Hedge Funds Role in a Diversified Portfolio
Value to Investors
Hedge funds help millions of investors and institutions, such as pensions and university endowments, meet their financial goals and obligations by investing in a variety of financial instruments, from stocks and bonds to currencies, futures, options, derivatives, and physical commodities.
- Aligned Interests
- Hedge funds are unique from other investment vehicles because the fund manager invests up to 50% of his or her own money in the fund, and sometimes more, aligning his or her interests with those of the investors.
- Further, hedge fund managers are not rewarded for poor fund performance. Unlike others in the financial services community, hedge fund managers’ pay is directly linked to the performance of their investments.
- Informed Investments / Due Diligence
- Investment techniques have evolved with the ever-changing marketplace. Hedge fund managers use exhaustive research of public information, performing due-diligence to identify opportunities other investors may have overlooked. Fund managers also employ sophisticated risk management systems to inform their investment decisions and protect investors in the fund.
- Investment managers use economic variables and the impact these have on markets to develop investment strategies.
- Managers employ a variety of techniques including discretionary and systematic analysis, quantitative and fundamental approaches, and long and short-term holding periods.
- Strategies are based on future movements in underlying instruments rather than the realized valuation discrepancies between securities.
- Investment managers maintain positions in companies currently or prospectively involved in corporate transactions including mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments.
- Managers pursue strategies based on fundamental characteristics (as opposed to quantitative) and specific future developments.
- Position exposure includes a combination of sensitivities to equity markets, credit markets and company-specific developments.
- Investment managers maintain positions based on valuation discrepancy in the relationship between multiple securities.
- Managers employ a variety of fundamental and quantitative techniques; investments range broadly across equity, fixed income, derivative or other security types.
- Positions may involve future corporate transactions, but these positions are predicated on realization of a pricing discrepancy between related securities rather than the outcome of the corporate transaction.
- Investment managers maintain long and short positions in equity and equity derivative securities.
- Managers employ a wide variety of techniques to arrive at an investment decision, including both quantitative and fundamental techniques.
- Strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios.
- An investment fund that trades positions based on computer models built to identify investment opportunities.
- These models can utilize an unlimited number of variables, which are programmed into complex, frequently-updated algorithms.
- Quantitative funds models are used as a means of executing a number of other hedge fund strategies.
- Investment managers maintain a variety of processes to arrive at an investment decision, including both quantitative and fundamental techniques.
- Strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage, holding period, concentrations of market capitalizations and valuation ranges.
Managed Futures Trading
- Managed futures traders–also known as commodity trading advisors (CTAs)–are able to invest in up to 150 global futures markets.
- They trade in these markets using futures, forwards, and options contracts in everything from grains and gold, to currencies, stock indexes, and government bond futures.
- Because they can go both long and short they have the ability to make money in both rising and falling markets. CTAs have been regulated by the Commodity Futures Trading Commission (CFTC) since 1974 and are overseen by the National Futures Association (NFA), a self-regulatory organization.