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Ìnvestment options

through Hedge Fund
By
Nirmoy Dey
Geo George
Megha C R
Ashim Mandal
Meenu Maria
Tanveer Ahmed
Vinoth K.
W Today, if asked to define a hedge fund, Ì
suspect most folks would characterize it
as a highly speculative vehicle for
unwitting fat cats and careless financial
institutions to lose their shirts."
÷ Mario Gabelli, hedge fund manager
hat is hedge fund?
W Hedge funds are private investment funds used primarily by
wealthy individuals and institutions to accomplish aggressive
investing goals.
W A hedge fund is a fund that can take both Iong and short
positions, use arbitrage, buy and seII undervaIued securities,
trade options or bonds, and invest in aImost any opportunity
in any market where it foresees impressive gains at reduced
risk.
W The primary aim of most hedge funds is to reduce voIatiIity
and risk whiIe attempting to preserve capitaI and deIiver
positive returns under aII market conditions.
volution of Hedge Fund
W Alfred inslow Jones is credited with creating the first
hedge fund in the year 1949 when he combined a
leveraged long stock position with a portfolio of short stock
positions.
W Ìnvestors in Jones' relatively unknown fund enjoyed large
returns and outperformed all other mutual funds of that era.
W This style of investment management exploded in
popularity in the late twentieth century with the arrival of
derivatives.
ey Characteristics of Hedge Funds
W 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.).
W Hedge funds vary enormously in terms of investment returns, volatility and risk
W Many hedge funds have the ability to deliver non-market correlated returns.
W Many hedge funds have as an objective consistency of returns and capital
preservation rather than magnitude of returns.
W Most hedge funds are managed by experienced investment professionals who
are generally disciplined and diligent.
W !ension funds, endowments, insurance companies, private banks and high net
worth individuals and families invest in hedge funds to minimize overall portfolio
volatility and enhance returns.
W Most hedge fund managers are highly specialized and trade only within their
area of expertise and competitive advantage.
W Hedge funds benefit by heavily weighting hedge fund managers' remuneration
towards performance incentives, thus attracting the best brains in the
investment business. Ìn addition, hedge fund managers usually have their own
money invested in their fund.
Features of hedge fund
W Minimum investment amount is very high such as $250000
to $10 million
W xempt from many rules and governance which are related
to Mutual fund, pension funds and insurance companies
W Maximum no of investors per fund is 100
W Ìnvestors in a hedge fund pay a management fee in
between 1 and 2 percent
W Hedge funds also collect a percentage of the profits, usually
20 percent
enefits of Hedge Funds
W !ositive returns in both rising and falling equity and bond
markets.
W Ìnclusion of hedge funds in a balanced portfolio reduces overall
portfolio risk and volatility and increases returns.
W ide choice of hedge fund strategies to meet their investment
objectives.
W Academic research proves hedge funds have higher returns and
lower overall risk than traditional investment funds.
W Hedge funds provide an ideal long-term investment solution,
eliminating the need to correctly time entry and exit from markets.
W Adding hedge funds to an investment portfolio provides
diversification not otherwise available in traditional investing.
How hedge fund is ditributed?
Hedge funds Vs Mutual funds
W Most mutual funds invest in a
predefined style , performance
compared with some sector or index
and relative performance is
considered
W Mutual funds make only buy sell
decisions
W !rofit in bull market, loss in bear
market
W Ìn contrast hedge fund seeks absolute
returns irrespective of index
performance
W hedge fund engages in more
aggressive strategies and positions,
such as short selling, trading in
derivative instruments like options and
using leverages (borrowing) to
enhance the risk/reward profile.
W !rofit in both bull and bear market
$imiIarity :
(1) they are pooled investment vehicles (i.e. several investors
entrust their money to a manager) and (2) they invest in
publicly traded securities.
Differences:
!arameters for hedge fund strategy
1. Investment returns,
2. Volatility, and
3. Risk
8trategies Adopted By Hedge Fund
· Equity Market Neutral:
Minimizes inherent securities market risks by combining an array oI long and
short sales within the same industry, market, country, etc. that oIIset one another
against the market.
It creates a hedge against market Iactors.
· 43;ertible Arbitrage:
$trategy that involves purchasing a portIolio oI convertible securities, generally
convertible bonds.
Hedging a portion oI the equity risk by selling short the underlying common
stock.
When a stock declines, the associated convertible bond will decline less, because
it is protected by its value as a Iixed-income instrument and it pays interest
periodically.
· ixed-I3.42e arbitrage:
ssumes opposing positions in the market to take advantage oI small price
discrepancies while limiting interest rate risk
ProIit Irom principal appreciation and interest income.
Most common Iixed-income arbitrage strategy is swap-spread arbitrage.
W Ma3aged utures:
Investments depending on the manager's view oI the economic or market
outlook.
Managers proIit Irom large up and down movements using both long
and short positions, resulting in returns similar to that oI a straddle.
$traddle is composed oI buying a put and call option on the same
investment & the gain is directly related to the volatility oI the
investment.
The more investments Iluctuates, the higher the return and vice versa.
· edi.ated Sh4rts:
$ells securities short in anticipation oI being able to re-buy them at a
Iuture date at a lower price.
Managers asses investment options based on his or her opinion oI the
overvaluation oI securities, the market.
Used as a hedge to oIIset long-only portIolios and by those who Ieel the
market is approaching a bearish cycle.
· l4bal Ma.r4:
This does not Iocus on individual companies but rather Iocus primarily on
proIiting Irom shiIts in global trends.
Iund may be long or short in various international stock indexes and
currencies, and at the same time attempting to take advantage oI assets that
are miss-priced relative to global alternatives.
Example oI emerging market strategy whereby a hedge Iund invests in
developing countries with less mature Iinancial markets, usually in equities.
· E;e3t ri;e3:
lso known as '$pecial $ituation¨ or '$pecial Opportunity¨ strategies.
Invest in companies that are expecting a large impact on the price oI the
stock over a short period oI time.
Tries to capitalize on the changing prices oI stocks caused by events such as
.4rp4rate restru.turi3g. st4.k buyba.ks. b43d upgrades. expe.ted
ear3i3gs surprises. and any other reason a company's stock price may
change.
E.g. ~distressed se.urities¨ hedge Iund would wait Ior an impending
reorganization or bankruptcy oI a company.
~Risk (Merger) Arbitrage ¨-the hedge Iund simultaneously buys a
company that is being acquired and sells the short the stock oI the acquirer.
The investment philosophy oI 'Fair Value Capital¨ in Indian market is Event
Driven.
Hedge Funds in India
W HFG Ìndia Continuum Fund - focused on Ìndia's aerospace, defense,
homeland security and other strategic sectors, New York based firm
W Avatar Investment Management - Headquartered in Mauritius, the
funds are focussed on the Ìndian public and private equity markets
W Ìndia Deep Value Fund ÷Focussed on Ìndian capital and real estate
markets
W Fair vaIue - Fair Value Capital is a highly specialized and exclusive
Ìnvestment Advisory Firm focused on Deep Value Ìnvestment
opportunities primarily in Ìndian equity markets
W Indea CapitaI Pte Ltd - a Singapore based investment advisor
W Ìndia Capital Fund - Mauritius based
W Monsoon Capital quity Value Fund - Mauritius based
W Karma Capital Management, LLC
W Atyant Capital
W Atlantis Ìndia Opportunities Fund
Some facts about Ìndian Hedge Funds
W Ìndia-focused hedge funds ranked among
world's top performers
W The urekahedge Ìndian Hedge Fund Ìndex
returned over 5% in the first eight months of
2010 vis-à-vis 2% gains by benchmark Sensex
in the same period.
W The $15bn FoHF portfolio of London-based
hedge fund giant Man Group, for example, is
10-15% exposed to emerging markets and 1%
exposed to Ìndia.
W Ìndian hedge fund industry has grown 30% this
year while Ìndia focused hedge funds have
increased 7% in September alone
Thank You

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