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Flashcards in Hedge Funds Deck (22):
1

Type of Entity

Most hedge funds operate as limited liability companies or as limited partnerships

2

Individual Accredited Investor

(1) Someone with a net worth in excess of $1M (excluding personal residence); (2) Income above $200k (or $300k joint with spouse) for past two years with reasonable expectation income will continue in year of investment

3

Governance

The typical U.S. hedge fund does not have a board of directors or any governing body similar to a mutual fund board of directors.

4

Transparency and Regulation

(1) Were not subject to any minimum disclosure and were lightly regulated; (2) Dodd-Frank required hedge-fund managers to register with the SEC, which means a Chief Compliance Officer must be appointed

5

Performance Standards

(1) Hedge funds gauged by individual returns rather than returns against index or peers. (2) Absolute returns means having positive returns in all types of market conditions.

6

Private Placement Memorandum

(1) Offering Document for a hedge fund (2) No specific disclosure requirement; (3) May include: investment strategies, investor qualifications, risk factors, allocation of gains and losses, lock up period, redemption provisions, tax aspects, fund financial statements

7

Fees

(1) Most hedge funds have a 2% management fee plus 20% profits; (2) Managers do not share in losses; (3) Usually a 40 to 60 bps administrative fee

8

Risk Management

(1) Hedge funds should have a system for identifying, tracking and management risks of fund investments and strategies; (2) A system in place for assuring proper valuation of illiquid securities; (3) There is no standard measure of risk for a hedge fund

9

Use of Derivatives

(1) Derivatives can reduce risk, (2) Substitute for Traditional Securities; (3) Increase returns through Speculation

10

Leverage

(1) Increases returns without increasing investment; (2) Can be accomplished through borrowing or derivatives to magnify both returns and losses.

11

Concentration

(1) Making big bets on securities by investing large amounts of capital into those securities; (2) Increases risk but can increase returns as well

12

Hedging

Taking the opposite of positions to reduce risk

13

Short Selling

(1) One seller borrows securities to sell with intention of closing out position by delivering securities to seller's portfolio or buying back in open market. (2) Can be used to hedge a long position.

14

Distressed Securities

(1) Securities trading at very low prices due to prospect of bankruptcy or corporate reorganization. (2) Gives these securities the possibility for large capital gains, but usually takes several years for the company to turn around.

15

Arbitrage

Arbitrage is exploiting price discrepancies between very similar or the same securities trading in different markets

16

Market Neutral

(1) Also called long/short; (2) Taking both long and short positions to make profits

17

Global Macro Investing

(1) Macro investing attempts to profit from changes in global economics, and are usually tied to (2) Interest rates, which in turn, impact currencies, stocks and bond markets. (3) Both leverage and hedging techniques may be used, thereby impacting the risks being taken.

18

Venture Capital

(1) Venture Capital is money invested in the very early stages in the life of a company in the hopes of very large gains if the company becomes successful; (2) If unsuccessful, the entire investment could be lost; (3) The equity position is illiquid and difficult to value until the company goes public or is sold

19

Private Offerings

(1) Sales of Securities issued by companies who do not want the expense, time, and inconvenience of issuing public securities. (2) Offered through Private Offering Memorandum that describes the company, risks, and other material factors.

20

Initial Public Offerings

(1) Many Hedge Funds have enough clout to obtain shares of "hot" IPOs, the performance of which can boost returns. (2) IPOs can gain 50%, 100% or more in the initial day of trading.

21

Business Financing

(1) Hedge funds have entered the business of providing financing to business. (2) Uses include: finance takeovers, the purchase of another business, or bridge loans (temporary financing until L-T capital can be arranged.)

22

Fund of Hedge Funds

(1) A fund that invests in many hedge funds, often as many as 15 to 25. (2) Diversification is provided through a multi-manager, multi-strategy approach to investing, (3) Low-minimums (some as low as $5,000, although $25,000 to $1 million), (4) Institutional investors buy FOHFS to hedge against other funds. (5) Typically 1% fee, 10% profits with operating expenses at both levels.