Basic 1 Flashcards
What is the definition of Hedge funds?
- Investmentstrategy is active and flexible (can go long and short in any financial instrument)
- Liquidity - between traditional asset classes and private equity
- Fee structure -> Management Fee and Performance Fee
- Alignment of interest of Hedge Funds Manager with Investors -> own money invested (old) -> in newer structure that is not the case anymore -> especially in offshort markets
Investment strategy in Hedge Fund is active and flexible: What does that mean?
- investment approach: both long and short positions, can apply leverage, can run concentrated or diversified books
- instruments: any instruments
- markets traded: any markets, liquid, less liquid
Definition: Gating
restriction or limitation of investor withdrawals during periods of high redemption requests. It protects the fund’s liquidity and prevents forced asset sales at unfavorable prices.
-> you can only go out after 3 month and you can only take 50% then -> to avoid illiquidity
Sidepocket
the money which is not going to be paid out (they communicate that to the investors)
Side pockets are separate accounts used by hedge funds to isolate illiquid or hard-to-value assets from the main portfolio. These assets are only accessible to investors who were part of the fund when the side pocket was created, ensuring fairness in profit or loss allocation.
What are some fees and how much is it typically?
- Management Fee; 1-2%
- Performance Fee; 20%
- Hurdle rate; depends on LIBOR/ SARON, almost not applied anymore -> Shortterm interest + 25 bip
- High Water Mark -> explained further
- Redemption penalty: 1-3%
What is a High Water Mark (HWM)
A high-water mark ensures that a hedge fund manager only charges performance fees on profits exceeding the previous peak asset value. This mechanism protects investors by ensuring that managers do not earn fees for simply recovering prevous losses.
Who and when did started the first hedge fund? and by what?
- Alfred W. Jones startet the first hedge fund in 1949, graduating from Harward and being a diplomant and journalist
- by using leverage and short selling, he effectively “hedged” risk in the market place
- 1952 he added a performance fee of 20% and converted the fund to a limited partnership -> Alignment of Interests
Who are the investors of Hedge Funds?
- Pension funds
- University endowments (Stiftungen)
- Sovereign wealth funds
- Philanthropic foundations
- high-net worth individuals
- Family offices
- Fund of Funds
- Individuals - qualified investors
Fund of Hedge Funds; Structures
- Fund of hedge funds are portfolios consisting of several single hedge funds
- possible forms: certificates or as investable indices or as managed accounts
- double layer of fees and liquidity problems in 2008 (side pockets)
- Replicator products try to rebuild return distribution of funds of hedge funds or certain hedge fund strategies
What does UCITS stand for?
Undertakings for Collective Investment in Transferable Securities
-> regulatory framework established by the EU to facilitate cross-border distribution of investment funds
-> was made for investors to protect them
What are some Offshore Investors fears and what are the UCITS Answer?
What are the difference between:
1. Offshore Hedge Funds
2. UCITS Hedge Funds
3. Traditional Funds
Who are the involved parties in a single hedge fund?
What are of the involved parties their funcion?
- Investor: person who invests
- Investmentmanager: The person running the fund
- Auditor: needs to be independent
- Administrator: Portfolio gets valuated monthly, also independent
- Prime Broker: Counterbody for trading, etc.
- Custodian: Processes the buys and the sells
- Legal Advisor: Helps setting up the fund
What does “redemption” mean in investments?
Redemption is the process where investors withdraw their money from an investment fund by selling their shares back to the fund at the current Net Asset Value (NAV). It can be subject to terms like notice periods or fees.
