Hedge Funds - Hedge Funds FIN 461 Professor Thomas Boulton...

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Hedge Funds FIN 461 Professor Thomas Boulton “Hedge Funds: What Do We Know?” Edwards and Gaon, 2003, Journal of Applied Corporate Finance
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Hedge Funds According to the Securities and Exchange Commission (SEC), the term hedge fund “has no precise legal or universally accepted definition.” Most agree that hedge funds have the following characteristics: 1. Almost complete flexibility in relation to investments, including both long and short positions 2. Ability to borrow money (and further increase leverage through derivatives) in an effort to enhance returns (leveraged assets typically 2.5-3.5x AuM) 3. Minimal regulation 4. Illiquidity: an investor’s ability to get an investment back is restricted through lock-up agreements and quarterly disbursement limitations 5. Investors include only wealthy individuals, institutions, and qualified institutional buyers 6. Fees that reward fund managers for performance
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Hedge Funds By mid-2007, hedge fund assets under management reached an estimated $1.7 trillion ($6 trillion if leverage is included) Hedge funds target absolute returns : Absolute returns are investment returns that theoretically do not depend on the performance of broad markets and the economy A lack of correlation is attractive to investors attempting to lower risk without lowering returns or increase returns without increasing risk Compensation: “2-and-20” fee structure is common (similar to PE Industry) 2% on assets plus 20% of excess returns
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Largest Hedge Funds Source: Institutional Investor Hedge Fund Assets (Billions $) Bridgewater Associates $58.9 JPMorgan Asset Management $54.2 Man Investments $40.6 Paulson & Co. $35.9 Brevan Howard $32.0 Soros Fund Management $27.9 Och-Ziff Capital Management $27.6 BlackRock $25.0 BlueCrest Capital Management $24.5 Angelo, Gordon, & Co. $23.6
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Hedge Funds Most hedge funds have the ability to prevent invested capital from being withdrawn during certain periods of time.
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