Fund: A hefty sum of financial resources that is allocated for a specific purpose is termed as a fund. For example, a gifted fund made out to a university is set aside only for the purpose of sponsoring research students.
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Below please find a definition of “Sovereign Wealth Funds”
Sovereign Wealth Funds: No longer to be ignored sovereign wealth funds seem to be popping up in the WSJ as often as Ipod advertisements and pink slips for CEOs. These are pools of fully discretionary capital that are controlled by the government an often times but a small financial committee of close political allies to the president or leader of the respective nation where the funds are based. Many of these funds range in the tens to hundreds of billions of dollars and some have estimated that this pool of capital will grow from $3 trillion to over $12 trillion by 2012.
Many of these sovereign wealth funds have made headlines by taking large long-term positions in western companies such as Citigroup. Below are some of the recent transactions involving hedge funds and banks who invest in hedge funds:
UBS sold a 9% stake to the Government of Singapore Investment Corporation and another $1.77B stake to a undisclosed investor from the Middle East
Abu Dhabi Investment Authority the sovereign fund of the Gulf Arab state acquired a 4.9% state in Citigroup for $7.5B
Central Hujin Investment Co. acquired 71% of China Everbright Bank for $2.7B
Dubai International Capital, ran by Dubai’s ruler Sheikh Mohammed bin Rashid Al Moktoum acquired 9.9% stake in Och-Ziff Capital Management Group for $1.1B
China’s Citic Securities and Bear Stearns agree to invest $1B in each other and run a 50/50 JV in Hong Kong
Abu Dhabi-based Mubadala Development Co. of the Abu Dhabi government regime paid $1.35B for a 7.5% stake in Carlyle Group
Dubai International Capital took a 2.87% in ICICI Bank of India for $750M
China state investment company paid $3B for a 10% stake in Blackstone
Dubai International Capital bought an undisclosed stake in HSBC Holdings
Free MP3 Download: To download our free 35 minute audio interview with expert Richard C. Wilson on how to succeed in the field of finance please click here.
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Tags: Sovereign Wealth Funds, Foreign Wealth Funds, Superfunds, Government Investment Company, Sovereign Wealth Fund Investment, Middle East Fund, hedge fund
Below please find a definition of “Futures and Commodities Market”
Futures and Commodities Market: The futures and commodities markets are two vital parts of the investment world but represent two very different things altogether. Commodities markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. The futures market is an auction market in which participants buy and sell future contracts for delivery on a specified future date. Trading is carried on through open yelling and hand signals in a trading pit.
A commodities market serves the purpose of allowing two individuals to exchange the rights to goods without visual inspection. Commodity markets require the existence of agreed standards opposed to spot markets where delivery either takes place immediately, or with a minimum lag and normally involves visual inspection of the commodity or a sample of the commodity. A forward contract is an agreement between two parties to exchange at some fixed future date a given quantity of a commodity for a price defined today (buy now, pay later). Forward contracts have evolved and have been standardized into what we know today as futures contracts.
A futures contract is a type of derivative instrument, or financial contract, in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract, you are basically agreeing to buy something that a seller has not yet produced for a set price. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities – remember, buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods.
That is why futures are used as financial instruments by not only producers and consumers but also speculators. The futures market allows buyers and sellers an opportunity to manage price risks for goods they will either need to purchase or sell at a later date. An example is Boeing utilizing the futures market to hedge against an increase in the cost of aluminum at a later date which is a major component in the manufacture of an aircraft (i.e. hedging).Unlike a stock, which represents equity in a company and can be held for a long time, if not indefinitely, futures contracts have finite lives.
Free MP3 Download: To download our free 35 minute audio interview with expert Richard C. Wilson on how to succeed in the field of finance please click here.
Fast Financial Training: If you want to take your finance or business career to the next level you should explore our financial analysis certification program, or our training programs on financial modeling, investment banking, hedge funds, or private equity. All of these programs are offered on https://BusinessTraining.com
Tags: hedge fund, hedge funds, commodities, futures, futures and commodities market, what is a futures and commodities market?, commodity, futures definition, alternative investments
In the following video recorded in Zurich Switzerland, Richard Wilson shares his experience as a global speaker on family offices, capital raising and alternative investments. Richard most recently served as the Opening Day Chairman of the GAIM Conference, the hedge fund and family office industry’s oldest and biggest conference.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Coming soon.
If you’d like to have Richard Wilson speak at your family office or capital raising event send him an e-mail to Richard at HedgeFundGroup.com and he’ll send you a brochure.
In the following video recorded in Zurich Switzerland, Richard Wilson shares his experience as a global speaker on family offices, capital raising and alternative investments. Richard most recently served as the Opening Day Chairman of the GAIM Conference, the hedge fund and family office industry’s oldest and biggest conference.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Coming soon.
If you’d like to have Richard Wilson speak at your family office or capital raising event send him an e-mail to Richard at HedgeFundGroup.com and he’ll send you a brochure.
It’s hard to predict the future of any industry, and the hedge fund industry changes especially quickly. In the following video, I offer my expectation for the future of the hedge fund industry.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Coming soon.
I hope that this video has given you a better understanding of what is a hedge fund.
Hedge funds are often confused for other types of funds like private equity funds, mutual funds and others. So, to clear up any confusion, I recorded the following video that provides a short, clear definition of what is a hedge fund.
Video Transcript/Summary: The strategies and tips provided within this video module include:
A hedge fund is a private investment partnership where the portfolio manager typically co-invests their own assets with the assets of the clients which they manage.
Hedge funds charge a management fee and performance fee.
Management fee is typically 2%.
Performance fee is typically 20%, but has been known to reach as high as 30%.
The prime difference between a hedge fund and that of other management funds is the fact they charge both the management and performance fee.
Transcript of What is a Hedge Fund?
Hello, this is Richard Wilson and today we’re going to define What is a Hedge Fund? Hedge Fund is a private investment partnership where the portfolio manager typically co-invests their own assets with their investor’s assets. They generally charge two types of fees: a Management Fee and a Performance Fee. Hedge funds charge management fees typically of 1% to 2% and they charge performance fees of generally 10% to 20%, some actually can be as much as 30%.
What really makes a hedge fund different from other types of investment funds is the fact that they charge both a management and a performance fee. Thank you.
I hope that this video has given you a better understanding of what exactly a hedge fund is.
The hedge fund industry is like an ecosystem and it’s important to understand how the various players in the industry interact. In order for you to better understand this system, I have recorded the following video on the hedge fund ecosystem.
Video Transcript/Summary: The strategies and tips provided within this video module include:
The hedge fund ecosystem refers to the different business partners in the hedge fund industry, of which 95% of existing hedge fund managers utilise the services of at least four. These five are (i) legal compliance firms, (ii) audit firms, (iii) prime brokerage firms, (iv) fund administration firms and (v) third party marketing firms.
Legal compliance firms are used when you are setting up your fund, which is a detailed process that can be quite expensive. In order to do this right, you have to retain the services of someone who charges usually $15-$40k but sometimes $60-$80k. Once the firm is launched, they manage compliance reporting, legal assistance, contract and other ongoing resources.
Accounting firms will come in and do an independent assessment or help with financial controls or prepare for an audit. An auditing firm will carry out their audits quarterly and annually.
Prime brokerage often refers to the service provider within a large investment bank and provides custody, trading and leverage to hedge fund managers. Most hedge funds work with a prime brokerage so for new hedge funds, particular focus and attention is emphasised here. We have set up www.primebrokerageguide.com as an insightful resource.
Fund administration firm will do third party verification of wire transfers, help with operations outsourcing, do day-to-day account reconciliation, book keeping and all other operation processes. It is a growing trend in the industry to retain the services of a fund administration firm to reduce operational and fraud risks. More information can be got at www.fundadministration.org.
Third party marketers are an independent capital raiser for the hedge fund. They often work for 2-5 years as a time, acting as a consultant outside of the firm. A third party capital marketer will typically work for a multiple of hedge funds at any one time, adopting various different strategies. Funds will pay him/her a retainer and a percentage of funds raised. This percentage is usually 20% for as long as the funds raised remains within the fund. To learn more, visit www.thirdpartymarketing.com.
Due diligence on all of the five providers within the ecosystem should be carried out, meeting with at least three from each before making a final decision, rather than making an emotional decision after meeting just one.
Hedge funds often fail or thrive based on the relationships developed in the hedge fund ecosystem.
Transcript for Hedge Fund Ecosystem
Hello, this is Richard Wilson and today we’re going to go over the hedge fund ecosystem. Basically, the different service providers and business partners that are basically included in the successful life of a business ran as a hedge fund, and that’s one thing that lost of hedge fund managers I think sometimes look over when they launch their fund, they’re really starting a small business and all those things that need to be in place for in a business, need to be in place for a hedge fund.
So if you’re looking to start a hedge fund, if you’re looking to enter the hedge fund industry or if you’re looking at different paths for how you could advance your career in hedge funds, this maybe one of the most important videos you want this year to just kind of cover the different business partners that hedge managers have and what I call a hedge fund ecosystem.
So first of, you should know there’s 5 main business partners that a hedge fund works with. And I would say over 95% of the 1,000 hedge fund managers I’ve worked with use all of these partners or at least 4 out of 5 and I’ll go over that here in just one minute. The 5 business partners are legal compliance firms, auditing firms, prime brokerage firms, fund administration firms, and third-party marketers. Now, I’m going to go over the definition of each and how and when they’re used.
Legal compliance firms are obviously used when you form your fund. It can be relatively expensive to form a hedge fund due to the number of provisions and partnership clauses and gaining clauses and a high water mark details. There’s just so many different things that go into creating a contract which is going to be flexible and robust for the operation of your funds the next 5, 7 or 20 years that you really want to do it right, and to do it right means you have to retain the services of someone who is usually is $15K to $40K or sometimes $60K to $80K depending on the structure of your fund. After you launch your fund, ongoing compliance reporting, ongoing legal assistance, just standard contracts for employees, nondisclosure, non-compete, that’s usually an ongoing resources using a lawyer or an attorney you can go to for the life of your fund.
Next is auditing and accounting firms. Sometimes you’ll have an accounting firm come in and do an independent assessment or help you improve financial controls as a consultant or it might just help you prepare for an audit. The auditing firm completes an audit either quarterly or annually. There’s some people, they may have some monthly activities but generally the big audits are done quarterly and annually. And if you’re an audit professional working in another industry you should know that a hedge fund auditing business is large and growing, more funds are being audited more frequently with more robust reporting each quarter which their investors get to see.
Prime brokerage is the space where a service provider usually inside of a large investment bank provides custody trading and leverage to a hedge managers and that they’re able to help managers leverage their assets and custody it within the third-party institution which helps improve the trust that investors have in their business. Often times a higher quality, the prime brokerage firm, the better it is for the hedge fund manager and almost every hedge fund I know works with a prime brokerage firm. It’s kind of expected, so this is one thing where if you’re starting a hedge fund you definitely want to seek out prime brokers and if you are looking to learn more about prime brokerage we actually have a website, primebrokerageguide.com which is a great website dedicated completely to prime brokerage.
Next, one business partner of hedge funds is a fund administration firm. This is a firm which will do third-party verification of wire transfers still help you with operations outsourcing day to day or month to month account reconciliation, accounting, bookkeeping. Basically all of the operational infrastructures or processes that your hedge fund is completing, almost all of those could be outsourced to a fund administration firm, they make sure they’re done by experts in those areas, they’re done consistently and professionally and as another source of operational improvement which investors are sometimes demanding.
I heard from a hedge fund just last quarter that they were on the board of another hedge fund and one of the advisers was — and he was requiring that his hedge fund retains a fund administration firm, an independent fund administrator or he would leave their board because he just didn’t want to have any of those operational risks or a possible fraud risk. It can go on when you don’t have an independent fund administrator. So it’s another point of assurance for investors to have one and it’s a growing trend in the industry to retain one.
The last business partner which we’re going to talk about is a third-party marketer which is an independent capital raiser. Third-party marketers often work for 2 to 5 years at a time. They’re outside of the fund and they act as a consultant who raises capital for the fund. So one third-party marketer, one professional might market for different hedge funds at once, usually they have different strategies and he might focus on something like wealth management firms or he could go all investor channels. But he is trying to raise capital on behalf of these funds and typically those funds are paying him a retainer plus a percentage of fees raise. So the typically rate in the industry is to charge some sort of fair retainer ongoing but then also charge a 20% of fees on assets raised.
So if you raise $10M, as long as that money is invested in the hedge fund, that third-party marketer should receive 20% of the fees earned off of that accounts. That’s different in every situation but that’s just kind of a template guideline for how those relationships work. And if you want to learn more about fund administration, please see fundadministration.org. If you want to learn more about third-party marketing, please see thirdpartymarketing.com. Both of those websites have hundreds of articles on those unique niche topics. If you’re looking to hire somebody in one of these areas, those websites will be helpful or this video might help if you’re looking to work in one of those areas, those websites might be helpful.
It’s good to do a thorough due diligence obviously on these professionals before you meet with them. Everybody is busy so it can be very tempting to meet with one. You know their reporting looks great, they seem very nice, they seem very nice, they were helpful on the phone, you know “Let’s go with them. Let’s just move on to the next task.” But I really think that whether you’re looking to work for someone or hire them as your service provider even more importantly, take the time to interview at least 3 different service providers who are not connected in any way, within each one of these niches. So interview 3 prime brokerage firms, interview 3 third-party marketers at least and have a short 1 to 2-page, 5-page due diligence questionnaire for them.
So have them complete information related to their references, their number of clients, their stability as a business, their niche expertise, their abilities, what they’ll be doing for you every week, every quarter, every month and exactly what that will cost. It’s good to have all that information upfront so you can compare kind of apples and apples with other organizations and make it less emotional and exciting or time-saving type decision because this is really critical. I’ve seen businesses in the hedge fund industry fail or thrive based on these 5 relationships. So it could be, you know choosing your business partners or it could be one of the top 3 most important things you ever do for your hedge fund. So it’s important not to rush it and to understand what you’re getting into.
So I hope this talk kind of helped clear it up. The main players in the hedge fund ecosystem, I hope it kind of makes it clear why it’s important to understand them and carefully choose them if you’re looking to work with them for any reason and I just want to thank you for your time here today. Thanks.
I hope that this video has given you a better understanding of the hedge fund ecosystem.
Many people were totally unfamiliar with the hedge fund concept until only a few years ago. It often surprises people to learn that hedge funds have existed in their basic form since Alfred Jones started his hedge fund in the early 1950’s. In the following video, I give an overview of the history of hedge funds, what makes up a hedge fund and how hedge funds operate.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Alfred Jones founded the first hedge fund in 1949 by matching short sales with long sales of stocks to manage risk in his portfolio.
The term hedge fund refers to this method of investing and how it hedges risk by combining long and short bets.
There are trillions of dollars in the hedge fund industry and more money pouring into hedge funds every year.
Some of the earliest hedge fund managers were Warren Buffet and George Soros.
The performance fee aligns the hedge fund manager’s interest with that of the investors.
Hedge fund portfolios can include almost anything which has led to a huge growth in the industry.
Hedge funds are mostly restricted from direct marketing to retail investors and must market to accredited and institutional investors.
The hedge fund industry can be highly-lucrative.
Knowledge is the hedge fund manager’s most valuable asset, therefore they are very private.
Transcript for History of Hedge Funds
Hello, this is Richard Wilson and today we’re going to talk about the history of hedge funds or the history of the hedge fund industry. This is a topic which is often confused with the term hedge fund and what makes up a hedge fund especially with people that work outside of finance. Most people on the financial industry have a pretty good grasp of what a hedge fund is or is not. But people who work just in business or in journalism or media or other areas are often confused by what would make a hedge fund versus something else. So the history of a hedge fund can kind of clear that up.
So first of, in 1949 there was a person, Alfred Jones, who was a journalist. He was also an author and sociologist, and he basically started the first hedge fund. What he looked at was the performance of securities in the broader markets and he looked at how he could pair trade or mesh some short sales with long sales of stocks to kind of manage risks within a portfolio. And so in a very literal sense he was hedging his investments. He would invest in Intel but short with AMD or something such as that.
And so that’s how the term hedge fund came to be. What happened next was that this method of investing became popular, really not till the 50s and the 60s. And in the 1970s it was recorded that there was 150 hedge funds in the industry, probably more if you count really the small ones, and there was also close to a billion dollars in assets which is very small compared to today and then on what source you go to, there’s between $1T and $2T in assets and hedge funds. So an enormous industry compared to a billion dollars.
I’ll give you an example. Just last month $14B in new capital was invested in hedge funds which means besides withdrawals there was actually a $14B increase in total capital in the industry. So just last month it increased 14 times more than it was in the 1970s. Some of the earliest hedge fund managers were Warren Buffet, George Soros and Michael Steinhardt. And since hedge funds were first invented and since the 60s and 70s they’ve evolved and instead of a hedge fund being a fund or portfolio hedges, they’re security investments, a hedge fund has come to mean an investment, a private investment structure which charges both a management and performance fee.
And that performance fee is really key to making something, a hedge fund, because a mutual fund might charge a management fee, and ETF might charge a management fee. But a performance fee really kind of aligns the hedge fund manager’s interest with the investors. So another important thing to remember is that hedge funds now getting glued, commodity investments, bonds, real estate, patent portfolios, commercial financing, currencies, foreign exchange really can include almost anything and that is why hedge funds have grown to such size.
They include such a broad spectrum of investments and the term is used so loosely that the hedge fund industry is now enormous, whereas a term like private equity although has expanded in various types is more concentrated. It’s just one of those terms. Hedge fund has just been used more frequently for more types of investment structures over the years. So that’s why there’s some confusion and some very large growth and some of that confusion around the hedge fund industry has also been created over basically two reasons. The first reason is that in many places such as United States, hedge funds are restricted and how they do it in public marketing and how they perform in public relations.
They can’t do most types of direct marketing as a traditional company could. Because their investments into a hedge fund are mostly restricted to accredited or high-net-worth investors and institutional investors. So that just leads to some confusion because many hedge funds are scared to do any educational or marketing efforts and they’re restricted from doing lots of types of marketing and public relations efforts. And so that is one’s risk and confusion in the industry. The other source is really just out of competitiveness. The hedge fund industry can be very lucrative for a fund manager or a professional in the industry, whether they’re raising capital or managing a portfolio or being an analyst. It can be very lucrative.
And the result is that knowledge is power and knowledge is a hedge fund professional’s greatest asset. Knowledge about investment process research, risk management, fund operations to a hedge fund is there most valuable asset. And if somebody else has all of your knowledge that you can quickly copy everything about your track record and maybe some of your team pedigree. And so it’s actually a very valuable thing to have unique knowledge and the constantly growing set of specialized knowledge within the industry. And because of that, hedge fund managers are not likely to give away their knowledge to the press. They’re not as likely to write books and they’re not as likely to consult with other their hedge funds.
For example, Jack Welch after leaving GE spoke to many different companies and is on the boards of many companies and he has written books about his practices and you don’t find that as much in the hedge fund industry. When a hedge fund executive retires they either have so much money that they don’t care about doing those other things or they’re on the board of a few hedge funds which pay them very handsomely or they go and join as a strategic adviser to a very large hedge fund and they serve that one hedge fund. Typically, they’re not out giving speeches everywhere, writing 6 or 7 books, going on to Oprah, doing interviews with the media all of the time. It’s just more of a competitive, very knowledge-centric industry. And so that can cause some more confusion.
So I hope that helps with the general overview of the history of hedge funds and how it moved from being a hedge portfolio to being more popular in the 60s and the 70s and being more of a management performance fee combination that made up a hedge fund. And then also how it moved from being a billion dollars in assets just in the 1970s, 30 years ago and now just last month gained over $14B and depending on who ask there’s $1T to $2T in the industry. And then we covered the two reasons why hedge funds are a little bit confusing or hard to understand, and that is the first reason about the laws of hedge fund marketing and public relations that restricts them. And second, it’s a very competitive knowledge based industry.
So I hope that’s helped with your understanding of hedge funds. If you’re completing the CHP designation this is important information to know. If you work in the industry it’s probably something you at least already partially know and hopefully it helps. Thanks for your time.
I hope that this video has given you a better understanding of the history of hedge funds and how hedge funds have evolved over the years.
Fund: A hefty sum of financial resources that is allocated for a specific purpose is termed as a fund. For example, a gifted fund made out to a university is set aside only for the purpose of sponsoring research students.
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