What is a Hedge Fund?


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This presentation will give users a general overview of many aspects of the industry and its purpose, including:

• The benefits of hedge fund investing
• Who invests in hedge funds?
• Who regulates the hedge fund industry?
• The various strategies and types of hedge funds
• How do hedge funds generate returns for their investors

Learn more about the global hedge fund industry at: www.hedgefundfundamentals.com.

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What is a Hedge Fund?

  2. 2. What is a hedge fund? Contents The hedge fund industry has grown in recent years to be a leading investment partner for institutions and individuals around the world. While hedge funds have become a popular, often-utilized investment tool, the industry is still misunderstood. Table of Contents: What is a hedge fund? What is their purpose? How do they work? Who do they benefit? Hedge Funds Defined 4 5 Who Invests 6 How Do Hedge Funds Invest • • • • 3 How Are Hedge Funds Regulated This presentation serves as a basic introduction to the hedge fund industry, answering the following questions: The Origin of Hedge Funds 8 Hedge Fund Types 9 How They Work 10 Who Benefits 11 2
  3. 3. What is a hedge fund? The Origin of Hedge Funds The roots of the modern day hedge fund industry date back to 1949 when a man by the name of Alfred Winslow Jones began employing an investment strategy that offset long equities positions with short positions in order to better manage risk. This balanced approach now defines today’s hedge fund industry. Hedge Funds Provide: Portfolio Diversification Risk Management Reliable Returns Over the years, hedge funds have evolved from an investment vehicle for wealthy individuals to a tool used by pensions, corporations, unions, universities, non-profits and high-net-worth individuals use to diversify their investments, manage risk and deliver reliable returns so they can meet their financial obligations and goals. 3
  4. 4. What is a hedge fund? Hedge Funds Defined A hedge fund is an investment vehicle that can employ a wide range of investment and trading activities to maximize performance returns while minimizing investment risk. Minimize Investment Risk Maximize Performance Return 4
  5. 5. What is a hedge fund? How are Hedge Funds Regulated? Virtually all countries with significant financial markets have regulatory authorities that regulate hedge funds and managers. These include: • In the United States, the Securities and Exchange Commission and the Commodity Futures Trading Commission regulate hedge fund managers and the managed futures industry, respectively. • In Europe, each country has its own regulator, which are then complemented by the European Securities and Markets Authority (ESMA) that provides a coordinating role among competent regulators in the member states and technical advice on hedge fund issues to the European Commission. • Regulators in Asia with authority over managers include, among others, Hong Kong’s Securities and Futures Commission and the Monetary Authority of Singapore. • International organizations play a role in assessing regulation on hedge funds including the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO). 5
  6. 6. What is a hedge fund? Who Invests? Because hedge funds are highly regulated, fund managers can only accept investment capital from accredited investors or qualified purchasers, including: 1. Public employee retirement plans 2. Corporate employee retirement plans 3. University endowments 4. Foundations and non-profit organizations 5. Family Offices and high-net-worth individuals. Regulatory qualifications for high-net-worth individuals are outlined below. An individual whose net worth, or joint net worth with the person’s spouse, exceeds $1 million at the time of the purchase, excluding the value of their primary residence Individuals with a yearly income of $200,000 or higher in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. 6
  7. 7. What is a hedge fund? Who Invests? More than half – 66 percent, according to research firm Preqin – of global hedge funds assets are held by institutional investors including public and private employee pension plans, university and college endowments and charitable organizations. *Source: 2014 Preqin Global Hedge Fund Report, January 2014 7
  8. 8. What is a hedge fund? How do hedge funds invest Hedge funds invest in a wide range of assets across capital markets globally, including: Common Stock Bonds Commodities Currencies Diversification helps hedge funds to: • Create a stable portfolio • Avoid over-concentration in a specific type of asset • Protect investments from risk in market fluctuations 8
  9. 9. What is a hedge fund? Hedge Fund Types There are many unique types (commonly called strategies) among the 9,900* various hedge funds active globally. Strategy examples include: • Global Macro Hedge Funds Traditional Long / Short Hedge Funds Evaluating economic variables to determine market impact and identify investment opportunities Investing in equity securities, holding stocks for varying lengths of time to balance risk and produce return on investment. Event-Driven These funds maintain positions in companies involved in corporate transactions including mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments Managed Futures Known as commodity trading advisors (CTAs), these funds invest in up to150 global futures markets, trading in everything from grains to gold, currencies and stock indexes. While each hedge fund calibrates its own degree of risk and return, their singular investment goal is to deliver positive return to their investors while carefully managing away downside risk due to market fluctuation. For a list of the various strategies common among U.S. hedge funds, click here. *Source: Hedge Fund Research 9
  10. 10. What is a hedge fund? How They Work Unique to the investment community, hedge funds are a partnership formed between the fund manager and the investors. Typically hedge fund managers invest a significant amount of personal capital - in some cases in excess of 50 percent of the total assets in the fund - aligning their interests with that of their investors. Hedge Fund Investment Capital Investor Capital Managers' Capital 10
  11. 11. What is a hedge fund? Who Benefits? Hedge fund investments benefit local communities and residents in ways that are not commonly explained or understood. Institutions partner with hedge funds in order: • Help strengthen retirement security for millions of public and private sector workers • Provide funding for scholarships and research grants for colleges and universities • Help fund critical economic, health-related and social development projects in local communities across the nation. Click here for an interactive map detailing how hedge funds benefit communities across the U.S. 11