Tag Archives: Hedge Fund Joe Healey

Brief history of hedge funds

5 Feb

Putting it in a nutshell, hedge funds are designed to handle a wide range of trading and investing activities. It must be mentioned, though, that hedge funds are open solely for certain types of investors. Generally speaking, investors can deposit and withdraw funds regularly, and this is only one of the advantages of these investment funds. In this article I will present you a short history of hedge funds, from the beginning until now.

The first hedge fund was founded back in 1949 by Mr. Alfred Jones. Jones had the idea of creating investment funds in 1948, when he was working as a journalist and he was writing an article about the main trends in investment forecasting. It was then when Alfred Jones reached the conclusion that he could develop a more efficient system for managing money. The term “hedged fund” refers to a specific investment strategy that involved purchasing assets whose price was believed to increase and afterwards selling the assets whose price was about to decrease. By doing so, Jones wanted to minimize the risks associated with the trading industry.

Despite the fact that hedge funds were blossoming, the unique strategy developed by Jones was brought to the public eye in 1966, in an article about the success of Alfred Jones and provided statistics regarding the benefits of hedge funds. After the article was published, more and more investors became interested in hedge funds. Nonetheless, it turned out that this strategy was not suitable for just any investor, and most of them simply stopped doing it. As expected, the number of hedge funds dropped significantly.

Hedge funds started to gain popularity again around the 1990s. Even though the strategy is basically the same, new hedging tools have emerged and made hedging safer. In addition, the concept of hedging has remained the same as well: hedge funds are still very exclusive clubs and, as stated above, they are designed only for certain types of investors that are specified by regulators.

Regulations on hedge funds in the United States

18 Jan

While the fact is that hedge funds are considered “unregulated,” there are some major stipulations to that claim. No investment is legally allowed to be unregulated, and so the term unregulated may give people the wrong impression. Regulation is necessary for hedge funds, although in practice they are quite a bit different from other investments. In terms of regulations regarding hedge funds within the United States, there are several things potential investors (and the average person) should know about.

The most direct way that the US has found to regulate hedge funds is by regulating the practices of financial advisers (the money managers). While it is true that hedge funds are considered to be private investments, and that money managers have limited transparency when engaging with the investments, they must still adhere to any regulations set down. This regulation is to protect against illegal activity and fraud, and to protect investors who trust their money to another party. The biggest issue with money managers is compliance with mandatory record keeping. Money managers/advisers with over one hundred and fifty million dollars in managed assets are required to register as such. This is one way of “keeping track” of hedge fund investors and their managers. Because of the privately owned status of hedge funds, they are exempt from reporting with SEC (US Securities and Exchange Commission); although in some situations there are exceptions to that rule of exemption. One such exception is the fact that hedge funds with equity securities with more than four hundred and ninety-nine owners/investors have to report to SEC.

Under the Investment Company Act of 1940, hedge funds are limited to one hundred or fewer investors. Another requirement under the Investment Company Act of 1940 (which was what allowed hedge funds to be exempt from SEC in the first place) stipulates that there is certain criteria that potential investors must meet in order to be able to invest in the first place. If investors can jump through those regulatory hoops and become a “qualified purchaser,” the hedge fund investment can move forward and take place. Individuals who meet “qualified purchaser” status would have to have at least five million dollars in investment assets. Companies, meanwhile, would need twenty five million dollars in investment assets. That is the very beginning of the criteria for investor qualification, and much of it specifically varies by state.

Other regulations to keep in mind regarding hedge funds in the United States would be that hedge funds cannot sell their securities publicly. Hedge fund shares are not registered. Hedge fund managers that own more than five percent of any equity securities are subject to public disclosure as well. These are just some of the additional regulatory stipulations and scenarios that investors and managers must comply with. All of this information is the “tip of the iceberg” when it comes to hedge fund regulation inside of the United States. As mentioned earlier, specific regulations may vary by state, and this complicates an already confusing situation.

Hedge fund trends in 2012

3 Jan

Hedge fund trends tend to change over time – hence why they’re trends! Hedge funds themselves have a long and storied history of changing over time; think of the massive diversification into the internet with the Dot Com boom, and more recently, the newest regulations with the Dodd-Frank Act reshaping traditional hedge funds as we know them.

Recent hedge fund trends are all over the map (and there is no guarantee that these trends will continue), but here is a small selection:

  • Hedge funds in the early part of 2012 have shown a move toward global markets. The fact that hedge funds have a very large global presence, and that there is virtually no limit to what kind of investments can be made inside of a hedge fund portfolio, means that now is the perfect time to invest in emerging global markets.
  • The uber rich have been careful with their assets lately, seemingly looking to protect themselves against margin calls and looming finance changes. Many hedge funds have taken their assets out of funds in the form of cash. Hedge fund portfolios are still going strong, though, with 2012 seeing the best performance in the beginning of a year since 2006.
  • Managed futures are up, as are global macros!
  • Larger funds are seeing larger inflows. Small funds are still mostly experiencing redemptions, but not the kind of net inflows that larger funds are seeing. The number stands as funds with more than one billion dollars in assets receiving 78% of inflows.
  • Hedge funds that beat their ‘peers’ in 2011 had similar results in 2012 – at least thus far. 57% of those peer-beating funds saw net inflows in the first quarter.
  • The trend did seem to be that those hedge funds which saw positive results in 2011 continued to do so into 2012. The majority of large hedge funds saw net inflows in the first quarter of 2012, where 63% of mid-size funds with positive performance in 2011 saw net inflows into 2012.
  • There was a marked trend of investors who discovered their investments had under-performed shifting out of them and heading for seemingly greener pastures. This is usually the case (no investor typically has the patience to “hang around” an under performing fund), but the numbers were higher in the first quarter of 2012.

One of the biggest changes of 2011, leading into 2012, is the continued implementation of the government’s insider trading charges and other legal actions. Some funds have closed, many managers are under investigation, and some funds are doing poorly in general due to the continued investigation and allegations. While it is true that some funds have had a rough year so far, a good portion of funds are seeing decent to good profits on their invested assets. It remains to be seen if these positive trends will continue through the rest of 2012. It is evident to some that in the wake of the Dodd-Frank Act that regulation may begin to increase on hedge fund investments across the globe.

Risks with hedge funds

22 Nov

The short answer to the question “are there risks with hedge funds?” is “yes.” With any type of investment, there are risks! The market is not foolproof, and there are dozens of cautionary tales for every possible type of investment. As for hedge funds specifically, the risks are incredibly varied. Because of the nature of any given hedge fund, which functions as a kind of investment portfolio and may be dealing with multiple types of investments at any given time, the risks associated are ever-changing and depend on individual hedge fund portfolios.

The main thing to remember about hedge fund risks is that the person delegated to control the fund, and to make investment decisions, should be a highly specialized and experienced money manager. Hedge fund management is not for amateurs. Hedge fund money managers must weigh their experience, knowledge, and study of the market against the goals of the investor, and must make sometimes difficult decisions. While hedge funds were initially developed as a method of reducing risk while seeking large profits, modern day hedge funds are often engaging in volatile markets. The higher the risk is, sometimes, the higher the gain is.

If the portfolio manager does end up taking “risks” by investing in a volatile market, things can be unpredictable and unsteady. This is where investors have to trust in the wisdom of their money manager. Recall that it is in the money manager’s best interests to make sound financial decisions so that they will make as much money as possible, along with the investor. Irresponsible or unskilled money managers will not have longevity in their profession, and will not be able to hold onto clients.

However, even the most responsible and thoughtful money manager with a great track record cannot predict every twist and turn of the market. What was considered a smart investment decision may ultimately fail to make profits. No one can predict the exact outcome of an investment, unfortunately, and there will be errors. If an investment does take a loss, the majority of investment partnerships will hold the money manager liable; many will not receive their performance fee, and there are often other safeguards put in place to make sure that the investor remains happy. Losing a great deal of money is always a possibility, when it comes to the world of investments, but a responsible investor who has done their research on their money manager will be prepared to weather the twists and turns of a tricky market.

Hedge funds are also generally designed to be long-term, and so an investor who sees little to no profit one year may see a substantial increase the next. The key is to remain in contact with your money manager, and yes, sometimes – if you feel they have acted irresponsibly – to perhaps take your business elsewhere. Do not make the mistake of thinking that hedge funds are “easy” money; hedge funds have been known to make people a lot of money very quickly, but that is not the case for everyone.