Recently, the hedge fund industry floated the news that assets engaged with the global hedge funds are peaking at an all-time high of $US3.25 trillion. The strong inflow was supported by the recovery seen in the first half of 2019. With such a high level, the global hedge fund asset has doubled the AUM in the last ten years.
A hedge fund can be described as an optional avenue for investment to sophisticated investors, such as institutional investors. Hedge funds are owned by private companies, which collects the investors’ money and invest it in a complex financial instrument with a key goal of achieving the outperformance as compared to the equity markets.
Structure of Hedge Funds and How They Work: A Hedge Fund is generally established as a limited partnership or limited liability corporation to defend the fund manager and investors from creditors in case of the bankruptcy of the fund. The fund opts different investments such as mutual funds, stocks, real estate, commodity, currency as per the goal of the fund. For the services, fund charges a fee structure, which is called “2 and 20”.
Things to be asked while investing in Hedge Funds: The investors should grill the manager about fees and expenses. Conventionally, there are two types of expenses – (a) Asset Management Fee, an annual charge in the range of 1% to 2% on the assets; and (b) Performance Fee, levied on the hedge funds profit, which is normally 20%. The performance fees prompt fund managers to take higher risk aiming to higher returns generation. The investors shall read the fund’s memorandum and related documents carefully to understand the investment strategies, the risk associated with the investments, etc. There are a wide variety of Hedge Funds with broad and different investment strategies, which an investor needs to match with his/her investment goal and risk appetite. A person with the age of 60+ might not have the same investment goal and risk-taking abilities as a person with the age of 30. An investor is also advised to research about the background of fund manager regarding his qualification, past performance, discipline related to the securities industry, etc. The investor should be aware of his/her rights to redeem the investments. The leverage status of the fund is something, which can turn an investment option into a higher risky bet from a conservation approach.
Various Types of Hedge Funds: As per the goal of the fund with regards to profits and risks, a wide range of hedge funds are available to the investors, such as relative value arbitrage hedge fund, distressed hedge fund, Long/Short Hedge Fund, Macro Hedge Fund, etc. However, the most common hedge funds are global hedge funds and equity hedge funds. Marco hedge funds invest in stock, bond, futures and options and currency, taking into account the change of economics and benefiting from it. Such investments are diversified as well as highly leveraged. On the contrary, Long/Short hedge funds choose the stocks, which are undervalued for the investment purpose. Apart from being long in the stocks, the fund opts for short candidates as well for hedging purpose.
Bridgewater Associates LP, Hedge Fund, founded in 1975 is headquartered at Westport, Connecticut, US. The institutional clients include pension funds, central banks, foundations, etc. The firm’s interesting hedge funds are Pure Alpha, All Weather, Pure Alpha Major Markets. Pure Alpha Hedge Fund was launched in 1991 and performed well during 2000-2003. With the gaining popularity, the fund extended its connections with many underfunded pension funds. In 1996, the firm launched All Weather Hedge Fund with risk parity approach.
Founded in 2001, Two Sigma offers its hedge fund products at international level with a variety of technological strategies, such as AI machine learning, distributed computing, etc. Due to its high rate of return, the company is comparable with D. E. Shaw & Co. and Renaissance Technologies.
Millennium Management, LLC, with the AUM of US$37.9 billion and 2,800 employees, is a hedge fund and a multi-strategy investment management entity. The firm was founded in 1989 and is headquartered in New York, US.
J.P. Morgan Asset Management, a leading name in asset management, offers a wide range of services to its clients. JPMorgan Chase is a combination of large US banking companies such as Chase Manhattan Bank, Bear Stearns, Bank One, etc. In 2012, JPMorgan Chase faced charges for misrepresentation and failing to disclosure, which led to a substantial loss for the company.
Elliott Management Corporation, the largest activist fund in the world, offers hedge funds with the affiliation of Elliott Associates L.P. and Elliott International Limited. Since inception, the fund has generated ~14.6% CAGR return as compared to the S&P 500 index. AUM as on 2018 stood at US$35 billion.
Citadel LLC, founded in 1990, offers its services through two segments - (a) Citadel, which is one of the largest alternative asset managers having >US$25 billion in AUM; and (b) Citadel Securities, offering products such as equities, equity options, interest rates swap, etc.
- E. Shaw & Co., founded in 1988, is famous for its complexed mathematical models, sophisticated computer programs, etc. The total AUM for the company stood at US$50 billion. Prima facie, the company offers hedge funds and private equity.
BlackRock, founded in 1988, the firm is a renowned global investment management corporation with 70 offices in 30 countries and client base in 100 countries. The company has received fame as the largest asset manager in the world with total AUM of $6.5 trillion as on April 2019. BlackRock holds 4.81% stake in Deutsche Bank as of 2019, being the largest single shareholder of it.
AQR Capital Management LLC, a global investment management firm was established in 1998 in the US. With the “Systematic and Consistent Approach”, the firm believes in diversifying the portfolio. The four strategic tools adopted by the company are; value, momentum, defensive and carry. Its alternative investment strategies are the flagship one, with a goal to provide low correlation to traditional, equity-dominated portfolios.
Man Group Plc, founded in 1783, was initially a sugar cooperage and brokerage firm. The firm offers its services to a variety of institutional and private investor base globally. The firm is also known as the largest publicly traded hedge fund in the world. In 2007, after the demerger and flotation of its brokerage business, the firm received the status of investment management business. The group offers various strategies to cater the different styles and asset classes of investors: (a) Man AHL, a diversified quantitative investment manager was Founded in 1987. The strategy offers absolute return and funds with Buy approach. (b) Man Numeric, of which the acquisition was made by the group in 2014, established a diversified quantitative fund management business with the ambition to create its name in North America. The approach is quantitative based and offers buy-only, active extension and hedged equity strategies. Man Group acquired Man Numeric. (c) Man GLG, was a publicly-listed entity as GLG Partners until it was acquired by the Man Group in 2007 for the consideration of $1.6 billion. A multi-team discretionary investment manager believes in absolute return and buy-only strategies. (d) Man FRM became part of the group in 2012. (e) After the acquisition of Aalto Invest Holding AG, a real estate arm with the AUM of $1.7 billion, Man GPM was rolled out in 2017.
Renaissance Technologies was founded in 1982 as a private investment manager and is headquartered in New York, US. The company’s key products include Medallion Fund, Institutional Equities Fund, Institutional Diversified Alpha with the total AUM of US$110 billion as of now.
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