Hedge_Funds.docVIP

Chapter 12 – Hedge Funds General Characteristics Category of investing that represents a broad range of different strategies Different asset class Lightly regulated pools of capital Great flexibility in investment strategies utilized Started as limited partnerships in US - now taking form of mutual fund trusts Majority of return from manager’s skill not market Mutual Fund Hedge Fund Relative Return - Aim to outperform a market benchmark like SP500 Absolute Return – aim to get make a profit regardless in all market conditions – regardless of benchmark Performance highly correlated to traditional equity/bond markets Little or nor correlation to traditional equity/bond markets Limited investment strategies Unlimited in investment strategies Cannot include short positions Can utilize long short positions Can use derivatives only in a limited way Can use derivatives in any way Are eligible for RRSPs May or may not be eligible for RRSPs Highly regulated, registered with securities regulators Not as regulated, registration not required Small minimum investment Usually large minimum investment Virtually unlimited in size Usually capped at a maximum size Daily liquidity redemption Redemption varies from monthly to yearly depending on fund Manager compensated by salary bonus and/or flat management fee based on assets Manager compensated primarily on performance incentive Manager doesn’t usually invest their own capital in fund Managers almost always invest their own assets Offered by a prospectus to general public Offered by Offering Memorandum to sophisticated or accredited investors only (private offering) Free to advertise to the public Restricted in advertising to public Investment process is clear usually easy to understand Investment process is often hard to define not widely communicated Who Can Invest? sophisticated investor accredited investor Hedge Funds - 2 - Retail Investor - Commodity Pools - Closed-end Funds - Principal-protected notes