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Business plan english

  1. 1. Company "Automatic systems hedging" BUSINESS PLAN March 24, 2012 99012, Ukraine, Sevastopol Russian: Tel: +38(066) 339-70-13 ICQ 483-624-139 Skype: automatic-systems-hedging English: Tel: +38(095) 355-56-06 ICQ 649-777-376 Skype: maxi19865 E-mail: CONFIDENTIAL No offering is made or intended by this document. Any offering of interests in Automatic systems hedging will be made only in compliance with Federal and State securities laws.This document includes confidential and proprietary information of and regarding Automatic systems hedging. This document is provided for informational purposes only. You may not use this document except for informational purposes, and you may not reproduce this document in whole or in part, or divulge any of itscontents without the prior written consent of Automatic systems hedging. By accepting this document, you agree to be bound by these restrictions and limitations. 1
  2. 2. Table of Contents1. Pitch ……………………...………………………………………………………………………………...42. Executive summary ………………………………………………………………………………..….......53. Company ………………………………………………………………………………..…........................7 3.1. Background: aims and objectives 3.2. Characteristics of the companys services 3.3. Innovations Company: Automated portfolio management4. Еnvironment for business ………………………………………………………………………..….........10 4.1. Sectoral environment: the category of hedge funds 4.2. Business concept: a comparison of hedge funds with mutual, mutual and other funds 4.3. Project Strategy5. Analysis of markets for the companys services .……………………………………………………….14 5.1. Estimating the size of the market and the possible development trends 5.2. Assessment of market share and volume of services. 5.3. Market segmentation and identification of niche services company6. Competition and competitive advantage ……….……………………………………………………….15 6.1. Comparative characteristics of competitive services 6.2. Comparative characteristics of competing firms 6.3. SWOT-analysis of the company7. Risk-management ………………………………………………………………………………..…..........17 7.1. Trade (market) risk. 7.2. Administrative (organizational) risk. 7.3. Political and currency risks (the risks of incidence of the underlying assets). 7.4. Natural, technical and production risks. 7.5. Technical risks. 7.6. Operational risks. 7.7. Legal risks and risks of conflict of interest. 7.8. Liquidity risk. 7.9. Transaction costs. 7.10. Counterparty risk8. The organization of foreign economic activity of the firm …..….……………………………………..23 8.1. Organizational maintenance of international relations. 8.2. Economic support of international relations.9. The strategy of the marketing plan ………………………………...……………………………………24 9.1. The overall marketing strategy. 9.2. Pricing. 9.3. Tactics of implementation services to investors. 9.4. Warranty Policy: Methods of insurance. 9.5. Break-even point.10. Organizational and Management plan…………………………………………………..…………….28 10.1. Business calendar: the creation of a hedge fund. Gantt chart. 10.2. The organizational structure and service contractors. 10.3. Summary of key executives. 10.4. Other investors. 10.5. Duties of directors and staff of the management company. 10.6. Hiring and bonus system.11. Investment Plan ……….…………………………..…..…………………………..…..…………………33 11.1 Sources of funding. 11.2. The strategy to attract funding.12. Financial plan ……………………………………………………………………………………..….......35 12.1 The need for funding (selection of the amount of investment and financing schedule): • Option №1. Investments up to $ 1-2 million. • Option №2. Investments 2 to $ 5 million. • Option №3. Investments of $ 5-7 million and above. 12.2. Statement of Cash Flow, the schedule of repayment of loans..…………………………………38 2
  3. 3. 12.3. The overall project efficiency and sensitivity analysis …..…………………………………...41 - Net present value (NPV); - Internal rate of return (IRR); - Profitability Index (PI); - Payback Period (PP); - Discounted Payback Period (DPP); - Net investment efficiency (NRR); - Duration (D); - Modified Internal Rate of Return (MIRR); - Modified the present value (MNPV); - Discounted profitability index (DPI); 12.4. Financial performance:….……………………………………………………………………….42 - Current ratio (CR), % - Quick ratio (QR), % - Total liabilities to total assets (TD / TA),% - Long-term liabilities to assets (LTD / TA) - Total commitment to his own. drops. (TD / EQ), % - Return on Investment (ROI),% - Return on equity (ROE),% - Return on sales (ROS),% - Absolute liquidity ratio (LR)? - Financial independence ratio (Equity to Total Assets) 12.5. Total costs, cost of service contractor, tax payments……………………………………………4213. Notes to the business plan: 13.1. Sheets ASH: results on real accounts…………………………………….……………………...46 13.1.1. Screenshots of trading posts in the accounts and balance sheet growth chart 13.1.2. Analysis of changes in equity and the number of instruments involved in the trade 13.1.3. Rates of return. 13.1.4. Table of profitable / unprofitable trades. 13.1.5. The matrix of the currency pairs that are used in the accounts 13.1.6. Monitoring settings the account 13.2. Arbitrage trading with the help of "ASH-Arbitrage"……………...…….………………………67 13.3. List of prime brokers and discount brokers…….……………………………………………….67 13.4. Stages and types of hedge fund registration:……………..……………………………………..69 13.4.1. Incubator hedge fund 13.4.2. Fund for the Platform 13.4.3. Full hedge fund 13.5. Costs of administration…………………………………………………………………………..75 13.6. Hedge Fund Due Diligence…………………………………………………………………….. 77 13.7. Cayman Islands hedge funds ……………………………………………….………………….. 80 13.8. Еrrors of hedge funds…………………………………………………………………………….82 3
  4. 4. 1. PITCH. The team developed and tested in the context of global markets trading automated methods of hedging risk.Developments allow to control trading on thousands of accounts and use for one-time trade in each of theaccounts of over 100 instruments: currency, metals, CFDs and futures, which allows trading to hedge risks and toget ROI 11-14% per month (regardless the growth / decline of individual instruments). To create acompetitivebusiness requires an organization capable of a hedge fund, which will formal opportunity to attract investmentfrom institutional investors, banks and pension funds. Dividends to investors - 70-80% of net profit managementcompany. 4
  5. 5. 2. EXECUTIVE SUMMARY.What is needed for each investor?• To make his money was invested in a variety of risk-free projects with a minimum amount ofcommercial risks: imperfect parts - perfect as a whole!• To all the investments were under the complete control of the investor and he could within a reasonabletime to extract them out of business!• To the investor was confident that the new business will have a stable set of independent risk factors:political, administrative and competition!But how to find so many projects, which all start up risky?The solution isThe project is within the community projects, each of which compensates for the temporary costs of theother - the fund that distributes risks to the set of trading tools and directions, independent of theincompetence of staff, political squabbles, falling exchange rates, taxes and competition.World analogsWhat structure can collect a lot of high-risk areas in the risk-free combination? At present, the bestsolution, tested by time and experience the world economy - it is hedge funds.StabilityThe percentage of defaults of hedge funds over the past 10 years - 0.37% per year.InvestorsDozens of European banks invest their money in hedge funds - are UBS, Credit Suisse, Crédit Agricole,HSBC, Societe Generale, Anglo Irish Bank, etc.According to the research company Global Alternatives large private investors (which is about 7.1million with a capital of more than $ 1 million and total assets of 26 trillion. $) Invested: in hedge funds -82% in private equity funds - 8 % and 5% in real estate and commodity futures. A significant proportionof charitable investments, pension funds and non-profit account for hedge funds (this is especiallycharacteristic for the U.S.).Assets and IncomeIn 1990 the total assets managed by hedge funds accounted for only $ 30 billion.By 2007 they had increased to $ 1.8 trillion. The number of hedge funds in 2011 reached 12 000.Over the past 18 years the cost of investments in bonds and stocks increased by 4 times, then as aninvestment in a diversified portfolio of hedge funds has increased by 10 times.TaxesFunds that are registered in an offshore jurisdiction, pay a minimum tax.Competition and LiquidityTo profit from trading in global markets - competition does not exist. The cost of trading is minimalbarriers to entry are virtually absent, the number of participants and liquidity tremendously almostperfect. You do not need to open a shopping site, explore the markets, to spend money on advertising, toopen offices in prestigious centers and other global markets will exist as long as there are separate state.Tools profitOn the New York Stock Exchange and the London Stock Exchange for more than 70% of trade takesplace with the participation of retail automation systems. Most of them - its automatic system of hedgefunds, as the company Sac Capital Advisor (assets of 14 billion $), RGM Advisors LLC, ManInvestments LTD (1783, assets of $ 71.7 billion) is a fund of hedge funds (for example, one of its funds 5
  6. 6. Global Fund sells 28 futures contracts), managed by Simons "Renaissance Technologies" is more than $25 billion (trade is conducted with the help of computer programs), and many others.That can offer our team?Ready for implementation, "Automatic system of hedging risks," which allows you to: • Informed and well-calculated distribution of the fund investments in a variety of tools (over 100 currency pairs, metals, and contracts for difference); • compensate for the problem at the expense of profitable elements (hedge of a tool by others); • gradual introduction of fund investments in trade (according to the strategy of "temporary" risk- sharing); • consolidation of profits during the trading period (the set of accounts that are running on different starting points in time); • profit from both the major and minor volatile instruments; • independence of trading results on the direction of tool (long / short strategies).What is the investor?The expected profitability of the project - 11-14% per month (rate of return an investor - 70-80% of netprofit). Terms investvlozheny return - 3 years. Project-developed scheme of protection against risks:falling base rates, administrative, commercial, legal and political. Monitoring the safety of investmentsand investment strategy by following a few inspectors partners: the bank, custodian, administrator, primebroker, auditors and legal counsel.Starting the projectTo start the project requires the cost of office equipment and legal registration of hedge fund - 1-5% ofthe total investment (about $ 40-50 thousand). Minimum investment - $ 1 million, the maximum -Unlimited (the strategy is scalable to any amount investment). 6
  7. 7. 3. COMPANY.3.1. Background: aims and objectives.AIM: To create a Hedge Fund using for the service ASH (automatic system hedging) for global markets incurrency, stocks, bonds, commodities / raw materials (Foreign exchange, CFD).OBJECTIVES: To create a working business that does not require large expenditures on the base and extensionactivities, has a stable independent of the commercial, political and administrative risks, and able to attract largeinvestments from qualified and institutional investors (banks, providing clients with asset allocation to hedgefunds, large private investors and pension funds).3.2. Characteristics of the companys services.Hedge Fund offers to investors (with the volume of investments of $ 300 000) services effective investment andprofit through the service of automatic hedging. An investor entering into an agreement with the hedge fund isable to hedge their investments and to profit from the volatility of the hundreds of tools (the movement of whichis associated with global changes in the global economy). And at the same time, the service allows companies toavoid the influence of negative trends in the global economic situation due to long / short strategies. Monitoringthe safety of investments and investment strategy by following a few inspectors partners: administrator, primebroker, auditors and legal counsel.3.3. Innovations Company: Automated portfolio management Parameters "automatically hedging" • Using a system of independent investment pools and joint stabilization fund: Individual approach to every investor can establish independent monitoring of accounts, selection ofindividual tools (used in commerce), insurance, individual selection of contractors (prime brokers), the repaymentschedule. This system gives the performance an investor of investment independent of other investors and hedgefunds in general. This is - additional insurance against the risks of scalability and availability of all the same allthe benefits of the strategy. Investment capital is divided into 2 parts: trade and stabilization. Stabilization Fund (amounting to 20-30%of total capital) is designed to meet the challenges necessary to prevent resetting the account in case ofapproaching critical levels Equity to the level of stop-outs. Practice shows that the level of Equity does not fall 7
  8. 8. below 20-30% relative to the size of the Balance Sheet. However, such insurance bills provide for future periodsof trade risk-free combination of technical and strategic account management tools. Stabilization Fund is the general strategic reserve investments and connects to the solution of commercialrisks of individual accounts of all investors. • Use 10 or more base currencies for hedging long-term trends in currency portfolio: Investment in one currency is translated in equal installments of 10 or more currencies, which makeshedging falling base rates. • Using an automated system of internal stabilization funds investment pool: Automated system of internal transfers of funds between the accounts of the investment pool gives extrastability ratio Equity / Balance and does not allow to incur losses in the event of a fall in the equity of individualaccounts. • Distribution of fund investments in a variety of tools (over 100 currency pairs, metals, and contracts for difference). Problematic elements of the compensation due to lucrative (one hedge instrument by others): The distribution of investment fund (within the same account) on a variety of tools (over 100 currencies,metals and contracts for difference), ie Volatility trading using multiple tools allows interdependent managementtools in one account (one hedge instrument by others). • Using the matrix input tools in the trade: Each account is distinct from other accounts (earlier and later switched to the active stage of the trade) a setof tools. That is, it is different for each of the accounts. • Gradual introduction of fund investments in trade (according to the strategy of "temporary" risk-sharing): Trading on the part of the allocated number of accounts equal to the trading period (1.5-2 months). Thegradual introduction of capital in the trade risks associated with trading and substantiated not repeatable marketfluctuations. In the case of formation of the negative vibrations of tools, their impact will occur on a limitednumber of accounts, rather than all at once. • Securing the profit for the entire trading period: Due to the fact that you are using the distribution of investments by the number of days of trading period,the question is not only the gradual introduction of fund investment in trade, but also the phasing out of trade, iesecure profits. Thus, the graph has a smooth removal of profit rising curve. Trading period and is associated with preservation of profit, ie at the end of active trading ASH systemswitches to a passive trade, and after 20-30 days, will close all orders, providing no subsidence approximation tothe Equity Balance. After the closure of all orders are removed from the account of the necessary funds, as well as part of thefunds goes to the Stabilization Fund, located on unused accounts to trade. • Making a profit from both micromotion currency pairs, day volatility instruments, and on the medium-term periods (1-2 months): The automatic system provides an opportunity to profit from both the low volatility of currencies and thevolatility of longer periods (weeks to months). This system gives an advantage over other systems is that theavailability of profitable trades is about 90%. The presence of an automatic exchange system and calculate the change profitable base rates makes itpossible to obtain additional revenue in the amount of 2-3% per month on investment. • To profit from arbitrage trading on the SPOT-market, using the resources of the stabilization fund: Stabilization Fund in addition to the direct purpose of using it as a stabilization in some accounts, thereallocation of resources between accounts is used to profit from arbitrage situations in the market for immediatedelivery through the exchange of Reuters SPOT / FWDS Matching attached to «ASH-Arbitrage." Since the 8
  9. 9. instantaneous exchange transactions, then the need for the base currency of the trading accounts can beimplemented immediately, without any loss. • The independence of the trading results of the direction of movement of tools (long / short strategies): Trading strategy, implemented in the automatic schemes ASH, makes a profit regardless of the direction ofthe tool, which is implemented by means of multidirectional trade, which would enable the simultaneous closureof unprofitable trades through profitable. • Ability to engage in trade an unlimited number of accounts: The system can carry out transactions and monitor thousands of accounts. Staff shall be thecontrolling function and is not directly involved in trading operations, while the system performs a fewthousand trades per month for each of the accounts. 9
  10. 10. 4. ENVIRONMENT FOR BUSINESS.4.1. Sectoral environment: the category of hedge funds 1. Hedge funds that combine long and short positions on shares (Long / short equity).The strategycorresponds to the "classical" model and is buying a "good" of securities and sale of "bad", thus not excludingcompletely, but significantly reducing market power. 2. Dedicated short. Funds that use only short positions in securities. 3. Equity market neutral. These funds use a ineffectiveness of market prices for different securities of therelevant (similar) assets, completely neutralizing the effects of dependence on the market. 4. Foundations of troubled securities (Distressed securities). They operate with debts or assets ofcompanies with financial or operational problems, which could be followed for the transformation of thecompany: bankruptcy, sale of assets, restructuring, etc. 5. Arbitrage Merger (Merger arbitrage). The strategy consists of investments associated with the companiesthat are expected to go through the process of mergers or acquisitions with other companies. 6. Arbitration on convertible bonds (Convertible bond arbitrage). Funds try to take advantage of pricediscrepancies between convertible bonds and their underlying stocks. 7. Arbitrage bonds (Fixed income arbitrage). This class of strategies aimed at generating income from priceanomalies between related bonds. 8. Emerging market funds (Emerging market). Funds invest in all types of securities related to developingcountries: stocks, bonds, government debt. 9. Global macro. Is aimed at investing in global markets in currency, stocks, bonds, commodities / rawmaterials. 10. Managed futures (Managed futures). Trade in the initial offering commodity and financial futurescontracts on behalf of its clients. Hedge funds, profit-making with multi-strategy Name Style Location Abax Global Capital Multi-Strategy Central Hong Kong Alydar Capital Hedge Boston, MA Alyeska Investment Group Multi-Strategy Chicago, IL Amaranth Advisors* Multi-Strategy Greenwich, CT Angelo, Gordon & Co. Multi-Strategy New York, NY APG Asset Management US Multi-Strategy New York, NY Apollo Advisors Multi-Strategy New York, NY Appaloosa Management Hedge Chatham, NJ Avalon Global Asset Management Hedge Houston, TX Azentus Capital Multi-Strategy Hong Kong Balyasny Asset Management Multi-Strategy Chicago, IL Barclays Capital Multi-Strategy New York, NY Blue Marble Capital Partners Limited Hedge Nelson, BC BlueCrest Capital Management Hedge London Bridgewater Associates LP Multi-Strategy Westport, CT Buckingham Capital Management Hedge New York, NY Canyon Capital Advisors Multi-Strategy Beverly Hills, CA Carlson Capital Hedge Dallas, TX Caxton Associates Multi-Strategy New York, NY Cheyne Capital Hedge London Citadel Investment Group Hedge Chicago, IL Clinton Group Multi-Strategy New York, NY Clovis Capital Management Hedge New York, NY CQS Management Limited Multi-Strategy London CR Intrinsic Investors Hedge Stamford, CT Czech Asset Management Hedge Greenwich, CT D.E. Shaw & Co Multi-Strategy New York, NY Deephaven Capital Management* Multi-Strategy Minnetonka, MN Duquesne Capital Management Multi-Strategy New York, NY Eclectica Asset Management Multi-Strategy London 10
  11. 11. Elm Ridge Management LLC Hedge Irvington, NYEton Park Capital Management Multi-Strategy New York, NYFarallon Capital Management Hedge San Francisco, CAFortitude Capital Multi-Strategy SydneyFortress Investment Group Multi-Strategy New York, NYFRM Capital Advisors Multi-Strategy LondonFrontPoint Partners Multi-Strategy Greenwich, CTGartmore Investment Management Multi-Strategy LondonGeorge Weiss Associates Multi-Strategy New York, NYGLG Partners Multi-Strategy New York, NYGoldman Sachs Principal Strategies* Multi-Strategy New York, NYHayground Cove Asset Management Multi-Strategy New York, NYHBK Investments Multi-Strategy Dallas, TXHighbridge Capital Management Multi-Strategy New York, NYHighland Capital Management Multi-Strategy Dallas, TXHoplite Capital Management Hedge New York, NYHunter Global Investors Hedge New York, NYHutchin Hill Capital Multi-Strategy New York, NYImplied Capital Multi-Strategy Boulder, COInternational Standard Asset Mgmt Multi-Strategy New York, NYIonic Capital Management LLC Multi-Strategy New York, NYIvaldi Capital Multi-Strategy LondonJames Caird Asset Management Multi-Strategy LondonJefferies Asset Management LLC Multi-Strategy New York, NYK Capital Partners Hedge Boston, MAKynikos Associates Short Seller New York, NYLionRock Capital Pte Multi-Strategy SingaporeLone Peak Partners Management LP Multi-Strategy New York, NYMagnetar Capital Partners Multi-Strategy Evanston, ILMan Group plc Multi-Strategy LondonManikay Partners Multi-Strategy New York, NYMariner Investment Group Multi-Strategy Boston, MAMarshall Wace Asset Management Hedge LondonMatrix Group Multi-strategy LondonMaverick Capital Hedge New York, NYMillennium Management Hedge New York, NYMistral Capital Partners Hedge Boston, MAMSD Capital Multi-Strategy New York, NYMyriad Asset Management Multi-Strategy Hong KongNorthwest Investment Management Multi-Strategy Hong KongOM Investment Management Multi-strategy Tampa, FLOrchard Capital Partners Multi-Strategy Hong KongPacific Alternative Asset Management Co Multi-Strategy Irvine, CAPaloma Funds Multi-Strategy Greenwich, CTPAR Capital Management Hedge Boston, MAParis Capital Partners Multi-Strategy LondonPaulson & Co. Multi-Strategy New York, NYPequot Capital Management* Multi-Strategy Westport, CTPerella Weinberg Partners Multi-Strategy New York, NYPermit Capital LLC Multi-Strategy West Conshohocken, PAPerry Capital Hedge New York, NYPlatinum Management Multi-Strategy New York, NYPolar Capital Multi-Strategy LondonPorter Orlin Hedge New York, NYRamius Capital Group Multi-Strategy New York, NYRound Rock Capital Advisors Co. Multi-Strategy TokyoRWC Partners Multi-Strategy LondonSAC Capital Advisors Multi-Strategy Stamford, CTSandelman Partners Multi-Strategy New York, NYSeminole Management Hedge New York, NYSigma Capital Management Multi-Strategy New York, NYSkyBridge Capital LLC Multi-Strategy New York, NYStark Investments Multi-Strategy St. Francis, WISteadfast Capital Management Hedge New York, NYSteenman Asset Management Multi-Strategy 1204 GenevaTalpion Fund Management LP Multi-Strategy New York, NYTiger Management Multi-Strategy New York, NY 11
  12. 12. TPG-Axon Capital Multi-Strategy New York, NY Trafalgar Capital Management Multi-Strategy London UBS O?Connor Multi-Strategy Chicago, IL Visium Asset Management LLC Multi-Strategy New York, NY Voras Capital Management Multi-Strategy New York, NY Wexford Capital LLC Multi-Strategy Greenwich, CT Xaraf Capital Multi-Strategy Greenwich, CT Hedge-funds investing in Global Macro Name Style Location Argonaut Capital Management Global Macro New York, NY Auriel Capital Management Global Macro London Autonomy Capital Research Global Macro London Avantium Investment Management Global Macro London Balestra Capital Global Macro New York, NY Brevan Howard Asset Management Global Macro London Cavenagh Capital Macro Singapore Clarium Capital Management Global Macro New York, NY Collard Capital Management Global Macro Geneva COMAC Capital LLP Global Macro London Covepoint Capital Advisors LLC Global Macro New York, NY Galle Global Macro Partners LLC* Global Macro New York, NY Grant Capital Partners Global Macro Santa Barbara, CA Minerva Capital Management* Macro Hong Kong OGI Capital Partners Global Macro Tokyo Panda Global Advisors LLC Global Macro New York, NY Pilgrim Partners Asia Pte Global Macro Singapore PointState Capital Global Macro New York, NY Principalis Asset Management Global Macro London PSQR Management LLC Global Macro New York, NY Round Table Investment Management Global Macro Charlotte, NC SemperMacro Capital LLP* Global Macro London SLJ Macro Partners Macro London Soros Fund Management Global Macro New York, NY Suranya Capital Partners Global Macro Stamford, CT Trigon Investment Advisors LLC Global Macro New York, NY Universa Investments (Black Swan) Macro Santa Monica, CA Woodbine Capital Advisors Global Macro New York, NY4.2. Business concept: characteristics of hedge funds compared to stocks, mutual fundsand other Hedge-fund - a private, not limited to regulation, or regulation subject to weaker investment fund is notavailable a wide range of individuals and managed by professional investment managers. Characterized byspecial fee structure for asset management, as well as the presence of equity in the assets of the fund manager.U.S. hedge funds are entitled by law to serve only professional investors (qualified investors), with an initialpayment of at least $ 5 million to private investors and $ 25 million - for institutional qualified investors."Unbounded regulatory" means nelimitirovannost nelimitirovannost strategy and margin leverage (leverage).Professional funds in offshore jurisdictions offer a more simplified conditions (capital investment of $ 100,000,and there is no restriction on the equity of the management company). The activities of hedge funds is subject to less regulation by government agencies, providing freedom ofchoice in the control tools of the trade, their share in the portfolio, investment strategies, etc. Hedge funds use the full range of existing tools of the trade: futures, options, stocks, bonds, currencies,bank certificates, instruments OTC market .... It allows you to effectively diversify its portfolio and providesmore opportunities to generate income. Hedge funds use a wide range of asset management strategy: short selling, arbitrage, futures trading, thesearch for undervalued assets, markets, pricing anomalies, buying shares of companies with commitments tofurther influence, etc. As a rule, they all have zero or negative correlation with the stock market, ie Hedge funds,unlike conventional funds show returns regardless of whether the stock market is falling or rising. 12
  13. 13. The basis of successful hedge fund of knowledge and skills management. They are professionals of thehighest class, the elite of the financial market. Only the best fund managers have a chance to perform well for along time for the entire spectrum of financial instruments and investment strategies. Risk control - the most important stage of management of hedge funds. Working with a diverse set of assetmanagers constantly monitor and control the risks for each individual instrument, strategy, and the entireportfolio as a whole. The remuneration of the management company, as a rule, consists of two parts: 1-2% of total assets undermanagement (as well as mutual funds), and 20% of the profits earned by the fund (only in hedge funds). Thus,there is a convergence of interests of investors and the manager as the main income of the latter depends on thesuccess of the fund. Hedge funds - a tool for long-term investment horizon of 5-10 years. Accordingly, for the withdrawal offunds before a certain date (usually 3-5 years) are charged an additional commission of 1-3%. The initialinvestment amount is much higher than in conventional funds, and amounts to 10-50 thousand dollars. Many hedge funds guarantee its investors a return of initial capital. This means that even if the manager isnot able to generate income fund, investors lose their money. Classic Funds are deprived of such opportunities.4.3. The strategy of the project. ASH system allows the independent yields for all accounts that use different instruments to trade, as wellas running in various business aspects. The ability to manage tens of thousands of accounts with an independentincome - a key factor for any of scalability, ie, strategy is equally functional to invest any amount investments. 13
  14. 14. 5. ANALYSIS OF MARKET SERVICE.5.1. Estimating the size of the market and possible trends of its development. According to the research company Global Alternatives large private investors (which is about 7.1 millionwith a capital of more than $ 1 million and total assets of 26 trillion. $) Invested: in hedge funds - 82% in privateequity funds - 8 % and 5% in real estate and commodity futures. A significant proportion of charitableinvestments, pension funds and non-profit account for hedge funds (this is especially characteristic for the U.S.).Banks lend themselves as hedge funds and private investors to attract investment to the volume of investmentsfrom $ 10,000 to purchase shares of hedge funds. If we compare this proportion with the banking sphere, it occupies a volume of 25-30 trillion. $ At a loweryield of bank fin. instruments and with a similar level of defaults. So hedge funds are able, under the same trends, but it is - an increase in assets from $ 30 billion. (In 1990)to $ 1.8 trillion in 2011 (100 times in 22 years) - focus on managing the assets in its banking, family offices,pension funds and charities. According to forecasts of the consulting firm McKinsey, in the coming years, the influence of hedge fundswill continue to grow: by 2012 their assets will grow to 3.5 trillion dollars, and invested money - up to 9.12trillion dollars. Thus, hedge funds along with funds and Asian central banks welfare will be among theinstitutions that have the greatest impact on the development of the global financial system.5.2. Assessment of market share and volume of services. According to the information portal HedgeCo.Net, now there are about nine thousand hedge funds. Lastyear, their total assets have exceeded 1.8 trillion dollars. At the same time four hundred and first in terms ofcapital structures controlled almost 80% of total assets industry. Among the most influential players - JP MorganAsset Management, Goldman Sachs Asset Management, Bridgewater Associates, DE Shaw, Farallon CapitalManagement, Och-Ziff Capital Management, Barclays Global Investors, Man Group, Cerberus CapitalManagement. Most of them - came from the United States. The volume of services provided depends on returns of hedge fund and less commonly associated withadvertising activities, as the yield estimate is carried out by institutional investors. Because of the possibility ofattracting investments based on three basic factors: a) The ratio of return / risk hedge fund; b) the demonstrated stability of profitability; c) Availability of own funds in an asset manager of a hedge fund.5.3. Market segmentation and identification of a niche service business. According to the categories of hedge funds, pronounced 10 different types: 1. Hedge funds that combine long and short positions on shares (Long / short equity). 2. Dedicated short. 3. Equity market neutral. 4. Distressed securities. 5. Merger arbitrage. 6. Convertible bond arbitrage. 7. Fixed income arbitrage. 8. Emerging market. 9. Global macro. 10. Managed futures. Strategy "Automatic system of hedging" include the possibility of combining the Long / short equity inGlobal macro and Managed futures. Possible coverage of all markets in which it is possible to combine in oneinstrument purchase / sale. 14
  15. 15. 6. COMPETITION AND COMPETITIVE ADVANTAGE.6.1. Comparative characteristics of competitive services. Many hedge funds use a staff (traders) to trade in different markets. It uses a fairly large amount of money,because the number of professional traders is limited. Thus, increasing the risks of trading the transactions. Automatic systems are also very common, but they are rarely used in commerce for hundreds of hedginginstruments for trading on one account. Reference: automated trading, as less prone to the human factor is widely used for hedging, for example,the company RGM Advisors LLC (in Austen, Texas) uses high-frequency trading. The founder of SAC CAPITALADVISOR Steve Cohen manages assets of about $ 7 billion that was earned with Scalping operations. Consider the benefits of the ASH over manual trading. The main advantage - the ratio of labor costs and thus the feasibility of the principle of hedging. Given thepossibility of a person (not using ASH) to control accounts, he was given to the analysis of one currency pair andtrading decision making can spend 5-30 minutes. one trading action. ASH, depending on the speed of thecomputer is a complex calculation of a single instrument within a fraction of a second, making a day on one billfrom 500 to 1,000 transactions. The decision regarding the trading activities, the complex calculations that take into account acomprehensive account status, opportunities for trade for each instrument separately, under the full control ofASH. The human factor affects only the installation of the correct input parameters (which can not be determinedautomatically), the moment of transition from active to passive trading (at the end of the trading period), thecontrol over the need to involve the stabilization fund. Cumulative comparative table of the effectiveness of trade Accounts of The human resource- currency Trading on Bidder Accounts Total trading factor in an expensiveness pairs on an an account account (200 accounts) account 20 bargain. 20 Тrader 5-10 5 10-20 200 decisions computers every day 2-1 bargaining. 4 Comp. ASH+ solutions for (1 permultiterminal+ 1000 100 500-1000 200 000 the entire 50-100 of Тrader auction. accounts) Period Advantage 1:100 1:20 1:50 1:1000 1:300 1:5 The average final advantage on all counts - ASH (under the supervision of the trader) trader works moreefficiently at about 300 times, and taking into account the reduction of trade risk, the rate can increase efficiencyby 5-10 times (depending on the size of the initial capital in the accounts of the trader). In the implementation stage "Systems network control, global reporting and security ASH"(MultiTerminal), through which can be centralized to notify the Comptroller of accounts (100 to 10 000), aswell as in-depth analysis of trade and create a common reporting. The system is also designed to protect accountsfrom unauthorized or accidental interference with trade.6.2. Comparative characteristics of competing firms. Feature of competition in the market for hedge funds is: 15
  16. 16. 1) Lack of competition on the fact of trading strategies (especially on the global macro). 2) The competition is based on the yield and accumulated image stability. Closest to the niche occupied by the business - a company Sac Capital Advisor, and "RenaissanceTechnologies". They also form the basis of return on their automation systems. Profitability of these companiesbelow the stated yield hedge fund, but their advantage is the high image stability. In addition to these facts, the market of hedge funds in attracting new investment is growing andcompetitive services can be able to attract new investment clients without the need to adopt competingcompanies.6.3. SWOT-analysis of the company. The positive impact The negative impact Strengths (project properties, or the team, giving Weaknesses (properties that weaken the advantages over others in the industry): project): 1. No need for a large staff to monitor tens of 1. Small group experiences in the creation ofThe internal thousands of accounts. international relations.Environment 2. The desire to replenish the command of 2.Reassessment of their own knowledge knowledge in the field of know-how, trade and the regarding the understanding of the complexity desire to explore new opportunities to attract of financial models in global markets. investment and Fin. lending. Opportunities (external apparent factors that provide additional opportunities to achieve the Threats (external probable factors that can objective): complicate the achievement of the goal):The external 1.Of great interest from private investors to 1. Crisis of global proportions that do not giveEnvironment profitable hedge funds. fulfill duties with investors and counterparties. 2. Number investvlozheny in this area continues 2. Bankruptcy prime brokers. to grow and has not yet reached the point of stability. 16
  17. 17. 7. RISK-MANAGEMENT. 7.1. Trade (market) risk. Typical errors of market hedge funds, for that matter, and other forms of investments is an attempt to"predict" the direction of movement of assets (stocks, bonds and other instruments). Examples of this AmaranthAdvisors, Bailey Coates Cromwell Fund, Marin Capital, Aman Capital, Tiger Funds, Long-Term CapitalManagement (for more on errors of these funds in the 13.8. Еrrors of hedge funds.). Wishful thinking - is to lose alarge part of the capital, as happened with these hedge funds. The strategy used by ASH, is not focused on aspecific orientation of the movement of assets, and is focused on making a profit from any direction of the tool(long / short strategies). In any automated system is a key parameter stability: the system should not be omitted due to the criticaldifference between equity and balance. For this is the internal settings of protection: 1. Depending on the appearance of a lot of orders over a certain value includes tracking and, if the balanceof equity = - close all open and pending orders. 2. If the equity <20% balance included a ban on opening new units. 3. If the equity falls below the level of Risk by 10%, all open and pending orders are modified in such away that the closure orders on the take occurred at a lower price movement (ie, faster). 4. Profit. Another way to reduce the risks - it is shutting down all orders that are open for a specifiedtrading period, by the smooth end of trade. That is, after the termination of the period of active trading, thesystem switches to the passive trade, when all blocks are installed gradually over two to three weeks, and closedwith a profit is the difference between equity and the balance goes smoothly to zero (no sagging balance sheet.) 5. The most basic way to protect against losses - a multi. The advantage of this moment is also the fact thatall other methods of protection work independently on each of the pairs. Also, the possibility of getting into aprice range in which the price of long-term "frozen" - is reduced by the amount of currency pairs. 6. Time-based strategy further reduces the possibility of entering orders in the long range of movementrates and makes it possible to make a profit even if nizkovolatilnyh movements of the instrument. 7. The optimum ratio of active and passive trading. The study of this relation to the accounts of dozensmade it possible to optimize the trading periods and create an additional system of protection against trade risks. During the entire cycle of trafficking used two trading strategies associated with a profit: a) from the small movements of currencies for a short period (the ratio of transactions and profits with theminimum - that is, a lot of deals and a small profit on each transaction), the chart - this is the first 7 days; 17
  18. 18. b) on the major movements for long periods (the ratio of transactions and the maximum profit - that deals alittle, and profits - large), the chart - from the 15th day of trading. Thus, for 8 to 14 trading days there is an almost complete absence of transactions and profits associatedwith the fact that the 1st strategy exhausted, and on the 2nd - they have not yet occurred. As you know, the less the period of active trade, the less prone to risks of any account. Thus, without lossof efficiency during the active trading can be reduced to terms of an effective trade strategy for the 1st or evenless, ie, 1 (one) working day. This method also allows the optimization of trading periods, ie reducing downtimelocal yield, which is equivalent yield is not forgetting. Also, this method combined with the integrated softwareof the bank (providing transaction between accounts) and Multiterminal ON ASH, will provide an opportunity touse the unused funds in the accounts (in the transition from active to passive trading) due to the dynamic changeof number of instruments used and the size of the account. 8. Dynamic tracking the ratio equity / balance on all accounts and automatic transaction of funds betweenaccounts to maintain the same ratio. 9. Using arrays to determine the set rates for each of the accounts makes it possible to reduce the frequencyof tools consistently running accounts. 10. It is advisable to consider ways to prevent a margin call one or more accounts. If the equity falls, say to80% on the balance, you need to add to the expense of 30-50% of the balance (this figure is set for thestabilization fund). The necessity of this addition is calculated before the onset of the ASH price level when thebill may be lost. The reasons for the possible situations that require the use of the stabilization fund - a very long period ofmovement within a wide range (not the price movement in a certain direction, namely a wide range of limitations,output prices from a wide range brings equity to the balance sheet). Again, to achieve such conditions, allprevious methods of protection reduce the possibility of occurrence of such situations to insignificant interest.Practice shows that the decrease in equity on the balance does not exceed 20-30% during the trading period. 7.2. Administrative (organizational) risk. The main causes of administrative risks - it is an authority to manage risk and cash flow control in oneperson. Because the proposed organizational model to manage a fund, these functions are separated, theadministration risks can be offset. Negative example, when these positions were combined in one person, its Nick Lisson, the collapse of oneof the most stable banks in the history of Britain - "Barings". His strategy is also indicative in the sense of lack ofhedging items - dependent on the movement of one instrument (he has put on the Nikkei 225 index) and thedependence on the direction of the market (he has put on growth). Hedge funds are secure and transparent investment business. As strange as it may sound for a weaklyregulated company in the Cayman Islands, but the credibility of qualified investors in such hedge funds are notless than the usual regulated mutual funds. It is based on a system of independent contractors who work withhedge fund on a commercial basis. In the hedge fund, that is, investment structures, including the managementcompany and the fund, there are at least five reputable auditors partners: the bank, custodian, administrator, primebroker, auditors and legal counsel. Some contractors (eg, prime broker and custodian) interact with each other,administrators monitor daily performance, liquidity, etc. In any action inconsistent control signal is input toinvestors and partners, and with the active development of the institution of the independent risk managementfalls under the control and the implementation of the strategy itself. In other words, to organize a fraudulent scheme in this case is almost impossible. If you have any suspicionof a counterparty leaves the scheme or simply initially refused to cooperate with the Fund, as the reputation itmore expensive. So if you intend to deceive investors to create the classic structure of a hedge fund simply doesnot make sense. 7.3. Political and currency risks (the risks of incidence of the underlying assets). The main factor of political risks are the risks of incidence of the underlying assets (this is the currencywhich is the basic input / output in the accounts of the broker). There is a complete solution of such risks. At acertain agreement with a broker can also provide additional revenue (amounting to 1-2% per month) due to theimplementation of protection against these risks. 18
  19. 19. Addressing these risks is to ensure that all open accounts at the broker had: 1) his base currency (7-10 major currencies separately on each of the accounts); 2) the opportunity at the end of the trading period change the base currency at the current rate for thecurrency, which fell for the current period relative to the base currency of the course - see details in paragraph 4of the Business Plan "strategy trades" (§ § Specification for Prime- broker). Thus, the dynamic change in rates will provide additional revenue and hedging political risks. In the eventof a significant drop in one of the base currency for the current trading period by 15-20% relative to othercurrencies, the availability of the list of underlying assets is 7.10 neutralizes rates drop to 1.5-2%, which did notsignificantly affect the profitability of the trading period. It is also possible the combination of this strategy using options to hedge the risk of incidence of theunderlying assets. Another example of the indigenous influence political decisions on the exchange rate was demonstrated toSeptember 6, 2011 the Swiss Central Bank, when he tied the Swiss franc (CHF) to Euros (EUR) - see Fig. A.Following this decision a couple EURSHF volatility was significantly reduced by the infusion method of theCentral Bank. Such a situation is not a risk for ASH, because: 1) is used to hedge a few dozen currency pairs; 2) The profitability of the system is extracted from both the volatile movements of currency pairs, and from nizkovolatilnyh; 3) In the case of excess volatility of the spread of a share of the pair, it is automatically disconnected from the trade and open positions are closed after a certain time. An example of a situation on the currency markets - the uncertainty of investors about the course"Eurodollar" in connection with the expected default dollars August 3, 2011 - see Fig. Two. As a result of thisuncertainty, there was steady movement of a wide range.This character of the currency pair exchange ratemovements is also not critical to thetrading strategy ASH: 1) In case of exceeding the threshold of one pair of lots, the remaining pairs compensatethe destabilization(described in more detail in a trade risks); 2) The presence of time-strategy provides a minimum percentage of open orders fallinginto similar priceranges. 19
  20. 20. 7.4. Natural, technical and production risks. Natural, technical and operational risks - partial or complete destruction of office equipment, which isdesigned to solve the trade problem. These risks are offset by the use of VPS-servers. The software (settings oftrading accounts) during the installation on office computers simultaneously duplicated on separate VPS-server.In case of violation of the office for more than a few hours and the inability to transfer work to another office,includes a remote trading terminals in the VPS-servers. This is a temporary solution to provide virtuallyuninterrupted trade, regardless of the risks. 7.5. Technical risks. Technical risks are associated with several factors: a violation of Internet communications, power failure,equipment failure (PC). Violation of Internet connection Solved by the presence of all computers connected to two independent providers. In the event of powerfailure - and an additional fixed-connection basis on each computer with a modem (telephone operator). Violation of the power In order to prevent short-term (up to 2 to 4 hours) of power outages to trade should be used laptops. Forlong trips should be provided for equipment (generator) to maintain power for a few days. Breakdown of equipment (PC) Solved with the help of preset settings for all accounts on one server. In the event of failure of one of thecomputers efficiently incorporated into the same trading account on the server. Note: in order to verify the degree of dependence ASH-fault connection, power failure, equipment failuredue to a run for nearly a month on the principle - the power is only a third of the total trading time. The results areas follows (see picture): 1. Disconnections hardly affected the balance of growth trends. That is, special subsidence is observed 2. The growth of the balance is less than planned for a given set of currencies and CFDs (65). Conclusions: The system is stable with technical faults, but with lower profitability. 20
  21. 21. 7.6. Operational risk. Examples of professionalism in the actions of traders can lead to significant losses, because the use ofautomated trading with ASH and multiterminalnogo software system will provide a significant proportion ofprotection against these risks (for details see Section 7 of the Business Plan, "The advantages over manual tradingASH"). Historical examples of professionalism in the actions of traders: Londons FTSE100 index fell 2%, when a trader is one of the brokers sold the shares for 300 millionpounds instead of 30 million A more comical story is connected with Salomon Brothers, now part of Citigroup. In 1998, a trader of thecompany unwittingly sold the French government bonds worth 850 million pounds. The thing is that heinadvertently leaned against the keyboard, thus pushing some "unnecessary" buttons. 7.7. Legal risks and risks of conflict of interest. The primary brokers, which typically interact with hedge funds, have a high reputation. Nevertheless, therisk of nonpayment by the broker of positive trading results and solve a technical and legal methods. Techniques (warning and monitoring): 1) Connected, the terminal hangs. Short breaks connection to the server are reflected in the results of trade with ASH only indirectly, if theyare limited to a few minutes. These cliffs are mainly affected the speed of updating currency pairs (a change ofcontrol for them). Low speed operation can significantly affect profitability. 2) Submission of quotations of poor quality: this includes an increase in spreads is not provided for in thecontract, gaps (gaps between the candles), candle drawing nonexistent size of several hundred items, etc. The size of gaps, drawing candle does not have any significant effect on the account, can only boost theirprofits. Growth spread above a certain value to the minimum can be fixed with the help of ASH and inform thebroker of non-compliance of contract (in which the prescribed limits of these changes). For candles, having a sizeabove a certain value is the control for all currency pairs with a periodicity of 7-15 seconds, which is theappearance of a candle can immediately track and in the absence of connection between these bursts with realquotations (including by comparing quotes from other brokers) may apply to the broker for an explanation. 3) Third party broker closes the open orders. 21
  22. 22. In the case of closing the deal were not from the terminal, ASH tracks incident intervention. Legal techniques A properly executed contractual relationship with the broker that clearly specified trading terms(commission, a range of changes in spreads, etc.) as well as the choice of a broker who is not tarnished its "name"of fraud, minimize legal risks. If you have any problems with the West by the broker can make a complaint to theCommission Commodity Futures Trading or the National Futures Association If there is evidence of violation of its obligations broker may fines million. Examples of recent incidents are quite revealing: Alpari Ltd Company in the spring of 2010 was fined by the Financial Services UK - FSA to 140,000 poundsfor the lack of control by the company for money laundering by their clients. Brokerage company BroCo Investments was fined by the Securities and Exchange Commission USA (SEC)in the amount of $ 1.3 million. Russian broker accused of manipulating the quotes, and breaking into customeraccounts. The use of market access through the prime broker, who often value their prestige, to avoid legal risks, andcontrol all elements of the trade with ASH - to reduce those risks to zero. 7.8. Liquidity risk. Risk arising from the sale of an existing asset. This type of risk means the inability to quickly implement anasset without significantly reducing the cost. The main measure of market liquidity is the difference between thepurchase and sale (the so-called spread).The value of the spread depends on the volume of trading financial assetin the market.The smaller the value of trading volume, the greater the spread. Therefore, before starting to tradein a test mode ASH excludes trades less liquid instruments (currency pairs and CFD): all of the tools that havespread in relation to the average daily volatility of the above 1:10 (1:7 for example) are excluded from the tradeas ineffective. The same thing happens in the trading process - a tool can be excluded from active trading after thestart of the trading account. 7.9. Transaction costs. Access to different markets (in different countries) by PRIME-broker (and legal guardians and powerscustodian bank), thereby reducing transaction costs and difficulties associated with the need to monitor multipleaccounts, etc. 7.10. Counterparty risk. After the bankruptcy of Lehman Brothers investors realized that no one, even the largest prime broker, isnot protected from bankruptcy, and began to actively put their money in different primary brokers, reducing therisk of the counterparty. There are several reasons for the active use of multiple prime brokers: • First, the financial crisis and the bankruptcy of Lehman Brothers have set the task of hedge funds todiversify counterparty risk: it is clear that if you have multiple primary broker, you can quickly share andtransfer their assets between them. • Second, for those hedge funds that need to securities lending by their primary brokers, the presence ofmultiple primary means brokers can access various sources of borrowing, covering the necessary range ofsecurities with a choice of "best" price. • Third, an additional primary brokers allow you to use additional sources of funding, thereby reducing therisk of financing. • Fourth, the "new" prime brokers may offer some services which did not have the "old" or that brokerprovided on less favorable terms. To date, large hedge funds have a 5 to 10 primary brokers. Therefore, the original term "primary broker»(prime broker), in the sense of principal, principal, sole (meaning primary broker), no longer reflects its originalessence, since hedge funds are working with multiple prime brokers. Thus, to solve the counterparty risk, cooperation with several prime brokers. 22
  23. 23. 8. THE ORGANIZATION OF FOREIGN ECONOMICACTIVITY OF THE FIRM 8.1. Organizational maintenance of international relations. The output of transnational markets is through technological cooperation with the Prime Broker. Technical requirements for Prime-broker: 1. A sufficient number of instruments for hedging (over 50). Trading tools that can be used to hedge: • currency pairs - all except for those that do not meet the principles of trading strategies, most oftenspread with commensurate volatility pairs. In case of failure ASH currency pair, it is a transition into thecategory of passive trade until the close of all orders (after the trade is automatically terminated on theinefficient instrument). • CFD (Contracts For Difference - CFDs): CFD INDICES (major stock indexes), CFD GRAINS (wheat),CFD MEATS (meat and poultry), CFD SOFTS (coffee, cocoa), CFD CTOCK (U.S. stocks) CFD ENERGIES(energy: oil, petrol), CFD BOND (government bonds), CFD RUS (Russian stocks), CFD METALS (metal). • Futures (futures) - provided that the duration of the futures contract exceeds the trading period. Note: The technical requirements of efficiency, determined automatically apply to all instruments. Thenumber used on one account and the instruments depends on the speed of the terminal broker - the smallerrequotes, breaks communication with the server, the more it makes sense to use the tools. 2. Minimum lot size - 0.01 (no more), the maximum lot - 10 (no less), or in a ratio of 1:1000. For the CFD -minimum lot may be 0.1. 3. The number of open and pending orders - no less than 200. Minimum number associated with thenumber of CMV-used tools, such as 50 instruments: 50h8 = 400 (orders). 4. Terminal "MetaTrader-4" of "MetaQuotes Software Corp." Five. Ability to set countervailing orders (long / short). 6. The size of the shoulder 1:100-1:500. Can trade with any shoulder, but the effectiveness of the strategy(profitability) depends on the size of the shoulder. The minimum level of leverage for the most efficient trade isautomatically determined for each instrument, and may be issued in the form of a tabular report on the stage ofchecking the validity of trading conditions. 7. The presence of an automatic (configurable) of transactions between the accounts of the investment pool.The system features: a) automatic transactions between trading and reserve (stabilization) accounts managed by the signalsemanating from Multiterminal ASH; b) Management of foreign exchange operations on the SPOT-market stabilization fund by using the systemReuters SPOT / FWDS Matching, connected to the "ASH-Arbitrage." 8.2. Economic support of international relations. Custodian will charge a fee (per transaction) between 0.05% and 0.10% of total NAV or transactionalbasis. It can also be set a minimum threshold of payment. Prime brokers also establishes a commission depending on the size of the order. 23
  24. 24. 9. THE STRATEGY OF THE MARKETING PLAN. 9.1. The overall marketing strategy. Short term plans: 1-3 months: the creation of legal and financial framework for trade in global markets. 3-15 months: the accumulation of good trading history. Medium-term plans: 1-3 years: audit the results of trade, bringing the results of additional investment from private investors. Long-term plans: 3-10 years: the expansion of effective strategies for different markets. Attracting investment frominstitutional investors, banks and pension funds. 9.2. Pricing. In world practice, set fees for the services of a hedge fund. They consist of an entrance fee, managementfee and the fee for the result. Entry fee - can vary up to 1% for other investors and is required to complete necessary legal documentsand additional office equipment technology. Management fee (% of capital) - 1-2% of the managed capital (before the trading period) and dividedbetween the Fund and the Management Company. All costs for contractors (bank-custodian, prime broker, administrator, auditor and legal counsel) areusually borne by the fund. S / n, office and other expenses (including an investment adviser) associated with themanagement takes care of the Management Company. Success Fee (20% of profit) - paid monthly by the Management Company on the fact of making a profit.Remuneration for the result can be withdrawn from your account without interrupting trade, as a percentage ofthe removal of 1-2% the size of the account balance does not affect the trade and would not requirereconfiguration of Automatic hedging. 9.3. Tactics of implementation services to investors. 1. With the potential investor held a presentation of services provided by the hedge fund and itscounterparties. 2. The investor signs the investment memorandum (Offering memorandum), and, if necessary, theinsurance risks of trading with counterparties. Investment memorandum is signed for one year and maybe extended. 3. After that transaction in the investment accounts of the hedge fund custodian bank. 4. Through the system of foreign exchange transactions received by Reuters Investment dividedby 10 or more accounts with different base currencies. 5. Further, the Management Company account connects to the trading system, Prime-broker ormultiple brokers according to Prime-entry plan for investment (displayed in the InvestmentMemorandum). 6. In any moment of shopping can be displayed from the sale of investments. In this case, thepossible loss an investor incurs. In addition, the investor pays a fee for CC lost profits amounting to 5%of the investment. 7. If an investor wishes to stop the trade in accordance with the investment strategy, its funds for 4months will be refunded an amount equal to the embedding. 24
  25. 25. 8. In a year when investment memorandum will not be renewed, the investor returns the sum ofinvestment + income received after deduction of all expenses: entry fee, management fee, the fee for theresult. 9. During the year the investors costs (management fees and compensation for the results) aretaken from the returns received from investment. 9.4. Warranty Policy: Methods of Insurance Hedge-fund may use internal and external resources of insurance transactions. Internal resources: 1. The use of the stabilization fund (from 10 to 30% depending on the decision of the investor). 2. Using a complex dynamic changes in the balance of accounts (depending on changes in equity onaccount of the investment pool). External Resources: 1. Insurance risks of trading companies with contractors. For example, "Miller Insurance Services Limited2012" commercial risk. 2. The formation of the legal elements of the guaranteed hedge fund (GHF). Most of the guaranteed funds are arranged on the same principle: the part of the invested funds used topurchase guarantees the return of investment capital, and the remaining funds are invested to produce income (seethe figure.). Also, for security in the GHF used options strategies. 9.5. The point of payback. The hedge fund is not a manufacturing company, for break-even point can not be calculated for him. Butthe point of the project payback (when profits exceed the projectcosts are spent) depends on the size of the initialinvestment. Take, for example: 400 thousand, a million and 10 million: MONTH 0 1 2 3 4 5 BANALCE (at the end of month) 400000 372312 386352 400932 416073 431796 one-time Registration of hedge fund -35000 0 0 0 0 0 costs Office costs -5800 0 0 0 0 0 variable costs Management costs -4000 -3723 -3864 -4009 -4161 -4318 Transaction and other costs -355 -372 -386 -401 -416 -432 fixed costs Office costs -262 -262 -262 -262 -262 -262 Balance (at the beginning of 354583 367955 381840 396260 411234 426784 month) 25
  26. 26. 400000 40000 30000 20000 10000 0 1 2 3 4 5-10000 400000-20000-30000-40000 MONTH 0 1 2 3 4 5 BANALCE (at the end of month) 1000000 993041 1030908 1070231 1111067 1153472 one-time Registration of hedge fund -35000 0 0 0 0 0 costs Office costs -8000 0 0 0 0 0variable costs Management costs -10000 -9930 -10309 -10702 -11111 -11535 Transaction and other costs -947 -993 -1031 -1070 -1111 -1153 fixed costs Office costs -300 -300 -300 -300 -300 -300 Balance (at the beginning of 945753 981817 1019268 1058159 1098545 1140484 month) 1000000180000160000140000120000100000 80000 60000 1000000 40000 20000 0-20000 1 2 3 4 5 MONTH 0 1 2 3 4 5 BANALCE (at the end of month) 1000000 1031142 1070710 1111799 1154467 1198776 0 7 2 0 6 9 one-time Registration of hedge fund -35000 0 0 0 0 0 costs Office costs -34000 0 0 0 0 0variable costs Management costs -100000 -103114 -107071 -111180 -115447 -119878 Transaction and other costs -9831 -10311 -10707 -11118 -11545 -11988 fixed costs Office costs -762 -762 -762 -762 -762 -762 Balance (at the beginning of 9820407 1019724 1058856 1099493 1141692 1185514 month) 0 2 0 3 1 26
  27. 27. 10000000 2500000 2000000 1500000 1000000 10000000 500000 0 1 2 3 4 5 The point of return for the investment amount in nearly 10 million comes in the 1st month of trading. At the start of trading depends on the speed of processing of legal issues: 1) Making jur. documents the hedge fund. 2) Formation of external economic relations with the prime brokers. The possibility of removal of funds from trading accounts occurs within 1.5-2 months fromthe start oftrading. Thus an investment of between 1 million and above give coherencetime of return and trading strategiesof the system. The point of return to investors, investing in an already-formed hedge fund, is 4 monthssince the launch ofinvestment in trade (according to the investment memorandum.) 27
  28. 28. 10. ORGANIZATION AND MANAGEMENT PLAN. 10.1. Business calendar: the creation of a hedge fund. Gantt chart. Months 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Weeks 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4Manufacturing matters:1. Rent an office.2.Connecting to the office of the alarm system.3.Installation of office equipment, furniture andstationary power systems.4.Connecting to a 3rd independent providers ofInternet-Network.5.Connecting to the Reuters system.Questions for personnel:1.A set of qualified personnel.2.Training of staff to the principles of monitoring andcompliance reporting ASH.3.Training work on Reuters.Information Questions:1. Setting up "the system network control, globalreporting and security ASH".2.Setting up interaction with the software ASH primebroker and Reuters.Legal Questions:1.Legal registration of hedge fund and managementcompany (see section 13.4).2.Registration foreign economic relations andcontracts with prime brokers, auditors andadministrators.3.Audit.Trading:1. Realization trade operations.2.Reporting. 28
  29. 29. 10.2. The organizational structure of hedge fund counterparties and services. INVESTMENT (money, valuable securities, other assets) INVESTMENT MANAGER CUSTODIAN BANK BOARD OF DIRECTORS (operations) (deposit of assets) AUDITOR HEDGE FUND INVESTMENT ADVISER ADMINISTRATOR (accounting) PRIME BROKER LEGAL ADVISOR (access to markets, trading platforms, loan to the fund) SUB-BROKER 1 SUB-BROKER 2 THE MARKET (stocks, bonds, futures, currencies and other instruments) It is quite possible to do a simple structure, in some cases, for example, there are funds for a limited ofnumber of investors who may not be so cumbersome. Also features custodian bank often does Prime Broker. The sponsor / owner of the fund Sponsor, often a major participant in the hedge fund is its creator. As a parent he becomes the primary orsole holder of voting shares through which control is exercised over the activities of the board of directors.Voting shares, as a rule, do not give the holder the right to a share of the profits derived from investment of thefund. In addition, the sponsor may be one of the investors and as such holds equity stakes in the form of non-voting shares that are entitled to profit participation fund. Board of directors On the board of directors of hedge fund charged with the function of control of all aspects of its activities.The Board of Directors oversees the activities of the investment manager and other professional firms providingservices to the fund. Its mission also includes conflict resolution, when the shareholders interests are in conflictwith the interests of the investment manager. The Board of Directors approves the remuneration of the manager,appoints independent auditors, as well as selects the key agents that will serve the hedge fund. Although theseduties are often represented a mere formality, and ideally the board of directors of hedge fund shall consist of themost respected professionals in the financial or legal field, whose task is to prevent fraud or illegal acts on thepart of managers. Board members are personally liable up to the criminal, for the observance of the principles andrules of the fund, stated in the investment memorandum. The board of directors and may include the owner fund. Investment Manager Investment Manager is a management company, which uses the funds accumulated in hedge-fundinvestment, according to investment strategy, taking concrete investment decisions for its implementation, as wellas taking the lead in the operating performance of the fund. Typically, hedge fund manager is the owner or part owner, and manages its own funds.In the hedge fundindustry adopted a fee structure 2/20, that is, the management company receives a percentage of fund assets forthe management (Management Fee, typically 2%) and the percentage of the result (Success Fee, usually 20%).Opening and maintenance fund is quite expensive, so the Management Fee is usually completely spent onregistration fees of all contractors, office personnel, marketing, etc. Investment adviser Attracts investments in hedge fund and interacts with customers. Hedge funds voluntarily provideinformation about their activities to specialized news agencies, as they are forbidden to advertise themselves 29
  30. 30. among ordinary investors. Qualified investors use to search for and selection of hedge funds such sources as the"Bloomberg", specialized databases and platforms such as largest investment banks. Legal Consultant Sometimes they can be an administrator. Responsibilities consist of a consultant to comply with therequirements of regulators, contracts with the investors and the decision of other legal issues. Bank-Custodian In the role of hedge fund custodian should serve a large bank with a good reputation in the function ofwhich is, above all, keeping the assets of the investor, ie, securities and cash. In some cases the custodian doesnot have them in reality, it just takes them to the balance of a central depository system of the country in whichlocated. Custodian may also engage in conduct and execution of transactions, but this function is actually moreoften goes to the primary broker. Custodian also prepares reports on the transactions that pass through the fund,and sometimes it can check compliance with investment policy manager stated in the charter of the fundobjectives. Administrator The main function of an administrator is to determine the funds net asset value (net asset value - NAV).Calculation of NAV, as a rule, the date of subscription for shares of the Fund or the repayment, which usuallyfalls on the first working day of each month or the next day at regular intervals, usually within a month. For somefunds with greater liquidity (eg, CTA) NAV calculation is carried out weekly and even daily. Essentially, theactivities of the administrator is to determine the value of the Fund regardless of the investment manager. Mostadministrators also perform several other functions, including preparation of financial statements, paying bills,sending reports to shareholders, the coordination of investor relations, etc. Often, the administrator assumes thetasks of the paying agent, which holds the subscription for shares of stock and repay them, and distributes profitsto shareholders. Administrators are usually licensed by local regulators, and are responsible for their work. Auditor The auditor shall audit the financial statements of fund accounting rules and financial regulations.Typically, the fund conducts an audit of its accounts on an annual basis. The presence of an auditor - a necessarycondition of the hedge fund as an auditor without other agents, and service companies are unlikely to agree toserve. Availability of audit as a prerequisite for attracting investment. In the event of an audit - it may be such famous companies such as KPMG, Deloitte, etc. For example, a global company "Ernst & Young" ( carries out an audit of financialstatements in accordance with International Financial Reporting Standards (IFRS) and national standards (USGAAP, the Russian Accounting Principles). The prime broker If conventional brokers simply spend one-off transactions of hedge funds, prime broker takes a muchbroader set of functions. In the role of prime broker acts as a rule, an investment bank with a worldwidereputation (Morgan Stanley, Goldman Sachs, Merrill Lynch, Bear Stearns). Since the structure of such a bank andbrokerage company located, and trading unit, and operating office and management company, it is able to providehedge funds at the same time a range of services. Thus, the brokerage division conducts transactions of hedgefund or redirects them through a broker, which selects hedge fund, and then closes the deal and will report to thecustodian of it. In addition, the primary agent and he often acts as a custodian. The management company mayprovide prime broker hedge-fund shares in debt. In addition, the primary broker provides hedge fund leverage. 10.3. Summary of key executives. KSENDZOV ОLEKSANDR 30
  31. 31. 28/09/1977, married, two daughters.Experience in building software:2000-2006. Creating a systemmorfosinteza the Russian language.Development and registration ofcopyright in the program "A collectionof texts and illustrations."Licensingauthoring program (SBULicense and License Min.ekonomikiUkraine).2006-2011. Development of amathematical model of the global market laws. Creating"automatically hedging" strategy andmanagement, providing risk-free trading in global markets.Tasks in the project: investment manager.TSURKAN MAKSYM08/07/1986 unmarried.Education: Southern Branch «CrimeanAgrotechnological University" NationalAgrarian University, Faculty of accountingprofession - accounting and auditing. Courseson management of tourist business. Courses onInternet trading.Experience:2007-2008. Internship in England.2008. SC "Crimean Wine House» Ltd.«LEMPIRE DU VIN».Manager to manage material flows of materials main production warehouse.2009. LLC "Kaczynski." Organization of accounting. Development of standards for wages.2010-2011. Commodity-accountant jewelry network, "Silver Star" (UKRZOLOTO) 31
  32. 32. Duties: Work in 1S 8.2 "Management Accounting": recording and analysis of the TMC, the primary accounting, record keeping, discount programs, interaction with various parts of the central office and the entire chain of stores "Silver Star". 2011-2012. The official representative of the broker "InstaForex". General skills: driving license categories A, B, C, English (fluent), Ukrainian (fluent), 1C: Accounting 8.2. Tasks in the project: Investment Advisor. 10.4. Other investors. Investors put their money into the fund in order to make a profit. Usually they do not have the rightto vote (voting shares), and vote with their money, or bringing them to the fund or taking back. 10.5. Duties of directors and staff of the management company. Investment Manager: 1. Alignment with the investor some points of the memorandum of the investment: a plan of capital input into the scheme hedged trade, inventory hedging instruments (currency pairs, etc.), the optimal size of the stabilization fund. 2. Setting up a stabilization fund management. 3. Organization of round the clock monitoring of trading activities in the accounts of investors, and analysis of the changes in the accounts of the investment pool. 4. Sending a test report on the accounts of the investor of the investment pool. 5. Trading decisions and setting ASH under trading conditions the broker. 6. Personnel matters. Investment Advisor: 1. Attracting investment / loan to the fund. 2. Dealing with financial issues of interaction with the counterparties: prime brokers, custodian bank, the administrator and the auditors. 3. Bookkeeping Management Company. Legal Counsel: 1. Monitoring compliance with the requirements of regulators. 2. The conclusion of contracts with investors. 3. The decision of legal issues of cooperation with banks, prime brokers, and others. Programmer: 1. Configuration and control of serviceability of the equipment and software. 2. Setting up "The system network control, global reporting and security ASH". 3. Setting up interaction with the software ASH prime broker and Reuters. 4. Providing information security management company, designing and creating complex informationsecurity systems (KSZI) for the OID (object information activities), writing a threat model (description of thechannel information leaks, and their elimination). Supervisors (4 people): the control and maintenance of Multiterminal ASH. 1. Undergo preliminary training on demo accounts. 2. Lead round the clock monitoring of accounts. 3. Trading decisions are not taken. Report a need for intervention in trade investment manager. 4. Control of constant power and Internet connections. 5. Monitoring the effectiveness of interaction with the software ASH prime broker. 10.6. Hiring and bonus system. Hiring of staff will be through the media (newspapers), as well as with the "Employment Center". The system of bonuses and changes in employees salaries will be commensurate increase in thenet profitability of the company. 32
  33. 33. 11. INVESTMENT PLAN: STRATEGY AND SOURCES OFFUNDING.11.1 Sources of funding. Potential investors of hedge funds: • high net worth individuals; • financial advisors; • wealth-management offices and RIAs; • single- and multi-family offices; • fund of hedge funds; • corporations; • foundations and endowments; • pensions; • sub-advisory relationships; • banks. Consider for example the ability to attract capital in a hedge fund formed by the leading Europeanbanks: Swiss bank UBS Under the direction of Wealth Management Bank offers wealthy clients with services to build aninvestment portfolio, which may include investments in hedge funds. The website of the bank the possibility ofsuch investments are as follows: "Hedge funds can generate an attractive return over the long term. They have a relatively modest level ofvolatility in the capital and most of them have the means to produce positive results even in falling markets. Inaddition, hedge funds portfolio confer resistance and improve its performance in the ratio yield / risk. " The Management Company UBS Global Asset Management A & Q is recognized as one of the largestinvestors in the shares of hedge funds. Swiss investment bank Credit Suisse The Bank offers its customers a wide range of services to build an investment portfolio, built on the basisof the strategies of hedge funds. Credit Suisse has established links with many hedge funds and can offer itscustomers as investments in single hedge funds, and multiple strategies of hedge funds. Credit Suisse calculates and publishes its own index of hedge funds, Credit Suisse / Tremont. The bankallows customers to build an investment portfolio based on its index.(Https:// ) Credit Suisse is the largest investor in hedge funds and attempts to expand its business through theacquisition of investment companies, managers of hedge funds ( ). French investment banking group Crédit Agricole In August 2009, the investment arm of the group, Crédit Agricole Asset Management (Caam), has arunning fund of hedge funds of $ 14 billion, said it was going to jump on the platform of managed accounts.(Http:// ) HSBC London HSBC also provides services to wealthy clients to build portfolios based on alternative investmentinstruments, including hedge funds. The bank and hedge funds are among the major players in this market. TheManagement Company HSBC Private Bank is recognized as one of the largest investors in the shares of hedgefunds. HSBC also offers prime brokerage for hedge funds. (Http:// French Societe Generale In the area of private banking offers customers a portfolio of services based on the formation of hedgefunds. (Http:// ) 33
  34. 34. Irish Anglo Irish Bank The direction of the banks private banking offers to invest in alternative investments, including, and hedgefunds. (Http:// ).11.2. The strategy of attracting funding. In order to attract additional investment in a hedge fund, you must earn a "historical performance". Anaudit of the company (Die Dillegence) at the end of the first reporting period (1 year), as well as advertisingmakes it possible to attract the attention of investors on the basis of historical data. Hedge-Fund may advertise themselves in specialized media outlets, as advertising among ordinaryinvestors is prohibited. Qualified investors use to search for and selection of hedge funds such sources as the"Bloomberg", specialized databases and platforms such as largest investment banks. 34