Given the growing demands of investors and regulators, hedge fund managers seek to improve the integration of their platforms and their business process to enhance the efficiency of their business model.
What is a hedge fund?
Hedge funds, or alternative funds are funds that are subject to less regulation than investment funds, pension funds or insurance funds. They are free to choose their investment objectives, can use any type of financial instrument or technique (notably short selling), and can intervene either in stock markets or Markets. They also have the opportunity to go into debt.
Since the English verb “to hedge” means “security”, it is reasonable to assume that hedge funds reduce the risks inherent in their investments by hedge transactions. Many do, but this is not an obligation and the choice of whether to cover all or part of the risks, and depends on the investment strategy of the fund.
What are the strategies used by hedge funds?
There are a number of different strategies. Global macro funds, such as the Quantum Fund of the renowned George Soros, seek, for example, to take advantage of macroeconomic forecasts and, in principle, can intervene with any financial product on any financial market in the world.
Other funds seek to exploit price differences in specific markets or market segments. A fund that, for example, judges the Societe Generale share undervalued in relation to the BNP Paribas share, will buy Societe Generale shares and sell (short) BNP Paribas shares.
Who provides hedge funds in cash?
The hedge funds’ liquidity providers are institutional investors, such as banks, insurers, pension funds, even foundations, state funds, central banks or wealthy families. The entry ticket for an investor is often worth a million euros.
During the decade preceding the crisis, hedge funds benefited from the popularity of what was called alternative management, which included, in addition to private equity funds, venture capital funds, real estate and commodities. Before the crisis, alternative management frequently achieved above average returns.
Many hedge funds therefore borrowed additional cash at good prices, thus creating a leverage to improve their yield profile.
How is the richness of many managers of these funds explained?
The remuneration of hedge funds is freely negotiated between the fund managers and the liquidity provider. One frequently encounters a model called “2 plus 20”, meaning that the manager asks the investor for an annual commission of 2% of the amount invested plus 20% of the profits realized.
Often the distribution of profits is linked to the overshooting of a minimum yield, called watermark. US manager John Paulson has made several billion dollars in profits, anticipating the collapse of the subprime market in the United States, and betting accordingly. 40% of the funds, however, were not beneficiaries last year.
Top Hedge Funds in London
Europe remains a very promising investment market. At the end of 2015, assets under management in the European Union (EU) amounted to US $ 14200 billion, up 11% since the end of 2014 and almost twice the volume in 2008. European markets are likely to outperform the EU in the short term, in a context where EU companies continue to control spending and will see their exports sustained by the depreciation of the euro against the dollar. In addition, investors can expect to benefit from higher dividends and lower valuations.
From the fully regulated approach at European level (UCITS or FIA) to national private placement schemes (NPPR), there are many ways to market investment products. For example, the directive governing undertakings for collective investment in transferable securities (UCITS) offers management companies a “passport”, which enables them to sell open-end funds to retail investors throughout the EU. Although it is mainly used for traditional structures, it is also open to funds with long / short strategies or to eligible collective investment schemes complying with the UCITS directives in terms of diversification, leverage and risk management.
Alternative investment companies may prefer the Alternative Investment Fund (AIF) solution, which imposes a robust operational transparency principle for investors and regulators through the AIFM Directive. Companies are required to provide frequent and detailed reporting on investment practices, management remuneration and other critical aspects. Knowing that the application of the AIFM Directive may vary from one region to another, companies in several jurisdictions should be aware of the rules in force in each participating member country. In this context, alternative managers looking to develop in the EU may wish to be accompanied by a partner in their marketing and compliance efforts.
Some of the Top 10 Hedge Funds in London are:
- Caxton Associates
- Citadel Investment Group
- Millennium Capital Partners
- Och-Ziff Asset Management
- Aspect Capital
- Man Group
- Arrowgrass Capital Management
- Lansdowne Partners
- AQR Capital Management
- Two Sigma
Are hedge funds regulated?
It is important to distinguish between regulation, recording and surveillance. Fund managers are required to register in financial centers like London. In the United States there have been many peculiarities and exceptions to the obligation to register, which have since been hardened. Hedge funds are not regulated to the same degree as banks, because they manage the money of institutional investors and not small holders, where obligation to protect them is greater.
Hedge funds are monitored by national supervisory authorities, which, with the direct and indirect support of banks, ensure that hedge funds meet certain criteria, such as the existence of occupational risk management, transparency, minimum equity, and independent valuation of their portfolios.
To conclude, these rules have been tightened in Europe by the AIFM Directive. For this reason, hedge funds increasingly delegate control tasks to directors. HSBC and State Street are among the largest trustees of hedge funds.