Tag Archives: Joseph Healey Healthcor

Controversy and debates about hedge fund

2 Dec

There are several debates and controversies on the subject of hedge funds. A good deal of the debate has to do with the fact that there is supposedly systemic risk when dealing with hedge funds. Also, a good deal of attention is paid to the fact that there is very little transparency required with hedge funds, as they are considered private investments, and have limited regulation compared to other types of investments.

Critics of hedge funds have claimed that the nature of these high risk investments could lead to a domino effect in the financial sector with catastrophic results. Systemic risk refers to the collapse of the entire financial system, and so it may be difficult for some to picture one failed hedge fund or failed hedge fund company bringing the entire system down. However, people who feel that – if such a failure should happen, and it should be noted that failure has happened on scales both big and small – a major failure could occur with one hedge fund, and be seen in hedge funds that are similar. Many pro-hedge fund people debate this claim of systemic risk, because failure has already occurred in many hedge funds, and the result was that the financial system was nowhere near systemic failure. When a hedge fund does fail, they are typically leveraged low and the market as a whole can weather the failure fairly easily. In fact, dozens of hedge funds failed during the financial crisis – and there was still not systemic failure.

The other major issue that is up for debate is transparency. The lack of disclosure that is required regarding hedge funds is deeply troubling to some people, who argue that this atmosphere of secrecy can perpetuate fraud. In many cases, the investors themselves have very limited information on what the hedge fund managers are actually doing. An example of issues with transparency would be that many American hedge funds do not rely on third parties to perform crucial tasks, such as administration or acting as custodian of assets, and this has been shown to lead to conflict of interest, and in some cases even fraud. There have been several high profile arrests made of people who have engaged in fraudulent behaviors or schemes with regards to running hedge funds.

Another issue regarding hedge funds is the fact that it is extremely difficult to track performance statistics. Between the fact that the majority of hedge funds were not required to submit performance findings, and the fact that there is a restriction against public advertisement and offerings (leading to a reticence or outright refusal of fund managers to willingly put the performance information out to the public), it is incredibly difficult to comprehensively study how hedge funds perform on average. Individual funds can be studied, but many remain a relative mystery.

These are just some of the controversies and debates surrounding hedge funds. Hedge funds are a subject of some scrutiny after the financial crisis of recent years. The SEC, for example, is scrutinizing the possibility of insider trading within hedge funds; it remains to be seen, but there is always a chance that regulation will be strengthened for hedge funds.

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.

Hedge Fund structure

15 Oct

No one hedge fund is structured like any other. There are a number of factors that come into play, mostly having to do with what state (or even country) the hedge fund is located in, the hedge fund manager’s practices, policies, and specific skill set, and of course the amount of money in the fund itself. Furthermore, the diversity of the investments in the hedge fund changes the structure of the hedge fund as well a typical, well-managed portfolio has more than one type of investment at a time. In a way, hedge fund investments can be “mixed and matched” in order to achieve the best results. Investment managers can use a risk parity strategy with one investment, and on another use fixed income arbitrage, for example.

Typically, a hedge fund is comprised of an investor (either an individual or a company), and the investor enters into a partnership with the hedge fund money manager – or (when there are multiple parties) else enters into a company with the manager. Once established, the hedge fund company will make investments; this is the hands-on part of the partnership or company. The investor virtually has no role in the investment process, and is not nearly as involved in the decision making, business practices part of the hedge fund.

Other people may provide services in a hedge fund as well. These may include a distributor, who primarily markets the funds to investors; a prime broker, who do the majority of the work with lending money and securities; and an administrator, who handles the withdrawals and subscriptions of investors. This is a very basic outline of what various people within the hedge fund may do, and every hedge fund is different. A hedge fund never has any employees or assets other than the investments within the fund itself.

The taxation and regulation of hedge funds varies greatly depending on the location of the fund itself. For example, hedge funds in America are considered very loosely regulated (they typically do not have to report to SEC, for one). A lot of hedge fund companies take advantage of tax opportunities by establishing the fund in an offshore financial center, so that the investor pays taxes on the portfolio, and it doesn’t come out of the fund itself. However, despite many hedge funds being technically located offshore, a lot of investment managers are located onshore.

Legally, hedge funds are usually formed as limited partnerships, or limited liability companies. The general partner is the investment/money manager, and the limited partner(s) is the investor themselves. Hedge funds are considered private investments and are not held up to the same amount of regulation that other investments are. While hedge funds are often referred to as “unregulated,” the fact is that there is some regulation that has to take place by law – it is simply different than regulation for other types of investment. An example of how hedge fund regulation functions is that investors are heavily scrutinized and must meet certain criteria before being approved.

Market trends of Hedge Fund industry

8 Oct

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 2013 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 2012 had similar results in 2013 – 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 2012 continued to do so into 2013. 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 2013.

One of the biggest changes of 2012, leading into 2013, 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.