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What is a hedge fund ? |
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What does it mean to "hedge"? |
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Are all Hedge Funds hedged? |
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Are all hedge funds highly aggressive? |
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What are common structures for hedge funds? |
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What is a hedge fund? |
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Hedge funds are defined by their structure rather than any specific investment method. These pooled investment vehicles are commonly set up as limited partnerships in which the manager acts as the general partner while the investors act as the limited partners. Oddly, the term 'hedge fund' is a misnomer. Not all hedge funds are hedged. Hedge funds invest in any number of strategies regardless of the common term that attempts to corral them. These strategies include investing in asset classes such as stocks, bonds, commodities, currencies, and return enhancing tools such as leverage, derivatives, and arbitrage. Some funds, however, are simply 100% long equity securities. |
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What does it mean to "hedge"? |
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"Hedging" roughly means managing risk. Typically, a money manager employs a particular hedging technique in order to mitigate a particular type of risk. For instance, market risk - the risk of a decline in the overall market - can be hedged against by selling a broad collection of securities short in equal proportion to one's long exposure. The same end could also be accomplished by buying put options on an index like the S&P500. Other types of risk often hedged against include interest rate, inflation, and large weightings in a sector, region, single company, or currency. Tools and techniques of hedging include: raising cash, selling short, buying or selling options, futures, commodity and/or currency futures, etc. |
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Are all Hedge Funds hedged? |
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No. Not all hedge funds are hedged. Many are simply long stocks, and may even use leverage. One must ascertain on a case by case basis, therefore, whether a fund hedges, how, and how much. This is absolutely crucial to understanding a fund's performance. Without this information, one cannot gauge how much risk produced its return |
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Are all hedge funds highly aggressive |
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No. This is the greatest misconception regarding hedge funds. Although some funds are aggressive, many other funds emphasize consistency of returns or protection of investors' capital. Recall that hedge funds cover a wide variety of investment strategies including fixed annuities and other conservative strategies. |
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What are common structures for hedge funds? |
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The initial element that a manager must determine prior to starting a hedge fund is the structure, or corporate “make up” of the fund. The simplest, least expensive, least complicated form is a limited partnership, with the manager as an individual general partner. However, many investment managers do not like this form because it does not offer the "appearance" of limited liability. Many prefer a limited partnership with a limited liability company as the general partner or even a limited partnership with a limited liability company as its general partner serving as the general partner of the Hedge Fund. The use of a limited liability company as a general partner of the Hedge Fund or as the general partner of the general partner of the Hedge Fund gives the "appearance" of limited personal liability. We use the word "appearance" in quotation marks because many of the unexpected liabilities that a general partner might have in running a Hedge Fund are liabilities under the securities laws for which he or she can be held to be personally liable. Irrespective of the legal form of the entity that serves as the general partner. One advantage of a limited liability company or limited partnership as a general partner is the opportunity it offers for estate planning provided one wishes to take advantage of such opportunities. These entity general partners also provide the opportunity to offer equity interests to employees or to create certain incentive compensation arrangements for employees. We are seeing the increasing use of limited liability companies for Hedge Funds, but LLCs are not used by certain managers because of the franchise tax consequences of the use of LLCs in certain jurisdictions |
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| FAQ's are provided courtesy of www.hedgeco.net |
