What is a hedge fund. hedge fund

Hedge funds: how do they work?

Traditional investment methods, such as deposits, gradually reduce profitability and do not make money. Many investors try different ways of investing and earning. If the names of mutual funds, trust management, PAMM, etc. are already well-known, hedge funds still remain a "dark horse" for the Russian market. Meanwhile, Western investors are quite actively using this way of earning. The first analogue of the hedge fund emerged in the middle of the last century, but mass creation began in the 1990s, which led to speculation in the financial markets.

What is a hedge fund?

This is an organization that is created to make a profit under given risk conditions, regardless of the market situation. It consists of investors, called partners, and is headed by a fund manager. They deposit money, and the manager invests it in accordance with the chosen strategy. The name "hedge" comes from the English "protection, guarantee", which fully explains the essence of the fund - to get the maximum income and eliminate the risk of losses.

Hedge fund - it's a money making tool, which does not limit the possibility of investing only in foreign exchange or industrial sectors. As part of the investment tools of a hedge fund, you can find stocks, options, futures, leverage, derivatives. The fund is not constrained in its actions by strict regulatory rules, is not available to a wide range of people, and is managed by a professional market participant. Thus, American hedge funds serve investors who are ready to make a contribution of $5 million. In offshore zones, hedges serve investors from $100,000.

The first hedge organization was created by Alfred Jones in 1949. He set himself the goal not so much to earn, but to provide himself with finances in order to do his favorite thing - social problems. His action was to buy stocks that could rise in value and immediately open trades for stocks that were supposed to decrease in price, which allowed him to reduce risk. For 5 years, the strategy has brought a return of 325%, which is 3 times the return of the most profitable mutual funds. There are now over 12,000 hedge funds in the world managing trillions of dollars. In Russia, these funds are not common due to complex registration rules.

The popularity of hedge funds in the West is due to the fact that, unlike mutual funds, they have more options in choosing tools for making money. To prevent funds from having a catastrophic impact on the stock market, the US (since this is where most of the funds are located) introduced a ban on banks owning hedge funds. This is due to the fact that banks, which are insured by the state and receive funding from the reserve system, could not invest in more profitable, but risky instruments. A collapse in the financial system dependent on hedge funds could trigger a tsunami in the financial sector around the world.

Thus, the difference between a hedge and a conventional investment fund is as follows:

• Earning income in any market condition - the hedge needs an absolute income, not a relative one.
• The presence of the maximum set of financial instruments on which you can earn.
• Opportunity to capitalize on declining stock prices.
• The use of leverage is borrowed funds.
• Management fees are calculated according to the scheme, for example, 20-2, which means 20% of the annual profit and 2% of the contributed assets.
• The actions of the manager are not constrained by strict regulation by the state.
• Large volumes of investments (minimum contribution from 100 thousand dollars)
• A limited circle of investors - the structure is almost closed.
• Low legal protection for the investor and less transparency are disadvantages of the fund.

How does a hedge fund work?

The essence of the work is similar to conventional investment funds, but with some differences. The fund is created at the initiative of the manager. Then investors are attracted who are ready to invest an amount not lower than the specified one. Having received a cash basis, the fund begins trading on an increase or decrease, using the available assets. The success of each operation depends entirely on the actions of the manager. Due to the fact that there is practically no government control, there are many fraudulent schemes in the hedge market.

In the process of investing, funds simultaneously play on the increase and decrease in the value of assets. The manager works to earn income regardless of the situation on the market (according to experts, this approach initiated the recent global financial crisis). Investors receive income minus a percentage of the remuneration of the fund manager.

How to become a member of a hedge fund?

It is not easy to become a partner - for this you need to be a recognized professional qualified investor with a portfolio of at least $100,000. It is also enough to have a certificate of a financial market participant and have experience in working with securities for at least 12 months.

When looking for a fund, you should not chase high returns - 15% per year is quite an adequate indicator of the integrity of the hedge. The average investment period is also not small - 3-5 years.

Thus, hedge funds use various strategies to invest money. The volume of some funds exceeds 1 trillion dollars. They can afford to play on macroeconomic indicators and have a global impact on the entire financial sector. This can create a "bubble effect". If it bursts, it could bring down the economy of more than one country.

A peculiar shadow of a wide variety of conjectures and theories has been trailing behind every organization called a hedge fund for several decades. Unfortunately, there is still nothing surprising in this, and the true essence and specifics of the work remain a kind of dark horse even for seasoned economists. In many ways, this is provided by the term "hedge" in the title - in the environment of financial management, this, in general terms, means providing coverage for financial risks.

Of course, the delusion of clients about such organizations, which are somehow perceived by many only as insurance against various problematic situations in the field of finance, were generously flavored with numerous positive reports from the funds themselves about the success of their activities. However, in reality, this financial mechanism does not work as expected, and this is clearly something that every investor interested in profit should know.

The essence and purpose of the organization

Hedge funds are a private investment partnership, the purpose of which is to maximize the return on the funds invested by investors for given risks, or to reduce risks for a given return (this is what the term "hedge" in the name explains - from the English. protection, insurance). The very essence of such funds lies in one simple idea of ​​obtaining a constant profit based on the investments of depositors, regardless of the current situation in the market: whether it is either an unprecedented decline or a tangible growth. For such tasks, complex tasks are often used, which also include leverage, buying shares long or selling short, and many others.

The whole range of various financial operations that the fund can undertake is extremely wide. And exclusively risk management in the market is, rather, the prerogative of only certain hedging organizations, for the most part this aspect is only one of the possible tools for working with finance, but by no means the only function.

Most of the funds of depositors are invested by managers in publicly traded securities, however, in essence, they are able to invest in literally everything that, in their opinion and strategy, can bring profit in the future: land, real estate, commodity market, currency, etc. The only restriction in this regard is prescribed directly in the investment declaration of the fund.

At the same time, such wide investment opportunities in practice are not available to everyone who wants to increase their fortune: access to the hedge fund is open to either “accredited” or professional investors, whose net worth must exceed at least $1 million (excluding the cost of their main housing). This limitation exists in view of the fact that professional investors are already sufficiently prepared for the difficulties and risks that a hedge fund's broad investment declaration implies. The limit on the number of investor participants is determined by the US Securities and Exchange Commission and is a maximum of 99 people, of which at least 65 must be, as mentioned at the beginning, "accredited" (an investor whose net income, according to US law, must be at least $200,000). Given the wide range of possible actions of the fund, the risks can be extremely high, which at the legislative level obliges investors to invest in such a way that their complete loss does not entail any damage to the family budget.

The birth of the revolution and its indelible mark on the world economy

Unique for its time and generation, the profit-making strategy was invented by American economist Alfred Winslow Johnson, who founded the first ever hedge fund in 1949. The authorship in the name of the hedged fund, likewise, belongs to him. He published the results of his work only six years later, in 1965, which made a lot of noise and interest in the market. In it, he described in detail the entire strategic mechanism for making money in a falling and rising market through the use of combinations of selling overvalued and buying undervalued stocks.

The former are securities whose current value is high, but there are some signs - harbingers that their price will collapse in the future. Undervalued - exactly the opposite, when the value of shares is low, but they have some prerequisites and potential for growth.

Using the strategy described above in general terms, Jones achieved impressive results - the value of his investments over the ten years of the fund's existence reached 670%.

The successful strategy gained enormous distribution, and by 1968 in the United States, the Securities and Exchange Commission had registered about 140 investment partnership associations that fell under the definition of "hedge fund".

However, the financial idea, revolutionary for its time, turned into a real financial disaster closer to 2008-2009, referred to in wide circles as the “great recession”. Generated largely by numerous and increasingly complex financial speculations, the global crisis of those years received a lot of influence from the hedge funds themselves, and hedge funds are, at their core, speculative organizations. However, for the sake of objectivity, it is worth noting that the housing bubble was the first to burst this financial storm. Outstanding mortgage loans, which were issued on an astronomical scale at that time literally for everyone (in a considerable amount and for those whose solvency could not close the issued debt obligations at all), dragged the entire financial and credit sector to the bottom, after which the crisis in full least spread to the real economy of the United States and countries of other continents.

By shorting bank stocks, investment hedge funds only exacerbated the growing financial panic, significantly catalyzing the global economic collapse. And although part of the guilt of these organizations for everything that happened at that time is undeniable, but still not only they influenced those events. The greed of the consumers themselves, which is in no way inferior to the thirst for profit on the part of economists, attracted to the mass appearance of huge credit debts, which in general were absolutely disproportionate to their ability to pay.

Today, the world has recovered from the severe consequences of the crisis, and the control over the activities of hedge funds has been significantly updated after a barely repairable blow to their image as financial institutions. In total, the global market has about 12,000 hedge funds, whose managing assets amount to trillions of US dollars. However, due to the complex and in most cases extremely confusing legal structure of these organizations, it is extremely difficult to calculate more accurate amounts of assets of specific funds.

Structural components of a single mechanism

Hedge funds are, in most cases, partnerships that are unique in their organization with many features and nuances. Some are incredibly complex and confusing, while others get by with the simplest and most transparent structure - it all depends solely on the goals, strategies and methods of the fund. However, almost any hedge fund structure consists of the following key links:

• Investors- exactly those people, without whose assets the existence and activity of the fund itself is impossible. The organization offers its services to investors, who, if they agree, invest some part of their capital. After that, as a result of its correct use, on this basis profit is obtained in the market, both for the client and for the fund.
• Guarantor bank, or custodian is a bank whose main task is to ensure the safe storage of investors' assets, whether it be currency, securities, precious metals, etc. this is a task for prime broker). In addition, the custodian also prepares reports on transactions made through the fund account; checking the compliance of the real policy of the manager with the list of goals stated in the charter of the fund. Of course, this role is usually played by a large bank with a solid positive reputation.
• Manager- a person or, as a rule, a company that determines the entire investment strategy, while being responsible for each of the decisions made by the fund. In addition, the hedge fund manager also oversees all operations.
• Board of Directors- monitors the activities of the manager, as well as the companies providing services to the fund. The Council is authorized to resolve disputes and conflicts between shareholders and managers, to appoint personnel to key positions of the fund. It is the members of the council who are personally responsible (up to criminal liability) for the fund's compliance with all the principles and rules prescribed in the memorandum.
• Administrator- determines the net asset value of the fund, regardless of the manager, which gives a significant reduction in risks in the event of a valuation error of the latter. However, most administrators assume the functions of accounting, paying bills, notifying shareholders with activity reports, distributing profits among shareholders, and subscribing to and redeeming shares / shares of the fund.
• Primary Broker- this role is usually played by a large investment bank, which does not perform one-time transactions on behalf of the hedge fund as an ordinary broker. The Primary Broker provides the Fund with a range of professional services related to clearing (cashless settlement between enterprises/companies/countries through goods/securities/services), custody services and operational support.
• Auditor- a person who checks the compliance of financial statements with accounting standards and financial legislation. The manager usually conducts an audit annually, but even such rare audits do not detract from this position in the structure of the organization - without an auditor, other service companies or third-party agents are unlikely to agree to service the fund.
• Legal advisor- is necessary to ensure the fund's licensed status, which is issued by authorized regulators subject to a number of specific requirements. The license opens up a much wider scope for opportunities and recruiting an investor base, but, in addition, a consultant is often used to conclude various contracts and agreements.

This is exactly what the structure of a hedge fund looks like. Again, in various cases, this scheme in practice can be even more simplified (even with the absence of any of the above frames) or much more tortuous and complex.

"Typical fund": varieties and classifications based on the ongoing investment strategy

In addition, despite the structural component, the International Monetary Fund distinguishes three types of hedge funds:

1. Global Funds- Their activity extends to the entire world market. However, this type of fund usually develops its strategy on the basis of analysis and forecasts of the dynamics of shares of individual companies.
2. Macro funds- work exclusively within the framework of a specific national market. Usually based on the macroeconomic and financial characteristics of a particular country.
3. Relative value funds- the original classic type of hedge funds, as they were at the very start of their existence. They carry out financial transactions within the stock market of any one country, using the good old strategy of selling overvalued and buying unvalued shares. At the same time, the manager constantly monitors the current situation on the market in order to choose the most appropriate moment for the transaction and get the maximum profit.

Of course, the variety of hedge funds on the world market does not end with the official classification, because there is little that prevents managers from creating many additional subspecies and branches, if necessary.

Learn more about hedge fund working hours

The partnership policy of the vast majority of hedge funds is aimed at long-term membership of investors, so that their deposits remain at the disposal of the fund for a long time. This mainly concerns the exit rules: the contributor needs to warn the organization about such a decision in advance, while the interval between notification and termination of membership can reach up to 2-3 months (depending on the established regulation). Another alternative often encountered in practice is the immediate withdrawal of the entire deposit in cash, however, the prices for the purchase / sale of assets are determined directly by the fund itself. And, of course, in most of these cases, the difference between them reaches very significant indicators.

So, upon entry, exit, or with a partial decrease in its contribution, the entire volume of investments of each partner is reviewed and, accordingly, the share ratio also changes. The termination of membership of a certain number of investors can significantly increase the total amount of profit among the remaining ones: management can pay off departing investors with far from the most successful investments, leaving more promising assets in their portfolio. Thus, after some time, the hedge fund can experience a sharp increase in return on capital due to the contribution that previously participated in the creation of income and was subsequently withdrawn to the exiting investors, but who had not yet had time to receive the percentage of benefits due. However, if in the hedge fund environment there is a persistent trend towards the active exit of investors, then no one is immune from a completely opposite effect in the form of a mass panic exit of partners. Often this is fraught not only with a drop in the return on capital, but also with the complete bankruptcy of the entire organization.

More controversial than the broad area of ​​investing in finance is the expanded commission system. Hedge funds receive not only a single operating cost ratio, but 2% for the management of the assets themselves and 20% of any profits made. At the same time, even if the manager suffers losses and does not bring any income at all, according to the memorandum of association, in any case, he is entitled to these 2% of the total volume of controlled assets (such a system was appropriately called "2 and 20"). A similar commission system is practiced by the vast majority of hedge funds on the planet. However, many analysts today especially emphasize the trend of the gradual transition of funds to the "1 and 10" system. In the case when the manager does not charge charges at all simply from the disposal of assets, this is covered by a higher percentage of commissions from the profits received.

In pursuit of big profits: modern strategies for working with investments

Extremely diverse investment opportunities and areas, as well as the influence of many different factors, constantly contribute to the generation and implementation of new earning technologies for hedge funds. However, despite this, the modern basic strategies for working in the financial field can be quite classified into several general types:

• Long/short position (Long/short position)- usually hedge funds with this strategy work with 40% of their assets. It consists in the acquisition of undervalued assets (long) and the sale of overvalued assets (short).
• Market-Neutral Arbitrage- works only when the same assets diverge in value on different exchanges. The manager enters a long position on overvalued assets on one exchange and a short position on another - where the same assets are overvalued.
• Reaction to events (Event Driven)- the strategy is based on the unfair value of the shares of any enterprises that have undergone certain changes (whether it be a merger, acquisition, reorganization, etc.). The manager catches a favorable moment for the operation (purchase / sale) before the market equalizes these unfair prices.
• Short positions (Short Bias)- with this strategy, the fund mainly holds short positions, earning on falling markets.
• Real value (Value)- investing is carried out in securities that are sold at a discount to the main assets or undervalued by the market.
• Crisis Securities (Distressed Securities)- purchase at a deep discount of shares and liabilities of companies that are on the verge of bankruptcy or restructuring. Investing according to this strategy assumes that as a result of internal changes, the selected companies will become more powerful, bringing profit along with it.

Often, funds resort to mixed strategies, using several of the above working methods at once to make a profit.

Regulation: what are the rules of the game and leverage for hedge funds?

For a long time, hedge funds stood apart in the global market due to their closeness and weak regulation of financial transactions. However, of course, there could never be any talk of complete anarchy and freedom of action - the normative regulation of funds was, is and will always be. Today, given their rapidly growing influence on the world market and the increasing frequency of various violations and insider trading, special commissions and bodies monitor and control them more carefully than ever before.

In particular, the JOBS Act (Jumpstart Our Business Startups Act), introduced in March 2012, after some time made quite significant changes in the work of hedge funds. Designed as a measure to encourage funding by various institutions for small businesses, this act weakened the control of the securities market. Thanks to the new law, hedge funds, given their wide investment opportunities, have become almost the main providers of capital for start-ups and small businesses. This act subsequently had a major impact in September 2013 in lifting the ban on advertising for hedge funds and firms offering individual placements.

In many countries, hedge funds are required to report to government financial authorities at the first request for large positions in foreign exchange contracts, as well as to disclose their positions in newly issued or upcoming securities. Such measures are introduced specifically to limit money laundering and strengthen capital controls so that large players do not infringe on the interests of small players in the market.

In addition, the policy of state control of hedge funds is also aimed at reducing the systematic risks of destabilizing the financial system as a whole. This is reflected in the regulation of margin requirements, collateral and limits set by financial intermediaries for individual clients.

In order to mitigate risk with hedge fund lending, major prime brokers and banks re-evaluate their positions against market-priced positions of the funds they lend to on a daily basis. These loans must be secured by appropriate collateral in the form of valuable assets. In addition, banks have the right to set lending limits for each fund separately, based on their own monitoring of the investment strategy, monthly income, cases of investor withdrawal and the history of business relationships.

The Most Successful Hedge Funds in the World Today

Meanwhile, not the best times for hedge funds continue to drag on from last year. Overall earnings have been below the average recorded over the past few years: the biggest hedge funds made $517.6 million last year, what? according to some experts? better than the results of 2014, but as much as 40% worse than the profit received in 2013.

At the same time, the price of all assets involved in one way or another in the activities of hedge funds increased by about $51.7 billion, reaching a total estimated value of $2.97 trillion.

The negative downward trend in profits is clearly reflected not only in the tangible financial losses suffered by even the best hedge funds in the world, but also in the obvious changes in the ratings of the strongest market participants. Such well-known figures as John Paulson of Paulson and Co., Leon Cooperman of Omega Advisors, and Daniel Loeb of Third Point lost their positions. In their former places, such players as Ken Griffin from Citadel and James Simons from Renaissance Technologies firmly established themselves. Both managed to earn a record $1.7 billion in 2015, thus quite deservedly ascending the podium of the strongest hedge fund managers.

The rating of hedge funds can change beyond recognition, ruthlessly throwing seemingly time-tested and market leaders to the bottom. Whether the current top players will remain at their positions without suffering significant losses by the end of the year - only time will tell. In the meantime, these ten managers hold the leadership among all hedge funds on the planet:

Hedge funds in Russia: ratings, prospects and emerging trends

Not the most profitable times for hedge funds also affected the Russian counterparts of American traders. Demonstrating a negative return, the situation with domestic funds in general looks less colorful than in the Western market, where such institutions are considered one of the most reliable financial instruments, consistently bringing up to 20% return on investment with minimal risks in most cases.

In mainly represented by mutual funds (Unit investment fund) and OFBU (general funds of banking management). Especially hedge funds in Moscow quite often have the status of trust management. The total number of domestic hedge funds now stands at about six dozen. A similar figure was recorded in the mid-eighties in the United States, where the market at that time already really appreciated hedge funds. In Russia, the legislative framework significantly limits the tools for the activities of funds, preventing the use of a vast number of strategies for working in the market. For the same reason, a huge part of Russian investment partnerships are registered in offshore zones.

Therefore, the adoption of a number of changes in the legislation on this issue can significantly stimulate Russian hedge funds and their economic growth, allowing them to adopt a much wider choice of strategies.

And although hedge funds are not as widespread in Russia as in the West, we still have impressive examples of leaders who can compete with competitors at the international level. The most successful of them was VR Global Offshore Fund, whose profit for the year amounted to 32.32%. But VR Global Offshore Fund managed to achieve such a record yield for the domestic market by blocking funds: the fund has the highest percentage of a penalty for investors for early exit - 4.5%. Diamond Age Atlas Fund earned less - 22.92% of the total profit, leaving Copperstone Alpha Fund in third place in the rating. The bronze medalist managed to grow by 22.06% over the year.

Finally, in fourth place is Burnem Asset Management, whose income for the past year amounted to 17.63%.

In the hands of all four of the above funds, approximately 80% (3.425 billion dollars) of all assets are concentrated compared to other competitors in the Russian market. At the same time, more than half of these funds - 1.634 billion - belong to the VR Global Offshore Fund.

Personal experience with hedge funds in the reviews of the market players themselves

Today, hedge funds are one of the most profitable and at the same time the most stable investment partnerships among many other investment alternatives in the modern market. Large professional entrepreneurs and businessmen in search of profit, as a rule, always mark the hedge fund as the highest priority financial institution to which they entrust their hard-earned money. The reviews are negative, the reviews are positive - hardly anyone now trusts the opinion of strangers - "depositors" on the Web, when fake accounts have become almost one of the main tools of commerce.

Another thing is that there have always been risks, there are now and will be in the future, especially in the economy. Thus, not every hedge fund can actually be an investment partnership, but rather creates a fake around its name for the one and only illegal purpose - fraud.

One of the most high-profile cases was the scam that cost Madoff Investment Securities investors about $50 billion. His investment fund, which cost several million US dollars to enter, was known to many people from high society. Madoff himself was also known for his generous philanthropic donations to cancer and diabetes research, Democratic Party campaigning, and cultural and educational institutions.

However, this did not save the fund from the inevitable restructuring after the 1995 crisis from an investment partnership to a financial pyramid. However, the bubble he created burst at the end of 2008, after which Madoff was sentenced to 150 years in prison.

Truly experienced players (people who have already earned more than the first million by investing funds) first of all recommend taking a closer look at the minimum amount for entry. If it is equal to or even less than $50,000, then be sure for sure - you are faced with a hype disguised as a hedge fund. For example, foreign hedge funds tested by time and dozens of clients accept investments of at least $100,000.

The concept and structure of hedge funds

Today I want to touch on the topic of hedge funds. In the minds of many ordinary people, a hedge fund is usually some kind of safe haven for millionaires, bringing a stable guaranteed income above a bank deposit. The wording may differ somewhat, but the meaning remains approximately the same - while such an understanding is very weakly consistent with the truth.

The first hedge fund was founded in 1949 by A.W. Jones (in the book by B. Biggs it is written that Jones asked him a question: did he wash his hands after going to the toilet or before and was not satisfied with the first answer as indicating standard thinking) and had an initial capital of $ 100,000, and Jones for the first time insured the purchase of shares opening short positions. Let me remind you that a short position means the ability to borrow a certain amount of shares and offer them to other market participants. If the price falls, they are bought again and given to the borrower, and the profit between the initial and final price remains with the fund.

At that time, it was a new version of working with the market, which brought excellent results. Hedge funds have gained mass status since about the 80s. In 2012, over 1.3 trillion dollars was concentrated under the management of only large, “billion dollar” American hedge funds - in total, there were about 13 thousand hedge funds in the world in 2012. That's more than half of America's annual budget. The internal structure of the hedge fund itself can be represented as follows:

Sponsor a hedge fund is usually its creator. He is also the founder of the fund and a possible member of the board of directors;

Custodian— a custodian of managed assets (securities) independent of the fund. Usually it's a big bank. Fund accounts are opened there and reports on transactions are drawn up;

Investment manager is a physical the person or money manager of a fund that makes investment decisions. In fact, this is the brain of the fund;

Investment Advisor can advise an investment manager, help in making decisions;

Primary Broker provides the fund with trading platforms and access to relevant markets

The board of directors of a hedge fund oversees its activities:

• Supervises the activities of the investment manager;

• Can resolve conflicts between shareholders and the manager;

• Approves the established remuneration for the manager (depends on the results of the fund);

• Appoints auditors and legal advisors serving the fund

Regulation of hedge funds

As world practice shows, hedge funds are much less regulated by government agencies than other investment companies, to the point that x Edge funds are sometimes referred to as unregulated investment vehicles. And that's really one of the industry's problems. However, in the mid-2000s, some regulations were passed that tightened the work of hedge funds. In the US, in 2006, the financial regulator (SEC) published several draft rules for discussion that would provide additional protection to hedge fund investors.

Approximately one and a half years earlier (in December 2004), amendments were made to the Investment Advisers Act of 1940, according to which hedge advisors must be registered in the manner required by the Act with the financial regulator. A number of hedge funds are audited by the companies of the so-called "Big Four"; completed the creation of the Financial Stability Oversight Council (FSOC), which intends to collect and process data from large financial institutions. Finally, on July 21, 2010, the U.S. Financial Reform Act, known as the Dodd-Frank Act, was signed into law with the following provisions relating to hedge funds:

Mandatory registration with the SEC upon reaching $150 million in assets under management;

• Various activities aimed at strengthening internal and external control over trading strategies, risk management and reporting;

Raising Qualified Investor Requirements - $1M Hedge Fund Investor Equity Requirement

Hedge Fund Entry Threshold

By their very nature, hedge funds try to profit from market volatility, and have a very wide range of opportunities due to weak government regulation. Hedge funds invest in stocks and bonds, forwards, futures and options. In this sense, they resemble Russian OFBUs, but unlike the latter, they do not have to be created by a bank and have a high entry threshold, targeting multimillion-dollar capitals.

In the US, the minimum contribution for private investors starts at $5 million and $25 million for institutional investors, with the minimum threshold in many cases determined by local law. The exceptions are the laws of countries such as Canada, where you can invest about 2 thousand Canadian dollars in a hedge fund. In Europe, the minimum contribution starts from tens of thousands of dollars, but usually not less than $ 100,000. Many funds are registered in offshore jurisdictions, which, on the one hand, reduces the transparency of investments, and, on the other hand, reduces reporting costs and reduces income tax. The distribution of hedge funds by country is shown below:

The ups and downs of hedge funds

Even in a relatively short history, due to huge capital, some hedge funds have become “famous” - both with a plus sign and a minus sign. For example, Soros' hedge fund "Quantum Group" in 1992 earned $1 billion (in 1 day!) with the fall of the British currency. W. Buffett's Berkshire Hathaway fund has reached a similar status, and today owns assets of about 130 billion dollars. Another iconic example is the Madoff scam, one of the founders of the NASDAQ.

His Madoff Investment Securities fund was considered one of the most reliable in the United States, and people stood in line to invest in it. Since about 1995, against the backdrop of losses, Madoff's hedge fund began to work on and worked until the end of 2008, when, against the background of the crisis, several investors wanted to take large sums. As a result, the fund turned out to be the largest pyramid scheme in history with a total damage of about $65 billion, and the organizer received a life sentence. Another sad example:
hedge fund Long-Term Capital Management (LTCM) with a book capital of almost seven billion dollars (1997) led by two Nobel laureates in economics Myron Shoals and Robert Merton, created in 1993 and on the verge of bankruptcy on August 17, 1998 due to investment in the Russian economy. In a panic, investors began to sell US stocks in an attempt to save the rest of the funds and avoid bankruptcies of other financial institutions - the scale of the fund is evidenced by the fact that these sales brought down the Dow Jones by more than 12% by the end of August, and the loss of LTCM itself amounted to more than 4 billion .dollars So the games of the big hedge funds could easily reverberate in the global economy, as the leaders in this space earn more than giants like McDonalds.

As it turns out, due to the lack of transparency of the funds, even one person with an average level of training can organize them - this was done by Moazzam Ifzal, who was noted by Bloomberg and even received the BarclayHedge award for "outstanding results" - in 2010 and 2011 the manager announced almost 300 and 200% per annum respectively. In total, the fund raised more than 800 million dollars, of which investors returned only 83,000. By the way, from 1994 to 2005, 109 cases of hedge fund bankruptcies were recorded, but there are incomparably more closed due to losses:

Hedge fund returns

The profitability of hedge funds can be different - and even a portfolio of three dozen randomly selected hedge funds (they are the so-called hedge fund funds) does not at all guarantee an investor a permanent positive result. The most famous indicator of hedge fund activity is the Barclay Hedge Fund Index, the yield of which can be seen on the website www.barclayhedge.com. The index currently includes 2500-3000 funds. In general, it is clear that its profitability simply follows the American market - however, at the same time the investor pays about 2% management fee and 20% of the profit .

Since hedge funds have little transparency, the reported return is likely to be higher than the actual return. The simplest reason is that the statistics do not take into account the results of closed hedge funds, as well as those merged with others due to unsatisfactory results. Bad quarters may simply not be included in the reports, and the cost of illiquid securities of the fund may be overestimated. Only single hedge funds are able to bring on average about 15-20% per annum over several years; besides, the story with Madoff teaches how to be as attentive as possible to non-trading risks, and the story with LTCM - to trading. The real return of the investor is likely to be close to conservative bonds with greater risk.

You can also notice that hedge funds are characterized by rather low liquidity - a complete withdrawal of money usually takes about two months, there is often a so-called blocking period, when the investor either cannot withdraw his money at all, or must pay a fine for this. Moreover, since the stock and derivatives markets operate in much smaller volumes compared to forex, very large securities funds often suspend investments, since market liquidity is not always enough to implement the strategies used. Fund managers' returns consist of a fixed rate and a performance fee, and are usually paid on a quarterly basis.

Recently, there has been a downward trend in risk due to more participation in hedge funds by institutional investors, which is why investors believe that funds fees should be reduced, as they no longer pay off with increased returns. The days when funds like Buffett's could earn fairly consistent high returns are long gone and unlikely to return. In recent years, he himself has been on a par with the market.

Hedge Fund Strategies

Hedge funds use a wide variety of money management strategies, but the predominant one is ″ Equity long-short″. The idea is to buy some stocks and go short while selling others. It doesn't matter if the market rises or falls, what matters is that the shares you buy rise faster or fall slower than the ones you sell.

Also quite popular event-driven strategy, consisting in speculation on events related to the activity of companies - for example, mergers and acquisitions, spin-off of subsidiaries, restructuring, etc. You can also name Fixed income arbitrage strategy is a strategy in which a hedge fund profits from price anomalies that occur in the fixed income securities market, which can also be considered as an arbitrage strategy. Finally, futures and options trading, macroinvesting with an analysis of global macroeconomic processes are popular. An approximate balance of the entire spectrum can be seen below:

Hedge funds in the world and Russia

The global practice of hedge funds has more than half a century, and the total amount of funds under management is about 3 billion dollars. The leaders in terms of capitalization are the United Kingdom and the United States.

Russia is far behind: the Federal Service for Financial Markets (FFMS) allowed registering hedge funds in Russia only in 2008. Currently, there are more than three dozen hedge funds with Russian roots, but most of them are registered offshore: VR Global Offshore Fund (opened in 1999, assets of about $ 1.5 billion), Copperstone Alpha Fund, BCS Quant Fund and others. SPEAR'S Russia Hedge Fund Index (equivalently weighted index) and MHFMC Russian Hedge Fund Index (funds with a longer trading history are more weighted) are tracked. The top four make up about 80% of capitalization.

Domestic hedge funds are only allowed to take on private clients who fall under the definition of a "qualified investor". Based on the Federal Law “On the Securities Market”, to be recognized as a qualified investor, you must meet any two of the following requirements:

• own securities or other financial instruments in the amount of 3 million rubles or more;

• in the presence of a certificate of a financial market participant, have at least a year of work experience in a financial institution that performed transactions with securities. For the rest, work experience in a similar company is at least three years;

• within four quarters, make at least 10 transactions with securities in the amount of at least 300 thousand rubles on a quarterly basis.

Looking at Russian hedge funds as a whole for 2013 and 2014, one can detect a clear trend. Namely, their behavior differs little from world analogues:

It is clearly seen that Russian hedge funds (blue line) reduce the losses of the RTS index, but cannot fully follow its growth. You can also find more optimistic data on the index overtaking the Russian hedge funds market - but as mentioned above, they need to be approached very carefully. In addition, the chart can show the fund's net income without deducting investor fees.

Volumes of hedge funds in the world

At the moment, the number of actively managed investments in hedge funds has equaled the capitalization of exchange-traded funds that simply track market indices. This can be seen as a growing realization among investors that finding a hedge fund that beats passive investments long enough is not easy:

conclusions

The closeness of hedge funds leads to the manipulation of their returns, which turn out to be inflated. In addition, hedge funds require a very high entry threshold, have little liquidity, and charge high commissions, including for results. In my opinion, the investor has no reason to be upset because of the high entry threshold - you can effectively manage your capital yourself.

So if you see a fund where you are offered 30% per annum in foreign currency with minimal risk, then you should understand that the manager claims to be many times smarter than all bank analysts and hedge fund managers. And no matter how strong evidence of the reality of trading is presented, you should always think about the legal framework and protect your money from non-trading risks. Continue reading.

Russian managers have become more responsible in their attitude to risk. If in the previous rating none of the funds turned out to be profitable, then in 2013 the average growth of profitability in the industry was 2.4%. More than half of the rating participants – 18 funds – went into plus.

Among the "Russian" hedge funds, the most successful was VR Global Offshore Fund, which earned 32.32% in a year. The Richard Deutz Foundation also leads in the Sortino index - an indicator of "negative" volatility - which amounted to a seemingly incredible 7.03 for the Russian industry. But for greater returns, VR Global Offshore Fund investors have to pay by blocking money: the fund has the highest penalty for early exit in the rating - 4.5%.

The second-place Copperstone Alpha Fund rose 22.06% in 12 months, less than the bronze medalist Diamond Age Atlas Fund (22.92%), but the fund pulled ahead thanks to a higher Sortino index (1 .27 versus 1.03).

In 2013, two new funds appeared - BCS Quant Fund and Eganov Asset Management & Derivatives Strategies S.P. At the same time, four funds got into a separate rating table - those that published data for less than a year, but more than for nine months. All of them remained in positive territory, while Burnem Asset Management managed to earn 17.63% with a good Sortino index (1.27).

The traditional 2/20 commission system in the industry remains almost unchanged. Only nine hedge funds are out of the general trend, taking 10-15% of investment profits. With management fees, the situation is slightly more diverse: from 2.25% for Sturgeon Central Asia Bal to 0.75% for Arbat Global FD - Fixed Income.

In the first quarter of 2014, most of the industry players went negative. Positive returns continue to generate six funds led by Copperstone (28.41%). Growth is also demonstrated by Arbat Global Funds (2.27%) - the worst in 2013.

Despite the fact that hedge funds are sensitive to macro news, the correlation with the RTS index remains high: during the year this indicator remained at the level of 90%. At the same time, the correlation with the results of the Western hedge fund industry is only 40%.

Methodology

In the study, a Russian hedge fund refers to a fund with a Russian manager or headquarters in Russia. The list includes companies that provided earnings data for nine or more months of 2013. Funds with a 12-month track record form the main rating; funds with results less than a year are listed in a separate table.

Two parameters determined the position of the funds in the ranking: profit based on the results of 2013 and the Sortino index, an indicator that takes into account the volatility of returns. Both criteria had equal weight in the calculation. The rating of each of the funds is the sum of the specified weighted averages.

Maxim Baitashev is a senior trader at Copperstone Capital.

Copperstone Alpha Fund

Tell us about the Copperstone Alpha Fund strategy. What is it?

The Fund's strategy consists of two parts: long-term and short-term. The first is a value-based approach to investing, which involves looking for companies that are fundamentally undervalued or with great growth potential in the future. A short-term strategy - speculative - is based on impulsive market movements, which can be caused by the news background or technical factors.

It has been a challenging year for emerging markets. What was your strategy for them? Did you have to correct it somehow?

The year was really difficult, but we did not expect another. Given the ongoing stimulus program in the US and good GDP growth, investors have switched to companies in developed markets. This caused a significant outflow of capital from developing countries, and also reduced the volatility of financial markets (the average value of the VIX volatility index was 14 points against an average of 26 in 2008-2012).

We initially made a long-term bet on specific Russian companies, and not on the market as a whole, which turned out to be a winning strategy. During the year, the RTS index fell, and our companies grew even more than the American indices.

Which sectors have made a profit?

Russian stock markets remained volatile throughout 2013, which made it possible to earn money by trading both index futures and individual securities at shorter time intervals. At the same time, we maintained long-term investments in the food retail and IT sectors.

In the first quarter of 2014, your fund was the leader in terms of profitability. What did you bet on?
The fund's performance for the first quarter is the result of our long-term and, as it turned out, successful research in the development of new sectors in foreign markets. In particular, some European companies worked, and Italian papers turned out to be the most successful investment. Among the sectors we are actively researching, some high-tech, pharmaceutical and biotech companies demonstrated good dynamics.

Short-term trading in the VIX volatility index and futures on the RTS index also contributed to the positive result.

Have you felt the growing fear of foreign investors in emerging markets?

We can see from the example of Russian companies that trading volumes did not critically decrease and in some cases even increased in a falling market. Russian stocks remain among the cheapest not only among emerging markets, but also among frontier markets.
Risks, such as, for example, a slowdown in the Chinese economy, remain. However, when the political situation in Ukraine stabilizes, foreign investors may reconsider their views on Russia.

What, in your opinion, is the advantage of Copperstone Alpha Fund over competitors within the framework of the chosen strategy?

We have wide opportunities for investment not only in the Russian market, but also in the American, European and Asian markets. In addition, we can always maintain the desired degree of involvement in the papers of individual companies / sectors. If we see a good opportunity, we direct free funds there. And, on the contrary, we keep a significant part of the fund in monetary instruments, if there are no such opportunities.

Slava Rabinovich is CEO and CIO of Diamond Age Capital Advisors.

Diamond Age Atlas Fund Ltd

Russian hedge funds in 2013 showed good results. How do you assess the industry and what are its prospects?

Against the backdrop of growing global markets, the Russian stock market sank by 5% in 2013. In this context, not losing money is already a success. Nevertheless, the investment field, having somewhat decreased, still remains interesting for making profit both with an increase and a decrease in prices for some shares.

In general, the prospects for Russian hedge funds are completely unobvious. While the assets under management of the global industry have exceeded $2 trillion, the number of funds in Russia and their AuMs are declining. Foreign investors are voting with their feet and fleeing Russian risk.

Tell us about your strategy. What assets do you invest in and what are the specifics of your management?

The Fund invests primarily in shares and bonds of Russia and the CIS countries, as well as other countries - in companies with a significant presence in these regions. Diamond Age Atlas Fund is more risky, without a high degree of diversification. Depending on the situation, the fund may not hold any positions in the portfolio - only cash.

What big mistakes have you managed to avoid and what do you consider your investment success?

We managed, despite the Cyprus crisis, to choose those instruments and positions on them that gave such a high yield. A lot of emphasis in the fund was placed on the telecommunications industry, although this is quite conservative in terms of selected issuers (all positions are very liquid).

Some of the mistakes didn't go away. Most of them concerned lost profits. There was one expensive gaffe that cost the fund a 5% return in 2013.

Are there, from your point of view, specific difficulties in working on the Russian market?

Yes, and huge. They are mainly related to three problems. First, many companies in Russia do not trade at fair value. Their assessment depends on the market participants' perceptions of the corporate governance of the company, political and economic instability.
Secondly, over the past 10-12 years, free float and trading volume have been steadily declining. This, of course, is very bad for the market, economy and prosperity of the country.

Thirdly, the structural inability of the financial sector in Russia to support the creation, development and normal functioning of hedge funds in the volume and sense that is possible in the US, UK or Switzerland. Without a normally functioning financial market and its participants, there is no "fabric" of the economy itself. And the return on the Russian stock market speaks for itself: since May 2008, the RTS index has lost more than 50%, which means a return of minus 50% in six years.

At the beginning of 2014, your fund went negative. How are you planning to end this year? What will you bet on in your strategy?

No one could have predicted the annexation of Crimea, sanctions against Russia, the collapse of the financial market, the cancellation of all IPOs, the abolition of the issuance of bonds, including government ones. This is a crisis of astronomical proportions against the backdrop of a good dynamics of the world economy and the profitability of global financial markets.

In connection with the events in Ukraine, we have added some tools. For example, they actively used put derivatives to hedge a significant part of the portfolio. However, the strategy of the fund is that each position is held for a long time, and we do not pay much attention to hourly, daily and even weekly price fluctuations. Unless they are caused by our investment mistakes.