I will be diving into hedge funds for this post. I'm not sure about you, but in my perception, a Hedge fund is really prestigious and yet shrouded in mystery. Like, what do they do and what are they for? Allow me to answer that in today's post:
Definition:
Hedge funds are alternative investments using pooled funds that employ different strategies to earn active returns, or alpha, for their investors. Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns - Investopedia
A hedge fund is a sort of investment partnership or pooled investment structure that is setup by a money manager or registered investment advisor. - DrWealth
Here are the keywords:
1. Pooled funds/investment - From other investors and the fund's manager
2. Aim to generate high returns - By going into derivatives and leverage (Hedging)
3. Only accessible to accredited investors - You have to be really rich to gain access
4. Less regulated than mutual funds - They can invest using a wider set of financial instruments
5. Actively-managed investment style
So... What is a Hedge Fund?
Imagine: I discovered a way to exploit the market (I honestly don't know in what way) by using derivatives that would allow me to above-average return. That would be my strategy. From there, I put in $20 million and pooled $200 million from other investors and set up a fund where I promise to deliver returns given a fee for my services.
The benefit for me is that I am paid a fee for my services and from the original fund, I can leverage (let's say I borrow another $400 million from the bank) to make even more return. Because of the less regulation of Hedge Funds, I can look at other instruments, beyond stocks, bonds, etc. Usually, a fund would specialise in one particular field (like junk bonds, real estate, wine, whiskey, patents, etc)
So now that we know what is a hedge fund, let us look at the advantages and disadvantages:
Advantages:
1. Alignment of interest (As the fund manager has his money inside the fund, his aim is to increase his wealth)
2. Flexibility (Due to the lesser regulations, Hedge Funds can be flexible in their investment approach)
3. Professional Management (You have a manager that professionally manages your money)
4. Diversification (Hedge Funds may use other instruments to diversify their risk)
5. Potential to do better than the market
Disadvantages:
1. Less Transparency (Due to the lax regulation, there is not much transparency in Hedge Funds)
2. Fees (You would have to pay for the manager's services)
3. Understanding of Strategy (You might not understand the strategy employed by the fund due to the complexity)
4. Low liquidity (You can only redeem quarterly or a set period)
5. Potential to do worse than the market
Thoughts and comments:
In Singapore, you would have to be an accredited investor before you are allowed to invest in Hedge Funds. This would mean that you have either S$2 million in net personal asset or income of S$300,000 in the past 12 months or a corporation with net asset more than S$10 million. I am definitely not one. Hence, I do not have any reasons to invest in them.
If you are interested, these are the criteria to select a good hedge fund:
1. Investment Approach - Do you believe in the strategies applied by the fund?
2. Fund Manager - How much is the manager vested in the fund? Why should you put your money with him?
3. Fund's liquidity - What is the redemption period in the year?
4. Amount of marketing/ pitching the managers have to do - If the manager is that good, does he need to market his hedge fund to you?
Personal Portfolio:
As mentioned, I am not an accredited investor (when I am, I'll tell you k?) As you guys have already known, I am a firm believer of the efficient market hypothesis, that no investor can consistently exploit the market. Hence, even when I am an accredited investor, I would not have a big portion of my investment in hedge funds
There a lot of famous hedge fund managers out there. I'll just list a couple out here:
1. Ray Dalio (famous for predicting the 2007 Global Financial Crisis, He has also managed one of the biggest hedge funds in the world - Bridgewater Associates)
2. Michael Burry (famous for being portrayed by Christian Bale in the "Big Short", he also managed Scion Capital from 2000 to 2008. He successfully took advantage of the 2007 financial crisis and shorted the housing market.)
On the other side of the spectrum, Warren Buffett did make a bet with the top Hedge Fund managers that investing in the market index would generate a larger return compared to Hedge Funds. If you are interested, you can take a look at this article: https://www.investopedia.com/articles/investing/030916/buffetts-bet-hedge-funds-year-eight-brka-brkb.asp. It also shows us that fees really do play a huge role in the returns that we get from our investors.
I hope that you now have a better understanding of Hedge Funds
With that,
I end today's topic.
Stay vested, Stay frugal my friends,
Dionysius
https://www.straitstimes.com/business/banking/worlds-biggest-hedge-fund-returns-found-in-singapore
https://www.drwealth.com/hedge-fund-singapore/
https://www.fa-mag.com/news/how-o-select-hedge-funds-5267.html
https://seekingalpha.com/article/4266569-how-to-pick-hedge-funds-3-common-traps-to-avoid
https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp
https://www.investopedia.com/terms/h/hedgefund.asp
https://infoforinvestors.com/investing/alternative-investments/hedge-funds-pros-cons/
https://seekingalpha.com/article/4266569-how-to-pick-hedge-funds-3-common-traps-to-avoid
https://insidermonkey.com
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