Wednesday, October 15, 2008

Hedge funds

WHY INVEST IN A HEDGE FUND? To beat the market, obviously.


On that score, the winners of our annual Top 100 Hedge Fund ranking came through with flying colors, posting an average annual return of 20.83% over the past three years, compared to a 2.24% return for all hedge funds and a 15.94% loss for the stock market overall.

Because many of our Top 100 invest in bonds and engage in short-selling stocks, they don't always benefit as much in an up market. Last year the average fund on our list was up 25.14%, a tad less than the 26.5% gain for the Standard and Poor's 500 Index.

Our winner this year is John Paulson, whose Paulson Credit Opportunities Fund finished No. 1 in our tally with a mind-boggling three-year compound annual return of 122.92%. Paulson, whose New York firm now runs more than $32 billion, also had two other funds in the Top 100, Paulson Advantage (an event-arbitrage vehicle up 41.31% a year over three years and our No. 1 last year) and merger-arbitrage specialist Paulson International (up 20.23%).

Although Peconic, with 18 staff members, is mostly a buy-and-hold investor, its $455 million Grenadier Fund came through 2008's crash with just an 8.15% loss owing to some savvy short plays in financial stocks. Included was Freddie Mac (FRE), which the fund shorted between September and November 2007 and walked off with a 35% gain.

The No. 56 fund on our list was 73% long and 43% short on May 10, giving it a net exposure of 40% (70% of its money was sitting in cash). "Most of the time we make our money on the long side," says Timothy O'Brien, a portfolio manager for Peconic Grenadier.


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Hedge Fund Contacts

Hedge Funds Go Retail
The Mass Affluent
In general, fund of fund managers seek investors that meet minimum accredited investor criteria established via Regulation D, such as the $200,000 annual income and $1 million net worth requirements. This is because only accredited investors can be charged performance fees by the fund, as mandated by the SEC.

Minimum investment amounts are still very high, although the retail funds coming to market ask for much less than the $200,000 average seen in traditional hedge funds. Most of the new funds of funds coming to market have minimum investments of $20,000 to $30,000 for investors who meet the sophisticated investor requirements.

Fee structures and liquidity options are very different as one looks across the fund of funds landscape. While most traditional hedge funds have operated on a "1 and 20" fee structure (1% of assets, 20% of profits), funds of funds come with slightly lower performance-based fees but higher asset-based fees, in the range of 1.5% all the way to 3% of assets annually.

Investing strategies among hedge funds are as varied as the types of securities they use to implement them; there's the market neutral, convertible arbitrage, long/short, event driven and global macro, just to name a few.


Absolute Vs. Relative Returns
Most hedge funds and private equity funds are focused on absolute returns as opposed to relative returns. For example, consider a year when the S&P index is down 10% or more. If a large cap mutual fund were to be down "only" 2-3% in that same year, most investors would consider that a good year, even though they had lost money. Most retail investors are trained to think in this "relative performance" way, but most hedge fund managers are simply looking to make money every year. Because of the focus on absolute returns, hedge funds may trail equity indexes during bull market years.
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asr: this Institutional investor site is reffered by bloomerg , so it is credible ..
see at image bottom:
- top 100 hedge funds control 1.33 trillion, which is 74% of total assets of all hedge funds.
- top 100 asset base increaed 33% in year 2008 menaing consolidation is happening, small hedge is going done
- top 10 contorls 324 billion


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Papers on Hedge fund and index
http://www.hedgeindex.com/hedgeindex/en/research.aspx?typeid=0&cy=USD

http://www.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20071022005918&newsLang=en

http://www.hedgeindex.com/hedgeindex/en/indexoverview.aspx?indexname=HEDG&cy=USD
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Renaissance_Technologies
Because it is so successful, it charges a 5% management fee and a 44% incentive fee.

Renaissance employs many specialists with non-financial backgrounds, including mathematicians, physicists, astrophysicists and statisticians. Renaissance's quantitative trading model trades at such high frequency that it (the Nova fund, specifically) occasionally accounts for over 10% of all the trades occurring on NASDAQ

The Renaissance Institutional Equities Fund, started in mid-2005 is being offered as a "mega-fund" for institutional investors; reportedly it has a capacity of up to $100bn.

On September 25, 2008, Renaissance Technologies wrote a letter to the SEC discouraging them to allow public to see list of shorted positions just like long positions. The company cited many reasons for this which included the fact that "Institutional investors may alter their trading activity to avoid public disclosure"! Long positions are disclosed but short positions not be disclosed in an era where SEC is not enforcing delivering shares that are naked shorted which SEC chairman Cox himself has called naked short selling 'criminal'.
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Hedge funds are extremely flexible in their investment options

Top Performing Hedge Funds of 2007


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Investment_fund


A hedge fund is a private
investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment funds and which pays a performance fee to its investment manager.


Industry size
In 2005, Absolute Return magazine found there were 196 hedge funds with $1 billion or more in assets, with a combined $743 billion under management - the vast majority of the industry's estimated $1 trillion in assets.

The 2008 Hedge Fund Asset Flows & Trends Report[5] published by HedgeFund.net and Institutional Investor News estimates total industry assets reached $2.68 trillion in Q3 2007.

A typical manager will charge fees of "2 and 20", which refers to a management fee of 2% of the fund's net asset value (or "NAV") per annum and a performance fee of 20% of the fund's profit (being the increase in its NAV).


Typically, hedge funds charge 20% of gross returns as a performance fee.[citation needed] However, the range is wide with highly regarded managers charging higher fees. In particular, Steven Cohen's SAC Capital Partners charges a 3% management fee and a 35-50% performance fee,[6] while Jim Simons' Renaissance Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund.

Hedge fund management worldwide

In contrast to the funds themselves, hedge fund managers are primarily located onshore in order to draw on larger pools of financial talent. The US East coast – principally New York City and the Gold Coast area of Connecticut (particularly Stamford and Greenwich) – is the world's leading location for hedge fund managers with approximately double the hedge fund managers of the next largest centre, London. With the bulk of hedge fund investment coming from the US, this distribution is natural. It was estimated there were 7,000 hedge funds in the United States in 2004.[13]

London is Europe’s leading centre for the management of hedge funds.

Offshore regulation
Many offshore centers are keen to encourage the establishment of hedge funds. To do this they offer some combination of professional services, a favorable tax environment, and business-friendly regulation. Major centers include Cayman Islands, Dublin, Luxembourg, British Virgin Islands and Bermuda. The Cayman Islands have been estimated to be home to about 75% of world’s hedge funds, with nearly half the industry's estimated $1.225 trillion AUM.[27]

Top performing funds -- see this section.

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