This talk about hedge funds in simple terms. It covers hedge fund managers, investors, strategies, comparison between hedge funds and mutual funds, performance measurement, Indian scenario, and historical performance.
2. Biggest insider-trading scandal in HEDGE FUND
history
Rajat Gupta had tipped off Raj Rajaratnam, the owner of $3 billion Galleon fund
about Warren Buffett's confidence-boosting $5 billion investment in the teetering
investment bank in September 2008, during the depths of the market turmoil.
4. Formula 2/20: Manager receives 2% of assets under
management and 20% of profits made annually
Hurdle Rate : Minimum returns to be generated annually
before 20% commission clause is applicable
High water mark: Benchmark decided based on previous
year’ performance, based on which 20% commission paid
only if present returns exceed the benchmark
7. Long Only
• A strategy in which a hedge
fund owns long positions in
securities
• Looking for return to the
upside to outperform their
benchmarks
• If the BSE SENSEX is a
fund's benchmark and is up
10%, and the hedge fund is
up 15%, the extra 5%
between the two is the
return generated by the
portfolio manager
Short Only
• A strategy in which a hedge
fund only sells stock short
• A very risky strategy
• Portfolio managers running
short only portfolios have
been absolutely crushed
over the past couple of years
as the rising market tide has
lifted most securities
8. Long/Short
• Using both the strategies
• Say 70% of the stocks are
long traded and 30% are
short sold
• Then the difference
between the two is 40%
• This is called as the net
exposure to markets
Market Neutral
• The concept is to reduce the
net exposure to markets to
zero
• Removes any impact of
market movements
• Fund manager relies solely
on his or her ability to pick
stocks
• Achieved by
• Equal investment in long
and short strategies
• Reducing beta of overall
fund to zero
9. Global Macro
• Investment in stocks,
bonds, & other derivative
securities
• Highly leveraged directional
bets on underlying assets
• Limited capacity issues
because of diversity of
investments, market size &
global perspective
Quantitative Hedge
Funds
• Quantitative hedge fund
managers often employ
computer programmers
who comb the statistical
models and data looking to
find alpha that hide behind
market abnormalities
• This can be exploited by
super high-frequency
trading programs that can
buy and sell thousands of
stocks or futures instantly
• Unfortunately, they do not
always anticipate market
commentary
12. Mutual Funds
Lesser fees
Need for high
disclosure
Regulated
Hedge Funds
Higher fees
No need for
disclosures
Generally
unregulated
13. Absolute Returns
The Sharpe Ratio
Benchmarks
• Analyze relative returns versus a benchmark example the S&P 500 Index
Quartile Chart
• the top quartile of peers on an absolute return comparison, standard
deviation, and a variety of other metrics
14. Qualitative Factors
• Evaluations of management
A fund must have good, strong management just like a
company
• Back-office operations
Including trading, compliance, administration, marketing,
systems, etc
• Scale
It takes a subjective opinion to determine whether a fund's
strategy will be impacted by having too large of a fund and
by how much returns will be affected
15. A novelty in India
New investment style in a country that traditionally prefers
buying and holding stocks
Domestic investors are not used to the high fees commanded
in the hedge fund industry
High success threshold in a country where plain vanilla bank
deposits offer nearly double-digit returns
16. India-focused foreign funds returned 12.3 percent last year
Overseas funds are not regulated
SEBI imposes
A 1,000-investor limit
A 10 million rupee (US$188,000) minimum investment
requirement
A minimum size of 200 million rupees (US$3.8 million)
Typically, India-based hedge funds are relatively risk-averse
and invest in illiquid equity funds
20. • Long-term outperformance by hedge funds occurred solely due to
outperformance in down markets
• The converse is also true. Hedge funds underperformed when the
market rose, rising 21.8% per annum less than index returns
• The market “won” more often and won by a great margin than
when it lost
• But, it turns out the compounded return of hedge funds and the
market during this period was roughly the same. The math of
compounding tells this story
21.
22. Assets under management approximately Rs. 20 Crs
($3.28 million)
Advisory fund: returned 11.86 percent so far this year.
Top 5 Holdings (%)
Syndicate Bank (12.60)
Satyam Computer Services Ltd. (12.20)
Mahindra & Mahindra Financial Services Ltd. (12.10)
Dabur India Ltd. (11.70)
Godrej Consumer Products Ltd. (10.17)
23. Aiming to raise $1.25 billion for the latest fund to increase
its stake in Facebook
The firm is known for its long position
Apple
Google
LinkedIn
Major Stakes in:
MakeMyTrip
Just Dial
24. When Warren Buffett searched for his successors to
manage Berkshire Hathaway’s stock investments,
he had the world as his oyster. Sure enough, he
hired two hedge fund managers!
Hedge funds performing in this manner have a rare ability to win a war by losing every battle. In the two-thirds of the time the market rises, hedge funds will underperform and their investors might get antsy. In the one-third that really counts for long-term compounding, hedge funds outperform but do so at a time when investors are licking their wounds from losing money in other strategies. So it’s heads you win, tails I lose. Each battle along the way, investors have something to complain about. Only after a long period of time will investors look back and realize hedge funds had done right by them all along