Below please find a definition of “What is Hedge funds?”
What is Hedge funds?: A private investment vehicle whose manager receives a significant portion of its compensation from incentive fees tied to the fund’s performance — typically 20% of annual gains over a certain hurdle rate, along with a management fee equal to 1% of assets. The funds, often organized as limited partnerships, typically invest on behalf of high-net-worth individuals and institutions. Their primary objective is often to preserve investors’ capital by taking positions whose returns are not closely correlated to those of the broader financial markets. Such vehicles may employ leverage, short sales, a variety of derivatives and other hedging techniques to reduce risk and increase returns. The classic hedge-fund concept, a long/short investment strategy sometimes referred to as the Jones Model, was developed by Alfred Winslow Jones in 1949.
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Below please find a definition of “What is a Hedge Fund?”
What is a Hedge Fund?: I often see Yahoo Questions, Linkedin Questions and HFMA questions about what is a hedge fund?, what are hedge funds?, how are hedge fund different from mutual funds? etc. To help answer these questions here is a video that explains what a hedge fund is.
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
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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.
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.
Investing in hedge funds is very different from investing in traditional investments like stocks or mutual funds. In the following video, I point out five warning signs that hedge fund investors should look out for while investing in hedge funds. This should not be considered financial advice, rather it is a few red flags that hedge fund investors should watch out for.
Video Transcript/Summary: The strategies and tips provided within this video module include:
Avoid one-man hedge fund shops. If something happens to that one person, the hedge fund will surely suffer.
The hedge fund does not have an administration firm.
No ability or track record of raising capital.
No marketing materials. A hedge fund is wasting your time if they haven’t taken time to compose their thoughts and strategy in easy-to-understand marketing materials that give you all the necessary information to make a well-informed decision on whether to invest in their fund.
There is no deep experience on the team. Don’t settle for an inexperienced team.
Transcript for Warning Signs for Hedge Fund Investors
Hello, this is Richard Wilson. I’m coming to you from Nice, France today. I’m here recording some training videos for the hedge fund group. And today I want to talk to you about how I’ve been working with a single-family office from the United States and helping them develop criteria for identifying potential hedge fund managers to invest in.
So what I’d like to do is provide you with 5 kind of warning signs, very obvious things if you’ve been invested in hedge funds for a long time, but if you’re a family office or a wealth management firm or other type of investor, just to kind of give you a start in investing in hedge funds. There are some very basic things to look at while analyzing hedge fund managers. This is not financial advice but it is kind of just some basics on hedge fund education and now hedge fund businesses are formed.
The first thing is to avoid one-man hedge fund shops. That one person gets sick, God forbid if they died, their business is not going to be sustainable. You know multiple minds acting collectively with some organization is going to be more powerful than one person, even a team of just 2 or 3 people is better in my experience to invest in than just a one-person hedge fund.
The second thing is not having an administration firm. Since the Madoff scandal mini board of advisers of hedge funds all over the world have been forcing their hedge fund to have a third-party fund administration firm in place. As for many reasons it verifies the assets, it has some checks and balances while running the hedge fund and if you need someone who is not using the fund administration firm, you have to want to know why and wonder how serious they are about working with other types of investors like yourself.
The third thing is have no ability or track record of raising capital. If someone is at $5M or $10M or $30M on capital they may be worth looking at, maybe they’re just getting started, maybe they have an unrecognized talent on their team and a deep bench of experience on their team and you can be one of those first people to discover them. You can have huge amount of capacity in this voyage maybe very well. But many times the funds which have a lot of talent but are bad at raising capital may not survive long enough to really have a sustainable business. They don’t want to invest in a hedge fund and do all these due diligence and grow a great relationship with a hedge fund manager just to have them go out of business a year later.
So even if the hedge fund doesn’t have a lot of capital they should at least have some potential ways of raising capital and somebody on their team dedicated to raising capital, not the portfolio manager doing it 5 hours a week and not the idea that they’re going to build a track record for 5 years and then outsource it to a third-party marketer. It just doesn’t happen very often. Lots of times those hedge funds never make it.
The fourth thing is not having any marketing materials. The hedge fund manager meets with you and he hasn’t put all of his thoughts, his investment processes, risk management strategies, his past investment details, his term sheet. A service provider is all within a well-organized document and he really hasn’t invested in his business enough then he’s wasting your time. You should tell him to go back and come back to you when he has organized his thoughts within a one-pager and a PowerPoint pitch book. It’s very, very basic. So if somebody doesn’t have that they’re really not worth meeting with in most cases unless you’re doing somebody a favor just to give them some early kind of hedge fund startup advice.
And the final tip here on avoiding certain types of hedge fund managers is just the one who has no deep experience on the team. There are some teams out there that are focused on very niche areas like trading, orange juice contracts, or trading freight shipping contracts or on running a global map or a strategy focused only a few different parts of the world or focused on frontier markets specifically, maybe they specialize in 4 different countries specifically. So there’s very, very specialized people out there. There’s people that have 20 years or 30 years experience in one or two small niche areas. So don’t settle for a team that didn’t have a really experience on an area that’s directly connected to their scope of investments.
And again, it might seem overly obvious but many times hedge fund managers might have some fancy sounding model or their back testing might be amazing or they have this 3-year track record that’s amazing. But really I wouldn’t care what their 3 or 5-year track record is if they don’t have a unique position in the marketplace and don’t have a deep experience that leads them to have any competitive edge in the marketplace.
So I hope these 5 tips helped. I’ll just run through them again; avoid hedge fund managers, have a one-man shop that don’t have an administration firm, they don’t have the ability or track record of raising capital, funds that don’t have marketing materials and funds that don’t have a deep experience on their team that’s directly connected to what they’re investing in in their hedge fund.
This is Richard Wilson coming to you from Nice, France. Thanks for joining me and we’ll see you again next time.
Again, this video should not be taken as financial advice, please refer to your financial or legal adviser. I do hope that hedge fund investors like family offices, institutional investors and high-net-worth individuals will keep these red flags in mind while investing in hedge funds.
What is Hedge funds?: A private investment vehicle whose manager receives a significant portion of its compensation from incentive fees tied to the fund’s performance — typically 20% of annual gains over a certain hurdle rate, along with a management fee equal to 1% of assets. The funds, often organized as limited partnerships, typically invest on behalf of high-net-worth individuals and institutions. Their primary objective is often to preserve investors’ capital by taking positions whose returns are not closely correlated to those of the broader financial markets. Such vehicles may employ leverage, short sales, a variety of derivatives and other hedging techniques to reduce risk and increase returns. The classic hedge-fund concept, a long/short investment strategy sometimes referred to as the Jones Model, was developed by Alfred Winslow Jones in 1949.
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