Académique Documents
Professionnel Documents
Culture Documents
By Nirmoy Dey Geo George Megha C R Ashim Mandal Meenu Maria Tanveer Ahmed Vinoth K.
"Today, if asked to define a hedge fund, I suspect most folks would characterize it as a highly speculative vehicle for unwitting fat cats and careless financial institutions to lose their shirts.
Mario Gabelli, hedge fund manager
Hedge funds are private investment funds used primarily by wealthy individuals and institutions to accomplish aggressive investing goals. A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.
Alfred Winslow Jones is credited with creating the first hedge fund in the year 1949 when he combined a leveraged long stock position with a portfolio of short stock positions. Investors in Jones' relatively unknown fund enjoyed large returns and outperformed all other mutual funds of that era. This style of investment management exploded in popularity in the late twentieth century with the arrival of derivatives.
Minimum investment amount is very high such as $250000 to $10 million Exempt from many rules and governance which are related to Mutual fund, pension funds and insurance companies Maximum no of investors per fund is 100 Investors in a hedge fund pay a management fee in between 1 and 2 percent Hedge funds also collect a percentage of the profits, usually 20 percent
Positive returns in both rising and falling equity and bond markets. Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns. Wide choice of hedge fund strategies to meet their investment objectives. Academic research proves hedge funds have higher returns and lower overall risk than traditional investment funds. Hedge funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets. Adding hedge funds to an investment portfolio provides diversification not otherwise available in traditional investing.
Convertible Arbitrage:
Strategy that involves purchasing a portfolio of convertible securities, generally convertible bonds. Hedging a portion of the equity risk by selling short the underlying common stock. When a stock declines, the associated convertible bond will decline less, because it is protected by its value as a fixed-income instrument and it pays interest periodically.
Fixed-Income arbitrage:
Assumes opposing positions in the market to take advantage of small price discrepancies while limiting interest rate risk Profit from principal appreciation and interest income. Most common fixed-income arbitrage strategy is swap-spread arbitrage.
Managed Futures:
Investments depending on the manager's view of the economic or market outlook. Managers profit from large up and down movements using both long and short positions, resulting in returns similar to that of a straddle. Straddle is composed of buying a put and call option on the same investment & the gain is directly related to the volatility of the investment. The more investments fluctuates, the higher the return and vice versa.
Dedicated Shorts:
Sells securities short in anticipation of being able to re-buy them at a future date at a lower price. Managers asses investment options based on his or her opinion of the overvaluation of securities, the market. Used as a hedge to offset long-only portfolios and by those who feel the market is approaching a bearish cycle.
Global Macro:
This does not focus on individual companies but rather focus primarily on profiting from shifts in global trends. A fund may be long or short in various international stock indexes and currencies, and at the same time attempting to take advantage of assets that are miss-priced relative to global alternatives. Example of emerging market strategy whereby a hedge fund invests in developing countries with less mature financial markets, usually in equities.
Event Driven:
Also known as Special Situation or Special Opportunity strategies. Invest in companies that are expecting a large impact on the price of the stock over a short period of time. Tries to capitalize on the changing prices of stocks caused by events such as corporate restructuring, stock buybacks, bond upgrades, expected earnings surprises, and any other reason a company's stock price may change. E.g. distressed securities A hedge fund would wait for an impending reorganization or bankruptcy of a company. Risk (Merger) Arbitrage -the hedge fund simultaneously buys a company that is being acquired and sells the short the stock of the acquirer. The investment philosophy of Fair Value Capital in Indian market is Event Driven.
Thank You