The main operating principle of all hedge funds is to invest in absolutely all markets and all types of stocks. Other types of funds are limited by law and invest only in limited types of assets. The ability of hedge funds to invest in all types of assets allows them to select the most profitable assets, depending on the current market situation.

Because the hedge fund operates on side financial instruments, they can make money even if certain types of assets fall.

What is hedging?

This is exactly what allows you to earn money even when the quotes of a certain asset fall. Hedging uses instruments that have a negative market impact on another instrument. Thus, hedging reduces risk by providing a form of “insurance.” Risks are not reduced by 100%, but they are minimized.

How to make money with a hedge fund

The main operating principle of any hedge fund is the same: you need to buy undervalued securities and get rid of overvalued ones. Undervalued assets are securities that trade at a value lower than they would actually trade. Overvalued ones, on the contrary, are traded at a price higher than their real value.
This is not the only strategy for hedge funds. But it illustrates the basic principle of its operation. It is also worth mentioning that hedge funds do not only use their hard-earned money, but also take funds or assets on credit or from brokers.

What is a short and long position

A short position means that the hedge fund borrowed assets from the broker with the condition that they later sell them back to the broker. In the case of a long position, the securities are repurchased by the fund from the broker if they rise in price, without returning the securities to the broker.

In the first case, the fund takes 10 shares at a price of, for example, $1 per share. The fund sells these securities for $10 and waits for them to go down in price. When the securities cost $9, the fund will buy them and return them to the broker. Thus, the hedge fund will make a profit of $1.

In the second case, the fund buys 10 shares at a price of $1 per share. After the shares (or securities, it doesn’t matter) rise to $11, the hedge fund sells them and also makes a profit of $1 ($10 is given back to the broker).

Types of hedge funds

Classic hedge fund or relative value fund. These funds operate in national markets. The strategy is based on the difference in relative prices of interrelated assets.

Global funds. They work in an unlimited area. The trading strategy is based on studying the quotes of specific companies.

Macro funds. They operate in the market of only one state. Based on the macroeconomics of the asset they are interested in.

How to invest in a hedge fund

We will talk about foreign hedge funds, since hedge funds are not sufficiently developed in the former CIS countries.

To invest, for example, in a hedge fund operating in the United States, you need to open an account in a local bank and fund it with several million dollars. The smallest hedge funds will require a minimum contribution of one hundred thousand dollars.

In addition, only qualified investors can invest in hedge funds. Up to 25% of the profit is retained by the fund, and to exit it you can sell the share, but only within the hedge fund.

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Hedge fund - what is it in simple words? A private investment fund that:

1. Controlled professionals in the interests of investors.
2. Valid according to aggressive investment strategies.
3. Is not limited in choosing investment methods, actively uses derivative hedging instruments (derivatives) and their combinations.
4. Goal: focuses on minimizing risk at a level of profitability strictly set by investors or maximizing profit at a given level of risk.

Key principles:

1. The principle of protecting the interests of investors.
2. The principle of equity participation or trust management. The latter means that by investing in a hedge fund, you transfer your money to professional managers and become a beneficiary.
3. The principle of free and unlimited control. Based on minimal government regulation and control. Thus, in the USA, even the Securities and Exchange Commission does not interfere in the work of the organization. On the one hand, the principle guarantees the maximum degree of freedom. On the other hand, the investor must be able to independently protect his interests (for example, in the event of a trader’s fraud).

As a result, a hedge fund has the following features:

• greater flexibility and the ability to follow any investment strategy, including aggressive;
• a large selection of potentially profitable investment assets with limited availability for other investors: securities of foreign issuers, precious metals, exchange derivatives (futures, options);
• unlimited leverage;
• the ability to use the most modern financial technologies (fintech, blockchain);
• limited participation rights and strict requirements for investors - the funds are intended only for professional investors.

Important! In international practice, such an investor must have the status of “qualified, accredited” and have significant capital. For example, in the USA, the minimum investment size for individual private investors is $5 million, for corporate investors - $25 million. Offshore structures are simpler - the entry threshold is from $100 thousand.

A qualified individual investor in Russia must meet one of the following requirements:

• owns cash, cash equivalents, securities and derivatives in the amount of RUB 6 million or more;
• has three years of experience in an organization that made transactions on the securities market;
• over the last year, conducted transactions worth 6 million rubles, making at least 10 transactions quarterly;
• has a higher education in the field of activities in the securities market.

To finally determine the specifics of hedge funds, let’s look at their differences from classic mutual funds.

Criterion	Hedge fund
State control	Strict rules of the institution. Activities are poorly regulated	Strict control and regulation of activities
Entry threshold	From 100 thousand dollars	From 1 thousand rubles.
Investor requirements	Qualified/Accredited
Investment assets	Any securities Property assets Precious stones and metals Derivatives: forwards, futures, options	Nationally traded securities Property assets
Investment strategies	Long and short positions	Long positions
Fund remuneration / investor costs	Commissions on the value of the share (1–2%) plus a percentage of profit (20–25%)	Percentage of share value (2–5%)
Exit method	The shares are not traded on the market and can be transferred to a third party only with notification of the management company (usually within the fund).	The units are traded on the secondary market.

Important! The popularity of this method of investing abroad is due to the following fact: provided that a competent strategy is implemented, the hedge fund will bring profit to investors not only in a growing market, but also in a falling one.

Peace Funds

The first ever hedge fund - A.W. Jones & Co. Year of registration: 1949. Founder: Alfred Jones.

He made long-term investments in shares of promising companies while simultaneously opening short positions to sell securities that did not live up to expectations. Over 10 years, the value of investments increased 7 times, which significantly exceeded the profitability of any traditional mutual fund. The experience was considered successful, and in 1968, 140 organizations were already registered in the United States.

The global stock market boom occurred in the mid-80s, when a new type of strategic funds emerged that formed their portfolio based on the most accurate tools for forecasting economic and political trends.

Interesting fact: The most famous among the general public is George Soros's Quantum fund, which rose on the devaluation of the pound sterling after Black Wednesday in 1992 with a profit of $1 billion.

Today, more than 12 thousand hedge funds with assets of over $2 trillion have been founded in the world. Most of them are registered in the UK (London), the USA and offshore zones. Below is a list of the largest management companies.

A large portfolio is a relative guarantee of reliability and greater maneuverability. However, the size of assets and profitability, as a rule, are not interrelated. This is confirmed by the fact that the profitability ranking is often dominated by young structures with a small portfolio. A key feature of hedge funds is the fact that their returns are volatile. Thus, the leaders of 2015 according to this criterion have today lost their positions. The returns of the best funds on the planet in 2016 have been analyzed In this article.

Kinds

The IMF classification identifies three types of structures:

1. Relative Value Funds- operating in a specific market segment using classical hedging strategies, relying on the duality of prices of the underlying asset in the spot and futures markets.
2. Macro funds- prefer to invest in the assets of a specific country, based on the forecast of its political and economic development as a whole.
3. Global funds- play on the markets of all countries based on the investment attractiveness of securities of specific issuers.

Operating procedure

How do hedge funds work? A typical structure of its environment looks like this.

Investors- source of funds.

Board of Directors- a link between investors and managers. Supervises the activities of management companies and companies providing services, resolves controversial issues, and determines personnel policies.

Management company (MC)- attracts investors, determines investment strategies, and provides general management. The Criminal Code includes:

• managing partners;
• analysts - the quality of predictive models for the development of the economic and political situation depends on them;
• traders are the “core” of the fund; the profitability of investors depends on the level of these people.

Administrator- conducts an independent assessment of the value of net assets (risk minimization), in some cases prepares accounting and external reporting for investors, pays bills, deals with issues of profit distribution, subscription and redemption of shares.

Primary broker- provides operational support and technical support for transactions in national and foreign markets. Provides a range of financial services (clearing, depository, etc.). It must ensure the most complete coverage of the markets where the management company operates, so a large bank (Merrill Lynch, Goldman Sachs, Morgan Stanley) often acts as a primary broker.

Bank guarantor- ensures the integrity of deposits, generates reports on transactions on the account, and in some cases checks the activities of the management company. In most cases, a large bank with an unshakable reputation.

External auditor- checks the reporting for its reliability and compliance with accounting and legal standards. An auditor is a guarantor of reputation, which, given the volume of investments, is of paramount importance. Therefore, they try not to skimp on it and attract well-known companies from the TOP 10.

Legal advisor(internal or external) - ensures obtaining a license, manages all issues of concluding contracts in different jurisdictions.

The structure considered allows for numerous variations in the direction of simplification or complexity.

Strategies

Even a small hedge fund in the USA brings its investors 10–20% per annum (in foreign currency, of course). The profitability of top organizations exceeds 100%. How do hedge funds make money?

A variety of investment strategies, methods and methods of hedging can be conditionally combined into several groups.

Fair Value or long position- long-term investments in undervalued or discounted securities. Let's remember from articles "Promotions", What underrated A share is considered a security if its estimated fair value exceeds its market value. This is the main strategy of any long-term portfolio and venture investors. Reliably estimating fair value is not an easy task, which is why hedge funds require the services of professional appraisers.

Short position- a trader sells short positions, making money on a falling market.

Example 1. A trader borrows 1000 shares of company A from a broker. Price: $100. Broker's commission: $1 thousand. Debt: $101 thousand. The trader sells securities on the market. A month later, the spot price dropped by 25% to $75. The fund buys the shares, returns them to the broker, and makes a profit of $24,000.

Long/Short position- the most popular hedging strategy, usually applied to half of the assets. It involves the acquisition of undervalued assets (long position) and the sale of overvalued ones (short position). The strategy can be diversified, but most often the fund uses it in relation to firms competing in the same industry.

Example 2. A trader uses his own funds to buy 1,000 undervalued shares of automaker A at a price of $100. Broker's commission: $1,000. To hedge risks, under the same conditions, the trader opens a short position with the broker for 100 shares of automaker B. If the trader is not mistaken in the degree of undervaluation of the shares of manufacturer A, then:

• In a growing market, for example, shares of company A will increase by 30%, company B - by 20%. Profit on a long position: 130 – 100 – 1 = 29 thousand dollars. Loss on a short position: 100 – 120 - 1 = 21 thousand dollars. Total profit: 29 – 21 = 8 thousand dollars.
• In a falling market, for example, shares of company A will fall by 20%, company B - by 30%. Loss on a long position: 100 – 120 – 1 = 21 thousand dollars Profit on a short position: 130 – 100 – 1 = 29 thousand dollars Total profit: 29 – 21 = 8 thousand dollars

Thus, the strategy will allow you to make money both when the market rises and when it falls. A loss is possible only if the change in the price of company B’s shares exceeds company A’s absolute value, which signals the trader’s incorrect assumptions.

Market Neutral Arbitrage- the trader makes money on the difference in prices (spot and futures) of the underlying asset on different exchanges.

Event Driven- the trader promptly reacts to short-term unfair changes in the price of shares of a particular issuer caused by significant events (acquisition, merger, reorganization, etc.). The essence of the strategy: buy or sell securities in time before the price levels off. The strategy is most effective if managers have insider information or hold leadership positions in the investee.

Distressed Securities- acquisition at a large discount of the assets and liabilities of a company on the verge of restructuring or bankruptcy. The essence of the strategy: hope for the revival of the company as a result of internal changes and capital injections.

Global Macro- a hedging method that involves profiting from major macroeconomic and political changes in specific countries. Bonds, interest rates and currency pairs are used as the underlying asset (hedging currency risks).

Foundations in Russia

The Achilles heel of the Russian market is its youth. The existence of investment funds at the legislative level was enshrined in 2008 by the “Regulations on Investment Funds”. Russian hedge funds are recognized as a separate category of mutual funds.

Opening a hedge fund in our country is problematic due to complex registration rules - according to the website investfunds.ru, only 24 organizations are officially registered.

Russian structures are characterized by features inherent in a young, undeveloped market:

• increased degree of secrecy of large, well-known players;
• high proportion of fraudsters;
• lack of trust in managers;
• a pronounced shortage of investors.
• problems with covering operating costs and insufficient funding for research and market analysis;
• problems with qualified personnel, increased demand for good traders.

Among the Russian organizations the following can be distinguished:

• Management Company: Alfa Capital. "Private Investment Fund". Year of foundation: 2009. It is closed. Later, under the auspices of the same management company, the “Corporate Investment Fund” was created.
• UK: "Europe Finance". Dominum Russia Global Foundation. Year founded: 2009. DRG uses the popular Western managed futures strategy.
• Founder: FC Otkritie. Management Company "Meriden IFM". Open strategic fund "Otkririe Hedge Fund". Registered in 2007 in Andorra. Focused on working with Russian assets based on its own multi-strategies.
• Of particular interest are also organizations founded by PJSC Sberbank and VTB, as well as: VR Global Offshore Fund, Diamond Age Atlas Fund, Copperstone Alpha Fund, Burnem Asset Management.

In addition to “pure” hedge funds in Russia, one can distinguish their closest analogues in terms of their economic essence: trustees and general banking management funds (MFBU).

The bank acts as the management company of the OFBU, the license is issued by the Central Bank of the Russian Federation. The property of the OFBU is completely separate from the property of the bank. Such an organization of activities provides a number of advantages:

1. Possibility of effective use of banking infrastructure: depository, banking audit and financial control, branch network. This reduces the investor's commission costs.
2. Good reliability and transparency. A separate correspondent account for depositors in a bank of Russia and a separate foreign currency account in a bank designated by the Central Bank of the Russian Federation. In the event of a bank's default, its depositors have no claim to the fund's property.

Participation procedure: the investor invests funds in exchange for a certificate of equity participation, which is not a security, but gives the right to part of the property. Unlike securities (shares), the certificate is not traded on the market, but can be bequeathed or simply re-registered to a third party (based on an application to the bank).

Bank requirements:

• "life" period - at least 1 year;
• capital amount - from 100 million rubles;
• condition rating - “financially stable”;
• No more than 15% of the portfolio can be invested in the securities of one issuer (except for government securities).

Instead of a conclusion

Summing up the preliminary results, we will definitely focus on the disadvantages of hedge funds:

• limited entry options - major structures are closed;
• high entry threshold and strict requirements for investors;
• diversion of funds for a long period of time;
• limited exit options;
• limited capabilities for monitoring and controlling the activities of management companies;
• high probability of fraud;
• high risks - performance results are poorly predictable and volatile.

On the other hand, hedge funds are reliable (the large size of assets plays an important role) and are, in fact, the only reasonable way to invest in the pursuit of excess income. Analysis of profitability and recommendations for choosing a fund will be discussed in the article investing in hedge funds.

Useful video

The word “hedge”, which has become familiar, means minimization. Knowing this, a novice investor may think that investing in hedge funds is less risky than other types of investing. Let's figure out how safe the hedging strategy is and whether it can protect capital.

What is hedging and how is it used?

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Especially for readers, I developed the Lazy Investor Course, in which I showed step by step how to put your personal finances in order and effectively invest your savings in dozens of assets. I recommend that every reader complete at least the first week of training (it's free).

The concept of “Hedge” is translated from English as a hedge, obstacle or obstacle. Based on this, hedge funds are created to counteract investor losses. In one of the articles I already wrote about. It is actively used by banks that open positions to buy a rising currency against a falling one. As a result, they not only protect their balance sheet from losses, but also make a profit.

There are two main types of hedging:

• through purchase (long), for the purpose of insurance against future price increases;
• through sale (short), the goal is insurance against price reductions.

Hedging is a combination of long and short positions in a certain proportion through the purchase of undervalued and sale of overvalued assets. For example, purchasing stocks that are growing while simultaneously opening short positions in shares of companies that are predicted to go down. If the calculations are correct, this allows you to protect the profits made from buying growth stocks.

This is precisely the case when the manager does not care in which direction the market is moving. As a rule, it is not physical goods that are bought and sold, but derivatives market instruments or currency. The entire value of the transaction is not necessarily hedged. In case of any risks, the price of the supplied goods, the exchange rate or will not fall to zero. Therefore, partial contract hedging is often used.

Any transaction is not free, because assets are borrowed from the broker. However, even taking into account the intermediary's compensation, this can be beneficial. For example, securities that were sold short and fell in price are then bought back at a profit. By opening a long position, a hedger holds growing assets and sells them after they rise in price. Minus the commission to the broker, he makes a profit. Thus, the hedger makes money in both rising and falling markets. , provided by the broker, is used as a lever to increase profitability.

You can hedge using various tools:

1. Transactions in the opposite direction from an already open position. For example, simultaneous play on the markets of two countries with a difference in bet.
2. Converting the deposit into the currency in which growth is planned. Example: transferring assets from ruble to dollar can be an excellent way to hedge currency risks. This was profitable in 2014 or in the first quarter of 2018, on the eve of the introduction of sanctions. But in 2016–2017, this would have brought a loss multiplied by leverage.
3. hedging, when a contract to purchase a stock asset or currency is concluded with a deferred execution. In this way, the seller and buyer agree that the goods will be delivered in the future at today's price. Forward contracts and margin CFD contracts for price differences are also similar in mechanism.

The terms of the contract may vary:

1. Direct execution of a contract in the future at an agreed price.
2. Inclusion in the contract of insurance conditions, for example, on the division between the parties of both profits and possible losses;
3. Interest rate hedging, when the currency is exchanged at the current rate and placed in a bank account. This is used when you need money in a few months, and the exchange rate may move in a direction unfavorable for you.

How hedge funds work and why they are needed

The Wikipedia definition states that it is “an investment fund that aims to maximize return for a given risk or minimize risk for a given return.” To understand how this tool works, let's dig deeper.

Hedging operations were known long before the advent of specialized funds. The Chicago Exchange used commodity futures back in the 19th century. The history of hedge funds themselves began in the late 40s of the 20th century in the United States. The first fund was created by Alfred Jones. Although he was an amateur investor, he successfully shorted shares of companies in a downward trend. In the 60s, hedge funds already numbered in the dozens, winning recognition from investors. The peak of popularity of such strategies came in the 80s, when the amounts under management reached several trillion dollars. The world's largest concentration of hedge funds is in the City of London (more than a third).

A classic example of a hedge fund is Quantum, led by George Soros. The latter became famous for making a billion-dollar profit shorting the British pound in 1992. He is also known for investing in the Russian economy, where losses from the 1998 crisis amounted to an amount comparable to the winnings on the pound. To get a better idea of ​​what a hedge fund is, watch the movie “The Big Short,” based on the book by Michael Lewis.

The main elements of a hedge fund structure are:

• Asset manager – management company that determines strategy and operational support;
• Custodian (usually a guarantor bank for transactions);
• Independent auditor – establishes the value of assets and maintains accounting;
• LegalAdviser – provides legal support.
• Prime broker (usually an investment bank) - makes transactions on behalf of the fund, lends assets and.

One of the features of hedge funds is low regulatory requirements. Managers are relatively free in their choice of instruments. Professionals managing investors' assets use a wide range of strategies. These include leverage and complex derivatives. This explains why access for non-professional investors is very limited, and in most cases it is completely closed. As a rule, a depositor cannot invest less than a million dollars (in Europe from $100 thousand), and the number of participants should not be more than 100.

The result of hedging can be not only the containment of the risk of losses, but also the limitation of possible profits. After all, if you guessed the price movement, then opening a trade in the opposite direction will put you on the right course. Why are such operations carried out? The answer is obvious: funds deal with clients' money and use high leverage. Under these conditions, investors' funds need insurance, and the fund receives its profit in the form of a management fee.

Is the game worth the candle?

In 2008, Warren Buffett made a $1 million bet with Protégé Partners, which manages a portfolio of 5 hedge funds. Its founder J. Terrant and head T. Sides admitted defeat in 2018 and gave all the lost money to charity. grew by 80% over 10 years, and actively managed funds by 22%. True, it is worth noting that the market at this time was growing phenomenally after, and hedge funds performed better than the index in a falling market. If Buffett lives to see the next global crisis and makes another bet, he is likely to lose.

Among the funds there are stars in terms of profitability, but they are rather the exception:

Hedging itself does not aim to extract excess profits. The main task is to protect the price of a product or exchange rate from. The average net return of hedge funds over the past 20 years has been around 4-6% per annum. For comparison, they can give from 6 to 12%. Let's also remember the restrictions for private investors that exist in hedge funds. And the management fee for ETFs is significantly lower. Thus, index ETFs charge an average of 0.36% for management, and the Vanguard Equity Income fund charges 0.26%. Hedge funds typically charge around 2% plus 15-20% of asset gains.

Advantages of hedge funds:

• can earn not only on a growing, but also on a falling market;
• a wide range of investment instruments: stocks, bonds, currencies, futures, options, etc.;
• freedom of managers to choose a strategy, which potentially increases profitability;
• are able to smooth out the consequences of crises and, reducing drawdown compared to the index.

Flaws:

• relatively high trading risks, including those associated with the use of leverage;
• inaccessibility to unqualified investors;
• high entry threshold;
• at the stage of a growing market, on average they lose to indexes in terms of profitability;
• negative trail from resonant financial pyramids;
• you can only enter at the formation stage;
• It is permissible to sell your share only within the fund.

Given the role of hedge funds in the global crisis of 2008, today they have lost their former function. The story of the Madoff Foundation, which received a 150-year prison sentence in 2010 for organizing a financial pyramid, received particular resonance. The best results come from “single-manager funds” like Buffett and Soros, who are already in old age. However, at least 10,000 funds around the world still find their clients. Today the so-called time is running out. unregulated funds: the degree of transparency and control by regulators increases. Investments in a modern hedge fund are most often made through a bank account. Non-trading risks are reduced, since the account is owned and controlled by the investor.

The share of hedge funds in the global investment market is about 10%. The outflow of funds from them is about $100 billion a year, and their share is gradually decreasing. Within the funds, the share of funds from institutional investors (banks, etc.) back in 2007 exceeded the share of private individuals. This is a market of large players, and its consolidation continues.

There are two misconceptions among investors:

1. Hedge funds are designed to relieve their participants from risks. The truth is that even with such a wide range of speculative instruments, investment risks cannot be completely eliminated. Hedge funds don't really have that task. The goal is to optimize the risk-return ratio. In other words, it is not about protecting against risks, but about managing them.
2. At the other extreme, hedge funds carry excessive risk of capital loss. Many of their strategies actually use aggressive tools. However, this does not indicate the irresponsibility of managers who are aimed at receiving commissions regardless of the profits of their clients. Most funds are not focused on maximum profitability, but on protecting participants’ funds from market volatility and. In the end, the client can always choose a conservative fund or order a low-risk portfolio.

In the portfolio of a wealthy investor (from $1 million), hedge funds can be present with a share of up to a third of assets. This will be good in case of a global crisis. It is better to choose funds offered by large banks such as UBS or Barclay. The selection can be determined using specialized services, for example, europe-finance.ru, Barclay Hedge, Morning Star (the last 2 are in English) or from your broker. When choosing a fund, you should pay attention not only to profitability, but also to the length of its history, which guarantor bank is behind the transactions and the reputation of the manager.

Hedge funds in Russia

The legal opportunity to open hedge funds in Russia appeared only in 2008. The first such fund was the “Private Investment Fund 05.09” from Alfa Capital (discontinued in 2012). The second unsuccessful attempt by the same broker was the “Corporate Investment Fund 09.10” (closed in 2014).

The closest “relatives” of hedge funds in Russia are OFBU (General Funds of Banking Management). They consolidate assets (including foreign ones) in the form of cash, securities, and various derivatives under a trust management agreement. OFBU are established by banks that have received special accreditation in. The investor receives a certificate of rights to participate in the fund's property. Management fees depend on the amount and duration of investment and can range from 0.5 to 3%.

Additionally, the manager receives a percentage of the increase in the share. The minimum investment amount in different funds is from 10 to 100 thousand rubles. You can view the current list of banking management funds, for example,. Since 2013, registration of new OFBUs has been discontinued. Relative freedom in choosing a strategy and vague guarantees for private shareholders played a role in this.

If you're looking for an affordable collective investment option, it's best to consider an ETF alternative. The Russian version could be , which is a distant analogue of a hedge fund. Moreover, according to Russian legislation, OFBU is a type of mutual fund. Unlike contributions to OFBU, a share of a classic mutual fund has the status of a security. While among OFBUs there are only a few funds with positive returns, mutual funds show relative stability. But the main difference is that unqualified investors can invest in ETFs and mutual funds.

A qualified investor is one who owns property (securities) worth at least 6 million rubles. or has experience working in an investment company, or makes transactions at least once a month (on average 10 times a quarter) and has a specialized education.

In Russia, the choice of analogues of hedge funds is extremely limited, and the funds themselves are not very popular. Information on them is mostly closed; statistics are not published on monitoring services. Therefore, domestic investors focus mainly on foreign markets. If you are a qualified investor and have a significant amount of money, then to participate in a hedge fund you will be forced to open an account in a foreign bank, which will buy shares of the fund on your behalf. You can make the choice yourself or entrust this issue to the bank. A more attractive, affordable and widespread alternative is foreign ETFs.

Unfortunately, the choice of ETFs on the Russian market is limited. From the available probabilities you can use:

• purchase shares of a mutual fund that invests in ETFs;
• through a Russian broker (access to a foreign exchange - mainly through an offshore);
• through foreign investment products;
• directly through a foreign broker operating in Russia (Saxo Bank);
• on the Moscow Exchange, for example, through Finex Management Company.

More information about the structure of hedge funds and the procedure for investing in them can be found in the video from NES (Russian Economic School)

Profit to everyone!

What is a hedge fund: 5 characteristic features + 5 structural elements of this company + 3 main types of hedges + a simple and clear example.

Recently, so many different investment tools have appeared that it’s a piece of cake to get confused in them, especially if you are not a financier.

And yet, those who do not want to limit themselves to good old deposits or buy movable and immovable assets need to figure out what is a hedge fund.

A guarantor bank in which all investors' assets are stored.

It must be as reliable as possible, because we are talking about the largest amounts of money, shares, gold and foreign exchange reserves, etc.

Here is a simple diagram of the hedge fund structure:

If you use a diagram to depict the expanded structure of this investment company, it will look something like this:

History of the emergence and development of a hedge fund

The homeland of hedge funds, like many other financial organizations, is the United States.

American journalist A.W. Johnson was once working on an article on the topic of capital investment and the market.

The journalist loved his work, but received shamefully little money for it.

As a trading strategy, he chose a simple scheme: buying shares that were supposed to increase in price, and at the same time speculating in shares whose value was supposed to decrease.

The strategy turned out to be extremely successful and over the 15 years of A.U. Johnson was able to get an unprecedented profit at that time: 670%.

His share was 20% - this was enough for a comfortable life.

Following the example of the talented journalist, other financiers began to act.

By the end of the 1960s, there were already about 150 companies operating in the United States, which began to be called hedge funds.

Gradually, the fashion for highly profitable investment companies spread to other countries.

Hedge funds operate in Russia and Ukraine, but, alas, not as successfully as in the USA or Europe, because their activities are not regulated by law, and the risks of investors are extremely high, especially in times of crisis.

The main habitat of modern hedge funds is offshore zones:

And yet people with free capital of several million dollars can become investors in reliable hedge funds:

• Odey Asset Management;
• Citadel;
• Fortress Investment Group`s;
• Harbinger Capital Partners;
• VR Global Offshore Fund;
• Copperstone Alpha Fund and others.

Features and types of hedge fund

For more than half a century of their activity, hedge funds have managed to win enough fans and form their own distinctive features.

If you are going to invest money here, you should study the features of their activities.

It is also important to remember what types of hedge funds there are in order to choose the optimal investment company for investing your money.

Characteristics

It is not for nothing that Hedges stand apart from other financial organizations.

Their activities are difficult to regulate by current legislation and control.

These are special investment companies with their own characteristics.

Without knowing these features, it is difficult to fully understand what a hedge fund is.

Inaccessibility for small investors.

Only “professional” investors who have assets (excluding the value of property) worth $1 million or more can join a hedge fund.

An extraordinary selection of trading schemes.

High profitability and high risk for investors is explained by the fact that the manager chooses extraordinary trading schemes and investment objects, which ultimately bring great income to both investors and the manager.

If the scheme does not work, everyone loses.

Virtually unlimited area for investment.

If most investment organizations have a narrow area for investing money, then a team of professional fund managers can pour assets into whatever they see fit: real estate, the foreign exchange market, gold, land, etc.

Active use of financial leverage.

The management company willingly borrows money that they are going to invest in a particular object, which can bring profit.

Special commission structure for the manager.

Many funds pay the manager a fee only for transaction costs (usually 2-5% of profits).

But the manager receives payment not only for operating costs (usually 2%), but also his share of profitable operations (15–25%).

Main types

There are a huge number of different types of classifications in the specialized literature, but let specialists understand them.

If you are interested in the topic only for general development, then you just need to familiarize yourself with the three main types of these investment organizations.

3 main types of hedge funds:

Global.

Its investment activities cover many countries, but its trading strategy is based on the activities of specific companies.

Macroeconomic.

It operates in the market of a specific country, for example, China.

Investment objects and trading strategies are selected in connection with the macroeconomic situation in this country.

Relative cost.

This is the most common type of hedge.

It operates in the country where it is based.

The basis of the trading strategy is to use the difference in prices of goods of the same group, for example, shares or real estate.

How do hedge funds work and earn money?

There are such countless hedge funds operating all over the world that, even if you have a tidy sum, it would be a sin not to take advantage of the opportunity to invest it in some innovative project to get impressive profits.

After all, it is precisely in high profits associated with high risks that the peculiarity of hedging lies.

What is special about a hedge fund?

The activities of a hedge fund differ significantly from other financial institutions, primarily in that the management company is practically unlimited in the choice of trading strategies, investment objects and management methods.

Of course, there is legislation and state committees, but most often these financial structures do not experience pressure either from the state or from the market.

Moreover, they are often the ones who shape the market.

Given wide discretion, a prime broker can enter into such risky trades and inject such huge sums that, for example, the currency market curve can change its direction.

The richest people on the planet understand this well when they choose hedging for investing.

If we depict the features of the financial structure in the form of a diagram, we will get something like this:

A detailed explanation of what hedge funds and hedging are is given in the video:

Characteristics of the activities of a fictitious hedge fund

To better understand what we're talking about, let's look at a fictitious example.

Let’s say some famous financier Ivan Ivanov decided to found a fund called “Investment Company of the Future.”

Thanks to his impeccable reputation and the gift of persuasion, he managed to attract 10 reliable investors, each of whom invested $5 million.

Now Ivan Ivanov has a capital of 50 million dollars.

He enters into an agreement with each investor, according to which he is unlimited in instruments, can choose any trading strategies and objects for investment, and his remuneration during successful operations will be 20% of the income, if the amount of income is more than 10% of the initial amount.

Ivan Ivanov is looking for profitable investment properties.

Once it finds such an object, it signals the primary broker to execute the trade.

Let’s say that during the year the “Investment Company of the Future” managed to earn 50% of the profit, that is, 25 million dollars.

The first 10% of this amount ($2,500,000) belongs to investors.

The remaining 40% ($22,500,000) is divided as follows:

• 20% ($4,500,000) – the reward of Ivan Ivanov, who chose the right objects for investment and smart trading strategies that brought profit;
• 80% ($18,000,000) is the profit of investors, since there were 10 of them and they invested the same amount, then each of them will receive $1,800,000 profit + $250 thousand (the first 10% of the profit, which they cannot count on manager).

As you can see, understanding what is a hedge fund, you can earn decent money not only as an investor, but also as a manager.

Of course, for this you need to study a lot and have a decent amount to invest.

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The term "hedge funds" is often heard in the world of economics and finance. Let's look at how this type of fund differs from classic investment funds

1. What is a Hedge Fund in simple words

Hedge fund(from the English "hedge fund" - insurance fund) is an investment fund that is available only to professional investors and has greater profitability potential.

Unlike mutual funds, hedge funds have many more options for making money. They are virtually unregulated by anyone in terms of their investments. For example, they can purchase:

• Currency
• Goods

Funds can also take leverage and trade on a bearish basis, which is unacceptable in mutual funds. Thanks to this, they have much more opportunities for action and are potentially more profitable, but on the other hand, more risky. After all, trade can be conducted on all fronts, both up and down.

For using the services of a hedge fund there is a fixed commission of about 2-3% per annum (regardless of the result). Plus, for income above a certain threshold (for example, 10%), a commission of around 20% will be taken. This is similar to mutual funds, but with slight differences.

Investments in hedge funds are long-term in nature. You can sell your share only within the fund to another participant.

2. History of hedge funds

The hedge fund first appeared in 1949 in the United States. It was called A. W. Jones & Co. It was managed by Alfred Jones. His goal was simply to earn a living by making money on the stock market. He took 20% of all profits received.

Alfred Jones's first investors were his friends and relatives. The fund brought an average of 65% per annum over 10 years of operation, which could not but please investors.

After this incident, hedge funds began to spread sharply in the United States. At the time of 1968 there were already 140 of them.

At that time, regulators made strict restrictions on the minimum threshold of deposited funds. As a result, the average person simply did not have enough money to take part. For example, in the USA the cost of entry was from 500 thousand dollars. And this is at that moment! At the current moment, taking into account inflation, this amount would already be equal to 1 million dollars.

Russia also has a similar restriction. You must be a professional investor. And this will require an amount of over 6 million rubles.

Since the regulation of such funds is quite specific (for example, the minimum investment amount), many hedge funds are opened offshore, where the jurisdiction is much softer and allows them to accept investments from small investors.

In total, there are about 12 thousand hedge funds in the world as of 2018 with a total amount under management of 2 trillion. dollars. Moreover, more than half of them are located in two countries: the USA (31%) and the UK (27%). Actually, all movement and development began with them.

In Russia, the first fund appeared only in 2008. But a little earlier, in 2007, the Otkritie corporation opened the first fund in Andorra.

3. Classification and structure of hedge funds

According to the IMF classification, hedge funds distinguish the following types of structures:

1. Relative value funds (operate using classic hedging strategies)
2. Macro funds (operate in specific countries)
3. Global funds

Any hedge fund has the following structure:

1. Investors
2. Bank guarantor
3. Asset Manager
4. Administrator (Auditor)
5. Prime broker

Watch also the video “the truth about hedge funds”: