What is a hedge fund?
A hedge fund is an aggressively managed portfolio of securities set up for investors who have a net worth of more than 1 million dollars. Investors who participate in a hedge fund should sign a letter of agreement specifying that they are knowledgeable investors and that they are conscious of the risks.
The hedge fund managers use advanced techniques to maximize the return on investment to the fund. The strategies employ extremely leveraged positions in long and brief derivative positions in each domestic and international markets. Derivatives consist of choices (puts and calls), futures (contracts), and swaps, which they combine to safeguard the bulk of the portfolio. Most hedge funds (but not all) use sophisticated mathematical models to design protective “collars.”
A regular requirement for hedge funds is that the investor should leave their investments in the fund for at least 1 year. To withdraw funds investors should notify the hedge fund manager inside a narrow window (1 or two months) and at no other time.
Regulation
Considering that hedge funds do not deal with the regular public but with sophisticated “accredited” investors, they aren’t regulated. Consequently, managers have wonderful flexibility in their selection of instrument. While hedge funds resemble mutual funds, they aren’t considered mutual funds (which are regulated and banned from using derivatives).
But, due to the fact hedge funds participate in organized and regulated markets they turn out to be topic to US law, and they may be scrutinized by the SEC and the Fed. In this respect, in spite of the truth that hedge funds aren’t regulated, “insider trader” laws and other laws also apply to them.
Return on investment
Simply because sophisticated investors demand higher returns for their investments, hedge funds are produced to fill that want. As soon as a hedge fund can show a steady track record of high performance (much higher than the common markets), money begins to flow in. The more explosive the return on investment the greater the allure of the hedge fund.
Cash Flow as a measure of liquidity, profitability, and future returns
No two hedge funds are alike they all function independently and in common they turn out to be a reflection of the personality of their managers, but in certain of the personality of the general partner.
Some general partners with cowboy personalities will ride more than all open fields: buyouts, IPOs, stock splits, arbitrage, and foreign currencies.
For numerous stock investors, the index “earnings per share” (EPS) is the absolute measure of profitability and an indicator of future corporate efficiency. For the hedge manager, even so,
a a lot far better crystal ball is the corporation’s statement of money flows.
Why is the statement of money flows preferred by the hedge fund managers over the EPS? Hedge fund managers know that EPS can be ‘doctored up,’ manipulated, disguised, and shaped to appear great, when the underlying reality may be distinct-even grim. Cash flows on the other hand can be double checked with the banks that hold the money accounts. The pieces that go into the preparation of the money flows statement must fit perfectly and harmonize with the balance sheet and the income statement.
From the leading section of the statement we read the inflows and outflows from the primary line of company-operations. From the middle section we read the investing activities: what money was generated and utilized by non-present assets and non-present liabilities. From the third section we can see the inflows and outflows due to dividends, and bond and stock concerns. The Statement of money flows paints a detailed panorama of all the significant activities that management engaged in in the course of the year. Of most importance are the clues that the figures give to hedge funds managers as to the direction of the corporation: what plant expansions are taking spot, what restrictions are being placed on retained earnings, and so forth. And if the business is getting difficulties with liquidity, this can be gleaned, too.
Hedge fund managers value fresh, current, timely, and accurate facts. Not only do they value facts, but they also cultivate excellent sources of info and connections. In this respect, hedge fund managers have to tread lightly so as not to develop into prey to “insider trading.”
Several Brokers and Arbitrage
To squeeze the maximum return on investment, hedge fund managers employ various brokers, always seeking to make economies on broker fees and commissions. Given the volume and large amounts of dollars their savings can be important, which in the finish will add to the fund’s bottom line.
Once again, given the massive investments hedge funds can dump on brokers, they aren’t too proud to engage in arbitrage. If they see that there’s a price disparity in between exchanges, they will capitalize on it by crossing markets. Of course, most of these mispricing can be detected by personal computer programs that crawl the internet, pouncing on each opportunity and therefore eke out gains with no labor investment.
Conclusion:
Investors with cold blood in their veins, powerful hearts, and powerful stomachs will entrust -risk, could be a better word- their funds to hedge funds. Is there any protection? None. They go into the funds with open eyes, trusting only the personality of the general partner.
May universities, hospitals, museums, art organizations, and other non-for profit organizations invest in hedge funds? Yes, they could. The overseers, trustees, directors, and in certain those in finance and investment committees will be considered ‘accredited’ investors. And in keeping with their fiduciary responsibility they will follow the “prudent man” philosophy of diversification, investing only a fraction of their endowments.
Highfields Capital Management, LP is a privately owned hedge fund sponsor. The firm supplies its services to endowments, charitable and philanthropic foundations, pension funds, and other institutional and private investors It manages equity portfolios and hedge funds for its clients. The firm invests in the private and public equity markets of the United States, Canada, and international markets. It invests in value stocks. The firm also invests in lengthy-term mezzanine or other fixed income financing to fund organization acquisitions or growth and participates in leveraged get-outs, venture investments, and recapitalizations. Go to Highfields Capital.
What Is A Hedge Fund, Anyway? 