Stock Market Analysis and Personal Finance

Mr. Bernstein

Hedge Funds

May 15, 2013

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Stock Market Analysis & Personal Finance Mr. Bernstein

What is a Hedge Fund?Pooled investment funds generally offered only to sophisticated investorsCan use wide range of investment vehicles and techniques often not allowed in mutual fundsExamples: Derivatives, Short Selling, Short-term trading strategies, High Leverage, Illiquid itemsCan engage in risky investments (high volatility) but often strive for low overall risk

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Stock Market Analysis & Personal Finance Mr. Bernstein

What is a Hedge Fund?Benchmark is usually “total return” rather than an indexInvestors seek high risk-adjusted returns and low “drawdowns”Exact holdings are often not shared with investors to

protect proprietary strategies from being copiedTypically set up offshore to avoid full SEC regulation

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Stock Market Analysis & Personal Finance Mr. Bernstein

Hedge Fund fee structures“2% and 20”: 2% fee plus 20% of gains…Example: Return is 10%; manager earns 2% + 1% = 3%…Mutual funds typically 1%; index funds 20bps

Only earns incentive above “high water mark” – encourages hedge fund to avoid losses

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Stock Market Analysis & Personal Finance Mr. Bernstein

Common Hedge Fund StrategiesLong/Short or Market NeutralRisk ArbitrageGlobal MacroConvertible or Volatility ArbitrageDistressed Securities

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Stock Market Analysis & Personal Finance Mr. Bernstein

Why include Hedge Funds in a portfolio?Reduces risk – low correlation with stocks, commoditiesInvestments usually made in a series of funds or a single “Fund of Funds” to further diversify…can the Hedge Fund investment process be packaged into a Mutual Fund for retail investors?