Hedge funds often seen as a quick way of making money for the managers; and the investors are trying to reinvent themselves as more socially conscious industry.
20th June 2013
Hedge funds are experiencing rapid growth, often referred to as an exclusive corner of the professional investment community. It is little more than a mystery to most market watchers. Hedge fund industry is worth $ 2.4 trillion and are a ‘pool group of capital’ of wealthy people, pensions and endowments. Unlike mutual funds, hedge funds are more aggressive and take more risk in order to get higher returns. Hedge funds frequently deploy specific strategies or focused bets and their investments go beyond simple stocks and bonds.
Hedge fund is an alternate investment opportunity available only to sophisticated investors such as institutions and individuals with high net worth. Like mutual funds, hedge funds are pools of underlying securities. However, like mutual funds they are not regulated by the Securities and Exchange Commission (SEC) the market regulator for trading and securities. As hedge funds are relatively unregulated, they can invest in a wider range of securities than mutual funds. Although many hedge funds invest in traditional securities such as stocks, bonds, real estate and commodities, they are best known for using more sophisticated and risky investments. Hedge funds use both long and short strategies for maximizing the return on their investments, Long positions are buying stocks at certain prices and sell them later when they appreciate. Short positions also known as short selling means selling stocks at borrowed money and then buying them back later when their price has fallen. Hedge funds also invest in futures and options, also known as derivatives. Hedge funds have less liquidity as they are invested to seek returns in a specific period of time called as “lock up period” during which investors cannot sell their shares. Hedge fund managers are offered very high compensation unlike the mutual fund managers who are paid a fixed sum for their services, compensation of hedge fund managers is calculated on a percentage of the returns earned by the investors, this is in addition to the management fee which is 1 % to 4 % of the net asset value (NAV) of the fund.
The hedge fund industry has been affected by the Euro zone’s debt crisis and Japan’s Abenomics, a money printing gamble to revive its economy. Hedge fund managers opine that the rally in financial markets over much of the past year fuelled by central bank money printing could mask a failure to tackle some European countries and banks debt problems and the selloff in recent weeks may be the start of a longer downward move. In the past, hedge funds were the sought after investment destinations of the wealthy looking to maximize their returns and having the capability to bear the risk. They carried minimum investments of $ 1 million or more. The $ 2.4 trillion industry is trying to justify its existence and redefine its purpose amidst discontent among investors, pressure from the regulators and blame from politicians and the public for generating ‘unscrupulous wealth’. To overcome this blame on the industry, executives at an annual industry conference in Monaco have agreed to make more charitable donations. The idea is to ensure that social responsibility and money making go hand in hand. Jeroen Tielman, CEO of hedge fund investor IMQubator said “I think impact investing is the new buzzword”. Investors are starting to think and realize they can make a difference, he said.
The meet also debated whether philanthropy was a “natural activity” for the industry and Nick Rees, a partner at Absolute Return insisted the delegates sponsor his row across the Atlantic in aid of cancer research which would cost $ 400,000.