Hedge Funds:
Managed pooled fund for alternative
investment methods which employs trading into complex products.
Hedge fund tries to “hedge” the risk associated with a
particular investment choice based on the price relevant information.
Hedge fund managers choose from the variety
of investment options from stocks to bonds and commodities to currencies.
How did it start?
Alfred Winslow Jones launched the first hedge fund in 1949.
Equal short (or selling) and long (or buying) positions for his portfolio.
Combination of long and short positions made his portfolio more stable with lower risks.
Hedge fund vs. mutual fund:
(In Bubble 1):
Hedge funds are only open to certain accredited wealthy investors.
Mutual funds are open to non-accredited investors as well.
(In Bubble 2):
In terms of investment risk, hedge funds are much riskier than mutual funds.
Hedge funds involve various
types of investments other than stocks including bonds, commodities, exchange rate, etc.
(In Bubble 3):
Hedge funds are subjected to less regulatory checks.
Mutual funds are subject to greater level of
regulations and must provide higher level of disclosure.
(In Bubble 4):
Mutual funds do not take share from profits but charge a management fee ranging from 1-2%.
Hedge funds charge management fee and a cut from profits as well.
Profit share could range from 10-20%.
Hedge funds examples:
During the mid-80s, hedge funds became the center of
attraction due to Julian Robertson’s Tiger Fund.
Tiger funds used leveraged investments in securities and currencies based on
global macroeconomic and political situations.
Tiger Fund lost more than US$2 billion in trading of Japanese Yen with respect to the
US dollar which led to its closure.