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Hedge funds

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  • 1. Hedge FundsWhat is a hedge fund? Simply put, a hedge fund is an alternative investment platform which is ableto offer a broader range of investment strategies when compared to other types of funds. Hedgefunds are aggressively managed investment portfolios that offset a greater degree of risk on theinvestors part with a greater potential for substantial returns against the initial capital investment.One would expect the term “hedge fund” to be applied to an investment strategy which offeredlower risks and returns: to hedge an investment is to act in a way that minimises losses during a bearmarket. However, modern hedge funds are seen as a pro-active investment strategy and simply away to diversify an investment portfolio. In this sense, the diversification acts as the hedgeinvestment, even if the fund itself is offering a higher risk strategy.Hedge fund managers offer bespoke investment strategies which exploit long, short, leveraged andderivative positions to deliver alpha investment returns that out-perform the overall performance ofthe market. The principle role of hedge funds is to out-perform other alternative investmentplatforms and strategies such as long-only managers. This is traditionally achieved by relying onqualitative assessments of the market and expert advice to make returns through a variety ofchannels. The market expertise that make this type of investment strategy are highly sought-after.More recently, hedge funds have been able to exploit high end analytical computing technology.Known as quantitative investors, these funds utilise powerful computing programmes to cross-reference a huge database of market data to find investment patterns and automatically divulgestrategies. Examples of modern quantitative traders include Robeco in the Netherlands andBlackrock Management in New York.The size of hedge funds varies substantially. Existing US regulations state that the minimum capitalworth of an investor in a hedge fund should be $1mn, whilst industry insiders suggest that as of2012, a new hedge fund may realistically now require a starting capital of as much as $1bn to remaina viable entity in the US marketplace. Codes of conduct as well as large-scale initial capitalinvestments allow hedge funds to remain stable.Hedge funds have always fallen under some level of regulatory frameworks and, since the globalmarkets downturn began in September 2008, hedge funds have been faced with increasingly robustsets of guidelines and codes of best practices. Such policing of the industry is seen as a way to focusinvestment strategies towards long-term, sustainable growth, and to prevent the possibility of fraudoccurring or positions of trust being exploited for personal gain. Hedge funds are established tocater for specific client needs, and they deal primarily with institutional investors such as pensionfund managers and mutual fund managers.
  • 2. The nature of hedge fund activity is one of innovation and constant re-evaluating of marketconditions and investment patterns. Although regulation may be seen by some within the industryas an unnecessary or inconvenient obstacle for business strategies, the long-term objectives ofgrowing confidence from investors, and earning a reputation for trustworthiness will see a netincrease in the capital open to fund managers with a resultant growth of the industry as a whole.Many hedge funds take steps beyond the regulatory framework to ensure full confidence from theirinvestors. In the United Kingdom, hedge funds such as Shore Capital and Eden Rock CapitalManagement are either fully-, or majority-owned by the business partners.