Professional Documents
Culture Documents
First
Hedge Fund
Formed by Alfred Winslow Jones in 1949 Started with $100,000 Between 1955-1965 had returns of 670% Primarily long positions, but also short
Black
Box Funds
Esoteric Portfolio Theory Highly complex mathematical formulas Computer driven Quants
Hedge
Fund
a private investment vehicle that engages in the active trading of various types of securities and commodities, employ sophisticated investment techniques, such as arbitrage, leverage, and hedging and whose structure and operations are designed to promote the goal of absolute returns.
Pooled/Partnerships
Long
Term Capital
Former
Math Professor Code Breaker for Department of Defense Uses computer driven models to detect pricing anomalies in stocks, commodities, futures, and options Charges 5 and 44 Earns over 20% for his partners over a multi-year period
Bear Stearns
Founded his own hedge fund with $2 million and 2 employees Under his direction, Paulson & Co. capitalized on the problem in the foreclosure and mortgage backed
securities market In 2007 alone his firm earned $15 billion! He personally made $3.7 billion In 2008, his firm hired former Fed Chairman, Alan Greenspan
Management Incentive
Fee
Fee
Absolute
Four
Primary Characteristics
Organized as partnerships with the General Partner having a significant investment Managers are compensated based on fund performance Investors purchase interest in fund for a % of a fund profit. Interests are significant, restricted transferability and limited redemption Provide liquidity and capital to the market place
A role that has been vacated by the large brokerage firms as they have shut down their proprietary trading desks
Limited
Partnerships/LLC Fees typically are 2 and 20 Normally utilize a high water mark or hurdle rate
No
Limited
redemption opportunities Governed by the partnership agreement Approximately 8,000 hedge funds with more than $2.68 trillion currently
rules
Types
of Funds
3(c)(7) Fund under 500 investors, limited to only qualified investors (investors with over $5 million in liquid, investable assets) 3(c)(1) Fund under 100 investors and limited to 35 nonaccredited sophisticated investors (accredited investors have excess of $200,000 of annual income or a minimum of $1 million in net worth exclusive of Primary residence Except for the exemption under Sec. 3(c)(1) or Sec. (c) (7) above, hedge funds would fall under the regulations for regulated investment companies
Assets are pooled into one account and managed as a single portfolio Profits and losses are allocated on where funds come from (capital contributions/distributions)
Entry
normally limited to yearly, quarterly, or monthly per partnership agreement Sold through a private placement memorandum
Partnership Agreement Subscription Agreement
Administration/Operations
Prime Broker
Execution of trades done monthly through trading screens piped through the internet to a broker Provides portfolio reporting, securities lending, office space, technology help, leverage, etc. Could be the prime broker or a non-clearing broker Provides office space, computer, and the rest of build out in the office quarters
Administrator
Provide general ledger accounting The allocation of income and expenses and gains and losses to the partners Calculation of management and incentive fees, high-water-marks and hurdle rates There is an interface between what the prime broker provides and what the administrator provides
The prime broker often provides a special trade date run that complies with U.S. GAAP
Accounting
Break Period
Occurs as partners ownership percentages changes through purchases and redemptions
The Layering Method accounts for each partners share of unrealized gain or loss generated on each security over a period of time
Rule 206(4), an investment advisor registered with the Sec and acting as general partner to a pooled investment vehicle, such as a hedge fund, and has custody of the clients assets is subject to this rule. 1
Must maintain clients funds and securities with a qualified custodian Must be audited annually Must distribute audited U.S. GAAP financial statements to all investors within 120 days of the end of the fiscal year or 180 days for Fund-of-Funds Must have a compliance officer
1
Hedge funds must register with the Securities and Exchange Commission when they have $100 million in assets.