L6 Flashcards
Hedge funds
- largely unregulated and private equity comps are secretive about their activity (size is unknown)
-2013, TheCityUK. Hedge funds increased from 4000 with $324bn of assets in 1999 to the peak of 10.7k with 2.15t in 2007, but declined to 10.1k $2.054t by the start of 2013
Hedge and Private equity
coming closer, many private equity funds have set up hedge funds, especially in US
-concerns: conflicts of interest and insider trading
Hedge at end of 2016
500 managers’ total Assets Under Management (AUM) was $81.2t
- top three: BlackRock, Vanguard group and State street global
AUM by:
US- firms: 53.5%
euro: 31.8%
uk: 7.8% of total and 24.4% of euro
- top 20 manager shares is 42.3% (13 US managers (72.8%) + 7 European)
-majority of total assets (78.4% are actively managed
assets are mainly traditional asset classes (78.7%) of all assets:
-equity 44.3%; fixed income 34.4%
gotten from Pensions and investment and wills towers watson
how are Hedge funds managed and what are their features?
actively managed investment funds, using different strategies to generate attractive absolute returns
Features
-secretive and privately owned
- cant take money from public
- can be illiquid
-largely unregulated
-have freedom: leverage, short, derivatives
-funds managers have a major personal investment in firm
-small base of much more sophisticated investors
difference between Hedge and other funds
Mutual have limitations on borrowing, short selling and the use of derivatives
investment trust may borrow but have the other two limitations
both mutual and investment provide daily liquidity for their investors
pension funds have limitations too, but they are now making investments in Hedge funds
strats of Hedge Funds
wide range, complicated, not for retail investors, but high net-worth individuals
-equity HF: equity Long/short strats
-Relative Value arbitrage: relative value of individual shares, etc,. they go long on the relatively better one and short on the other one
-event-driven investing: looks at special situations and seeks to exploit them
-marco-driven investing
-short selling: looking for overvalued assets
-funds of funds
high fees:
2% management fee on total AUM
20% of performance past a certain threshold
High fees of HF
2 and 20 structure
-2% management fee charged on total AUM
-20% performance fee, if it passes minimum threshold
what is leverage?
ability to do deal with only small amount of investors capital
- put forward a premium or margin
- borrow all or most of money
-effect: given percentage change in price of security produces a bigger percentage profit or loss for the investor
leverage example:
invest buys 100k shares, using 20k of own capital, rest is borrowed. interest is 2000
and the share goes up by 20%
total value of share is now 120k. must repay borrowing of 80k along with interest
120-80-2=38
return = (amount gained/amount invested) /amount invested = 90%
short selling
way of making money out of price fall
-sell a security you don’t have
- borrow that security from the lender and deliver it to buy
- if share price falls, rebuy shares and give them back to lender and borrower keeps the profit
-can be banned i.e. bank shares during the crisis
fund of funds
investment comp that invest in HF giving investors diversification amount HF stats. allows smaller investors to access HF
-Creates an additional layer of fees beyond the fees charged by the individual HF in the portfolio
Paulson funds example:
-American investment management firm, found in 1994
-relatively low profile on wall street, until its hugh success during subprime mortgage crisis in 2007
-reportedly earned 15bn on 12.5b investment in 2007
-estimated 1.9bn from the global credit crisis by shorting comps involved in subprime mortgages
Regulation on HF
in mid 2009- IOSCO called for funds to register and accept scrutiny of their positions and working practices
-EU recommended that HF should minimum capital requirements
-us debate whether there should be heavy regulation
-Dodd-Frank Act introduced various registration requirements for HF advisers, but had little impact
-UK: HF managers need to register at financial services authority
-overall, sector is still mostly immune
