Guide to Hedge Funds

What Are Hedge Funds?
Hedge Fund Facts and Terms
Types of Hedge Funds
Who are Hedge Fund Managers?
Suggested Resources Available at Baker Library or Via the Internet
Associations and Hedge Fund Trackers
Other Relevant Publications

What Are Hedge Funds?

According to Van Hedge Fund Advisors:

A U.S. hedge fund usually is a U.S. private investment partnership invested primarily in publicly traded securities or financial futures. Because they are private investment partnerships, the SEC limits hedge funds to 99 investors, at least 65 of whom must be "accredited." (Accredited investors often are defined as investors having a net worth of at least $1 million.)** The General Partner of the fund usually receives 20% of the profits, in addition to a fixed management fee, usually 1% of the assets under management. The majority of hedge funds employ some form of hedging -- whether shorting stock, utilizing "puts," or other devices.

Offshore hedge funds usually are mutual fund companies that are domiciled in tax havens, such as Bermuda, and that can utilize hedging techniques to reduce risk. They have no legal limits on numbers of non-U.S. investors. Some meet requirements of the U.S. Securities and Exchange Commission that enable them to accept U.S. investors. (For U.S. based investment partnerships; i.e. 99 investors, etc.)

** In October, 1996, Congress passed the National Securities Markets Improvement Act of 1996. "Under the rules, which take effect this month (June 1997), hedge funds can have more than 99 investors and still be exempt from the Investment Company Act of 1940, provided investors fit the requirements of a qualified purchaser, who is defined as an individual with $5 million in investments or a company with $25 million in investments." (Futures, June, 1997)

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Hedge Fund Facts and Terms

Aggressive growth: Expected acceleration in growth of earnings per share. Often current earnings growth is high. The manager buys small-cap stocks that are expected to experience rapid growth.

Arbitrage: (1) simultaneous purchasing and selling of the identical item in different markets in order to yield profits. The result is that the price of an item becomes equal in all markets. (2) the purchase of foreign exchange, stocks, bonds, silver, gold, or other commodities in one market for sale in another market at a profit.   (3) the simultaneous purchase and sale of mortgages, future contracts, or mortgage-backed securities in different markets to profit from price differences.

Convertible arbitrage: Manager focuses on returns with low or no correlation to the market. Manager buys different securities of the same issuer, as the common stock and convertible, and works the spread. For example, within the same company the manager buys one form of security that is believed to be undervalued and sells short another security of the same company. One of the most conservative styles.

Distressed securities:  Buying the equity or debt of companies that are in or are facing bankruptcy. Investor buys securities at a low price, hoping the company will come out of bankruptcy and securities will appreciate. Often classified as "even driven."

Emerging markets: Investing in the equity or debt of emerging markets. These countries tend to have high inflation or high volatile growth. Examples: India, Pakistan, and Russia.

Hedge: to offset. Also a security that has offsetting qualities. Thus one attempts to "hedge" against inflation by the purchase of securities who values should respond to inflationary developments. Securities having these qualities are "inflation hedges." See arbitrage.

Hedge fund: (1) a mutual fund that uses hedging practices by purchasing stocks on margin, selling short, or trading in options in an effort to maximize its profits at risk. (2) any limited partnership of investors that invests in speculative stocks.

Short sale: a transaction made by a person who believes a stock will decline and places a sell order, though he or she does not own any of these shares. Stock exchange and federal regulations govern and limit the conditions under which a short sale may be made. Sometimes a person will sell short a stock already owned to protect a paper profit. This is known as selling against the box.

Short selling: Strategy is based on finding overvalued companies and selling the shares of the companies. The manager anticipates the share price of the company will fall and borrows the shares from his broker. When the share price does fall, the manager buys the shares at a lower price and repays the broker with the shares sold earlier.

Value: Manager invests in stocks that are undervalued, are out of favor with the market and are not followed by analysts. The manager believes the prices of the stocks will increase.

(Definitions from Futures, June 1997 and from Dictionary of Investing by Jerry M. Rosenberg, NY: John Wiley & Sons, Inc. 1993 (Ref. HG 4513 .R67 1993))

"In Fortune magazine's recent listing of the richest people in America, six of the top 10 managed hedge funds."(Futures, April 1994)

"Most funds cannot do well when markets are very volatile and in the absence of good trends." (Futures, April 1994)

"Under the partnership agreements, their (partners') money may only be taken out at the end of the quarter and is often "locked up" for as long as three years." (Business Week, April 1994)

"Hedge funds require hefty minimum investments, ranging from $25,000 to several million dollars." (Futures, June 1993)

Funds do not have to disclose performance ... lead to a dearth of information on hedge funds. They are exempt from Investment Co. Act of 1940. (Futures, June 1993)

Some offshore funds are incorporated and publicly traded on foreign exchanges.

"Even though hedge funds that accept U.S. investors are subject to the U.S. securities and commodities laws, they can substantially limit the amount of regulatory requirements imposed by these laws ... If sales of interests in the hedge fund are made only to accredited investors, no specific disclosure to the investors is required. If sales are made to one or more non-accredited investors, the same kind of information must be provided as the investor would receive in connection with an offer of interests in a registered fund. Such information includes: audited financial statements, an opinion of counsel as to the legality of the securities being offered, the material tax consequences of investing in a limited partnership, risk factors, plan of distribution, and the use of proceeds."

(From Futures and Options Trading for Hedge Funds: The Regulatory Environment". Paper compiled by the Chicago Mercantile Exchange 1995, available at http://www.cme.com/market/institutional/strategy_papers/hedge.html.)

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Types of Hedge Funds

Macro - A global or international manager who employs an opportunistic, top-down approach following major changes in global economies. The manager hopes to realize profits from shifts in global interest rates and changes in economic policies. Macro funds are the largest category of hedge funds. (From Futures, June 1997)

"MAR Hedge, a newsletter that started reporting on the hedge fund industry in January 1994, is beginning to make sense of the many types of hedge funds. It puts them into 9 categories:

1. arbitrage (between securities)
2. emerging markets
3. market-neutral
4. opportunistic(directional, macro)
5. short-selling
6. small-cap
7. special situations (bankrupt or near bankrupt)
8. value (securities prices below net asset value) and
9. yield-curve arbitrage."

(From Euromoney, April, 1994)

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Who Are Hedge Fund Managers?

"They are, for the most part, veteran Wall Streeters who have decided to go into business for themselves--investing their own money and the funds of a handful of clients and receiving in return a hefty portion of the profits." (Business Week, April 25, 1994)

"Hedge fund managers are not required to register with the SEC as investment advisors. But, hedge fund managers who use futures are required to register as commodity pool operators with the Commodity Futures Trading Commission (CFTC)." (Futures, June 1993)

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Suggested Resources Available at Baker Library or Via the Internet

Books

Evaluating and Implementing Hedge Fund Strategies: The Experience of Managers and Investors.

Edited by Ronald A. Lake. London: Euromoney, 1996.

(Core HG 6041 .E92 1996)

"Collection of essays written by and for professionals as well as serious students seeking an insightful overview of the trends, developments and issues facing hedge funds." Introduction has good definitions/summaries in an essay entitled "Spectrum of Hedge Funds."

Money Manager Directory.

Chicago: Hedge Fund Research. Quarterly.

(Reserves - Circulation Desk)

This reference guide on hedge fund managers is the first directory to categorize money managers by strategy.

Nelson's Directory of Investment Managers.

Port Chester, N.Y.: Nelson Publications, Annual.

(Ref. HG 4907 .N37)

Has an "Investment Specialties - Investment Strategies" index in the back, which includes "Hedging."

Magazines

Euromoney.

(Reading Room - West End)

Provides in-depth coverage of the industry.

Futures..

(Reading Room - West End)

Top performers listed in June 1997 issue.

ABI/Inform.

Search subject heading "hedging"

Bloomberg.

Tracks offshore hedge funds listed on foreign exchanges by name only. Use Equity key. To pull up several hedge fund indices, follow these steps: Hit INDEX key, Hit GO, Choose #1, Hit GO, Type HEDGE, Hit GO. Once you've chosen an index, choose #15 for a description.

Web sites

Hedge Fund Newsgroup.

http://www.fortitude.com/wwwboard/

Van Hedge Fund Advisors.

http://www.nashville.net/~vanhedge/

Has some performance tables and rankings.

The HBS Investment Club.

http://wasat.hbs.edu/invest/index.html

The club's homepage has a link to the Student-Run Hedge Funds Discussion Boards with contact names.

BARRA.

http://www.barra.com/ResearchResources/hedf-n.asp

This site has fulltext articles with a search engine.

Magnum Hedge Fund Reporter.

http://www.magnumfund.com/magnewsl.html

"A newsletter dedicated to reporting on funds with an edge. Published periodically, MHFR covers a wide range of investment opportunities and features performance results and interviews with fund managers. Columnists provide expert advice on legal issues, global economic trends, and investment terminology." Website includes text of issues back to Dec. 1995 and an index to funds covered. Website also includes the MGI Fund Alert, a synopsis of hedge fund opportunities, under category "Other Hedge Fund Opportunities."

MAR (Managed Account Reports, Inc.)

www.marhedge.com

Leads users to all kinds of hedge fund rankings.

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Associations

Managed Funds Association.

Washington, DC; (202) 872-9186

http://www.mfahome.com

Recently changed name from Managed Futures Association in order to allow for inclusion of more investment managers (including hedge fund managers). Web page contains list of publications.

Hedge Fund Trackers

These advisors typically maintain internal use databases of hedge funds and/or publish directories. They may be useful in career searches.

Collins Associates.

Newport Beach, CA; 714-644-5771

Firm of fund managers specializing in hedge funds.

Dome Capital Management.

New York, NY; (212) 371-5935

Publishes U.S. Offshore Funds Directory.

Micropal.

Boston, MA; (617) 451-1585

http://www.micropal.com

Publishes The Micropal Guide to Offshore Investment Funds, a directory which includes hedge funds.

Hedge Funds Research.

Chicago, IL; (312) 658-0958

http://www.hfr.com/

Maintains an internal database of 2500 hedge funds (U.S. and International). Publishes Money Manager Directory, which is entirely hedge funds. Also publishes a quarterly journal.

Hennessee Hedge Fund Advisory Group.

http://www.hedgefnd.com/

Maintains database of over 1400 managers. Also publishes the WPG-Hennessee Hedge Fund Index available through Bloomberg.

TASS Management Limited.

535 Madison Avenue, New York, NY 10022; (212) 751-1252

http://www.tassman.com/

The TASS Alternative Investment Database tracks over 1600 alternative managers and funds globally including hedge funds. Based in London with a New York office.

Van U.S. Hedge Fund Advisors Index.

http://www.nashville.net/~vanhedge/

Based on about 1350 hedge funds in the U.S.

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Other Relevant Publications (Not Held at Baker Library)

"...despite the release of one or two specialist books, no comprehensive, single-volume survey, handbook, or how to manual of hedge funds has been available." (From Evaluating and Implementing Hedge Fund Strategies: the Experiences of Managers and Investors. Edited by Ronald A. Lake. London: Euromoney, 1996.)

Hedge Fund News
Quarterly publication of the U.S. Offshore Funds Directory, 405 Park Avenue, Suite 500, New York, NY.

MAR/Hedge
Monthly newsletter providing news and information about the global hedge fund marketplace. Published by Managed Account Reports, Inc. 200 5th Avenue, New York, NY 10001. Website at http://www.marhedge.com/mar/mrsb_idx.htm

MAR/Hedge Performance and Evaluation Directory
Published twice a year, provides detailed statistical and contact information on the performance of more than 500 hedge funds.

HFR Journal of Hedge Fund Research
Published by Hedge Fund Research, Inc., 208 S. LaSalle, Suite 774, Chicago, IL 60604.

Lookout Mountain Hedge Fund Review
Published by Lookout Mountain Capital, Inc., 3661 Brainerd Road, Suite 308, Chattanooga, TN 37411.

Investment Secrets of a Hedge Fund Manager: Exploiting the Herd Mentality of the Financial Markets by Laurence A. Connors. Published by Probus Pub. Co., 1995. Available from http://www.amazon.com.

Hedge Funds: Investment and Portfolio Strategies for the Institutional Investor Edited by Jess Lederman. Irwin Professional Publishing, 1995. Available from http://www.amazon.com.

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