The purpose of this blog is to share / gain knowledge on the various happening in the world of finance, investing & economics.
Saturday, November 15, 2008
Monday, November 10, 2008
Hedge Funds
What are Hedge Funds?
Hedge funds are private pooled investment limited partnerships which fall outside many of the rules and regulations governing mutual funds. Hedge funds therefore can invest in a variety of securities on a leveraged basis. Today, the term hedge fund refers not so much to the hedging techniques hedge funds may employ as it does to their status as private investment partnerships. There are other unregistered pools of investments that are similar to hedge funds such as venture capital funds, private equity funds and commodity pools which are not categorised as hedge funds.
Some of the key characteristics of hedge funds include:
- Exemption from many of the rules and regulations governing mutual funds. Hedge funds therefore are not required to meet disclosure requirements and are prohibited from public advertising and soliciting investors directly or through a registered broker-dealer.
- Flexibility in their investment options. Hedge funds can use short selling, leverage and derivatives. This enables them to deliver non-market correlated returns
- Wide dispersion in investment returns, volatility and risk
- Linking compensation to performance with compensation of managers based on a percentage of the hedge fund’s capital gains and capital appreciation. In addition, hedge fund managers often invest their own money in their fund.
Difference between hedge funds and mutual funds
Hedge funds have a structure similar to mutual funds in that they are both pooled investment vehicles that accept investors’ money and invest it on a collective basis in publicly traded securities. There are, however, many important distinctions:
- Mutual funds are highly regulated and restricted in the variety of investment options. Hedge funds are less regulated and therefore have a wider range of investment options.
- Mutual funds are measured on relative performance such as a market index or other mutual funds. Hedge funds are expected to deliver absolute returns.
- Hedge funds are often specialised and operate within an industry or speciality that requires a particular expertise- Mutual funds remunerate managers based on percent of assets under management. Hedge funds remunerate managers with performance related investment fees. Hedge fund managers typically charge a 2% basic fee plus a 20% performance fee. Fund of hedge funds operators typically charge an additional 1.5% in basic fees and up to 10% in performance fees.
- The future performance of mutual funds is dependent to a greater extent than that of hedge funds on the direction of equity markets.
- Hedge funds have much larger minimum investments (average $1m) than mutual funds. Usually very little of the investment manager’s own money is invested in mutual funds.
- While mutual funds are available to the general public, hedge funds usually face many restrictions in selling their product. In the US, for example, an individual needs to be an accredited investor (annual income over $200,000 or net worth over $1m) in order to invest in a hedge fund.
Source: Hedge Fund, City Business Series-International Financial Services,London
Hedge funds are private pooled investment limited partnerships which fall outside many of the rules and regulations governing mutual funds. Hedge funds therefore can invest in a variety of securities on a leveraged basis. Today, the term hedge fund refers not so much to the hedging techniques hedge funds may employ as it does to their status as private investment partnerships. There are other unregistered pools of investments that are similar to hedge funds such as venture capital funds, private equity funds and commodity pools which are not categorised as hedge funds.
Some of the key characteristics of hedge funds include:
- Exemption from many of the rules and regulations governing mutual funds. Hedge funds therefore are not required to meet disclosure requirements and are prohibited from public advertising and soliciting investors directly or through a registered broker-dealer.
- Flexibility in their investment options. Hedge funds can use short selling, leverage and derivatives. This enables them to deliver non-market correlated returns
- Wide dispersion in investment returns, volatility and risk
- Linking compensation to performance with compensation of managers based on a percentage of the hedge fund’s capital gains and capital appreciation. In addition, hedge fund managers often invest their own money in their fund.
Difference between hedge funds and mutual funds
Hedge funds have a structure similar to mutual funds in that they are both pooled investment vehicles that accept investors’ money and invest it on a collective basis in publicly traded securities. There are, however, many important distinctions:
- Mutual funds are highly regulated and restricted in the variety of investment options. Hedge funds are less regulated and therefore have a wider range of investment options.
- Mutual funds are measured on relative performance such as a market index or other mutual funds. Hedge funds are expected to deliver absolute returns.
- Hedge funds are often specialised and operate within an industry or speciality that requires a particular expertise- Mutual funds remunerate managers based on percent of assets under management. Hedge funds remunerate managers with performance related investment fees. Hedge fund managers typically charge a 2% basic fee plus a 20% performance fee. Fund of hedge funds operators typically charge an additional 1.5% in basic fees and up to 10% in performance fees.
- The future performance of mutual funds is dependent to a greater extent than that of hedge funds on the direction of equity markets.
- Hedge funds have much larger minimum investments (average $1m) than mutual funds. Usually very little of the investment manager’s own money is invested in mutual funds.
- While mutual funds are available to the general public, hedge funds usually face many restrictions in selling their product. In the US, for example, an individual needs to be an accredited investor (annual income over $200,000 or net worth over $1m) in order to invest in a hedge fund.
Source: Hedge Fund, City Business Series-International Financial Services,London
Recession - A perspective
RECESSION – A perspective
9th November 2008
With IMF cutting world GDP forecast for the second time during this year, it is now certain that majority of the G7 countries are headed for a very severe recession which would last for a bitter 2 years plus.
What typically would happen in a recession in any country is:
a. Economic Output would fall.
b. Jobs would be lost.
c. Consumer spending & confidence is battered.
d. Investment climate takes a beating and risk aversion sets in.
And one can go on and on….
However what would happen if countries like US, entire Europe, Japan got into recession together? One might wonder its not the first time we have faced such a situation. Yes you are right but this would be the first recession post serious globalization has taken place in the world economy. This is also the only recession in the last ten decades where the trigger is the banking and financial services sector.
One may also argue that recession in developed countries would not mean that emerging/developing and less developed countries would also face the same situation. My answer to this would be yes, although developing countries are not heading into a recession the higher single digit growth rates would surely fall in the coming six to nine months. I so not agree with the RBI/Govt./Finance Ministers ambitious growth rate of 7% for India (Its more an election gimmick). Our GDP can’t grow beyond 5.5% next year. Anything above that would be a bonus. We would see the first effect in the industrial production numbers over the coming 6 months once production cuts are affected in the coming months.
All this would mean business would slow down, consumer spending & confidence will fall, property prices would crash, stock markets would continue to remain in intensive care unit, RBI would infuse liquidity to help the economy recover etc.
The stocks markets would be headed back to its lows of October 2008 before February 2009. The effect on property prices would be with a lag. Expect property prices to fall anywhere between 15 – 40 % in various heated pockets of the country by April – June 2009. Even though the interest rates and inflation would taper down over the coming months the real effective interest rate would continue to be in the negative territory. The only place where you could make money is ……….do let me know.
I may go terribly wrong with these predictions but who cares its better to have a view and go wrong rather than have none.
So it’s a good time to cut the fab, focus on your health, mind rather that money and seek divine intervention.
Vikram Shivram
9th November 2008
With IMF cutting world GDP forecast for the second time during this year, it is now certain that majority of the G7 countries are headed for a very severe recession which would last for a bitter 2 years plus.
What typically would happen in a recession in any country is:
a. Economic Output would fall.
b. Jobs would be lost.
c. Consumer spending & confidence is battered.
d. Investment climate takes a beating and risk aversion sets in.
And one can go on and on….
However what would happen if countries like US, entire Europe, Japan got into recession together? One might wonder its not the first time we have faced such a situation. Yes you are right but this would be the first recession post serious globalization has taken place in the world economy. This is also the only recession in the last ten decades where the trigger is the banking and financial services sector.
One may also argue that recession in developed countries would not mean that emerging/developing and less developed countries would also face the same situation. My answer to this would be yes, although developing countries are not heading into a recession the higher single digit growth rates would surely fall in the coming six to nine months. I so not agree with the RBI/Govt./Finance Ministers ambitious growth rate of 7% for India (Its more an election gimmick). Our GDP can’t grow beyond 5.5% next year. Anything above that would be a bonus. We would see the first effect in the industrial production numbers over the coming 6 months once production cuts are affected in the coming months.
All this would mean business would slow down, consumer spending & confidence will fall, property prices would crash, stock markets would continue to remain in intensive care unit, RBI would infuse liquidity to help the economy recover etc.
The stocks markets would be headed back to its lows of October 2008 before February 2009. The effect on property prices would be with a lag. Expect property prices to fall anywhere between 15 – 40 % in various heated pockets of the country by April – June 2009. Even though the interest rates and inflation would taper down over the coming months the real effective interest rate would continue to be in the negative territory. The only place where you could make money is ……….do let me know.
I may go terribly wrong with these predictions but who cares its better to have a view and go wrong rather than have none.
So it’s a good time to cut the fab, focus on your health, mind rather that money and seek divine intervention.
Vikram Shivram
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