...Do Hedge Funds Have Enough Capital? A Value-at-Risk Approach * Anurag Gupta† Bing Liang‡ April 2004 ____________________________________ *We thank Stephen Brown, Sanjiv Das, Will Goetzmann, David Hseih, Kasturi Rangan, Peter Ritchken, Bill Sharpe, Ajai Singh, Jack Treynor, and two anonymous referees for comments and suggestions on earlier drafts, and the seminar participants at Case Western Reserve University, University of Massachusetts at Amherst, Virginia Tech., the 2003 European Finance Association Meetings in Glasgow, the 2003 Western Finance Association Meetings in Los Cabos, the 2003 QGroup fall seminar in Scottsdale, the 2001 FMA European Meetings in Paris, and the 2001 FMA meetings in Toronto. Bing Liang acknowledges a summer research grant from the Weatherhead School of Management, Case Western Reserve University. We also thank TASS Management Limited for providing the data. We remain responsible for all errors. †Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University, Cleveland, OH 44106. Phone: (216) 368-2938, Fax: (216) 368-6249, E-mail: anurag.gupta@case.edu. ‡Department of Finance and Operations Management, Isenberg School of Management, University of Massachusetts, Amherst, MA 01003. Phone: (413) 545-3180, Fax: (413) 545-3858, E-mail: bliang@som.umass.edu. Do Hedge Funds Have Enough Capital? A Value-at-Risk Approach Abstract We examine the risk characteristics and capital adequacy of hedge funds through...
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...Cayman Islands Guide to Hedge Funds Introduction From offices in the British Virgin Islands, the Cayman Islands, Dubai, Dublin, Hong Kong, Jersey, London and Singapore, Walkers provides legal services to FORTUNE 100 and FTSE 100 global corporations and financial institutions, capital markets participants, investment fund managers and middle market companies. Walkers' Cayman office has an international reputation as the leading hedge fund and private equity fund practice in the Cayman Islands, advising the best-known asset managers, promoters and institutional investors in the investment world for five decades. Our global presence means we are always open and accessible to our clients – in all time zones. The purpose of this Guide is to offer a comprehensive, commercial and concise guide to the key aspects of structuring and establishing an offshore hedge fund – starting with a broad overview of hedge fund structures, and concluding with a short section on listing. We have also addressed some of the defensive mechanisms that can be deployed to stabilise a hedge fund in difficult times, including a section on the use of synthetic side pockets and side letters. The Guide is not a substitute for seeking appropriate onshore and offshore commercial and legal advice and should not be relied on in this manner. Introduction to hedge fund vehicles The key constitutional features of hedge funds to address from an offshore perspective are three-fold: 1. 2. 3. the types of vehicle used;...
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...Gregory Connor and Mason Woo An Introduction to Hedge Funds Introductory Guide 1 Introduction International Asset Management (‘IAM’) is the proud sponsor of the IAM Hedge Fund Research Programme of the Financial Markets Group. Within this programme the LSE team undertakes independent research into aspects of the hedge fund industry. It is hoped that the results of this research will give greater understanding about this growing area of financial innovation. This research paper gives a broad introduction to the hedge fund industry, the historical background to the evolution of hedge funds, the fund of funds industry and provides an explanation of some of the terminology used within this area. As an overview of the industry the document does not attempt to address the use of hedge funds within the broader context of portfolio management such as organisational risk or other areas of concern for the investor. This is a nontechnical paper and as such is intended for students or practitioners seeking a general introduction and reference tool. It is not a survey of the research literature and citations are kept to a minimum. If you wish to keep updated on the IAM Hedge Fund Research Programme please let us know. If you have any questions please contact IAM at our London office or visit our website: 34 Sackville Street London W1S 3EF Tel. +44 (0)20 7734 8488 www.iam.uk.com For information about the research activities of the Financial Markets Group see the following page...
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...Hedge Funds Instructor: Dr. F. Beer By: Vishal Pahuja | Angel Cardoz | Contents Introduction by Vishal Pahuja 3 History by Vishal Pahuja 4 Types of Hedge Funds by Vishal Pahuja 4 Key Characteristics of a Hedge Funds by Vishal Pahuja 5 Size and Market Statistics by Angel Cardoz 5 What is the Cost? by Angel Cardoz 6 Cost to manage 6 Cost to Economy 7 Risks and Returns by Vishal Pahuja 7 Hedge Fund Structure by Vishal Pahuja 8 A Success Story by Vishal Pahuja 9 Peer Evaluation 9 Pay for Hedge Fund Managers 9 A Failure Story by Angel Cardoz 10 Long-Term Capital Management 10 The Rise 10 The fall 10 The future of hedge funds by Angel Cardoz 11 Regulation 11 Markets 11 Bibliography by Vishal Pahuja 11 Quote Basically, I look at the trading screens all day and go with my gut. Hedge Funds Introduction S ince the early 1990s, hedge funds have become an increasingly popular asset class. The amount invested globally in hedge funds rose from approximately $50 billion in 1990 to approximately $1 trillion by the end of 2004 And because these funds characteristically use substantial leverage, they play a far more important role in the global securities markets than the size of their net assets indicates. Market makers on the floor of the NYSE have estimated that during 2004, trades by hedge funds often accounted for more than half of the total daily number of shares changing hands. Moreover, investments in hedge funds have become...
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...Hedge Funds Case Study in Ming Teng's course Hedge Funds, an industry that has experienced rapid growth since mid-1990s, control $2 trillion of investable assets, the number more than a quarter of total mutual funds’ assets, making hedge funds a growing influential power today. Institutional and private investors invest in hedge funds because they expect that hedge funds are more likely to produce higher return compared with traditional investment vehicles, such as mutual funds. More important, hedge funds pursue absolute return. Compared with benchmarking method, absolute return is critical for institutional investors that publish financial statements quarterly or yearly, particularly under low interest rate environment. Hedge funds can make money by deploying certain strategies, such as Long/ Short Equity (Appendix 1). To make their strategies successful, hedge funds must possess greater capabilities in the field they choose. For example, research is critical to know the fair value of a company’s stock, and hedge funds must invest heavily on related experts. Hedge funds are much more flexible compared with mutual funds. Hedge funds can have long or short position, and some hedge funds are highly leveraged (Appendix 2). On the other hand, information for hedge is often obscure, and investors must be very very cautious about the integrity of the hedge fund company. (Madoff Ponzi scheme) Management fee structure certainly affects the performance of a hedge fund...
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...Hedge Funds 1. Hedge Funds Versus Mutual Funds Mutual funds are regulated under the SEC Act 1933 and the Investment Company Act of 1940 and they must invest according to the stated goals in the prospectus. They are adjured to avoid ‘style drift.’ Hedge funds are not open to the general public. The primary investors are institutional investors but they are open to high net worth individuals. Most require minimum investments of $250,000, some go up to $1,000,000. A few now have a minimum investment of $25,000, but we will have to wait and see what kind of shakeout occurs after the financial crisis. The following table provides a summary of the differences between hedge funds and mutual funds. Characteristic | Mutual Funds | Hedge Funds | Transparency | Public info on portfolio composition | Info provided only to investors | Investors | Unlimited | < 100, high dollar minimums | Strategies | Must adhere to prospectus, limited short selling & leverage, limited derivatives usage | No limitations | Liquidity | Redeem shares on demand | Multiple year lock up periods typical | Fees | Fixed percentage of assets; typically 0.5% to 2% | Fixed percentage of assets; typically 1% to 2% plus incentive fee = 20% of gains above threshold return | Notes to the table: Some mutual funds can engage in short selling, but not to the extent that hedge funds can. The lock up period employed by some hedge funds allows the funds to invest in less liquid assets...
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................................ 1 INTRODUCING HEDGE FUNDS ............................................................................................................................................ 2 ORIGINS OF HEDGE FUNDS .................................................................................................................................................. 3 STRUCTURES OF HEDGE FUNDS ........................................................................................................................................ 6 ROLE OF PRIME BROKERS ................................................................................................................................................... 9 FEE STRUCTURES OF HEDGE FUNDS .............................................................................................................................. 11 MAJOR HEDGE FUNDS ......................................................................................................................................................... 13 BALANCE SHEET OF A HEDGE FUND .............................................................................................................................. 14 INCOME STATEMENT OF A HEDGE FUND .......................................................
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...OF CONTENT WHAT IS A HEDGE FUND? 1 WHAT GENERIC HEDGE FUND HAS SIMILAR LEVERAGE CHARACTERISTICS TO BANKS? 2 DO ALL HEDGE FUNDS HAVE A SIMILAR RISK PROFILE? IF NOT DESCRIBE THE TYPE OF RISK FACING EACH MAIN TYPE OF HEDGE FUND 3 More Risky 3 Moderate Risk 3 Risk-Avoidance 3 WHAT FINANCIAL RISKS LED TO FAILURE OF LONG-TERM CAPITAL MANAGEMENT (LTCM)? 4 WHY DID THE FEDERAL RESERVE OPT NOT TO SUPPORT LONG-TERM CAPITAL MANAGEMENT FINANCIALLY? 5 WHAT WERE THE ARGUMENTS IN FAVOUR AND AGAINST THE RESCUE OF LONG-TERM CAPITAL MANAGEMENT? 6 Arguments for the rescue of LTCM: 6 Arguments against the rescue of LTCM: 6 WHAT TYPE OF FINANCIAL INVESTOR WAS DIRECTLY AFFECTED? WHAT WAS THE POTENTIAL INDIRECT EFFECT OF THIS CATEGORY INVESTOR FAILURE? 7 DOES THE RESCUE OF INSTITUTIONS LABELLED “TOO BIG TO FAIL” 9 Strengthen the long term stability of financial services sector? If so, how? 9 Encourage excessive risk taking in the knowledge of an implicit “safety net”? If so, explain why 9 WAS THIS A CASE OF CRONY CAPITALISM? 10 REFERENCES: 11 WHAT ARE HEDGE FUNDS? Hedge funds are private investment funds that aim to make profits for their shareholders by trading securities. Hedge fund utilises a variety of financial instruments to reduce risks, enhance returns and minimise the correlation with equity and bond markets. They are flexible in their investment options and can use short selling, leverage, derivatives and arbitrage. Hedge funds are defined by their freedom...
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...Hedge Funds: A liability for the economy? Sander van Bentum 362107 Max Wielitsch 385533 Dhr. B. Tims 17-10-2013 Table of Contents Introduction 3 Risks for the investors 4 The creation of risks to financial institutions 5 The excess volatility risk 6 Transparency 6 Unlevel playing field 7 Hedge funds and financial bubbles 7 The role of hedge funds in crises 8 Conclusion 10 Bibliografy 10 Introduction Everybody that is somewhat involved with finance has probably at some point heard of the term hedge fund. But what is it exactly? In simple words it can be described as, ‘’an actively managed, pooled investment vehicle that is open to only a limited group of investors and whose performance is measured in absolute return units’’ (Connor et al. 2003). This limited group of investors contain wealthy investors who would be able to cope with possible losses. Commonly hedge funds make use of arbitrages and price discrepancies, terms that are also known as inefficiencies within the market. By making small profits on a large scale by identifying these market inefficiencies and attempting to correct them these hedge funds claim to help the market become more efficient. Hedge Funds first made their appearance on to the global financial stage in 1949, when the first hedge fund was created by Alfred W. Jones. ‘’He raised $60,000 and invested $40,000 of his money to pursue a strategy of investing in common stocks and hedging the positions with short sales’’...
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...granddaddy of worker sites.” – US News and World Report “A killer app.” – New York Times One of Forbes’ 33 “Favorite Sites” – Forbes “To get the unvarnished scoop, check out Vault.” – Smart Money Magazine “Vault has a wealth of information about major employers and jobsearching strategies as well as comments from workers about their experiences at specific companies.” – The Washington Post “A key reference for those who want to know what it takes to get hired by a law firm and what to expect once they get there.” – New York Law Journal “Vault [provides] the skinny on working conditions at all kinds of companies from current and former employees.” – USA Today HEDG FUND CARE VAULT CAREER GUIDE TO HEDGE FUNDS © 2007 Vault, Inc. HEDG FUND VAULT CAREER GUIDE TO HEDGE FUNDS ADITI A. DAVARE, HOLLY GOODRICH, MICHAEL MARTINEZ AND THE STAFF OF VAULT © 2007 Vault, Inc. Copyright © 2007 by Vault Inc. All rights reserved. All information in this book is subject to change without notice. Vault makes no claims as to the accuracy and reliability of the information contained within and disclaims all warranties. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Vault Inc. Vault, the Vault logo, and “the most trusted name in career informationTM” are trademarks of Vault Inc. For...
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...Hedge Fund Summary The Hedge Fund Project gave me an insight of what trading is like. In the beginning, I wanted to pursue this aggressively. It did not take long for me to realize I really had no idea what I was doing. I started to invest in large company stocks and waited. Returns were following the S&P and if I were to see results quicker I needed to risk more. I bought some small company stocks and realized they changed quite rapidly on a daily basis. I used a fundamental approach to picking my investments. Each week I would watch the news about company mergers or information that would affect certain stock prices. I also chose stocks that I knew would rise based on historical performance. Also, I chose companies that I personally like and use on a daily basis, like Costco and Target. My father has worked at CSX for years and I have an edge on getting information about the company from him (public of course). When it came to choosing more risky investments, I used Yahoo Finance and Google Finance as my tools to spot them. I choose poor performing stocks to buy and hope for a good turn around. It proved successful with Education Management. However for other stocks like Sequans, it performed very poorly. I was basically gambling on whether they would bounce back. I soon realized it is not so simple to trade in the markets from day to day. There really is no strategy on how to make money fast. Without considering the limitations of Stocktrak, I know I would be crushed...
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...A Tale of Two Hedge Funds: Magnetar and Peloton Describe in your own words, Peleton's winning strategy in 2006. Peloton’s winning strategy was effective in 2006 and allowed Peloton Partners to become one of the top hedge funds in the country. Ron Beller, the head of the company bet against the United States housing market. Before the subprime crisis hit the country, and people started to default on their mortgage, Beller was able to earn a healthy return by taking a short position on the housing market. The objective was to invest in the mortgage as the banks were issuing mortgages to a large number of people irrespective of their credit history. The investment in mortgage paid around 80% return in 2007 .Describe in your own words how Peleton went bankrupt. What role did liquidity play in Peleton\'s failure? What role did UBS play? How was Ron Beller trying to save the fund? Why didn\'t it work? How might gaining access to additional liquidity have helped? What arguments do you think Ron Beller was making to its financing banks in order to convince them to help? Ron Beller misunderstood the prices of highly rated mortgage securities and believed that the prices were unfairly punished after the crisis. So, he decided to lever up the investment by nine times. The investment took a severe hit when Alt-A-backed AAA securities fall by 10 to 15 percent. This happened when UBS announced that the bank owed $21.2 Billion worth of high-rated securities. Thus, UBS gave the market the...
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...Characteristics: * Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Many hedge funds are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc). * Hedge funds vary enormously in terms of investment returns, volatility and risk. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded. * Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns. They have learned this is the best way to attract large capital inflows and retain investors. * Most hedge funds are managed by experienced investment professionals who are generally disciplined and diligent. They are highly specialized and trade only within their area of expertise and competitive advantage. * Hedge funds are not regulated. There are limits to what they can do, such as the number of investors they can have (mentioned earlier), or the fact they cannot advertise to the general public. The implications of this are that an investor should be properly informed about a hedge fund, its strategy and the character of the principals before investing. * Hedge funds heavily weight managers’ remuneration towards performance incentives, thus attract the best talent in the investment business. Unfortunately, this can also lead to undue risks...
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...was later also arrested and charged with helping him escape. On Wednesday, July 2, 2008, Israel turned himself in to police (USA Today). On October 28, 2008, Israel avoided prison once again by pleading an addiction to painkillers, making him incompetent to enter a plea. He is ordered to undergo 90 days of psychiatric evaluation in a medical prison facility in North Carolina. (NYDailyNews.com) Bayou Management, LLC, which was headquartered in Stamford, CT, is a group of companies and hedge funds founded in 1996 and managed by Samuel Israel, III and co-founder, James G. Marques. They raised funds from investors with the goal of investing in short term trades, but defrauded investors from the start by misappropriating funds for personal use. Investors were initially promised that the fund would grow to about $7.1m within ten years. According to Bloomberg.com, Bayou “had problems from the very beginning. In 1996, Israel managed to cobble together just $1.2 million for his fund from friends and former colleagues. Even as the U.S....
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...Hedge fund is “an investing group usually in the form of a limited partnership that employs speculative techniques in the hope of obtaining large capital gains.” In other words, hedge fund uses its intricate financial technologies with the small amount of money to make the greatest profits as possible by investing and selling securities at the appropriate moment. Its foundation lies on the purpose to seek the absolute financial profits regardless of the economy situation. It can be seen as a zero-sum game since it either makes or lose huge amount of money in the market. In 1949, Alfred Winslow Jones, a Harvard graduate U.S. diplomat, first founded hedge fund, raising $100,000 from investors. Having made more and more profits from investing,...
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