Hedge Funds

[KrazyHorse]

Originally posted by Drogue

How so? Any evidence to back that up?

http://www.answers.com/hedge%20fund

hedge fund
n.

An investment company that uses high-risk techniques, such as borrowing money and selling short, in an effort to make extraordinary capital gains.

[Drogue]

Originally posted by KrazyHorse
a) No, they aren't. Hedge funds provide a generally better than average return.

No they don't. Worldwide, hedge funds have lost ground to indexs, with around a 12-13% growth in the last few years, compared to an 15-16% growth for indecies.

Originally posted by KrazyHorse
Hedge funds were originally designed to provide a set of uncorrelated returns. Some hedge funds might choose to do this through a low-risk, fairly constant return strategy, but most hedge funds are significantly higher risk than a simple index fund.

Again, how so? What measure of risk are you using?

Originally posted by KrazyHorse
I suggest you go look up the term "hedge fund" in any online dictionary and see what it has to say.

You do realise I spent the last summer analysing hedge funds (in part - project was on investment as a whole) and advising on what the regulatory position on them should be. Combined with an interesting discussion with the global head of alternative investment (ie. Private Equity, Hedge Funds and Infrastructure) at an investment bank on the future of hedge funds, what they are and should be used for, their performance, etc.

I think I know what a hedge fund is and how it works

[KrazyHorse]

I think you might be operating under the idea of what a hedge fund was 40 years ago. In those days the primary purpose of a hedge fund was quite literally to hedge the market (i.e. copper your bets), and provide a measure of absolute returns.

However, as time went on, hedge funds began to realise that the freedom they enjoyed to engage in all sorts of complex maneuvering presented them with a unique opportunity. Hedge funds continued their policy of offering uncorrelated returns, but more of them engaged in riskier and riskier strategies. Many hedge funds have been beating the market for a very long time based on just such moves. The point is that as time has gone on their relative advantage has diminished, primarily because of the explosion in the amount of assets in hedge funds. Its hard to beat yourself...

[Drogue]

Originally posted by KrazyHorse
http://www.answers.com/hedge%20fund

You use an online dictionary to define a technical term? Hedge funds *can* use such strategies, and indeed they do, however selling short (the definition of a hedge fund) is not high risk, and leverage is used very little these days. A lot has changed since LTCM. Hedge funds on average are less volatile than indicies. They do have a tendency to have many badly managed funds, which go bust, however avoiding those (say, with a trusted name) generally means you get lower returns at lower risk than average. Admittedly this is different to their use ~10 years ago, but then they're now used as they should be, being absolute return vehicles.

[Drogue]

Originally posted by KrazyHorse
I think you might be operating under the idea of what a hedge fund was 40 years ago. In those days the primary purpose of a hedge fund was quite literally to hedge the market (i.e. copper your bets), and provide a measure of absolute returns.

Again, no. Are you up to date with finance theory and practice? No. I am, as it was/will be again in 4 months my job. Hedge funds are not used as they were in the 1980s and 90s. Leverage has dropped from the 100 of LTCM to an average nearer 2 today.

Originally posted by KrazyHorse
Hedge funds continued their poilicy of offering uncorrelated returns, but more of them engaged in riskier and riskier strategies. Many hedge funds have been beating the market for a very long time based on just such moves.

Again, you're way out of date with this.

[KrazyHorse]

By the way, over the last 15 years, hedge funds have outperformed the market by ~11% to ~9%

Of course a fund offering uncorrelated returns gets you less in an upcycle (as the last couple of years have been. That's the point.

[Drogue]

Originally posted by KrazyHorse
By the way, over the last 15 years, hedge funds have outperformed the market by ~11% to ~9%

Source?

Originally posted by KrazyHorse
Of course a fund offering uncorrelated returns gets you less in an upcycle (as the last couple of years have been. That's the point.

They get you less over the cycle. Sadly I'm not allowed to upload the study I have (as it's propriety - banks being banks) but over the whole business cycle, hedge funds have been underperforming compared to indicies.

[KrazyHorse]

A pure hedge fund will of course get you less over the whole cycle. I just don't think that the average "hedge" fund is truly a hedge fund. Has this actually changed over the last 5 years?

[Drogue]

Originally posted by KrazyHorse
A pure hedge fund will of course get you less over the whole cycle. I just don't think that the average "hedge" fund is truly a hedge fund. Has this actually changed over the last 5 years?

Yes. Leverage has plummeted over the last five years, and it's become acceptable for stable funds to invest in them. They have the Harvard-Yale measure, which is basically how much of their endowment do Harvard and Yale invest in hedge funds, which has shot up.

Returns should always be measured over the cycle, as should risks. That way you see the long term picture, as with 6 month-2 year mandatory periods, hedge funds are not short term investments. If I wanted to put my money as a long term saving, say a pension, into a fund, I'd use a hedge fund. However I'd be very careful how I chose it.

[KrazyHorse]

Well, I apologise, then. My information on hedge funds dates from a few years back.

If I wanted to put my money as a long term saving, say a pension, into a fund, I'd use a hedge fund.

Why? If index funds beat them on the long term (and you're talking long term here) then why bother with reduced-risk strategy?

[LordShiva]

Drogue, where will you be working?

[Drogue]

Originally posted by LordShiva
Drogue, where will you be working?

Financial Services Authority

Originally posted by KrazyHorse
Why? If index funds beat them on the long term (and you're talking long term here) then why bother with reduced-risk strategy?

Less risk. Risk doesn't go to 0 in the long term for markets, especially not with a defined exit-period - what if the market is down when I retire? I'd someone had retired in 2002 they'd have got a lot less, had they self-invested their own pension. I'm happy with ~12% returns.

[KrazyHorse]

12%? That seems high (I know you mean with reinvested dividends, but still).

Plus, you can always gradually move money from the index fund to the hedge as time goes on.

And hedge funds kill you with fees...

[Drogue]

Originally posted by KrazyHorse
And hedge funds kill you with fees...

True, although this is slowing - you have to be a damn good hedge fund now to charge the type of fees they used to. I think it's becomming more normal, more competitive and thus the market will end up with fewer dominant players who are actually pretty good. I'm not expecting to be investing large amounts of money anytime soon, so I can wait

[LordShiva]

The fund I mentioned earlier charges a 5% management fee and a 44% incentive fee (whatever that is).