Hedge Funds

+ TulipmaniaBy

Mohammed Aqdas

Imran Zaidi

Hedge funds

What is a hedge fund ?

It is an important tool that creates value by

delivering reliable returns, managing risk and

diversifying investments.

It attempts to meet the financial goals &

obligations of millions of people.

WHO INVESTS IN HEDGE

FUNDS ?

Regulations in most countries limit hedge fund

participants to accredited investors. (In the US, this means only

those individuals with investments in excess of $5 million or net worth of at least $1

million and institutions with total assets over $5 million).

This means less regulations for hedge funds as

compared to the mutual funds.

About two-thirds of global hedge funds assets come

from institutional investors such as pension funds

and non profit endowments (the rest comes from

individual investors).

Why invest in hedge funds? Hedge funds are great tools for diversification. It provides investors with

the opportunity to manage their investment strategies in such a way that it minimizes risk and maximizes returns.

Risk-adjusted returns

Offers protection in volatile markets

Minimize investment

risk Maximize performance

returns

How do hedge funds invest ?

Hedge funds invest in a variety of assets globally :

This diversification allows hedge funds to :

• Avoid over-investing in a single type of asset

• Create a stable portfolio

• Protect investments from risk in market fluctuations

Common stockBonds Commodities Currencies

Hedge fund strategiesA variety of strategies:

1. Global Macro: Hedge fund managers invest based on the changes in the economic variables (such as interest rates).

2. Relative value/arbitrage: Positions are based on valuation discrepancy in the relationship between multiple securities

3. Event-driven: Positions are maintained in companies which are currently or might be involved in corporate transactions including mergers, restructuring, etc.

4. Directional/tactical: Positions are based on market trends, movements, etc so it is more exposed to fluctuations in the market.

Recent past’s performance

For the 10 years

ending in January

2015, Vanguard data

shows that a basic

portfolio of index funds

that own every security

in a market segment

(60 percent stocks, 40

percent bonds) would

have returned 6.6

percent a year. The

average hedge fund

only managed an

average return of 5.6

percent a year.

Hedge funds are expensive (2% of

investments and 20% of profits)

Conclusion (opinion based): Forget about

above average investment returns. Focus on

keeping management expenses as low as

possible.

A Tulip

Origins

Brought from the Ottoman Empire to Vienna

Spread to other European nations

Became extremely popular among wealthy

Rarity

The Trade

Seed produced a bulb which was planted

Bulbs produced seeds, bud clones and offsets

Bulbs with the mosaic virus were extremely

rare and expensive

A Tulip Bulb

Early Futures Market

Growing a tulip took a long time, around 7-12

years from seed to bulb to flower

Tulip traders signed contracts to buy the tulips

at the end of the season

Speculators also joined in

Prices

Spurred by huge demand, prices kept

increasing

Common color tulips prices also increased

Sky was the limit

Tulips fetched ridiculous prices

The Bubble Burst

February 1637, tulip auction at city of Haarlem