Hedge funds are alternative investment vehicles which seek to provide abnormal (investment alpha) risk adjusted returns. They are utilised predominantly by high net worth and institutional investors...
According to Preqin, total assets under management (AUM) in the hedge fund universe is currently in excess of $3.5 trillion globally with over 6,000 active firms in operation, two-thirds of which are in North America.
Trades executed for a fund will generally be either: systematic (computer model-driven and automatic) or discretionary (fund manager makes decisions for himself/herself). There are a wide variety of hedge fund strategies employed globally with variations on those strategies. The most common types are:
- Long/short equity
- Global macro
- Relative value
- Merger arbitrage
- Convertible arbitrage
- Market neutral (statistical arbitrage)
- Event driven
Since the strategies employed by hedge funds are complex and sophisticated, management fees can be significantly higher than conventional equity or bond funds. Some fund fees can be as much as 2% per annum with additional performance fees levied.
Although most large hedge funds will offer their investors the facility to buy and sell fund units daily (daily dealing or daily liquidity), the complexity of certain fund strategies can require investors to stay invested for a prescribed time period. Investors who purchase units can be subject to relatively lengthy minimum holding periods and pricing of fund units may be weekly or monthly rather than daily. In recent years, it has not been uncommon for fund managers to suspend unit sales, a practice known as “gating”, in order to prevent the fund and its strategy from being compromised by investors wishing to redeem their holdings.
Over the past decade or so, the allocation of money to hedge fund investment strategies has increased significantly as institutional investors have attempted to improve risk-adjusted returns for clients. Mainstream adoption in modern investment portfolios is now commonplace, although the ubiquity of funds has led to increased competition and hence lower fees.
Post-GFC (Great Financial Crisis), hedge funds have struggled to deliver the returns that made them famous in the late 1990s and early 2000s. This is largely due to the price volatility suppression effects of quantitative easing by global central banks on the assets that hedge funds typically trade. Therefore, it is arguably volatility suppression, combined with increased industry competition, that has made the generation of hedge fund investment alpha much more difficult today.
Hedge fund investment research covered on Savvy Investor includes hedge fund surveys and industry analysis. Our curated articles, blogs and white papers also highlight the issues surrounding hedge fund performance, hedge fund indices, fee structures, compliance and the regulation of hedge funds. Also included are the latest views on the outlook for the hedge fund industry, looking into the increased use of CTAs (commodity trading advisers) and managed futures.
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