Hedge Funds 101
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  • Talk about how you ‘bootstrapped’
  • It would be difficult to start Bonanza today Talk about how SEC registration will only give the perception of safety in hedge funds Cramer story
  • - Talk about how you feel some in the industry are profiting off the management fee and producing lousy returns.

Transcript

  • 1. Hedge Funds 101 Texas Investment Portfolio Symposium March 24, 2007 Bernay Box Bonanza Capital, Ltd.
  • 2. 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
  • 3. 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”
  • 4. 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
    • Gross and net exposures vary significantly from fund to fund, depending on what the manager is pursuing
    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
  • 5. Business Model Attributes
    • TRADITIONAL
    • Institutional
    • Asset gathering
    • Relative performance (to a market index)
    • Passive investors
    • HEDGE FUND
    • Entrepreneurial
    • High rate of returns
    • Absolute performance (regardless of market)
    • Active, Proactive
  • 6. 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
      • Growth
      • Value
      • Sector
      • Emerging Market
    • Distressed: Securities of bankruptcies / re-orgs
    • Short Only: Negative net exposure
    • Fund of Funds: A portfolio of hedge funds
  • 7. Hedge Fund Strategies Cont’d
    • Bottom Line:
    • 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 .
  • 8. 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
      • Prime Broker
      • Auditor
      • Legal Counsel
      • Administrator
    • W hen appropriate, find the right people for your business
  • 9. Current Events
    • Historically hedge funds have had less regulation and therefore a more entrepreneurial environment.
    • Institutionalization - “Growth in assets”
    Source: Freeman & Co.
  • 10. Hedge Fund Careers
    • Portfolio Manager
    • Analyst (Sector specific or Generalist)
    • Trader
    • Back Office
      • Accounting
      • Administrative
      • Compliance/Legal
      • Investor Relations
  • 11. Bonanza – “Our Game”
    • Small cap
    • Diversified
    • Consistent Exposure
    • Long-term orientation
    • Focused on research
  • 12. Deal or No Deal?
    • Why do investors pay hedge fund managers higher fees than other traditional money mangers?
    *Inception date 3/1/99 Annual ROR Growth of $100
  • 13. 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!