The hedge fund industry used to have humble beginnings: in 1990, it had $40 billion in assets under management. Now, its growing appeal has led to a staggering $2.6 trillion in 2013. In retrospect with the mutual funds industry and the global financial markets, this is a small figure. However, there has been tremendous growth in the hedge fund industry, with an estimated 10,000 active funds today[1]. The most initial hedge fund was started by Alfred W. Jones in 1949, who used a combination of leverage and short selling to hedge against the market risk. In spite of his success, hedge funds gained real prominence in the 1960s. This was when major investment names like Warren Buffet and George Soros implemented Jones’s strategy. As a result, the figure of new hedge funds has grown despite the alarming 10 percent of hedge funds shutting down each year due to a host of reasons such as unsatisfactory performance or inability to raise adequate funds.

Hedge funds not unlike real estate and private equity investments are perceived to generate high returns that are not related to traditional investments; this is what attracted many investors and institutions towards hedge funds. Nowadays, the hedging strategies used have become more complex, sophisticated and accurate, as compared to the short selling and leveraging techniques used initially. However, in the year of 2008, the hedge fund industry faced a great hit in its popularity as numerous successful investors and institutions incurred heavy losses of around 30 percent and more. As a result, the assets under management dwindled as the investors selected treasury bills and cash investments, which were deemed much safer than hedge fund investments. Fortunately, the advanced hedge fund strategies employed rendered attractive returns in the precarious market, which helped regain some of the lost charm of hedge funds. In 2009, the situation improved and hedge funds regained popularity.

Most hedge funds are extremely specialized and rely upon the specific expertise and skill of the management or fund managers. These managers make use of a variety of investment strategies, which will be elaborated on later. They specifically try to minimize the market risk by shorting equities and/or using derivatives. Since the hedge funds make use of sophisticated investment strategies, their returns have tended to outperform standard equity and bond indexes for a number of years, with not only less volatility but also less risk of loss as opposed to equities. This is why usually many endowment funds, pension funds, private banks, and high net worth people indulge in hedge funds. However, the main investors in the hedge fund industry are usually state and municipal pension plans, corporate pension plans, and universities endowment. The key players within the hedge fund industry can be explained via the following diagram:

Source: Managed Funds Association 

Portfolio managers identify the strategy and are usually invested in the hedge fund themselves; however, they are compensated according to the fund’s annual performance. The prime brokers secure their loans with collateral to generate margin and secure trades. As a result, each broker (typically in a large securities organization) employs their own risk matrix to assess how much to lend to each client as they act as a stand-in regulator. On the other hand, auditors are the ones who ensure legal fund compliance and verify financial statements as per the federal law[2]. Hedge funds are regulated and registered by the United States Securities and Exchange Commission (SEC) in the US and are subject to certain trading regulations as well as outlined by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, in order to ensure that what happened in 2008 is not repeated.

In spite of the scrutiny the hedge funds are under, the industry has grown. This is particularly due to the fund of fundsdevelopment, which is a mutual fund that is able to invest in multiple hedge funds. This enabled investors to have a more diversified portfolio and a lower minimum investment requirement that went as low as $25000. The fund of funds feature led to a proportion of the risk being taken out of the hedge fund investment and also made it possible for average investors to invest in the hedge funds as well, unlike before.

Source : http://www.hedgethink.com/industry/guide-hedge-funds-branding-part-2-introduction-industry/

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What is a Hedge Fund? 

A hedge fund is an aggressively managed investment fund that is maintained by a professional management firm. Hedge funds are typically a portfolio of investments that makes use of advanced and complex investment strategies like short and long positions, leveraged positions, arbitrage, and derivative positions in domestic and international markets with the aim of generating higher returns. Hedge funds invest in a broad set of markets and employ an extensive variety of investment styles and financial instruments. The term “hedge funds” employs the varying hedging techniques conventionally used by hedge fund investors. This definition may seem confusing to understand; hence, traditionally, hedge funds are classified as any sort of investment company or private partnership that makes use of the below mentioned strategies and instruments:

• Long or short positions across varying asset classes
• Derivatives, such as options and swaps
• Financial leverage

Hedge funds are legally set up as private partnerships that are open to only a few investors and require a hefty initial minimum investment. Typically, investments in hedge funds are largely illiquid because it stipulates the money to be held in the fund for a minimum of one year.

 Some common characteristics of hedge funds are:

• Hedge funds are usually formed as an unregulated investment pool and are domiciled offshore.
• Their performance is measured in absolute terms, which means that it is unaffected by market direction, and any benchmark.
• Hedge funds charge a performance fee. A performance fee is a payment made to a fund manager when they generate high positive returns for the investor. This fee is usually calculated as a fraction of investment profits.
• Hedge funds have fairly restrictive subscription and redemption policies and can even impose lock-up periods (a time duration within which hedge fund investors are disallowed from selling or redeeming shares) and gate provisions (this is a limit placed on hedge funds restricting them the amount of withdrawals from the fund for the duration of the redemption period).
• Hedge funds employ a combination of financial instruments to minimize risk, increase returns, and decrease the correlation concerning the bond and equity markets. Hence, many hedge funds are fairly flexible in their investment strategy options. Fund managers can use short selling, leverages and derivatives.
• Hedge funds greatly vary in terms of investment returns, volatility and risk. Most hedge fund strategies lean towards hedging against downturns in the market being traded.
• Hedge fund managers tend to invest their own capital along with that of their clients.

Typically, hedge funds are unregulated as they cater solely to sophisticated investors. The United States has made it mandatory for the hedge fund investors to be accredited. This implies that the investors must earn a minimum fixed amount of money each year and have a net worth exceeding $1 million and rudimentary knowledge about investment. Hedging is actually the practice of reducing risk; however, the name is now largely ceremonial as their aim is to maximize returns. The first traditional hedge funds were used to hedge against the downside risk of a bear market by shorting the market, however now many intricate techniques are used via hedge funds.

The different types of hedge funds are usually categorized as either fixed income or equity-focused. Subcategories of hedge funds are divided according to their investment techniques. Some common types of hedge funds include:

• Long-short funds: This is a common investment strategy used for hedge funds that entails taking a long position in stocks that are anticipated to increase in value and simultaneously taking a short position in stocks that are predicted to decrease in value.
• Market-neutral funds: This is an extension of the long-short hedge fund as it entails a combination of different investment strategies that the hedge funds have expertise in. These funds focus on making concentrated bets hinging upon observed price asymmetry whilst minimizing the general market exposure.
• Event-driven funds: This strategy entails taking advantage of pricing inefficiencies that can occur before or after a corporate event, such as bankruptcy, mergers and acquisitions.
• Macro funds: This strategy focuses on financial instruments that have a broad scope and operate based on systematic risk. Thus, fund managers trade within the context of broad global macro strategies (currency, interest rate, and stock index strategies).
• Absolute-return funds: Also known as non-directional funds, as the name suggests, this fund guarantees a consistent return regardless of the market direction. These are also known as alpha funds.
• Directional funds6: These are funds that do not hedge. Fund managers do account for some market exposure and they try to aim for the higher-than-expected return for the amount of risk undertaken. These are also called beta funds.

Source :: http://www.hedgethink.com/education/guide-to-hedge-funds-and-branding-part-1-what-is-a-hedge-fund/

http://www.investopedia.com/terms/h/hedgefund.asp

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Czech Republic wants a piece of the rising hedge fund industry, after a new EU regulation named AIFMD (Alternative Investment Fund Manager Directive)  takes effect in July. Previously the highest number of hedge funds, after the U.S., are domiciled in Luxembourg, a tiny EU state. But the new EU rules, which are meant to enforce greater regulation and control in the money-managing industry, will require outside hedge funds to be domiciled in any one of the European Union members.

Read more here : http://www.valuewalk.com/

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Commodity Futures Trading Commission data show the most-bullish six-week change to Aussie positions in more than 1 1/2 years over the period to April 22, just in time to catch a slump that made the local dollar the past week’s worst performer among 10 currencies tracked by Bloomberg Correlation Weighted Indexes. Earlier this year, futures traders were forced to abandon near record bets on declines when the Aussie rallied from the 3 1/2-year low reached on Jan. 24.

“The Aussie is in a steady range and, rather typically, short-term money is getting poorly positioned at both ends of the ranges,” said Hugh Killen, Westpac Banking Corp.’s Sydney-based global head of foreign exchange. “The market has got itself long at relatively unattractive levels and we could see a further sell-off as a result.”

The local dollar slid 1.5 percent in the past week against other major peers, the Bloomberg indexes show, after an April 23 report showing subdued inflation eroded bets the central bank will increase rates this year. The currency will probably fall to 88 U.S. cents by year-end from 92.43 cents as of 12:15 p.m. in Sydney, according to the median of forecasts compiled by Bloomberg.

http://www.bloomberg.com/

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