REVOLUTIONIZING HEDGE FUNDS AROUND THE WORLD
FROM $5 MILLION TO $100 BILLION US DOLLARS

“Hedge Funds Find Their Place In The Sun”

Hedging Your Bets:
A Heads Up on Hedge Funds and Funds of Hedge Funds

Your Access to Investment Strategies of the Super-Rich

Executive Summary

Since the bear market in stocks started four year ago, hedge funds have become one of the hottest investment vehicles, growing at a rate of 20% a year. The hedge fund market is expected to increase to $1.5 trillion in the next two to five years. They have been very prominent in the financial news, attracting a lot of attention from investors and brokerage firms.

A hedge fund is private investment club, usually a partnership, open to a small number of wealthy investors, that invests in a variety of securities. The name “hedge fund” is misleading since hedge funds do not necessarily hedge.

A new breed of hedge funds, called funds of funds, allows investors to invest as little as $25,000, compared with the previous typical minimum of $250,000.

Worldwide investment inflows for hedge funds reached a record of $106.6 billion for the first three quarters of 2004, more than the total for all of 2003.

What are hedge funds?

Hedge funds refer to funds that can use one or more alternative investment strategies, including hedging against market downturns, investing in asset classes such as currencies or distressed securities, and utilizing return-enhancing tools such as leverage, derivatives, and arbitrage.

At a time when world stock markets appear to have reached excessive valuations and may for further correction, hedge funds provide a viable alternative to investors seeking capital appreciation as well as capital preservation in bear markets. The vast majority of hedge funds make consistency of return, rather than magnitude, their primary goal.

Like mutual funds, hedge funds pool investors’ money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss.

Unlike mutual funds, however, hedge funds are not required to be registered. This means that hedge funds are subject to very few regulatory controls. Because of this lack of regulatory oversight, hedge funds historically have generally been available solely to accredited investors and large institutions. 

A hedge fund is primarily characterized by the fact that it is not dependent on rising market prices to generate a good return. The fund’s target in terms of return on investment is absolute; a positive return is to be achieved regardless of whether market prices rise or fall. The contrasts with conventional management where a fund manager, for example, are generally targeting a relative return by attempting to outperform a comparative index.

The five main categories of hedge fund investment “styles” are: long/short equity hedge, relative value, global asset allocators, event driven and fund of funds. A fund of funds invests in other hedge funds so as to benefit from the expertise of individual fund managers, to spread the portfolio’s risk across different strategies, and to give the fund of fund’s investors access to expert managers who may not accept investments from other sources.

Distressed Securities buys equity, debt, or trade claims at deep discounts of companies in or facing bankruptcy or reorganization. Profits from the market’s lack of understanding of the true value of the deeply discounted securities and because the majority of institutional investors cannot own below investment grade securities creates the deep discount. Results generally are not dependent on the direction of the markets. Expected Volatility: low – moderate.

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