Hedge Funds 101 Texas Investment Portfolio Symposium March 24, 2007 Bernay Box Bonanza Capital, Ltd.
What is a Hedge Fund
- A structure, not a strategy
- Originally pioneered by A.W. Jones in 1949
- Combination of two techniques – short-selling and leverage, to reduce risk in case of market down turns
- Today the structure is used to pursue the most aggressive to most conservative strategies
Hedge Fund Structure
- Primarily a Limited Partnership, where the fund manager acts as the General Partner
- Most/all of the fund manager’s assets are invested along with outside Limited Partners
- Fund manager has flexibility in managing the fund (stocks, bonds, options, and commodities)
- Only accredited investors and qualified investors are permitted to invest
- Profits are allocated between investors (typically 80%) and the fund manager (typically 20%) with a “high water mark”
Hedge Fund Composition
- How does short-selling and leverage lower market risk?
- The Typical long/short hedge fund is dependent on stock selection, not the market, to make money
25% 25% Net Exposure 95% 95% 175% Gross Exposure 95% 35% 75% Short Positions 0% 60% 100% Long Positions (%) 95% Hedge Fund - B Hedge Fund - A Mutual Fund
- Gross and net exposures vary significantly from fund to fund, depending on what the manager is pursuing
Business Model Attributes
- Relative performance (to a market index)
- Absolute performance (regardless of market)
Hedge Fund Strategies
- Market Neutral: 50% long / 50% short
- Convertible Arbitrage: Long converts / Short underlying equity
- Global Macro: Strategy George Soros made famous
- Long/Short: Various exposures and concentrations
- Distressed: Securities of bankruptcies / re-orgs
- Short Only: Negative net exposure
- Fund of Funds: A portfolio of hedge funds
Hedge Fund Strategies Cont’d
- There are as many different strategies as there are managers. The structure is what they have in common.
- Each strategy has its strengths and weaknesses. The key differentiator is the manager .
Building a Business
- Understand, develop and master your “Game”
- Create a flexible and realistic business plan
- Have very supportive family and friends (not just financially)
- Great relationship with all your service providers
- W hen appropriate, find the right people for your business
- Historically hedge funds have had less regulation and therefore a more entrepreneurial environment.
Source: Freeman & Co.
- Institutionalization - “Growth in assets”
Hedge Fund Careers
- Analyst (Sector specific or Generalist)
Bonanza – “Our Game”
Deal or No Deal?
*Inception date 3/1/99 Annual ROR Growth of $100
- Why do investors pay hedge fund managers higher fees than other traditional money mangers?
My advice to you
- Look at the business from a long-term perspective. Don’t cut corners for short-term gain.
- Run to where the ball is going, not where it is.
- Most importantly - Play YOUR game!