Apr 04, 04
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hedgefunds
anybody know anything about them?
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Apr 04, 04
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Quote:
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Apr 04, 04
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Hedge Funds:
A hedge fund the name typically referred to a pooled asset-type or mutual fund whos managers participate in the investment philosophy of hedging. Hedging usually involves derivative security products, such as put and call options, and futures. Other types of derivatives or purchasing or selling strategies may be used. Prior to hedge funds, hedge strategies were typically employed by farmers, farmers' boards, and anyone with a financial interst in a cyclical industry or market. The idea behind hedging is simmilar to gambling's term "hedging your bet", the idea is to either lock in a certain price in volume over the mid or long term to evade spot market price instability, or to make use of derivatives products to cover any potential swings in the price. An example of real-market hedging may be a company like Terasen Gas. They negotiate with the BC Utilities Commission to charge a certain price for gas for the next six months. The company estimates that they will deliver a certain amount of natural gas to their customer base over the period, and purchase futures with expectation for delivery of the product for as long as possible, then purchase options "near the money" in both directions (if the price rises or falls), and profit in any price swing or volatility using these contracts. A hedge fund, however, operates on simmilar principles but is markedly different. A hedge fund manager typically first initially purchases a block of stock in a company, then writes, issues, and sells covered contracts against the security giving the right to sell at 10% less than the current issue price. They then purchase a slew of call contracts on the same security, for the right to purchase at 20% higher than the current issue price. If the price rises, the covered contracts expire worthless, and the hedge fund manager exercises the call options, purchasing the security cheaper than the market price using the contracts and then sells the entire lot at market value. If the price falls, the purchaser of the covered contracts typically exercises their contracts, and the hedge fund manager has made up the 10% loss with the proceeds of the contracts they sold, and they net to zero, where they started again. Obviously, hedge funds are a lot more complicated than that, but in a nutshell, that's the idea.
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Apr 04, 04
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do you have them sir k?
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Apr 05, 04
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No. I dont own any hedge fund units.
Rather than purchasing a hedge fund if I was interested in hedging the market, I would employ hedging strategies directly in my own account using the derivatives so I wouldnt have to pay the MER, or management fee, which is usually above 4% of the invested amount annually on hedge funds. This technique wouldnt wise for someone who has little experience with securities markets or derivative products. I would reccomend against anyone getting involved in hedge funds of any type unless it is limited to 10% of the total portfolio, and would advise to steer clear of them if you do not have a strong understanding of the capital markets. Hedge funds are very speculative, high-risk investments, where you are basically betting on how smart the fund manager is; if you have no way of knowing what they are doing with your money you are probably better off in a lower-risk fund. Companies like Terasen and the Canadian Wheat board have no option but to protect their large financial interest in hedging; the average retail investor without a sophisticated knowledge of capial markets have every option but to use hedge funds. Watch out for hedge funds; you'll usually see them showing some crazy return over 6 months to a year like 1500% or more in their advertisements. Theres a saying in the investment biz "You can only beat the market average for so long, then it comes back to bite you back to size". These same funds usually take serious losses at some point after a few years (like in the 80-90% range), then close down, the managers move on and start a new hedge fund under a different name. More respectable hedge funds usually only show a return in the 6-10% range, almost tracking the equity markets with the exception of remaining positive during a market downturn. Like a gambler, if you cover your bets heavily on both sides, you will only take in nominal winnings. If you bet the farm on one side and win, you'll make huge gains. And like a gambler, hedge funds that bet heavily on their own ability to time and predict the market will generate phenomenal returns, until they bet the wrong way and basically lose almost everything. In any case, if you do not have a strong understanding of the capital markets, your best bet is always to have a professional financial advisor. In the $0.00 to $15,000 range, your best advisor would be your banker; in balanced mutual funds or term deposits. At $15,000 to $75,000, a licensed mutual fund and retirement planning professional (Cartier Partners, Investors Group, A bank IRP). Over $75,000 look for an investment advisor with their IDA license and FCSI designation, (some names, RBC Dominion Securities, ScotiaMcLeod, CIBC Wood Gundy), and over $500,000 always insist on an advisor with their Portfolio Managers' license and preferrably on the CFA track.
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