ALTERNATIVE INVESTMENT
Ch 6
What is hedge fund ?
It is a pooled investment structure where by investor pooled money and assign
professional fund manager to manage to manage the fund and the fund
manager deploys the fund as per stated strategy in order to above the desired
result hedge are very advanced type of pool fund where investor and manager
both are very smart the investor are generally ultra reach and HNI and the
investment ticket size very large generally of RS 10 CR and above the fund is
setup in partnership firms structure with investor being limited partnership and
manager being general partner.
The fund is not regulated by SEBI/ SEC /GOVT it does not have any reporting or
disclosure of investment.
It was a private of structure ( that must be in T&C , governed by partnership
agreement ) the fund does not have any restriction on investment strategy (
unlike mutual fund) the fund can deploy leverage derivatives sell short startup
funding forex trading , overseas fund and investment and many more.
The ultimate goal is to above the highest return event at cost of high risk.
Hedge = to avoids or mitigate risk done by using derivatives .
The basic idea the ‘ name’ “ Hedge fund “ that initially these used to long some
stock and short other stock in the index causing my portfolio to seen “ hedged”
towards the index hence the name “ hedge funds”.
These are long or short funds and market neutral funds the idea that contain in
some these stock done long shall results value of stock falls in and the fund will
earn on both side .
( which is not possible in mutual fund which are lose money)
Hedge funds are frequently evaluated on the basis of total return or risk-
adjusted return instead of being measured against a benchmark.
Fundamental long/short. Use long positions in undervalued securities based on
fundamental analysis while simultaneously having a short position in a portfolio
of stocks or an index. This strategy aims to capture alpha when market
corrections happens. The majority of managers have a net long exposure (ie, a
long bias).
Fundamental growth:- purchase stocks of companies that are anticipated to
continue experiencing relatively high rates of capital appreciation, and sell
stocks of companies anticipated to see little to no revenue growth. These funds
typically have a net long bias.
Fundamental value:- Based on fundamental analysis, buy equity shares that are
believed to be undervalued and sell equity shares that are believed to be
overvalued.
Market neutral :- Using technical or fundamental analysis to identify
undervalued stocks to be held long and overvalued stocks to be sold short in
roughly equal proportions .
Merger arbitrage. Purchase the shares of a company being acquired and sell
short the company making the acquisition. It was not a arbitrage because it
contain some risk that merger was change any time and merger is not occur as
per planned .
Distressed / restructuring :- means purchase the of financially weak companies
and after that value was increased by a successful restructuring. And possibly
short overvalued shares at the same time.
Activist Shareholder:- Buy sufficient equity shares to be able to influence the
company’s policies, with a goal of increasing company value
Special Situations:- events like a shares buyback or repurchasing.
Convertible arbitrage fixed income. Exploit differences in price between
convertible bonds, the common stock of the companies issuing them, and
options on those shares.
General fixed income. Exploit pricing differences between fixed-income
instruments of different issuers and different types.
Multistrategy:- Exploit pricing discrepancies among securities within and across
asset classes and markets.
Macro Strategies :- can comprise long or short positions in equities, fixed
income, currencies, or commodities and are based on global economic trends
and events. These strategies become less attractive when central bank
operations smooth out economic shocks.
In a simple sense :-
These basically works on macro events like a war, recession and such events that
effect on stock market .
Managed futures:-
Simple sense
This basically involves commodities and track the events associated with that
like supply and demand . like a CTAS ( commodity trading advisers)
in case of commodity, it can be seen that high prices tend to decrease demand,
which in turn lowers prices, while low prices tend to reduce supply, which in
turn raises prices.
NOTE :- the commingled fund means pooled funds and SMA means individual
investor.
What is Tax haven :-
Bill Ackman fuds Securities in various
Various USA
in Mauritius PE countries acc to various
investor (HNIS)
Hedge fund strategies
When Mauritius investor
invest in India there was
a tax exemption this tax
exemption called tax
haven
LOS 6.b: Describe investment forms and vehicles used in hedge fund
investments.
Master-feeder structures are frequently used in commingled funds because they
enjoy economies of scale benefit, tax-efficient, and allow funding from
international investors. There are two feeder funds in such a structure: one
offshore (in a tax haven) and the other onshore.
SMAs are suitable for larger or institutional investors because they also require
more operational oversight. The benefit of lower negotiated fees in SMA
structure is offset by the disadvantage of receiving allocations of only the fund
managers most liquid trades.
LOS 6.c: Analyse sources of risk, return, and diversification among hedge fund
investments.
Hedge fund returns come from three sources:
1) Market Beta:-The return that can be attributed to the broad market index is
this. Investors that invest passively in index funds can obtain this.
2) Strategy Beta:-This is the return that may be directly linked to a fund's
exposure to specific sectors.
3) Alpha:-This is the additional return that the manager delivers through
security selection.
Leverage is a tool used by hedge fund managers to increase the value that is
added through strategy beta and alpha. High fees, however, act as a drag on
performance.
The success of hedge funds as measured by indices is sometimes overstated
Backfill bias:- refers to the effect on historical index returns of adding fund
returns for prior years to index returns when a fund is added to an index. This
has the same tendency to misrepresent performance as selection bias does
because funds with higher historical returns are more likely to be included.
