Hedge Funds 101 Texas Investment Portfolio Symposium March 24, 2007 Bernay Box Bonanza Capital, Ltd.
What is a Hedge Fund <ul><li>A structure, not a strategy </li></ul><ul><li>Originally pioneered by A.W. Jones in 1949 </li...
Hedge Fund Structure <ul><li>Primarily a Limited Partnership, where the fund manager acts as the General Partner </li></ul...
Hedge Fund Composition <ul><li>How does short-selling and leverage  lower  market risk? </li></ul><ul><li>The Typical long...
Business Model Attributes <ul><li>TRADITIONAL </li></ul><ul><li>Institutional </li></ul><ul><li>Asset gathering </li></ul>...
Hedge Fund Strategies <ul><li>Market Neutral:  50% long / 50% short </li></ul><ul><li>Convertible Arbitrage:  Long convert...
Hedge Fund Strategies Cont’d <ul><li>Bottom Line: </li></ul><ul><li>There are as many different strategies as there are ma...
Building a Business <ul><li>Understand, develop and master your “Game” </li></ul><ul><li>Create a flexible and realistic b...
Current Events <ul><li>Historically hedge funds have had less regulation and therefore a more entrepreneurial environment....
Hedge Fund Careers <ul><li>Portfolio Manager </li></ul><ul><li>Analyst (Sector specific or Generalist) </li></ul><ul><li>T...
Bonanza – “Our Game” <ul><li>Small cap </li></ul><ul><li>Diversified </li></ul><ul><li>Consistent Exposure  </li></ul><ul>...
Deal or No Deal? <ul><li>Why do investors pay hedge fund managers higher fees than other traditional money mangers? </li><...
My advice to you <ul><li>Look at the business from a long-term perspective.  Don’t cut corners for short-term gain. </li><...
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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 of "Hedge Funds 101"

    1. 1. Hedge Funds 101 Texas Investment Portfolio Symposium March 24, 2007 Bernay Box Bonanza Capital, Ltd.
    2. 2. What is a Hedge Fund <ul><li>A structure, not a strategy </li></ul><ul><li>Originally pioneered by A.W. Jones in 1949 </li></ul><ul><ul><li>Combination of two techniques – short-selling and leverage, to reduce risk in case of market down turns </li></ul></ul><ul><li>Today the structure is used to pursue the most aggressive to most conservative strategies </li></ul>
    3. 3. Hedge Fund Structure <ul><li>Primarily a Limited Partnership, where the fund manager acts as the General Partner </li></ul><ul><li>Most/all of the fund manager’s assets are invested along with outside Limited Partners </li></ul><ul><li>Fund manager has flexibility in managing the fund (stocks, bonds, options, and commodities) </li></ul><ul><li>Only accredited investors and qualified investors are permitted to invest </li></ul><ul><li>Profits are allocated between investors (typically 80%) and the fund manager (typically 20%) with a “high water mark” </li></ul>
    4. 4. Hedge Fund Composition <ul><li>How does short-selling and leverage lower market risk? </li></ul><ul><li>The Typical long/short hedge fund is dependent on stock selection, not the market, to make money </li></ul><ul><li>Gross and net exposures vary significantly from fund to fund, depending on what the manager is pursuing </li></ul>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. 5. Business Model Attributes <ul><li>TRADITIONAL </li></ul><ul><li>Institutional </li></ul><ul><li>Asset gathering </li></ul><ul><li>Relative performance (to a market index) </li></ul><ul><li>Passive investors </li></ul><ul><li>HEDGE FUND </li></ul><ul><li>Entrepreneurial </li></ul><ul><li>High rate of returns </li></ul><ul><li>Absolute performance (regardless of market) </li></ul><ul><li>Active, Proactive </li></ul>
    6. 6. Hedge Fund Strategies <ul><li>Market Neutral: 50% long / 50% short </li></ul><ul><li>Convertible Arbitrage: Long converts / Short underlying equity </li></ul><ul><li>Global Macro: Strategy George Soros made famous </li></ul><ul><li>Long/Short: Various exposures and concentrations </li></ul><ul><ul><li>Growth </li></ul></ul><ul><ul><li>Value </li></ul></ul><ul><ul><li>Sector </li></ul></ul><ul><ul><li>Emerging Market </li></ul></ul><ul><li>Distressed: Securities of bankruptcies / re-orgs </li></ul><ul><li>Short Only: Negative net exposure </li></ul><ul><li>Fund of Funds: A portfolio of hedge funds </li></ul>
    7. 7. Hedge Fund Strategies Cont’d <ul><li>Bottom Line: </li></ul><ul><li>There are as many different strategies as there are managers. The structure is what they have in common. </li></ul><ul><li>Each strategy has its strengths and weaknesses. The key differentiator is the manager . </li></ul>
    8. 8. Building a Business <ul><li>Understand, develop and master your “Game” </li></ul><ul><li>Create a flexible and realistic business plan </li></ul><ul><li>Have very supportive family and friends (not just financially) </li></ul><ul><li>Great relationship with all your service providers </li></ul><ul><ul><li>Prime Broker </li></ul></ul><ul><ul><li>Auditor </li></ul></ul><ul><ul><li>Legal Counsel </li></ul></ul><ul><ul><li>Administrator </li></ul></ul><ul><li>W hen appropriate, find the right people for your business </li></ul>
    9. 9. Current Events <ul><li>Historically hedge funds have had less regulation and therefore a more entrepreneurial environment. </li></ul><ul><li>Institutionalization - “Growth in assets” </li></ul>Source: Freeman & Co.
    10. 10. Hedge Fund Careers <ul><li>Portfolio Manager </li></ul><ul><li>Analyst (Sector specific or Generalist) </li></ul><ul><li>Trader </li></ul><ul><li>Back Office </li></ul><ul><ul><li>Accounting </li></ul></ul><ul><ul><li>Administrative </li></ul></ul><ul><ul><li>Compliance/Legal </li></ul></ul><ul><ul><li>Investor Relations </li></ul></ul>
    11. 11. Bonanza – “Our Game” <ul><li>Small cap </li></ul><ul><li>Diversified </li></ul><ul><li>Consistent Exposure </li></ul><ul><li>Long-term orientation </li></ul><ul><li>Focused on research </li></ul>
    12. 12. Deal or No Deal? <ul><li>Why do investors pay hedge fund managers higher fees than other traditional money mangers? </li></ul>*Inception date 3/1/99 Annual ROR Growth of $100
    13. 13. My advice to you <ul><li>Look at the business from a long-term perspective. Don’t cut corners for short-term gain. </li></ul><ul><li>Run to where the ball is going, not where it is. </li></ul><ul><li>Most importantly - Play YOUR game! </li></ul>
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