What is a hedge fund: in simple words. Structure and profitability of hedge funds: is it worth investing in them? Investment declaration hedge fund

Essentially, a hedge fund is a fancy name for an investment partnership. Its participants are the fund manager (general partner) and investors (limited partners). Limited partners invest their money in the fund, and the general manages it in accordance with the chosen strategy. The fund's goal is to maximize profits and eliminate risks, which is why its name is derived from the word “hedge.” Perhaps this is where the similarities with other funds, such as mutual funds, end.

The name "hedge fund" is attached to these structures because they seek to profit from both rising and falling markets. Hedge fund managers simultaneously take long and short positions in stocks and other assets (short positions allow them to profit from falling prices).

Key characteristics of hedge funds

1. Open only to "accredited" or qualified investors: Investors must meet certain capital requirements - it must exceed $1 million, excluding the value of their primary residence.
2. Wide variety of strategies: The choice of instruments is limited only by the hedge fund's mandate. Essentially, he can invest in any asset - land, real estate, shares, derivatives, currencies. For mutual funds, on the other hand, only stocks and bonds are available.
3. Use financial leverage: Hedge funds often operate with leverage to increase returns. The financial crisis of 2008 showed perfectly that high leverage can lead to disastrous consequences.
4. Fee structure: Hedge funds charge investors not only a fixed commission, but also a so-called “performance bonus.” Typically the fees are 2% and 20% - 2% for asset management, 20% of profits.

There are other distinctive features of hedge funds. They are private investment partnerships designed exclusively for wealthy investors and can do whatever they want with their money within the framework of a pre-formulated strategy. This kind of wide open space may seem risky - and at times it is. Some of the most high-profile scandals in the financial industry have involved hedge funds. On the other hand, high flexibility attracts the most talented money managers to hedge funds with impressive long-term results.

Hedge Fund Activity - Fictional Example

To better understand hedge funds and why they are so popular among investors and managers, let's create a fictitious fund and track its performance for one year. Let's call it, say, Value Opportunities Fund. The operating agreement, the legal document that governs the fund, states that the manager receives 25% of returns exceeding 5% per year. In addition, you can invest in any asset.

10 investors became interested in the fund's prospectus, each investing $10 million. Thus, the assets are $100 million. All investors signed an investment agreement, similar to an account opening form, and sent checks directly to the fund's broker or administrator. The administrator reflected their investments in the fund's balance sheet and then redirected them to the broker. Typically, an accounting firm acts as administrator. Now our fund is open and ready to work. The manager finds an attractive opportunity, calls the broker and instructs him to invest the entire 100 million in it.

A year has passed, and the fund's assets have grown by 40%, to $140 million. Now, according to the current agreement, the first 5% belongs to the investors, and all income exceeding this amount is distributed in the proportion of 25% to 75% between the manager and investors. Thus, from the 40 million received at the end of the year, 2 million (5%) will be deducted, and the remaining amount of 38 million will be divided between the manager and investors. This 5% is called the “threshold return” because the manager must first exceed it in order to make good money.

Based on the results of the year and the agreement with investors, the manager received $9.5 million. Investors earned a total of 30.5 million. As you can see, working with a hedge fund can be a very profitable activity. If his assets were $1 billion, the manager would earn $95 million and investors $305 million.

Of course, managers are often criticized for such high compensation. However, people who condemn them (often the media have a hand in this) forget that investors also received a decent jackpot. When have you ever heard an investor in a successful hedge fund complain that the manager's fees were too high?

Hedge funds are not for everyone

Hedge funds have a number of advantages over traditional investment funds. Among them:

1. Opportunity to make money on rising and falling markets.
2. A balanced hedge fund portfolio helps reduce risk and volatility and improve returns.
3. A wide variety of investment styles, many of which do not correlate with each other, allow investors to tailor their own investment strategy as accurately as possible.
4. Hedge funds attract the most talented managers in the world.

Of course, there were some risks:

1. A narrowly focused investment strategy can potentially lead to colossal losses.
2. Typically, hedge funds lock up investors' money for many years.
3. Financial leverage (or borrowed money) can turn a small loss into a huge one.

Some algorithmic hedge funds underperformed last year, but that didn't stop them from increasing assets under management by double-digit percentages, according to Institutional Investor's 17th edition of The Hedge Fund 100 (HFR). at the beginning of August 2018).

Quants still rule the hedge fund world—at least when it comes to portfolio growth. Some players were even able to literally “break into” the top rankings in one year.

Five of the six largest hedge funds in this year's rankings use algorithmic investing strategies entirely or significantly. And although their results were sometimes disappointing, their assets under management continued to grow. At the same time, several leaders of previous years with a long track of good results either faced a sharp drop in assets or closed completely.

American-owned Bridgewater Associates, which runs predominantly quant funds, retained its top spot for the eighth year in a row. True, its assets grew only 2% last year, to $124.7 billion. Its main fund, Pure Alpha, grew only 1.2%.

The next three companies in the ranking, also quants, on the contrary, showed rapid growth in assets. AQR Capital Management increased its portfolio by 29%, to almost $90 billion, which allowed it to retain second place. Renaissance Technologies' assets grew by 35.7% to $57 billion - third place in the ranking.

Two Sigma, which took fourth place, increased its assets by 33.4%, to $56 billion.

Three years ago, Renaissance was in 15th place, and Two Sigma was in 21st place in the ranking. Interestingly, this growth in Two Sigma's assets occurred at a time when the fund had one of the weakest management results in its history.

D.E. Shaw, a multiple strategy fund known for its trading algorithms, came in sixth. Its assets grew by 12.5%, to $39 billion.

New to the top ten of the rankings is the Marshall Wace fund, based in London. Its assets grew by 25%, to $32.6 billion, which allowed it to take 9th place (in the previous ranking it was 18th). A few years ago, 25% of this hedge fund was bought by the American KKR.

In total, the 100 largest hedge funds' assets reached nearly $1.73 trillion at the end of 2017, up 5% from a year earlier. Let us recall that at the end of 2016, the assets of hedge funds in the ranking decreased by 1.2%. The 100 largest hedge funds accounted for about 54% of the industry's $3.21 trillion industry at the end of 2017, according to HFR.

However, many older, well-established hedge funds continued to see their assets decline in the past year. Some companies left the market altogether. For example, Eric Mindich's Eton Park Capital Management fund closed last year, and Blue Ridge Capital, owned by John Griffin, which was included in the current ranking, announced plans to leave the market at the end of last year.

In addition, Leon Cooperman recently announced the transformation of his Omega Advisors fund into a family office by the end of the year and the return of the capital raised. The hedge fund's legal problems have caused its assets to fall below $4 billion, leaving it outside the top 100 for the second year in a row. “I don't want to spend the rest of my life chasing the S&P 500 and trying to provide a return on capital for investors,” Cooperman explained his decision to clients.

Many other well-known funds included in this ranking have also sharply reduced their assets this year. For example, Paulson & Co, owned by John Paulson, was in 72nd position in the current ranking with $9 billion (assets decreased by 8%). Such figures are far from the peak value of $36 billion back in 2010. Then Paulson & Co was in third place in HFR.

Discovery Capital Management, owned by Robert Citrone, has assets under management estimated at just $5.7 billion. They have fallen sharply compared to the end of 2015 ($15 billion). The reason for the decline is that Citrone's funds, known as the Tiger Cub, have lost money in the last three out of four years.

York Capital Management Global Advisors, owned by James Dinan, reported a 5 percent increase in its assets, from $16.2 billion to $17 billion.

Caxton Associates, now led by Andrew Lowe, was down almost 40% last year. Its ranking has fallen to 98th place, and there are good reasons to believe that we will not see this hedge fund in HFR next year. When the fund was run by its founder, Bruce Kovner, Caxton had $10 billion in assets at the end of 2002, which put it ahead of all other funds, taking first place in the HFR.

Some companies have deliberately decided to reduce the size of their assets, although they show more or less stable and decent returns. For example, Andreas Halvorsen's Viking Global Investors deliberately reduced its portfolio under management by 21%, to $21.5 billion (22nd place in the ranking). After 15-year chief investment officer Dan Sundheim left the fund, it announced a voluntary return of $8 billion of the portfolio to investors. “We decided to focus on achieving long-term strong returns, so we decided to reduce management,” Halvorsen explained his decision to investors.

ValueAct Capital Management also announced an 11.7% decline in assets to $15 billion, primarily due to a voluntary return of capital.

Meanwhile, Och-Ziff Capital Management, which has suffered heavy losses in recent years due to a bribery scandal, appears to have stabilized its holdings last year. They fell by only 5%, to $31.9 billion (12th place in the ranking). This appears to have helped Och-Ziff's flagship multi-strategy fund deliver one of the best results among similar strategies. "In our view, consistent investment performance should lead to capital inflows," the fund's Chief Executive Officer Robert Shafir said earlier this year. “Market conditions today are creating increased interest in multi-strategy funds in general, which we believe bodes well for the Master Fund, which has been delivering very consistent returns,” Sharif said.

It is worth adding that the reduction of assets by many hedge funds has led to a lowering of the minimum bar for inclusion in the ranking. Thus, this year Paloma Partners managed to close the ranking of the top 100 with assets of $4.7 billion. Last year, to get into the list, you had to have $5.5 billion.

Material prepared by Algo Capital Investment Company

Moscow, June 27 - "Vesti.Ekonomika". 2016 was a challenging year for hedge funds. Overall, they delivered just a 5.4% return to clients, far below the 11.9% return for S&P 500 shareholders, according to eVestment.

Poor performance and high costs have led to outflows from hedge funds, with about $70 billion flowing out last year alone, the most since 2009, according to HFR.

However, not all hedge funds performed poorly - there were also those whose income grew 10 times or more.

Below are the top 11 largest hedge funds by assets.

11. Elliott Management - $31.3 billion

Paul Singer

Paul Singer founded the hedge fund Elliott Associates with a starting capital of $1.3 million. It included Singer's own savings, as well as money from his relatives and friends.

At the initial stage of its work, the company specialized in convertible bond arbitrage.

However, after the stock market crash of 1987, Singer became convinced that convertible bonds were difficult to hedge.

Elliott Associates earned its capital not from convertible arbitrage, but from distressed debt.

The hedge fund is considered the pioneer of this business strategy. Positioning itself as a representative of creditors, Elliott bought the outstanding debt and bonds of struggling companies and then sold them at a profit or sought full repayment of the debt.

10. Winton Capital Management - $32 billion

Winton Capital Management Ltd. – the fund was founded more than twenty years ago in the UK.

Billionaire David Harding, who founded hedge fund Winton Capital Management, has donated millions of pounds to an organization calling for Britons to remain in the EU.

He lost in this, but his Winton Diversified fund (which uses algorithmic programs) managed to make money on Brexit.

9. Och-Ziff Capital Management - $33.5 billion

Daniel Och founded the global hedge fund and institutional alternative asset management firm Och-Ziff Capital Management Group and serves as its Chief Executive Officer, Chairman of the Board of Directors and Chairman of the Partner Management Committee.

Och-Ziff invests assets around the world, while subordinating its funds to specific strategies and targeting them to perform in specific areas.

The portfolio for each of its funds is selected based on the current market conditions, the capital preservation standard chosen for it and the established breadth of diversity of investments.

Och-Ziff became one of the few publicly traded hedge funds in America with an initial public offering under the ticker symbol OZM on the New York Stock Exchange in November 2007 at $32 per share.

8. Man Group - $33.9 billion

In 2016, Man Group handled volatile markets better than many in the industry. The largest publicly traded hedge fund was able to retain most of its assets, with total assets under management falling by just $100 million, according to official data.

Strategic planning and diversification have borne fruit, but market instability remains a critical factor, as do unpredictable risks.

7. Millennium Management - $33.9 billion

Israel Englander, head of hedge fund

Millennium Management was founded in 1989. The number of employees exceeds 2,200 people, and the company's offices are located in Europe, the USA and Asia.

6. DE Shaw & Co - $34.7 billion

David Shaw, founder of DE Shaw

David Shaw founded the famous company D. E. Shaw & Co. (hedge fund), which Fortune magazine called "the most intriguing and mysterious force on Wall Street."

Founded by David, D. E. Shaw & Co. located in New York. This hedge fund is special because its activities are based on a combination of computer technology and finance.

5. Two Sigma - $38.9 billion

David Siegel

Founded by David Siegel and mathematician John Overdeck in 2001, Two Sigma is ranked 22nd among US hedge funds.

In 2014, Two Sigma raised a macro fund with $3.3 billion under management, one of the largest in the sector since the crisis. All Two Sigma funds work with big data.

This hedge fund has become one of many in the United States that actively uses algorithmic strategies for traders.

4. Renaissance Technologies - $42 billion

James Simons, founder of the foundation

For two decades, the investment company Renaissance Technologies, trading on exchanges around the world, has been at the forefront of mathematical and economic analysis.

It uses computer models to predict price changes for liquid financial instruments.

These models use as much data as they can collect, then look for non-random components from which to make predictions.

3. JPMorgan Asset Management - $45 billion

Mary Callahan Erdaz, fund manager

JPMorgan Asset Management serves financial institutions and retail investors around the world.

There are more than 650 investment professionals in every major global market.

They use over 200 different strategies covering all asset categories, including stocks, bonds, cash, currencies, real estate, hedge funds and private equity funds.

2. AQR Capital Management - $69.6 billion

Cliff Assnes, founder of the foundation

Hedge fund AQR Capital Management, with assets of $69.6 billion, took second place in the ranking of the largest hedge funds in 2016, behind only Bridgewater Associates led by Ray Dalio.

1. Bridgewater Associates - $122.2 billion

Ray Dalio, Founder and CEO

Bridgewater Associates is the largest hedge fund in the world with assets of $122.2 billion. The fund was founded by Ray Dalio. The fund earned a record amount of money in its history - $50 billion over 20 years.

The core fund has zero correlation of returns to the market and very low correlation to other hedge funds.

There is an unusual corporate culture within the company, instilled by Ray Dalio.

Russian managers have become more responsible about risk. If in the previous rating none of the funds turned out to be profitable, then in 2013 the average increase in profitability for the industry was 2.4%. More than half of the rating participants—18 funds—went into the black.

Among the “Russian” hedge funds, the most successful was VR Global Offshore Fund, which earned 32.32% over the year. The Richard Deitz fund is also a leader in the Sortino index, an indicator of “negative” volatility, which amounted to a seemingly incredible 7.03 for the Russian industry. But for greater profitability, investors in the VR Global Offshore Fund have to pay by blocking their money: the fund has the highest penalty for early exit in the rating – 4.5%.

Copperstone Alpha Fund, which took second place, grew by 22.06% over 12 months - this is less than the “bronze winner” Diamond Age Atlas Fund (earned 22.92%), but the fund pulled ahead thanks to a higher Sortino index (1 .27 versus 1.03).

In 2013, two new funds appeared - BCS Quant Fund and Eganov Asset Management & Derivatives Strategies S.P. At the same time, four funds were included in a separate rating table - those that published data for less than a year, but more than nine months. All of them remained in the black, while Burnem Asset Management managed to earn 17.63% with a good Sortino index (1.27).

The industry's traditional 2/20 commission system remains virtually unchanged. Only nine hedge funds stand out from the general trend, taking 10-15% of investment profits. The situation with management fees is a little more varied: from 2.25% for Sturgeon Central Asia Bal to 0.75% for Arbat Global FD – Fixed Income.

In the first quarter of 2014, most industry players went into the red. Six funds continue to generate positive returns, led by Copperstone (28.41%). Growth is also demonstrated by Arbat Global Funds (2.27%) – the worst according to the results of 2013.

Despite the fact that hedge funds are sensitive to macro news, the correlation with the RTS index remains high: during the year this indicator remained at 90%. However, the correlation with the results of the Western hedge fund industry is only 40%.

Methodology

In the study, a Russian hedge fund is defined as a fund with a Russian manager or headquarters in Russia. The list includes companies that provided profitability data for nine or more months of 2013. Funds with a 12-month track record form the main ranking; funds with results of less than a year are included in a separate table.

Two parameters determined the position of funds in the ranking: profit based on the results of 2013 and the Sortino index, an indicator that takes into account the volatility of profitability. Both criteria had equal weight in the calculation. The rating of each fund is the sum of the specified weighted average indicators.

Maxim Baytashev is a senior trader at Copperstone Capital.

Copperstone Alpha Fund

Tell us about the Copperstone Alpha Fund strategy. What is it?

The fund's strategy consists of two parts: long-term and short-term. The first is a value approach to investing, which involves searching for companies that are fundamentally undervalued or have great potential for future development. A short-term strategy - speculative - is based on impulse market movements, which can be caused by a news background or technical factors.

The year has been difficult for emerging markets. What was your strategy with them? Did you have to adjust it somehow?

The year was indeed difficult, but we did not expect anything different. Given the ongoing stimulus program in the US and good GDP growth, investors have switched to companies in developed markets. This caused a significant outflow of capital from developing countries, and also reduced the volatility of financial markets (the average value of the VIX volatility index was 14 points versus an average value of 26 in 2008-2012).

We initially made a long-term bet on specific Russian companies, rather than on the market as a whole, which turned out to be a winning strategy. Over the year, the RTS index fell, but our companies grew even more than American indices.

Which sectors made a profit?

Russian stock markets remained volatile throughout 2013, which made it possible to make money by trading both index futures and individual securities on shorter time intervals. At the same time, we maintained long-term investments in food retail and IT sector companies.

In the first quarter of 2014, your fund turned out to be the leader in profitability. What were you betting on?
The fund's profitability for the first quarter is the result of our long-term and, as it turned out, successful research in the development of new sectors in foreign markets. In particular, some European companies worked, and the most successful investment turned out to be Italian securities. Among the sectors we actively research, some high-tech, pharmaceutical and biotech companies demonstrated good dynamics.

Short-term trading in the VIX volatility index and RTS index futures also contributed to the positive result.

Have you sensed an increase in foreign investors' fear of emerging markets?

We see from the example of Russian companies that trading volumes have not decreased significantly and in some cases even increased in a falling market. Russian stocks remain among the cheapest not only among emerging markets, but also among frontier markets.
Risks, such as a slowdown in China's economic growth, remain. However, when the political situation in Ukraine stabilizes, foreign investors may reconsider their views on Russia.

What do you think is the advantage of Copperstone Alpha Fund over its competitors within the chosen strategy?

We have access to wide investment opportunities not only in the Russian market, but also in the American, European and Asian markets. In addition, we can always maintain the desired degree of involvement in the securities of individual companies/sectors. If we see a good opportunity, we direct available funds there. And, on the contrary, we keep a significant part of the fund in monetary instruments if there are no such opportunities.

Slava Rabinovich – CEO and CIO of Diamond Age Capital Advisors.

Diamond Age Atlas Fund Ltd

Russian hedge funds showed good results in 2013. How do you assess the industry and what are its prospects?

Against the backdrop of growing global markets, the Russian stock market dropped by 5% in 2013. In this context, not losing money is already a success. Nevertheless, the investment field, having decreased somewhat, still remains interesting for making a profit both when the prices of some shares rise and fall.

In general, the prospects for Russian hedge funds are completely unclear. While the global industry's assets under management have exceeded $2 trillion, the number of funds in Russia and their AuM are declining. Foreign investors are voting with their feet and running away from Russian risk.

Tell us about your strategy. What assets do you invest in and what are the specifics of your management?

The fund invests mainly in shares and bonds of Russia and the CIS countries, as well as other countries - in companies with a significant presence in these regions. Diamond Age Atlas Fund is riskier, without a high degree of diversification. Depending on the situation, the fund may not hold any positions in the portfolio - only cash.

What major mistakes did you manage to avoid and what do you consider your investment success?

We managed, despite the Cyprus crisis, to select those instruments and positions on them that gave such high returns. The fund's strong focus was on the telecommunications industry, although this is quite conservative in terms of the issuers selected (all positions are very liquid).

Some mistakes were not avoided. Most of them related to lost profits. There was one costly misstep that cost the fund 5% of its 2013 return.

From your point of view, are there any specific difficulties in working specifically on the Russian market?

Yes, and huge. They are mainly related to three problems. First, many companies in Russia are not traded at fair value. Their assessment depends on market participants’ perceptions of the company’s corporate governance, political and economic instability.
Secondly, free float and trading volume have been steadily declining over the past 10-12 years. This is certainly very bad for the market, the economy and the prosperity of the country.

Thirdly, the structural inability of the financial sector in Russia to support the creation, development and normal functioning of hedge funds in the same volume and sense as is possible in the USA, Great Britain or Switzerland. Without a normally functioning financial market and its participants, there is no very “fabric” of the economy. And the performance of the Russian stock market speaks for itself: since May 2008, the RTS index has lost more than 50%, which means a return of minus 50% in six years.

At the beginning of 2014, your fund went into the red. How do you plan to end this year? What will you bet on in your strategy?

No one could predict the annexation of Crimea, sanctions against Russia, the collapse of the financial market, the cancellation of all IPOs, the cancellation of the issue of bonds, including government ones. This is a crisis of astronomical proportions against the backdrop of good dynamics in the development of the global economy and the profitability of global financial markets.

In connection with the events in Ukraine, we have added some tools. For example, they actively used put derivatives to hedge a significant part of the portfolio. However, the fund's strategy is to hold each position for a long time and we do not pay much attention to hourly, daily or even weekly price fluctuations. Unless they are caused by our investment mistakes.

What is a hedge fund: 5 characteristic features + 5 structural elements of this company + 3 main types of hedges + a simple and clear example.

Recently, so many different investment tools have appeared that it’s a piece of cake to get confused in them, especially if you are not a financier.

And yet, those who do not want to limit themselves to good old deposits or buy movable and immovable assets need to figure out what is a hedge fund.

A guarantor bank in which all investors' assets are stored.

It must be as reliable as possible, because we are talking about the largest amounts of money, shares, gold and foreign exchange reserves, etc.

Here is a simple diagram of the hedge fund structure:

If you use a diagram to depict the expanded structure of this investment company, it will look something like this:

History of the emergence and development of a hedge fund

American journalist A.W. Johnson was once working on an article on the topic of investment and the market.

The journalist loved his work, but received shamefully little money for it.

As a trading strategy, he chose a simple scheme: buying shares that were supposed to increase in price, and at the same time speculating in shares whose value was supposed to decrease.

The strategy turned out to be extremely successful and over the 15 years of A.U. Johnson was able to get an unprecedented profit at that time: 670%.

His share was 20% - this was enough for a comfortable life.

Following the example of the talented journalist, other financiers began to act.

By the end of the 1960s, there were already about 150 companies operating in the United States, which began to be called hedge funds.

Gradually, the fashion for highly profitable investment companies spread to other countries.

Hedge funds operate in Russia and Ukraine, but, alas, not as successfully as in the USA or Europe, because their activities are not regulated by law, and the risks of investors are extremely high, especially in times of crisis.

The main habitat of modern hedge funds is offshore zones:

And yet people with free capital of several million dollars can become investors in reliable hedge funds:

• Odey Asset Management;
• Citadel;
• Fortress Investment Group`s;
• Harbinger Capital Partners;
• VR Global Offshore Fund;
• Copperstone Alpha Fund and others.

Features and types of hedge fund

If you are going to invest money here, you should study the features of their activities.

It is also important to remember what types of hedge funds there are in order to choose the optimal investment company for investing your money.

Characteristics

It is not for nothing that Hedges stand apart from other financial organizations.

Their activities are difficult to regulate by current legislation and control.

These are special investment companies with their own characteristics.

Without knowing these features, it is difficult to fully understand what a hedge fund is.

Inaccessibility for small investors.

Only “professional” investors who have assets (excluding the value of property) worth $1 million or more can join a hedge fund.

An extraordinary selection of trading schemes.

High profitability and high risk for investors is explained by the fact that the manager chooses extraordinary trading schemes and investment objects, which ultimately bring great income to both investors and the manager.

If the scheme does not work, everyone loses.

Virtually unlimited area for investment.

If most investment organizations have a narrow area for investing money, then a team of professional fund managers can pour assets into whatever they see fit: real estate, the foreign exchange market, gold, land, etc.

Active use of financial leverage.

The management company willingly borrows money that they are going to invest in a particular object, which can bring profit.

Special commission structure for the manager.

Many funds pay the manager a fee only for transaction costs (usually 2-5% of profits).

But the manager receives payment not only for operating costs (usually 2%), but also his share of profitable operations (15–25%).

Main types

If you are interested in the topic only for general development, then you just need to familiarize yourself with the three main types of these investment organizations.

3 main types of hedge funds:

Global.

Its investment activities cover many countries, but its trading strategy is based on the activities of specific companies.

Macroeconomic.

It operates in the market of a specific country, for example, China.

Investment objects and trading strategies are selected in connection with the macroeconomic situation in this country.

Relative cost.

This is the most common type of hedge.

It operates in the country where it is based.

The basis of the trading strategy is to use the difference in prices of goods of the same group, for example, shares or real estate.

How do hedge funds work and make money?

There are such countless hedge funds operating all over the world that, even if you have a tidy sum, it would be a shame not to take the opportunity to invest it in some innovative project to get impressive profits.

After all, it is precisely in high profits associated with high risks that the peculiarity of hedging lies.

What is special about a hedge fund?

The activities of a hedge fund differ significantly from other financial institutions, primarily in that the management company is practically unlimited in the choice of trading strategies, investment objects and management methods.

Of course, there is legislation and state committees, but most often these financial structures do not experience pressure either from the state or from the market.

Moreover, they are often the ones who shape the market.

Given wide discretion, a prime broker can enter into such risky trades and inject such huge sums that, for example, the currency market curve can change its direction.

The richest people on the planet understand this well when they choose hedging for investing.

If we depict the features of the financial structure in the form of a diagram, we will get approximately the following picture:

A detailed explanation of what hedge funds and hedging are is given in the video:

Characteristics of the activities of a fictitious hedge fund

To better understand what we're talking about, let's look at a fictitious example.

Let’s say some famous financier Ivan Ivanov decided to found a fund called “Investment Company of the Future.”

Thanks to his impeccable reputation and the gift of persuasion, he managed to attract 10 reliable investors, each of whom invested $5 million.

Now Ivan Ivanov has a capital of 50 million dollars.

He enters into an agreement with each investor, according to which he is unlimited in instruments, can choose any trading strategies and objects for investment, and his remuneration during successful operations will be 20% of the income, if the amount of income is more than 10% of the initial amount.

Ivan Ivanov is looking for profitable investment properties.

Once it finds such an object, it signals the primary broker to execute the trade.

Let’s say that during the year the “Investment Company of the Future” managed to earn 50% of the profit, that is, 25 million dollars.

The first 10% of this amount ($2,500,000) belongs to investors.

The remaining 40% ($22,500,000) is divided as follows:

• 20% ($4,500,000) – the reward of Ivan Ivanov, who chose the right objects for investment and smart trading strategies that brought profit;
• 80% ($18,000,000) is the profit of investors, since there were 10 of them and they invested the same amount, then each of them will receive $1,800,000 profit + $250 thousand (the first 10% of the profit, which they cannot count on manager).

As you can see, understanding what is a hedge fund, you can earn decent money not only as an investor, but also as a manager.

Of course, for this you need to study a lot and have a decent amount to invest.

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