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20 Jan 15
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Hedge fund
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A hedge fund is an investment vehicle that pools capital from a number of investors and invests in securities and other instruments.
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Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public
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18 Nov 14
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At its most basic, a hedge fund is an investment vehicle that pools capital from a number of investors and invests in securities and other instruments
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17 Sep 14
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02 Aug 14
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15 Jul 14
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Hedge funds invest in a diverse range of markets and use a wide variety of investment styles and financial instruments.
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The name "hedge fund" refers to the hedging techniques traditionally used by hedge funds, but hedge funds today do not necessarily hedge.
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05 Feb 14
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available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public
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operate with greater flexibility than mutual funds and other investment funds
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often open-ended and allow additions or withdrawals by their investors (generally on a monthly or quarterly basis
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trading strategies
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prospectus
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investment strategy, investment type, and leverage limit
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computerized system
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discretionary/qualitative
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systematic/quantitative
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neutral funds have less correlation to overall market performance by "neutralizing" the effect of market swings
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directional funds utilize trends and inconsistencies in the market and have greater exposure to the market's fluctuations.
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trend or counter-trend
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anticipate and profit from reversals in trends
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following trends (long or short-term
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CTAs trade in commodities (such as gold) and financial instruments, including stock indices.
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managed future fund.
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sector funds" specialize in specific areas
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fundamental growth" strategy invest in companies with more earnings growth
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fundamental value" strategy invest in undervalued companies
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opportunity and risk are associated with an event
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corporate transactional events such as consolidations, acquisitions, recapitalizations, bankruptcies, and liquidations.
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when these bonds or loans are being traded at a discount to their value.
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events that impact the value of a company's stock
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spin-offs, share-buy-backs
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relative discrepancies in price between securities
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24 Dec 13
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and often structured as a limited partnership, limited liability company, or similar vehicle
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Hedge funds invest in a diverse range of markets and use a wide variety of investment styles and financial instruments
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Hedge fund managers often invest money of their own in the fund they manage, which serves to align their own interests with those of the investors in the fund.
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Regulations passed in the United States and Europe after the 2008 credit crisis were intended to increase government oversight of hedge funds and eliminate certain regulatory gaps.
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16 Oct 13
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24 Jul 13
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private capital speculatively to maximize capital appreciation
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U.S. regulations,
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limit hedge fund participation to certain classes of investors
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otal number of investors allowed in the fund
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allow additions or withdrawals by their investors.
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hedge fund's value
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share of the fund's net asset value
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increases and decreases in the value of the fund's investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.
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regardless of whether markets are rising or falling
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"absolute return"
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its investment manager
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management fee,
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percentage of the assets of the fund
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assets under management (AUM).
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1.1% of the total funds
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and assets held by financial institutions
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not sold to the general public
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retail investors
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bull market of the 1920s
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Graham-Newman Partnership founded by Benjamin Graham and Jerry Newman
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"hedged"
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management of investment risk due to changes in the financial markets.
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1970s, hedge funds specialized in a single strategy,
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The increased interest was due to the aligned-interest compensation structure (i.e. common financial interests)
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credit arbitrage,
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distressed debt
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restrict investor withdrawals
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rebounded and in April 2011
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61% of worldwide investment in hedge funds comes from institutional sources.
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four main categories
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directional
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event-driven
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Managed futures or multi-strategy funds may not fit into these categories
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hedge fund strategy
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approach to the market
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instrument used
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method used to select investments
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amount of diversification
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selected by managers
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"discretionary/qualitative"
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computerized system
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"systematic/quantitative"
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multi-fund
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market neutral or directiona
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share, bond or currency markets
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in anticipation of global macroeconomic events
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profit from anticipated price movements.
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timing of the implementation of the strategies is important in order to generate attractive, risk-adjusted returns
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often categorized as a directional investment strategy
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discretionary
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systematic approaches
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limited human involvement
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trend or counter-trend approaches
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attempts to anticipate and profit from reversals in trends.
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diversified markets
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market movements, trends
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inconsistencies when picking stocks across a variety of markets
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US and international long/short equity hedge funds
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long equity positions are hedged with short sales of equities
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"Emerging markets" funds
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"sector funds"
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China and India
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"fundamental growth"
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invest in companies with more earnings growth than the overall stock market or relevant sector,
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"fundamental value"
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undervalued companies
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"quantitative directional" strategy
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investment opportunity and risk are associated with an event
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corporate transactional events
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consolidations
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acquisitions
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recapitalizations
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bankruptcies
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liquidations
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valuation inconsistencies in the market before or after such events,
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Large institutional investors such as hedge funds are more likely to pursue event-driven investing strategies than traditional equity investors because they have the expertise and resources to analyze corporate transactional events for investment opportunities
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distressed securities
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risk arbitrage
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special situations
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restructurings
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recapitalizations
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distressed securities
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bankruptcies
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bonds or loans of companies facing bankruptcy or severe financial distress
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aim to capitalize on depressed bond prices
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Hedge funds purchasing distressed debt may prevent those companies from going bankrupt, as such an acquisition deters foreclosure by banks.
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buying and selling the stocks of two or more merging companies
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Risk arbitrage
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market discrepancies between acquisition price and stock price
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The risk element arises from the possibility that the merger or acquisition will not go ahead as planned
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pin-offs, share-buy-backs, security issuance/repurchase, asset sales, or other catalyst-oriented situations.
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event that will increase or decrease the value of the company's equity and equity-related instruments.
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credit arbitrage strategies
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focus on corporate fixed income securities
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activist strategy
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where the fund takes large positions in companies and uses the ownership to participate in the management
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predicting the final approval of new pharmaceutical drugs
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egal catalyst strategy
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companies involved in major lawsuits.
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relative discrepancies in price between securities
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mispricing of securities compared to related securities
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Relative value is often used as a synonym for market neutral, as strategies in this category typically have very little or no directional market exposure to the market as a whole.
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market capitalization
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convertible securities and the corresponding stocks.
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Asset-backed securities (Fixed-Income asset-backed): fixed income arbitrage strategy using asset-backed securities.
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credit markets
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pricing inefficiencies between securities through mathematical modeling techniques
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Volatility arbitrage: exploit the change in implied volatility instead of the change in price.
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Yield alternatives: non-fixed income arbitrage strategies based on the yield instead of the price.
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egulatory differences between two or more markets.
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acquisition price and stock price
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(Multi-manager)
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Fund of hedge funds
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hedge fund with a diversified portfolio of numerous underlying single-manager hedge funds.
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130% long and 30% short positions, leaving a net long position of 100%.
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equalizing risk by allocating funds to a wide range of categories
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maximizing gains through financial leveraging.
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add diversification to investment portfolios
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investors may use them as a tool to reduce their overall portfolio risk exposures.
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educing market risks to produce risk-adjusted returns
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hedge funds were approximately one-third less volatile than the S&P 500 between 1993 and 2010
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sophisticated qualified investors who are assumed to be aware of the investment risks
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accept these risks because of the potential returns relative to those risks.
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formal portfolio risk models
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normality of return
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Funds which use value at risk as a measurement of risk may compensate for this by employing additional models such as drawdown and "time under water" to ensure all risks are captured
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operational due diligence
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Considerations will include the organization and management of operations at the hedge fund manager, whether the investment strategy is likely to be sustainable, and the fund's ability to develop as a company.
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14 Jul 13
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Hedge funds employ a wide range of trading strategies but classifying them is difficult due to the rapidity with which they change and evolve.[24] However, hedge fund strategies are generally said to fall into four main categories: global macro, directional, event-driven, and relative value (arbitrage).
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15 Mar 13
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Hedge funds are private, actively managed investment funds.[1] They invest in a diverse range of markets, investment instruments, and strategies[2][1][3] and are subject to the regulatory restrictions of their country. U.S. regulations limit hedge fund participation to certain classes of accredited investors.[4]
Hedge funds are often open-ended, and allow additions or withdrawals by their investors. A hedge fund's value is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.
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Hedge funds employ a wide range of trading strategies but classifying them is difficult due to the rapidity with which they change and evolve.[26] However, hedge fund strategies are generally said to fall into four main categories: global macro, directional, event-driven, and relative value (arbitrage).[27] These four categories are distinguished by investment style and each have their own risk and return characteristics. Managed futures or multi-strategy funds may not fit into these categories, but are nonetheless popular strategies with investors.[28] It is possible for hedge funds to commit to a certain strategy[29] or employ multiple strategies to allow flexibility, for risk management purposes, or to achieve diversified returns.[26] The hedge fund's prospectus, also known as an offering memorandum, offers potential investors information about key aspects of the fund, including the fund's investment strategy, investment type, and leverage limit.[29]
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16 Dec 12
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Hedge fund
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17 Oct 12
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Hedge fund
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and trading activities than other funds
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investment fund that can undertake a wider range of investment
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institutions, such as pension funds, university endowments and foundations, or high-net-worth individuals, who are considered to have the knowledge or resources to understand the nature of the funds.
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open to certain types of investors specified by regulators
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vest in a
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liquid securities on public markets.
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diverse range of assets
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make use of techniques such as short selling and leverage.
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open-ended, meaning that investors can invest and withdraw money at regular, specified intervals
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achieve a positive return on investment whether markets are rising or falling
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aim to
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12 Sep 12
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Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling.
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31 May 12
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hedge fund strategies are generally said to fall into four main categories: global macro, directional, event-driven, and relative value (arbitrage).[31]
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Directional investment strategies utilize market movements, trends, or inconsistencies when picking stocks across a variety of markets. Computer models can be used, or fund managers will identify and select investments.
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Funds that use quantitative techniques for equity trading are described as using a "quantitative directional" strategy.
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identifying pricing inefficiencies between securities through mathematical modeling techniques
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15 Mar 12
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, but they most commonly trade liquid securities on public markets
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Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling. Hedge fund managers typically invest their own money in the fund they manage, which serves to align their interests with investors in the fund
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As of 2009[update], hedge funds represented 1.1% of the total funds and assets held by financial institutions
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08 Feb 12
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A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund, and a performance fee if the fund's net asset value increases during the year.
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The Performance fee is typically 20% of the fund's profits during any year, though they range between 10% and 50%.
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Almost all hedge fund performance fees include a "high water mark" (or "loss carryforward provision"), which means that the performance fee only applies to net profits (i.e., profits after losses in previous years have been recovered).
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This prevents managers from receiving fees for volatile performance, though a manager will sometimes close a fund that has suffered serious losses and start a new fund, rather than attempting to recover the losses over a number of years without performance fee
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Global macro is often categorized as a directional investment strategy
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15 Jan 12
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24 Nov 11
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The estimated size of the global hedge fund industry is US$1.9 trillion.
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Worldwide, 61% of investment in hedge funds is from institutional sources as of February 2011[update].
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they can undertake a wider range of investment and trading activities, and invest in a broader range of assets, including equities, bonds and commodities.
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Hedge fund managers typically charge their funds both a management fee and a performance fee.
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Performance fees have been criticized by Warren Buffett, who believes that because hedge funds share only the profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the credit crunch.
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Some performance fees include a "hurdle", so that a fee is only paid on the fund's performance in excess of a benchmark rate (e.g. LIBOR) or a fixed percentage.
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hedge fund strategies are generally said to fall into four main categories: global macro, directional, event-driven, and relative value (arbitrage).
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Sometimes hedge fund strategies are described as absolute return and are classified as either market neutral or directional.
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Global macro
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Global macro fund managers use macroeconomic ("big picture") analysis based on global market events and trends to identify opportunities for investment that would profit from anticipated price movements.
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Global macro is often categorized as a directional investment strategy.
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Directional
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Directional investment strategies utilize market movements, trends, or inconsistencies when picking stocks across a variety of markets.
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Directional hedge fund strategies include US and international long/short equity hedge funds, where long equity positions are hedged with short sales of equities or equity index options.
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Within directional strategies, there are a number of sub-strategies. "Emerging markets" funds focus on emerging markets such as China and India,[43] whereas "sector funds" specialize in specific areas including technology, healthcare, biotechnology, pharmaceuticals, energy and basic materials. Funds using a "fundamental growth" strategy invest in companies with more earnings growth than the overall equity market or relevant sector, while funds using a "fundamental value" strategy invest in undervalued companies.[44] Funds that use quantitative techniques for equity trading are described as using a "quantitative directional" strategy.[45] Funds using a "short bias" strategy take advantage of declining equity prices using short positions.
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Event-driven
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An event-driven investment strategy finds investment opportunities in corporate transactional events such as consolidations, acquisitions, recapitalizations, bankruptcies, and liquidations.
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Managers employing such a strategy capitalize on valuation inconsistencies in the market before or after such events, and take a position based on the predicted movement of the security or securities in question.
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Distressed securities include such events as restructurings, recapitalizations, and bankruptcies.
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Corporate transactional events generally fit into three categories: distressed securities, risk arbitrage and special situations.
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While event-driven investing in general tends to thrive during a bull market, distressed investing works best during a bear market.
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Risk arbitrage or merger arbitrage includes such events as mergers, acquisitions, liquidations, and hostile takeovers.
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Other event-driven strategies include: credit arbitrage strategies, which focus on corporate fixed income securities;
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Relative value
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Relative value arbitrage strategies take advantage of relative discrepancies in price between securities.
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- Fixed income arbitrage – exploit pricing inefficiencies between related fixed income securities.
- Equity market neutral – exploits differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, which also creates a hedge against broader market factors.
- Convertible arbitrage – exploit pricing inefficiencies between convertible securities and the corresponding stocks.
- Asset-backed securities (Fixed-Income asset-backed) – fixed income arbitrage strategy using asset-backed securities.
- Credit long / short – the same as long / short equity but in credit markets instead of equity markets.
- Statistical arbitrage – identifying pricing inefficiencies between securities through mathematical modeling techniques
- Volatility arbitrage – exploit the change in implied volatility instead of the change in price.
- Yield alternatives – non-fixed income arbitrage strategies based on the yield instead of the price.
- Regulatory arbitrage – the practice of taking advantage of regulatory differences between two or more markets.
- Risk arbitrage - exploiting market discrepancies between acquisition price and stock price
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- Fund of hedge funds (Multi-manager) – a hedge fund with a diversified portfolio of numerous underlying single-manager hedge funds.
- Multi-strategy – a hedge fund using a combination of different strategies to reduce market risk.
- Multi-manager – a hedge fund wherein the investment is spread along separate sub-managers investing in their own strategy.
- 130-30 funds – equity funds with 130% long and 30% short positions, leaving a net long position of 100%.
- Risk parity - equalizing risk by allocating funds to a wide range of categories while maximizing gains through financial leveraging.
In addition to those strategies within the four main categories, there are several strategies that do not fit into these categorizations or can apply across several of them.
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Risk management
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"big hedge funds have some of the most sophisticated and exacting risk management practices anywhere in asset management."
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Hedge funds share many of the same types of risk as other investment classes, including liquidity risk and manager risk.
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the average leverage for investment banks is 14.2, compared to between 1.5 and 2.5 for hedge funds
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Hedge fund structure
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Prime broker – prime brokerage services include lending money, acting as counterparty to derivative contracts, lending securities for the purpose of short selling, trade execution, clearing and settlement. Many prime brokers also provide custody services. Prime brokers are typically parts of large investment banks.
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Administrator – the administrator typically deals with the issue of shares, and performs related back office functions.
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Distributor – the distributor is responsible for marketing the fund to potential investors. Frequently, this role is taken by the investment manager.
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Under the so-called "Volcker Rule", regulators are also required to implement regulations for banks, their affiliates and holding companies to limit their relationships with hedge funds and also to prohibit these organizations from proprietary trading, and limit their investment in, and sponsorship of hedge funds.
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23 Oct 11
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A hedge fund is a private, actively managed investment fund that utilizes sophisticated strategies in international and/or domestic markets designed to offset losses during a market downturn and/or generate returns higher than traditional stock and bond investments.[
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investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors
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investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals
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aggressively managed and may speculate in volatile assets such as foreign currencies and commodities, and aspire to accumulate capital gains based on future price movements
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open-ended, meaning that investors can invest and withdraw money at regular, specified intervals
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privately managed, loosely regulated, utilize advanced investment strategies, have high management fees and are open only to qualified private investors or institutions
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21 Sep 11
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A hedge fund is a private, actively managed investment fund that utilizes sophisticated strategies in international and/or domestic markets designed to offset losses during a market downturn and/or generate returns higher than traditional stock and bond investments.[1][2]
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The first hedge fund began in 1949 and was designed solely to neutralize the effects of a bear market on an investment portfolio. However in modern times many hedge funds have become aggressively managed and may speculate in volatile assets such as foreign currencies and commodities, and aspire to accumulate capital gains based on future price movements.[1][3][2] Hedge funds are privately managed, loosely regulated, utilize advanced investment strategies, have high management fees and are open only to qualified private investors or institutions.[4] The hedge fund industry has grown rapidly in the past decades and is estimated to have $1.9 trillion in assets under management.
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Hedge funds utilize a wide array of investment strategies according to the goals of their managers and clients. Some investment strategies include Global macro, directional, event-driven, relative value (economics), and many others. Hedge funds are generally unsupervised by national regulatory agencies and, on occasion, have been accused of destabilizing various financial markets.[1]
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08 Sep 11
Callahan BurkeA hedge fund is a private, actively managed investment fund that utilizes sophisticated strategies in international and/or domestic markets designed to offset losses during a market downturn and/or generate returns higher than traditional stock and bond investments.
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06 Jun 11
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12 Mar 11
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hedge funds undertake a wider range of investment and trading activities
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invest in a broader range of assets
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As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety of methods, notably short selling and derivatives.
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07 Jan 11
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A hedge fund is a lightly regulated investment fund that is typically open to a limited range of investors who pay a performance fee to the fund's investment manager.
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10 Nov 10
Goldn Locksso now all of the money is being sent to China via high risk investments
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03 Nov 10
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10 May 10
Giorgio BertiniA hedge fund is a private investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment funds and which pays a performance fee to its investment manager. Although each
110th Congress 130-30 funds Articles needing additional references from March 2007 Fact Finance Financial market participants Hedge fund Investment-management learning change
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09 Apr 10
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A hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of investment and trading activities than long-only investment funds
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hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of investment and trading activities than long-only investment funds
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hedge funds, though similar to mutual funds, are typically not registered with, and thus not regulated by, the Securities and Exchange Commission.
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Performance fees (or "incentive fees") are one of the defining characteristics of hedge funds. The manager's performance fee is calculated as a percentage of the fund's profits, usually counting both realized and unrealized profits.
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19 Mar 10
Jeffrey CookeThe most exciting Website we've tried in a long time
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12 Jan 10
rufousAs the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety of methods, most notably short selling and derivatives. However, the term "hedge fund" has also come to be applied to certain funds that do not hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing the return on their investment.
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19 Oct 09
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A hedge fund is an investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds, and that, in general, pays a performance fee to its investment manager.
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Estimates of industry size vary widely due to the lack of central statistics, the lack of a single definition of hedge funds, and the rapid growth of the industry. As a general indicator of scale, the industry may have managed around $2.5 trillion at its peak in the summer of 2008.[2] The credit crunch has caused assets under management (AUM) to fall sharply through a combination of trading losses and the withdrawal of assets from funds by investors
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15 Oct 09
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06 Feb 09
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A hedge fund is a private investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of activities than other investment funds and also pays a performance fee to its investment manager. Each fund will have its own strategy which determines the type of investments and the methods of investment it undertakes.
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16 Jan 09
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19 Sep 08
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15 Sep 08
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He saw that price movements due to the overall market would be cancelled out because if the overall market rose the loss on shorted assets would be cancelled by the additional gain on assets bought and vice-versa
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30 Aug 08
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As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, the term "hedge fund" has come in modern parlance to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase risk, and therefore return, rather than reduce it.[citation needed]
Hedge funds have acquired a reputation for secrecy due to the protection of proprietary investment strategies. While many believe that hedge funds are outside the regulatory regime that is applied to retail funds, there still remains significant disclosure that is required to be made when specific triggers are met, but in general informational disclosure is less burdensome than that of registered funds. Additionally, divulging trading methods and positions would compromise the business interests of many types of hedge fund, tending to limit the information they want to release.[4]
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15 Aug 08
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13 Jul 08
Dante-Gabryell MonsonA hedge fund is a private, largely unregulated pool of capital whose managers can buy or sell any assets, bet on falling as well as rising assets, and participate substantially in profits from money invested.
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28 Jun 08
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A hedge fund is a private, largely unregulated pool of capital whose managers can buy or sell any assets, bet on falling as well as rising assets and participate substantially in profits from money invested.
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n September 1998, shortly before its collapse, Long Term Capital Management had $125 billion of assets on a base of $4 billion of investors' money, a leverage of over 30 times. It also had off-balance sheet positions with a notional value of approximately $1 trillion.[10]
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Hedge fund risk
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14 Apr 08
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14 Mar 08
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17 Aug 07
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28 Jun 07
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18 Apr 07
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For example, the TFS Capital Small Cap Fund (TFSSX) has a management fee that behaves, within limits and symmetrically, similarly to a hedge fund "0 and 50" fee: A 0% management fee coupled with a 50% performance fee if the fund outperforms its benchmark index. However, the 125 bp base fee is reduced (but not below zero) by 50% of underperformance and increased (but not to more than 250 bp by 50% of outperformance. [17]
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