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Hedge funds and Tulipmania
- 1. Hedge Funds + Tulipmania By Mohammed Aqdas Imran Zaidi
- 2. Hedge funds
- 3. What is a hedge fund ? It is an important tool that creates value by delivering reliable returns, managing risk and diversifying investments. It attempts to meet the financial goals & obligations of millions of people.
- 4. WHO INVESTS IN HEDGE FUNDS ? Regulations in most countries limit hedge fund participants to accredited investors. (In the US, this means only those individuals with investments in excess of $5 million or net worth of at least $1 million and institutions with total assets over $5 million). This means less regulations for hedge funds as compared to the mutual funds. About two-thirds of global hedge funds assets come from institutional investors such as pension funds and non profit endowments (the rest comes from individual investors).
- 5. Why invest in hedge funds? Hedge funds are great tools for diversification. It provides investors with the opportunity to manage their investment strategies in such a way that it minimizes risk and maximizes returns. Risk-adjusted returns Offers protection in volatile markets Minimize investment risk Maximize performance returns
- 6. How do hedge funds invest ? Hedge funds invest in a variety of assets globally : This diversification allows hedge funds to : • Avoid over-investing in a single type of asset • Create a stable portfolio • Protect investments from risk in market fluctuations Common stock Bonds Commodities Currencies
- 7. Hedge fund strategies A variety of strategies: 1. Global Macro: Hedge fund managers invest based on the changes in the economic variables (such as interest rates). 2. Relative value/arbitrage: Positions are based on valuation discrepancy in the relationship between multiple securities 3. Event-driven: Positions are maintained in companies which are currently or might be involved in corporate transactions including mergers, restructuring, etc. 4. Directional/tactical: Positions are based on market trends, movements, etc so it is more exposed to fluctuations in the market.
- 8. Recent past’s performance For the 10 years ending in January 2015, Vanguard data shows that a basic portfolio of index funds that own every security in a market segment (60 percent stocks, 40 percent bonds) would have returned 6.6 percent a year. The average hedge fund only managed an average return of 5.6 percent a year. Hedge funds are expensive (2% of investments and 20% of profits) Conclusion (opinion based): Forget about above average investment returns. Focus on keeping management expenses as low as possible.
- 9. A Tulip
- 10. Origins Brought from the Ottoman Empire to Vienna Spread to other European nations Became extremely popular among wealthy
- 11. Rarity
- 12. The Trade Seed produced a bulb which was planted Bulbs produced seeds, bud clones and offsets Bulbs with the mosaic virus were extremely rare and expensive
- 13. A Tulip Bulb
- 14. Early Futures Market Growing a tulip took a long time, around 7-12 years from seed to bulb to flower Tulip traders signed contracts to buy the tulips at the end of the season Speculators also joined in
- 15. Prices Spurred by huge demand, prices kept increasing Common color tulips prices also increased Sky was the limit Tulips fetched ridiculous prices
- 16. The Bubble Burst February 1637, tulip auction at city of Haarlem