XIV. HEDGE FUNDS

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XIV. HEDGE FUNDS
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A. DEFINITIONS

• Hedge fund an investment vehicle, designed for
  wealthy individuals and for institutions, that is
  established to use aggressive strategies to
  obtain above market returns, such as leveraged
  purchases and/or sales, selling short, program
  trading, swaps, arbitrage, and derivatives

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A. DEFINITIONS

• Accredited Investor (from the SEC internet site
  http//www.smallbusinessnotes.com/financing/secexe
  mptions.html) - An "accredited investor"
  includes
• banks, insurance companies, business development
  companies, registered investment companies, or
  small business investment companies or
• an employee benefit plan, within the meaning of
  the Employee Retirement Income Security Act, if a
  bank, insurance company, or registered investment
  adviser makes the investment decisions, or if the
  plan has total assets in excess of 5 million
• a charitable organization, corporation or
  partnership with assets exceeding 5 million

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A. DEFINITIONS

• a director, executive officer, or general partner
  of the company selling the securities
• a business in which all the equity owners are
  accredited investors
• a natural person with a net worth of at least 1
  million
• a natural person with income exceeding 200,000
  in each of the two most recent years or joint
  income with a spouse exceeding 300,000 for those
  years and a reasonable expectation of the same
  income level in the current year or
• a trust with assets of at least 5 million, not
  formed to acquire the securities offered, and
  whose purchases are directed by a sophisticated
  person.

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A. DEFINITIONS

• Fund of Funds Hedge funds that collect pools of
  money from a number of investors to invest in a
  number of other hedge funds
• Feeder Fund A hedge fund that collects pools of
  money from a number of investors to invest in a
  specific hedge fund
• Private Partnership A group of investors
  pooling money to invest, includes a limited
  number of qualified individuals or pension and
  insurance funds

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A. DEFINITIONS

• Black Box An investment that is not fully
  understood by the investors an investment that
  has stated objectives, but which does not provide
  enough information to investors to allow full
  understanding of the black boxes investment
  strategy
• Due Diligence The duty of an investment advisor
  to learn the details of an investments
  operations and potential risks and rewards

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B. HEDGE FUND OPERATIONS

• Hedge funds were originally designed to protect
  against potential market losses through a number
  of approaches such as program trading, options,
  and short selling
• Hedge funds are restricted by law to no more than
  100 investors, this rule is fulfilled by
  requiring high initial investment amounts
• Hedge funds can operate without any disclosure
  does not have to comply with SEC rules detailing
  operations

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B. HEDGE FUND OPERATIONS

• Hedge funds have expanded in investment strategy
  as the pool of money seeking to invest in them
  has increased
• Hedge funds generally charge very high management
  fees 2.0 of assets plus 20 of all profits
  (ex. there is 100 million under management,
  which returns 10 in a year the fund manager
  receives a 2 million base fee plus 2 million as
  a performance fee, for an effective fee of 4.0
  on returns of 10). See

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B. HEDGE FUND OPERATIONS

• The investment management fees are compounded in
  a fund of funds each layer of management
  extracts their own investment management fees
• If a hedge fund acquires more than 5 of the
  equity of a single company, it is required to
  report this holding to the SEC, making the funds
  investment public
• Under Rule 13-F, hedge funds and investment
  managers with assets under management in excess
  of 100 million are required to report to the SEC
  every quarter their long holdings from the
  previous quarter however, they are not required
  to disclose their short or option positions

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B. HEDGE FUND OPERATIONS

• Withdrawing money from hedge funds can be
  difficult as private investments, there are no
  requirements for immediate release of funds for
  withdrawal, resulting in longer redemption times
  in unfavorable markets
• Plans under consideration by the Treasury
  Department would require some regulation of hedge
  funds

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C. HEDGE FUND EXAMPLES

• Long Term Capital Management Messy RIP in 1998
• Bear Sterns Funds Collapse
• HFR Asset Management
• Renaissance Technologies
• John Paulson
• There are Some Institutions that Track Hedge Fund
  Performance, and