) to visit managers onsite, one can identify problems and opportunities early and act decisively.
Jeet R.Shah
ONGOING MONITORING
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Once some investors decide to hire a manager, they pay little attention to ongoing due diligence. Simply tracking the managers performance is not sufficient. One should not underestimate the importance of maintaining regular contact with the managers as well as their peers, competitors, service providers, brokers, and other investors. A commitment to information gathering will better position an investor to monitor managers exposures, leverage, and diversification.
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INVESTING THROUGH A FUND OF HEDGE FUNDS
Jeet R.Shah
IDENTIFICATION OF MANAGE Two Primary Approaches to Investing in Hedge Funds

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Jeet R.Shah
Advantages of FOHF investing

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1. Professional management in the identification, evaluation, selection and monitoring process, as just outlined 2. Access to funds with as low capital as USD25,000 3. Diversification among selected strategies and managers
Jeet R.Shah
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Dhanyawaad
Jeet R.Shah

4.HF As Asset Class

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4.HF As Asset Class

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HEDGE FUNDS AS AN ASSET CLASS

R.Shah M.Com , CFP CM

Overall Objectives of Alternative Investments

Traditional versus Hedge Funds

Hedge Fund Strategy Characteristics

Hedge Fund Strategy Characteristics

HEDGE FUND DISTINCTIONS

3. Minimum Investment Requirements

6. Access and Transparency

Unique Return and Risk-Reduction Opportunities of Hedge Fund Strategies

INVESTING THROUGH A FUND OF HEDGE FUNDS

IDENTIFICATION OF MANAGE Two Primary Approaches to Investing in Hedge Funds

Advantages of FOHF investing

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