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HEDGE FUNDS

by DollarBillionaire™

High-Performance Individuals who create great Wealth understand Hedge Funds and the various services that they provide.  Here we define what a Hedge Fund is and give a broad overview of how these Hedge Funds operate.  We also look at a few of the Top Legendary Hedge Fund Managers.

HEDGE FUND

In this Teaching Document, you will find the DollarBillionaire ™ Guidance Notes on Hedge Funds.

Written by Barron Hall. Revised and Updated Monday 26 August 2019.

Table of Contents: [toc]

HEDGE FUND DEFINITION

Hedge Funds

HEDGE FUND DEFINITION

A Hedge Fund is a pooled investment scheme devised by experts at investments and managed by top professional investment managers.  The Hedge Fund raises money from interested accredited individuals and institutional investors and then invests that money on their behalf to obtain the maximum return possible.  The Hedge Fund often has a stated Investment Strategy that the investors are aware of and happy with.  Often the Investment Strategies used are complicated with highly sophisticated Risk Management techniques.

HEDGE FUND BASICS

What is a Hedge Fund in simple terms?

In simple terms, a Hedge Fund is just an arrangement whereby people with money to invest can partner with other people who know how to invest their money.  The monies of the investors are pooled into one fund.  The people who invest their money in the hedge fund hope to get a better return than they might be able to get themselves, or by investing themselves elsewhere.  The people who do the investing for the hedge fund are called hedge fund managers and they charge the investors for their services.  Hedge Funds only have wealthy persons as clients.  Hedge Funds can basically have any Investment Strategy that they want, as long as the clients are aware of this.

 What is a “Hedge Fund”?

A Hedge Fund is basically an Investment Partnership.  The partnership is between people with money to invest and people who have great skills in investing money.  The money contributed by the Investors is pooled together into a single fund.  The Professional Fund Managers then invest these monies to obtain the greatest possible return allowing for acceptable risk levels.  The professional fund manages are often called the General Partner.  The investors are often called Limited Partners.  Hedge Funds are often seen as a privilege of the rich to become even more wealthy.  Hedge Funds managed pools of money available mainly to the rich that are aggressive, risky, and they often use leverage to increase their returns.  Hedge funds often charge higher fees than mutual funds.  Hedge funds charge managment or administration fees and also performance based fees.

What qualifies as a Hedge Fund?

What is a Hedge Fund example?

Are Hedge Funds Alternative Investments?

Conventional Investments are asset classes that are equity, income, and cash.  These can be stocks or bonds.  Alternative Investments are investments that are not conventional investments.  So alternative investments are any investment that is not made in stocks, bonds or cash.  Hedge Funds are alternative investments, as are private equity, venture capital, real estate, commodities, and other tangible assets.

Most alternative investments are held by sophisticated investors like instituions and high net worth individuals.  This is because of their higher perceived risk, sophistication and lack of regulation.

What are the best alternative investments?

The best alternative investments are Hedge Funds, Mutual Funds, Real Estate and commodities like Gold and Oil.  To be a hedge fund investor one needs to be accredited, having a certain level of wealth.  So hedge funds as alternative investments are not available to everyone, only the rich.

What exactly does a Hedge Fund do?

Are Hedge Funds an asset class?

What are the 3 types of assets?

What are the 4 types of assets?

Are Hedge Funds closed-end funds?

How do closed-end funds make money?

Are Hedge Funds publicly traded?

Is a Hedge Fund a Security?

Do Hedge Funds really Hedge?

Do Pension Funds invest in Hedge Funds?

THE NAME HEDGE FUND

Why are Hedge Funds called Hedge Funds?

Hedge Fund Managers use Special Investment Techniques to attempt to ensure that the hedge fund makes profits if the market goes up, or down.  This is termed “Hedging“.  Similar to the term “Hedging your bets“.  This is why these banks got the name “Hedge Funds”.   Their investment strategies are such that they attempt to “hedge their bets” to win in either or rising or a falling market.

Alfred Winslow Jones launced the first Hedge Fund in 1949.  He invested long, but also took positions shorting other stocks in case the market went down.  In effect he was hedging his bets. 

 

HEDGE FUNDS VS MUTUAL FUNDS

Are Hedge Funds mutual funds?

Hedge Funds are not Mutual Funds.  Hedge Funds generally take on a higher level of risk than Mutual Funds.  Hedge Funds are also more exclusive and aggressive than Mutual Funds.  One very important difference between a Hedge Fund and a Mutual Fund is the Hedge Fund’s limited availability to investors.  An investor needs to be a financial institution or an accredited investor to make use of the services of a Hedge Fund.  To be an accredited investor one needs to have a net worth in excess of $1 million, (apart from your private residence), or an annual income that has exceeded $200 000 for the past two years.

Are Hedge Funds better than Mutual Funds?

The Investment Strategies of Hedge Funds can be much wider than that of Mutual Funds.  Depending on the Hedge Fund’s mandate, it can invest in any form of financial security, like stocks, shares, derivatives, foreign exchange, gold, silver, oil, real estate and so on.  Mutual Funds, by contrast, are generally much more limited in scope, sticking mainly to stocks and bonds.   Given this much wider choice, an astute Hedge Fund Manager could potentially find better investments than a Mutual Fund manager, and as a result, the returns from investing in a Hedge Fund can be greater than the returns from investing in a Mutual Fund.

HEDGE FUNDS AND RISK

Are Hedge Funds high risk?

Hedge Funds do tend to take on higher forms of risk.   However, the returns are often also higher than normal.  High returns tend to go together with higher risks.  The risk is relative to the knowledge of the Professional Fund Managers.  Risk can be minimized by the professional fund manager’s high level of knowledge and skills.  The Hedge Fund managers attempt to maximize returns and eliminate as much risk as possible.  Hedge Fund Managers use techniques to “hedge” the market, in an attempt to eliminate risk.  Techniques used include “going short” if the market is expected to drop, and “going long” if the market is expected to rise.  Despite the Hedging Strategies employed by Hedge Funds, their overall risk posture is higher than the norm.

Why do Hedge Funds fail?

Hedge Fund Managers can employ high levels of leverage, being borrowed funds, if they so wish.  This leads to amplified levels of risk, which could in a bad situation, lead to the failure of the Hedge Fund.

What happens if a Hedge Fund loses money?  What happens if a Hedge Fund loses your money?

Why are Hedge Funds riskier?

Hedge funds are not necessarily riskier.  Risk is relative to the knowledge and skills of the Hedge Fund managers.  An investment might be very risky for one individual to take, and less so for a highly experienced individual, who would weigh many factors before selecting a particular investment.  Hedge funds have wide latitude regarding what they can invest in.  Some see this as leading to more risk.  Maybe this is so if the investment managers are reckless and unprofessional.  The reverse can also be true.  If an investment manager has his hands tied to investing in a particular sector of the financial securities market, he is actually operating under more risk, because he cannot make use of other Financial Securities that might give better returns for equal or lessor risk profiles.  The flexibility and lower regulatory restrictions have led to many highly talented people moving into Hedge Fund management, and they could well lower the risk profile of the Hedge Fund by virtue of their professionalism, skills, and experience.

Do Hedge Funds lose money?

Hedge Funds have been involved in several controversies over the years.  They are less regulated than other investment vehicles and as such often get into riskier activities.  Together with higher levels of gearing they can potentially loose much money if things go wrong.

Do all Hedge Funds make money?

Why are Hedge Funds riskier?

 

STARTING A HEDGE FUND

Can anyone start a Hedge Fund?

How can I start a Hedge Fund?

You will need some startup capital of your own.  This amount will be anywhere from $15 00 t0 $50 000.  You will then need to appoint an experienced Hedge Fund attorney.  These people can be expensive.  It can cost up to $100 000 just for the legal part of the Hedge Fund’s formation.   This step can be postponed for a while by using a Hedge Fund Incubation platform, sometimes called an Emerging Manager Platform.  In this way you can commence finding investors, pooling their monies, and begin trading.  You can build up an audited track record in this manner whilst you postpone the expensive legal setup costs.  This freed up startup capital can be used to find other top staff and to fund other costs, like computer systems and data subscriptions.   Alternatively, use can be made of a Hedge Fund  Startup Template.  This can drastically reduce startup cost by up to 90%.  Such templates would cost between $5 000 to $10 000.

Oftern a hedge fund is set up as a private investment Limited Partnership.  It would be made available to wealthy accredited investors only and would have a minimum initial investment that is quite large.  The investment period, known as the lock-up period, is often quite long, maybe a year or more.  Withdrawals of funds will be allowed only at predeterminded intervals such as every 3 months, 6 months or 12 months, at fixed dates.

A Prospectus, or Offering Memorandum, will set out the Investment strategy of the fund and also its fees and leverage limits.

Who owns a Hedge Fund?

Do you need a CFA to work at a Hedge Fund?

Can an RIA run a Hedge Fund?

Do Hedge Fund Managers need a license?

How much money do I need to start a Hedge fund?

A person needs at least $15 000 to $50 000 to start a Hedge Fund.  Startup costs can extend to as much as $400 000.

How do you raise a Hedge Fund?

Where do Hedge Funds get their money?

What degree do you need to be a Hedge Fund Manager?

Do you need a degree to start a Hedge Fund?

Can I work for a Hedge Fund without a degree?

What should I major in to become a Hedge Fund manager?

Do you need a degree to start a Hedge Fund?

What license is needed to start a Hedge Fund?

What do Hedge Fund Managers major in?

How much money do I need to start a Hedge fund?

HEDGE FUND OPERATIONS

How does a Hedge Fund Work?

The limited partners contribute funds to the Hedge Fund.  Their monies are pooled into one overall account.  The professional fund managers then search for the best investments available out there.  In so doing they refer to their stated investment strategies and acceptable risk profiles.  These monies are then invested in the chosen financial instruments to achieve the highest possible return for the investors.

What types of Investment Strategies can a Hedge Fund have?

A hedge Fund can follow any Investment Strategy that it wants to, as long as the investors are aware of this strategy as laid out in its mandate.  There are many Hedge Fund Strategies and often hedge funds are classified by their strategies.

One strategy is to follow a Macro Strategy.  A Macro Strategy involves investing in shares, stocks, bonds, and currencies and trying to benefit from predicted changes in macroeconomic variables like global interest rates and the various countries economic policies.  As a case in point is the recent Trade Wars between China and the USA.

A Hedge Fund may follow a Global Strategy or a Country Specific Strategy.  Such a fund might buy promising financial securities and short overvalued or declining securities.

An Activist Hedge Fund Strategy involves getting involved in a company in an active way, to unlock perceived value that is locked away by poor management.  This could mean a change of Top Management, a change of the Board of Directors and the Chairman, or even pushing for the sale of the company.  Carl Icahn is one such well know activist hedge fund manager.

A Relative Value Strategy or Arbitrage Strategy would try and take profits from inefficiencies in the markets. 

Some Hedge Funds follow strategies that seek income, or aggressive growth

Some strategies might include emerging markets and futures markets

Some Hedge funds follow Directional Strategies

An Event-Driven Strategy is a Hedge Fund that concentrates on certain events, such as bankruptcy or IPO.  The strategy chosen is normally a function of the expertise of the Hedge Fund manager.

A newer Investment Strategy is to create a Hedge Fund of Funds.  The Hedge Fund essentially invests in a mix of other Hedge Funds, attempting to retain the potential for growth but to reduce overall risk.  This does have the drawback of incurring double costs, both in the original Hedge Fund and in the target Hedge Funds.  This would have a detrimental effect on overall returns for a Hedge Fund of Funds.

How do Hedge Funds raise money?

Are Hedge Funds audited?

Do Hedge Funds have to be audited?

How much does a Hedge Fund audit cost?

What does it mean to run a Hedge Fund?

What does a Hedge Fund manager actually do?

The Hedge Fund Manager examines the market to find the best possible investments out there.  They try to profit from a rising market and from falling markets.  In this sense, these hedge fund managers are more like Traders, who use mostly technical analysis to target their investments,  and less like Long Term Investors, who use mostly fundamental analysis to select their investments.

Do Hedge Funds buy companies?

Is working at a Hedge Fund stressful?

How many hours do Hedge Fund analysts work?

EARNINGS OF HEDGE FUNDS AND EARNINGS OF HEDGE FUND MANAGERS

How does a Hedge Fund make money?

Hedge funds have a fee structure that they charge for their services.  They normally charge both an Expense Ratio and a Performance Fee.  The most common fee structure is known as “Two and Twenty“.  This is a 2% Asset Under Management Fee (AUM fee) plus a 20% Levy on growth generated by the Hedge Fund.   Even if the Hedge Fund underperforms and loses money, the AUM fee is still charged.  On a $2 Billion Hedge Fund, the AUM fee would be $40 Million.  The Hedge Fund manager would thus charge $40 Million even if he did not do well, or indeed if he did nothing at all!  The 2 and 20 fee structure is not set in stone, and a Hedge Fund could charge 1 and 20 or even 0 and 25.

How much do Hedge Fund investors make?

Why do Hedge Fund managers make so much money?

Who is the richest Hedge Fund manager?

Who is the best Hedge Fund manager?

What is a Hedge Fund manager salary?

Who is the richest Hedge Fund Manager?

Who is the richest man on Wall Street?

What did the richest hedge fund manager earn in 2018?

How much do Hedge Funds return?

How do Hedge Fund traders get paid?

Who is the richest Hedge Fund Manager?

Who is the highest-paid Hedge Fund manager?

HEDGE FUND ROLE

The Role of Hedge Funds.

 

HEDGE FUND BENEFITS

What are the benefits of Hedge Funds?

Hedge Funds attract the world’s best investment experts to work as Hedge Fund Managers.  Their skills and expertise often lead to higher than normal returns on investment and reduced risk and reduced volatility.  Due to their lesser degree of regulation, hedge funds are more nimble and can move faster in changing conditions and between different forms of financial securities.  The wide range of possible investment strategies that they may follow can also lead to higher than normal returns, compared to other funds like Mutual Funds that might have a more restricted option set.   Hedge funds can structure themselves to benefit from both rising and falling markets.  Investors can pick and choose among various Investment Strategies followed by the various Hedge Funds, to suit their own particular needs.

On the downside, Hedge Funds are not accessible by all, but only by accredited individuals and financial institutions.  Due to their potential gearing, they can have an increased risk and volatility element.  Investors funds are locked up for a longer period of time than with other options.

Hedge Funds are meant to return Alpha returns for accredited investors.  Alpha is the excess return that an investment generates over and above the normal return on a standard benchmark or market index.

 

 

THE NUMBER OF HEDGE FUNDS

How many Hedge Funds exist?

 

 

 

 

INVESTING IN A HEDGE FUND

Should I invest in a Hedge Fund?

Can I invest in a Hedge Fund?

Who invests in a Hedge Fund?

Can nonaccredited investors invest in a Hedge Fund?

How much money do I need to invest in a Hedge Fund?

 

BERKSHIRE HATHAWAY

Is Berkshire Hathaway a hedge fund?

Why is Berkshire Hathaway so expensive?

Does Warren Buffett own Berkshire Hathaway?

 

 

 

 

ADVERTISING A HEDGE FUND

How do you raise capital in a small Hedge Fund?

Can Hedge Funds advertise?  Can Hedge Funds Market themselves?

In the USA the “Jumpstart Our Business Startups Act”, (the JOBS Act), came into law in 2012 and had the effect of allowing Hedge Funds to advertise.  The ban on hedge fund advertising was lifted in 2013 in the USA.  The idea was that this would lead to more cash flowing into the Hedge Fund pools, which would then find its way into promising startups.  Before placing an advertisement a hedge fund must submit certain forms (Form D) with the SEC.  Other minor rules are in place regarding advertising of Hedge Funds in the USA.

What does a Hedge Fund marketer do?

 

HEDGE FUNDS AND REGULATIONS

Why are Hedge Funds not regulated?

Hedge Funds are regulated, but to a much lesser degree than mutual funds, insurance companies, banks, pension funds, and other financial institutions.     The disclosure and compliance requirements of Hedge Funds are very low.  This is due to the fact that investors in Hedge Funds have to be Accredited individuals, namely persons of some wealth and financial standing.  Since they already have a fair amount of wealth the idea is that they do not need as much protection, due to the assumption that they are financially educated at evaluating investments and risks, and have other wealth to fall back on should the funds default or underperform.  To be an accredited investor to make use of the services of a Hedge Fund, an investor needs to have a net worth in excess of $1 million, (apart from his private residence), or an annual income that has exceeded $200 000 for the past two years.

In the USA the regulatory body is the SEC, the Securities and Exchange Commission.

Are Hedge Funds legal?

Are Hedge Funds 40 Act funds?

Are Hedge Funds private or public?

Do Hedge Funds Have to register?

 

 

 

 

 

 

 

 

ETHICS AND HEDGE FUNDS

Are Hedge Funds good?

Are Hedge Funds ethical?

 

 

 

HEDGE FUNDS VS PRIVATE EQUITY

What is the difference between private equity and Hedge Funds?

Are Hedge Funds private funds?

 

LARGEST, MOST SUCCESSFUL HEDGE FUNDS

What is the largest Hedge Fund?

Who runs the largest Hedge Fund in the world?

What is the most successful Hedge Fund?

SOME HEDGE FUND COMPANIES

The Paulson Hedge Funds

John Paulson made his name when he did very well betting against mortgages in 2008.

Is BlackRock a Hedge Fund?

Is Bridgewater the largest Hedge Fund?

Is Citadel a Hedge Fund?

Which is bigger BlackRock vs Blackstone?

Are BlackRock and Blackstone related?

What is the minimum investment for Bridgewater?

 

TOP HEDGE FUND MANAGERS

How did Tom Steyer become a billionaire?

How much is Larry Fink worth?

Is Ray Dalio rich?

Carl Icahn

Carl Icahn is a well know and ofter feared activist hedge fund manager.  Icahn Enterprises (IEP) is a publicly-traded Hedge Fund that Carl Icahn owns.  This gives investors who might not be otherwise accredited as investors for a hedge fund a chance to benefit from a hedge fund’s activities.  They can simply purchase shares of IEP.

 

PRIME BROKERAGE

LONG TERM CAPITAL MANAGEMENT

TOP HEDGE FUNDS

LARGEST HEDGE FUNDS

BIGGEST HEDGE FUNDS

QUANT FUNDS

BEST HEDGE FUNDS

HEDGE FUND STRATEGIES

MERGER ARBITRAGE

CRYPTO HEDGE FUND

LIST OF HEDGE FUNDS

STARTING A HEDGE FUND

ACTIVIST HEDGE FUND

HEDGE FUND PERFORMANCE

HFRX

QUANT HEDGE FUND

CONVERTIBLE ARBITRAGE

FUND OF HEDGE FUNDS

HEDGE FUND ACCOUNTING

HEDGE FUND TRADER

HFRI INDEX

TYPES OF HEDGE FUNDS

GLOBAL HEDGE FUND

HEDGE FUND INDEX

LONG SHORT FUND

MACRO HEDGE FUNDS

QUANTITATIVE HEDGE FUND

FOOLING SOME OF THE PEOPLE ALL OF THE TIME

HEDGE FUND ETF

HEDGE FUND MARKET WIZARDS

HEDGE FUND STARTUPS

HEDGE FUND STRUCTURE

CRYPTOCURRENCY HEDGE FUND

EVENT DRIVEN HEDGE FUND

FIXED INCOME ARBITRAGE

GLOBAL MACRO HEDGE FUNDS

HEDGE FUND ADMINISTRATORS

MARKET NEUTRAL FUNDS

COMMODITY HEDGE FUNDS

CONVERTIBLE BOND ARBITRAGE

FOREX HEDGE FUNDS

 

 

Top Hedge Funds include

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