Tag Archives: Joe Healey Hedge Fund

Planning to invest in Hedge funds?

15 Feb

For investors planning to invest in Hedge funds, one of the major concerns is regarding the fees that are associated with the hedge funds. This article is designed to help concerned  investors get their answers on the fees associated with hedge funds? After going through the information provided here, you will feel a bit more informed.

There are various fees involved in managing the hedge funds. In the majority of the financial markets across the globe, the following fees normally form a part of the hedge fund.

Withdrawal Fee

This is the fee that is charged by the hedge fund manager when the investor withdraws money from his/her hedge fund account. This fee has been introduced to discourage the investors from frequently withdrawing money from their hedge fund account. Such fees are applicable when the investor withdraws the money too soon or when the investor withdraws more money than the set limits.

Management Fee

This is the fee that goes to the fund manager who manages the hedge fund. The fee for the hedge fund manager is usually set between one percent and four percent of the total hedge fund value. This fee is usually paid to the fund manager in installments.

Performance Fee

In addition to the management fee, the hedge fund manager is also eligible for a performance fee. A certain percentage of the fund profits is set aside as the performance fee. This usually ranges from 18% to 20% of the total fund profits.

Hurdle rates

Hurdle rates are used  for computing the performance fees. Hurdle rates are calculated by comparing the fund performance with external standards. The external standard would include the standards established by the country’s apex financial regulatory institution. The fund manager would not receive a performance fee if the rate of fund return is less than the hurdle rate.

High water marks

This is another factor in addition to hurdle rates that goes in to determining the performance fees of the fund manager.

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How are hedge funds structured?

12 Jan

No one hedge fund resembles another, and the name of the game in today’s world of hedge fund investments is diversity. There are any number of strategies used with hedge funds, and many different types of investments to boot (everything from regular stocks and bonds to internet startups and currency).

Let us not forget that hedge funds located outside of the United States function very differently from those within it! However, there are a few things about the structure of most hedge funds that everyone should know.

  • Hedge funds are private partnerships (or companies) between investors and skilled money managers. Investors do not make the investment decisions regarding the hedge fund portfolio; that is left up to the money manager. There are no assets or employees within the hedge fund – aside from, of course, the investments themselves.
  • There are other roles within the hedge fund aside from investor and manager. These may include: administrator, prime broker, and distributor
  • Depending on where the hedge fund is located, its legal status (including regulations and taxes) may differ greatly. In America, hedge funds are considered private investments and are therefore unregulated (although in some ways that is a misconception; there is indeed regulation for all kinds of investments, including hedge funds. The major difference is that in most cases the SEC does not regulate hedge funds). In offshore locations, the investor is required to pay fees, rather than the money coming from the fund itself. Taxes on offshore hedge funds are also paid out by the investment manager, according to how much they receive for managing the hedge fund.
  • Location really is a huge key to how hedge funds work. While many hedge funds may be technically located offshore, the majority of popular hedge fund managers can be found on shore, near financial hubs.
  • Most hedge funds are designed to be open ended. This means that investors can withdraw their money periodically from the fund, and also add money as time progresses. There may be a requirement for a minimum balance, and of course a requirement to open a hedge fund, but there are typically no other restrictions set on the balance amount. (Frequent withdrawals from hedge funds are not encouraged, however.)
  • Before redemption of the hedge fund, usually profits are not distributed to investors. The profits from hedge funds are typically arranged to be withdrawn either monthly, quarterly, annually, or bi-annually. Individual hedge funds may have specific policies about when money can be withdrawn from the hedge fund.

This was a brief outline of how hedge funds are structured and work. The reality of hedge funds is that they are complicated, diverse investment portfolios. As mentioned above, no hedge fund truly resembles another, even if the specialization of the investment(s) is similar, or if the strategies used are similar. A hedge fund located in New York is going to be very different from one located in London, and even two hedge funds both located in New York are going to be nearly unrecognizable from each other.

Hedge fund indices

28 Dec

Like many other types of investments, hedge funds have indices that track the industry. There are some differences between hedge fund indices and more traditional investment indices, as hedge funds are considered private investments, and more than that, they are mostly all illiquid. This poses some issues with the reliability indices; how comprehensive, and thus satisfactory, are they, really? This is part of why several different methods of hedge fund indexing have been created over the years.

Regardless of whether or not hedge fund indices are fully satisfactory, there is no question that they exist, and that people use them. There are generally three types of hedge fund indices, and these include:

  • Non-investable indices – Using a hedge fund database from which to measure performance, non-investable indices are the oldest type of hedge fund indices used. The databases use weighted mean, medium, and mean in order to measure performance. No one database will represent all funds, which means that no one database is the same as another; every single performance result will be different. This is an issue that some have with the reliability of non-investable indices. Another issue that some have with them is that they are subject to a lot of bias. For one, database reporting is voluntary, which in some cases may lead to self-selection bias. Additionally, hedge funds may come and go (fail and succeed, if you will) annually, which changes the database selection significantly every year.
  • Investable indices – the main goal of an investable index is to eradicate some of the bias and issues raised with using a non-investable index. The main method it does this is by making the index return available to all shareholders. In an investable index, the index provider/manager will select certain funds to develop something somewhat like a “fund of hedge funds” portfolio. The investments created by the index provider must be accepted by any hedge funds, in order to be properly investable.
  • Hedge fund replication – this is more of a statistical look at how hedge funds have performed, analyzing past returns in order to make models of how hedge funds will perform under various circumstances with different assets. The model(s) can be used to make an actual portfolio of assets, and thus makes the index investable. Of the three types of hedge fund indices mentioned here, hedge fund replication is probably the newest. One of the pitfalls that goes along with this index form being so new is that there is very little history or data to support its usefulness in practice – especially when one considers the private, rarely disclosed nature of hedge funds themselves.

This is essentially the beginning of what hedge fund indices entail. They are meant to give investors – and the financial market as a whole – a view of what average returns on hedge funds are, and how they change throughout time. Even though there is some question as to the reliability of hedge fund indices, given that most of the data found within is self-disclosed and therefore very limited, they are popular and continue to grow.

Regulations for hedge funds in other countries besides the U.S.?

15 Dec

Regulation of hedge funds does differ when taken outside of the boundaries of the United States. However, much of the regulation on hedge funds throughout the world does resemble the regulation in the US. In Europe, for example, the primary method is to regulate the financial advisors/managers of the funds. The managers are required to register with the FSA (the Financial Services Authority). Within the European Union, there have been some differences with regulation between different countries, but the hard and fast rule is that EU fund managers are required to register.

Recently, something called the Directive on Alternative Investment Fund Managers, or AIFMD, was passed by the EU to better monitor the activities of hedge fund managers. Countries within the EU are required to adopt the practices of AIFMD by 2013. It is quite an undertaking for every hedge fund manager within the European Countries to comply with the regulations in AIFMD, but AIFMD has made certain allowances to make the transition easier. For example, they have introduced a sort of passport that enables any hedge funds authorized in a country in the EU to operate throughout the entire EU.

Obviously Europe is not the only place aside from the United States that participates in hedge fund activities. An incredibly popular option for those abroad, and even for a portion of American citizens, is to run the hedge funds through offshore locations. This includes Bermuda, the British Islands, Dublin, the Cayman Islands, and many more locations. Any hedge fund that is run through an offshore location has to comply with the individual regulations there. Offshore hedge funds are quite different from other types of hedge funds; one example of this difference is the fact that the funds are valued as net asset value (NAV), not as account balances as with domestic funds.

In South Africa, registration with and approval from the Financial Services Board (FSB) is required for hedge fund managers. Also in South Africa, much emphasis is placed on local investment rather than international. In Singapore, hedge funds are less regulated and have fewer licensing requirements than other Asian hedge fund “hot spots,” such as Hong Kong. Singapore is a popular hedge fund location for this reason.

Recently, the Dodd-Frank Act was passed in the United States. This act has wide reaching implications and may change the nature of hedge funds throughout the world. Those international hedge funds that have more than twenty-five million dollars with fifteen or more American managers or investors must register with SEC. Managers who are registered with SEC are also required to file and keep information about managed assets up to date with the SEC as well.

This is only the beginning of overseas regulation for hedge funds. However, it illustrates that there is still a focus on regulating investment managers rather than the investments themselves. Hedge funds are popular globally, and there is a good amount of cross over investment from countries with financial hubs. Some seek to take advantage of the opportunities presented by offshore accounts, but new regulation may be changing some of that activity.