Includes- 1. History and Timeline of Hedge Fund 2. Types of Hedge Fund 3. Characteristics of Hedge Fund 4. Two and Twenty Structure 5. Largest Hedge Fund 6. Strategies of Hedge Fund Investing 7. Pros & Cons 8. Case Studies 9. Best Trades of All Time

1. Hedge Fund
Presented by :-
Swayam SJ

2. Hedge - Meaning
A hedge is an investment that protects your finances from a risky situation. Hedging is done to minimize
or offset the chance that your assets will lose value. It also limits your loss to a known amount if the
asset does lose value.
Risk-Reward tradeoff - while it reduces potential risk, it also chips away at potential gains
Perfect Hedge - one that eliminates all risk in a position or portfolio. In other words, the hedge is 100%
inversely correlated to the vulnerable asset. This is more an ideal than a reality on the ground, and even
the hypothetical perfect hedge is not without cost.
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3. Hedge Fund - History
▫ Father of Hedge Fund industry - Alfred Winslow Jones
▫ Launched the first hedge fund in 1949
▫ He raised $100,000 (including $40,000 out of his own
pocket)
▫ Try to minimize the risk in holding long-term stock
positions by short selling other stocks. This investing
innovation is now referred to as the classic long/short
equities model
▫ In 1952, Jones introduced a 20% incentive fee as
compensation for the managing partner
▫ According to Warren Buffet, Hedge fund was originally
started by his mentor Benjamin Graham back in 1920s
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4. Hedge Fund - Timeline
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Early 2000s
Many high profile hedge funds
failed in spectacular fashion,
including Tiger Fund
1969-74
Heavy losses resulted in
closure of many Hedge Funds
1960s
Gained popularity by
outperforming Mutual Funds
1949
Alfred Winslow Jones
launched the first hedge fund
2020
10,000 active hedge funds
with AUM valued more than
$3.25 trillion
Julian Robertson’s Tiger Fund
outperformed by following
exotic strategies (F & O)
1986

5. Types of Hedge Funds
Domestic Hedge Funds
Domestic hedge funds are
open to only those investors
that are subject to the origin
country’s taxation.
Offshore Hedge Funds
An offshore hedge fund is
established outside of your
own country, preferably in a
low taxation country.
Fund of Funds
Fund of funds are basically
funds that invest in other
hedge or mutual funds rather
than the individual underlying
securities.
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6. Key Characteristics of
Hedge Fund
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7. Accredited or Qualified
Investors
Hedge funds investors have to meet certain net
worth requirements—generally, a net worth
exceeding $1 million or an annual income over
$200,000 for the previous two years.
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Fact : 66% of hedge fund assets are held by
institutional investors which includes PPF, NPOs,
Universities and colleges

8. Wider Investment
Latitude
A hedge fund's investment universe is only limited
by its mandate. A hedge fund can invest in
anything—land, real estate, derivatives,
currencies, and other alternative assets. Mutual
funds, by contrast, usually have to stick to stocks
or bonds.
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9. Often Employ Leverage
Hedge funds often use leverage or borrowed
money to amplify their returns, which potentially
exposes them to a much wider range of
investment risks—as demonstrated during the
Great Recession. In the subprime meltdown,
hedge funds were especially hard-hit due to
increased exposure to collateralized debt
obligation and high levels of leverage.
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10. Fee Structure
Hedge funds charge both an expense ratio and a
performance fees. The common fee structure is
known as two and twenty (2 and 20). 2% asset
management fee and a 20% cut of generated
gains.
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11. Two and Twenty Structure
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Total Assets
Under
Management
Capital Gain
on Assets
20%
2%
Total Fees = 20% of Profit + 2% of Total Assets

12. Largest Hedge Funds
Hedge Fund AUM Founder/CEO
Bridgewater Associates $160 billion Ray Dalio
Renaissance Technologies $110 billion James Harris Simons
AQR Capital Management $60 billion Cliff Asness
Two Sigma Investments $60 billion John Overdeck, David Siegel and
Mark Pickard
JP Morgan Asset Management $47.7 billion Jamie Dimon
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13. Strategies of Hedge Fund Investing
▫ Event driven: There are few event driven hedge and mutual funds that invest to take
advantage of price movements generated by corporate events. For example: merger arbitrage
funds and distressed asset funds.
▫ Market neutral: There are also some market neutral funds that seek to minimise market risks.
This category included convertible bonds, short and long equity funds and fixed income
arbitrage.
▫ Long/Short selling: By definition, short-selling means that you sell a security without actually
buying it but with the notion of buying it at a predetermined future date and price. You hope for
the share price to drop on this predetermined future date and book profits.
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▫ Arbitrage: An arbitrage-oriented strategy means buying a security in one market where the
security is trading at a lower price and then selling the same security at a higher price in another
market to book some profit. This can also be used for buying and selling two very highly
correlated securities simultaneously to book profit when markets are moving sideways. This is
called relative value arbitrage. Both the securities could be from one asset class or multiple ones.
▫ Market-driven: Hedge and mutual funds also take advantage of global market trends before
they make the decision to invest in securities. They look at global macros and how they will
impact interest rates, equities, commodities and currencies.

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Category Hedge Funds Mutual funds
Regulatory
requirements
No SEBI registration required or
disclosure of NAVs
Disclosure of NAVs at the end of the
day is necessary
SEBI registration is mandatory
Investor category HNIs, banks, commercial firms, etc. Any domestic investor
Underlying securities Equities, money market instruments,
currencies, real estate, derivatives,
convertible securities
Equities, money market instruments,
bonds, cash
Risk Very high Comparatively lower
Minimum ticket size Rs 1 crore Not uniform but as low as Rs 500 in
some funds
Minimum corpus Rs 20 crore for a hedge fund Not defined
Investment strategy Short selling permitted Mutual funds cannot do short selling

16. Pros
▫ Profits in rising and falling markets
▫ Balanced portfolios reduce risk and
volatility
▫ Several investment styles to choose from
▫ Managed by the top investment managers
Hedge Fund - Pros & Cons
Cons
▫ Losses can be potentially large
▫ Less liquidity than standard mutual funds
▫ Locks up funds for extended periods
▫ Use of leverage can increase losses
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17. CASE
STUDIES
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18. HOW GEORGE SOROS BROKE THE BRITISH POUND
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19. KEY INFORMATION OF 92’ POUND DEBACLE
Strategy of Soros
▫ Shorting Sterling
▫ Going long on Mark and
Franc
▫ Long on French & German
bonds
▫ Long on British stocks
▫ Short on German & French
equities
Result
▫ Soros made 1.5 Bn USD in
a month
▫ AUM of his fund rose from
3.3 Bn USD to 7 Bn USD in
4 months
▫ Allies Paul Tudor and
Bruce Kovner saw their
funds rising by 250 & 300
Bn USD respectively
Reason
▫ European Economics of
Unity
▫ Soros Credit Position
▫ High Leverage of 20:1
▫ Bet against artificial
exchange rates
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20. Why it happened in 1992 & can’t happen today?
1992
Artificial Currency Valuation
1992
Faster trading. Slower Central
Bank response
1992
Trading volumes in Billions
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2020
Much more flexible ERM
2020
Connected Central Banks
2020
Trading Volumes in Trillions

21. ON THE OTHER SIDE OF SPECTRUM: LTCM
DEBACLE
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22. KEY INFORMATION OF LTCM DEBACLE
Background
▫ Solomon Brothers Hedge
Fund set up in 1990
▫ Huge return margins and
fund manager margins of
40% & 27% respectively.
▫ Speculation on currency
derivatives
Result
▫ Fall in the value of capital
investments by 50% in
1998
▫ Bail-out by Bankers of US
where Fed brokered a 3.3
Bn USD deal
Reason
▫ Russian Ruble Crisis
▫ Dow Jones fall of returns
▫ Too Big To Fail stature
▫ High leverage position
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23. Major Consequences in Future
TBTF CONCEPT
Private Financial Institutions
understood the nerve of Fed
and got “TBTF” card to play
out the risk
2008 Financial Crisis
Linked to the last point, 2008
Financial Crisis could have
been avoided if there was no
TBTF concept at place
UBS & Mullins
Chairman of Union Bank of
Switzerland resigned for
becoming significantly in-the-
money and Mullins, potential
successor of Alan Greenspan
saw his future getting dashed
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▫ Bill Ackman turned $27 million into $2.6 billion during the coronavirus pandemic
▫ Michael Burry's 'Big Short'
▫ David Tepper's $7 billion win during the depths of the financial crisis
▫ 'Evil Knievil' Simon Cawkwell's ingenious shorts against Northern Rock
▫ Kyle Bass' $4 billion win on the US housing market collapse
▫ Andrew Hall's $100 million profit on $100 oil futures
▫ Neil Woodford's unconventional bets in tobacco stocks
▫ Louis Bacon's 86% return through betting on oil prices
▫ Stanley Druckenmiller's double bets on the Deutsche mark
▫ Andrew Krieger at odds with the Kiwi dollar
▫ Paul Tudor Jones' $100 million profit on Black Monday
Best Trades of All Time

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THANKS!
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