[...]... investors do not really understand hedge funds or how they differ from traditional stock and bond investments One of the common comments is that hedge funds are risky, a belief fueled by misconceptions and a lack of understanding in the area For instance, the very meaning of hedge implies reducing risk Hedge funds continue to spark the curiosity of investors, yet with that curiosity comes a need to. .. evolving regulatory environment; organizational behavior and health; and terminal value—both in terms of product offering and business economics We need to think about the “going concern” attributes of individual funds and the industry As chairman of Cumberland Associates LLC, one of the longest running hedge funds on the planet, these long-term concerns are at least as important as the quotidian requirements... advisors to pension funds, family offices, and other high-net-worth individuals in the construction of individual hedge fund portfolios, and have provided FOHFs products for direct distribution to qualified investors Our firm was one of the first to develop fund of hedge funds registered with the Securities and Exchange Commission (SEC), an insurance clone product, and an array of structured hedge fund... range Largely unregulated Fund manager skill Management fee plus performance incentive fee Restricted 4 HEDGES ON HEDGE FUNDS these regulations is that such investors are sophisticated enough to understand the kinds of investment techniques a hedge fund manager may employ and thus appreciate and withstand the kinds of risks being taken However, these two components of the regulatory structure help to. .. understand the industry and its respective strategies Before thinking about whether to invest in hedge funds, investors need a clear understanding of what a hedge fund is, what it is not, and how it works (See Table 1.1.) 1 2 HEDGES ON HEDGE FUNDS TABLE 1.1 Overall Objectives of Alternative Investments • • • • • • Preservation of captial Wealth accumulation/growth Management of risk and volatility Enhanced... correlation/diversification Access to strategies unavailable to traditional managers Basically, hedge funds are considered to be a type of alternative investment, along with venture capital and private equity funds, real estate, and commodities (See Figure 1.1.) The term hedge fund” is derived from the practice of investment managers who took long positions in various securities and then hedged against... established—can map mutual fund risks/returns onto standard asset classes Vary moderately Defining characteristic Vary substantially Traditional Investment Portfolios Investment styles Hedge Funds TABLE P.1 Key Differences in Risk between Hedge Funds and “Traditional” Investments • Investor as “global risk manager”—manages risk selects funds with different styles, exposures • Risk analysis applied to longonly... equity and/ or bond markets combining long investments with short sales to reduce, but not eliminate, market exposure and isolate the performance of the fund from the performance of the asset class as a whole Returns can be more correlated with other asset classes due to bias toward long market exposure Hedged equity funds invest both long and short and adjust the ratio of the long and short positions to. .. of hedge funds, the major strategies they use to pursue their investment objectives, the comprehensive process of manager evaluation and selection, and some of the complexities associated with hedge fund investing through what is known as a fund of funds (FOFs) or fund of hedge funds (FOHFs) Chapter 2 explores how to cut through the black box and timely issues related to hedge fund disclosure and transparency,... trillion in hedge fund assets by 2010—up from close to $800 billion in 2004 (See Figure P.1.) Because hedge fund investing is based on a dynamic approach that is uncorrelated to general market conditions, its appeal continues to expand and more investors than ever seek ways to capitalize on the hedge fund opportunity As a result, there are more hedge funds around than ever, a number of new products, and . Cataloging-in-Publication Data Hedges IV, James R., 1967–. Hedges on hedge funds : how to successfully analyze and select an investment / James Hedges. p. cm. Includes index. ISBN 0-471-62510-8 (cloth) 1. Hedge funds. . print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written specifically for finance and investment. Hedge Funds How to Successfully Analyze and Select an Investment JAMES R. HEDGES IV John Wiley & Sons, Inc. ffirs _hedges. qxd 8/30/04 11:53 AM Page iii Copyright © 2005 by James R. Hedges