Most of us have heard the words "Hedge Funds" splashed all over the media many times during this past economic slump. If you've been wondering what this creature called Hedge Fund is, then continue reading. This is just meant to be a introduction on the topic and is in no way exhaustive.
Why is it called a Hedge Fund? This is mainly to do with the investment vehicle's very nature of trying to hedge against market volatility and downsides. A regular unit trust fund aims to out -perform a certain benchmark. In contrast, a Hedge Fund seeks positive absolute returns even if the market is down. Let me illustrate this point.
In the Prospectus of the Public Ittikal Fund it is stated that the fund intends to beat the returns of the KLCI. So when the market is down by 20% if the fund is down by anything less than 20% it would have actually met its objectives and the fund managers can happily collect their salary. Thus, even when the fund declines in value there are still investors and the service charge is still at 5.5% (let alone the trustee and management fee).
On the other hand, where Hedge Funds are concerned, it is insufficient to say that a benchmark has been beaten. There is usually a 1% or 2% management fee but fund managers only get paid from the profits earned by the fund (typically 20%). This puts the heat on managers to actively manage the portfolio to ensure positive annual returns even in a bear market. That is why Hedge Fund managers are a sort of celebrity investor that usually only takes huge sums of money from high-end investors and institutional investors. Some Hedge Funds are only by invitation even. Additionally, many Hedge Funds actually invest their own capital in their Fund and this ensures they put in their best effort to get a positive return.
How does a Hedge Fund hedge against market movement? This involves many techniques but the most basic thing to understand is that they use something called "Short Selling" (click to read). This in essence means that they buy and hold investments that are good and at the same time also "short" investments that are dubious. This is a two pronged approach which is markedly different form regular unit trust funds that simply buys and sells stocks (or other asset classes).
Hedge Funds also have to report less to investors about their investments and thus provide them with more flexibility in what and where they get to invest. Investors in Hedge Funds are presumed to be large scale investors (above $1 million in assets) who can take a higher risk to get higher returns. The fund performance is largely based on the "talent" of the fund manager because he actually invests in assets that are pretty much the same as regular investors and yet he makes considerably higher profits.
Why is it called a Hedge Fund? This is mainly to do with the investment vehicle's very nature of trying to hedge against market volatility and downsides. A regular unit trust fund aims to out -perform a certain benchmark. In contrast, a Hedge Fund seeks positive absolute returns even if the market is down. Let me illustrate this point.
In the Prospectus of the Public Ittikal Fund it is stated that the fund intends to beat the returns of the KLCI. So when the market is down by 20% if the fund is down by anything less than 20% it would have actually met its objectives and the fund managers can happily collect their salary. Thus, even when the fund declines in value there are still investors and the service charge is still at 5.5% (let alone the trustee and management fee).
On the other hand, where Hedge Funds are concerned, it is insufficient to say that a benchmark has been beaten. There is usually a 1% or 2% management fee but fund managers only get paid from the profits earned by the fund (typically 20%). This puts the heat on managers to actively manage the portfolio to ensure positive annual returns even in a bear market. That is why Hedge Fund managers are a sort of celebrity investor that usually only takes huge sums of money from high-end investors and institutional investors. Some Hedge Funds are only by invitation even. Additionally, many Hedge Funds actually invest their own capital in their Fund and this ensures they put in their best effort to get a positive return.
How does a Hedge Fund hedge against market movement? This involves many techniques but the most basic thing to understand is that they use something called "Short Selling" (click to read). This in essence means that they buy and hold investments that are good and at the same time also "short" investments that are dubious. This is a two pronged approach which is markedly different form regular unit trust funds that simply buys and sells stocks (or other asset classes).
Hedge Funds also have to report less to investors about their investments and thus provide them with more flexibility in what and where they get to invest. Investors in Hedge Funds are presumed to be large scale investors (above $1 million in assets) who can take a higher risk to get higher returns. The fund performance is largely based on the "talent" of the fund manager because he actually invests in assets that are pretty much the same as regular investors and yet he makes considerably higher profits.
