Hedge fund advisors
Before trying to find out how a hedge fund advisor or an advisory firm can help you greatly, be very clear about the concept of hedge funds. Many investors looking for much higher returns view hedge funds as a logical option. Mutual funds are generally Public Corporation owned & therefore subject to higher regulation as compared to privately owned investment funds known as hedge funds. All hedge funds promise investors higher returns compared to other investment avenues.
To understand the logic behind this claim of hedge funds, we need to understand the unique manner in which hedge fund managers are compensated. The compensation of hedge fund managers is in the form of a percent of returns they earn. This sounds a much better option to those investors who have invested in mutual funds & are paying the required fees of mutual funds regardless of its performance. Thus, there is huge incentive for hedge fund mangers to achieve above market returns, because returns have a direct bearing on their own compensation. However, there is a flip side of this compensation structure too. It makes the hedge fund managers highly risk tolerant, because they will get zero regardless of the amount of money they lose, but they won?t be paying anything from their pocket. That is why, keep in mind, those hedge funds, although promising high returns, are considered very risky for the investor, for if the fund performs badly, the investor will end up losing much more than zero.
How fund managers try to achieve above market returns?
To achieve high returns, hedge fund managers use highly sophisticated derivatives such as options, puts & future contracts. To explain in simplest of terms, what these products do is that they promise large amount of stock or commodities using relatively small amount of money, i.e. leverage. Then they try to deliver this stock or commodity at a particular point of time. Thus, you can see that fund managers try to time the market. And here, the risk comes in; timing the market is really not an easy thing to do. In fact, there are a whole lot of people out there who maintain that it is almost impossible to time the market correctly over a period of time.
General profile of hedge fund investors.
Hedge funds are suited for those who have a great deal of funds to invest &; therefore can weather even significant losses in their portfolio in their quest for really high returns. That means these funds are more suited for wealthy individuals & institutions. Pension funds may also try to take advantage of hedge funds to cover their requirement of capital for retiring people, but they need to realize that hedge fund means lot of less & very little regulation. These two attributes of hedge funds make them, in the opinion of this writer, an unsuitable option for pension funds looking to outperform the market to easily cover their obligations.
The important role of hedge fund advisors.
Our discussion so far makes it abundantly clear that although hedge funds may give you high returns, they involve high risk & an in-depth understanding of financial products being used by experts in the markets. Therefore, whether you are planning to invest in hedge funds for the first time or you are a seasoned campaigner, you need the expertise of an advisor. Key here is proper allocation of return strategies, & this requires expertise in a number of financial disciplines. You need a hedge fund advisor or an advisory firm providing comprehensive support throughout your hedge fund investment decision. An advisory firm providing complete range of services to hedge fund investors will take care of following:-
Fund manager: - As already mentioned, the nature of hedge funds is such that mainly institutional investors fuel their growth. This attracts the best talents from the asset management community. If today the large number of hedge funds provides great opportunities to everyone involved, it also highlights the challenge of selecting a manager suitable for a given portfolio. Hedge fund owners employ statistical methods to find out that according to the requirements of a given portfolio, which manager is likely to perform better than its peers.
Due diligence: - If you want to be successful in hedge fund investing, please understand that the importance of the process of due diligence cannot be overemphasized. And how will a capable hedge fund advisor approach this process Here is how. There will not only be extensive collection & reporting of relevant data, but the analysis & reporting will go well beyond just the quantitative aspects & will include a whole lot of qualitative assessments also, such as the exact strategy the fund hopes to employ to pursue its objectives, the philosophy of its management, their propensity to take risk or a general aversion for risk taking, as the case may be & its way of running its operations. All these aspects will be carefully studied & analyzed in the process of due diligence.
Successful hedge fund investment without a well-constructed, diversified portfolio! Sorry, not possible. And to construct such a diversified portfolio requires proper hedge fund allocation which in turn requires a thorough understanding of the investor?s willingness to take risk & individuals fund strategies. Thus, knowledge is power as far as portfolio construction is concerned. An analyst needs to be very perceptible to investor?s view of risk. Pensioners may have a totally different view of permissible risk than another institutional investor who is ready to weather a few losses but is adamant of getting a certain minimum rate of return. All these factors will have a bearing on portfolio construction.
The final role of a hedge fund advisor is in analyzing the performance of hedge funds & their portfolios. This performance analysis is done by advisors & analysts employing a host of sophisticated data query & reporting tools. This analysis is absolutely vital because this will tell you which hedge fund portfolio is complimentary with the rest of your portfolio. Another informative tool of performance analysis is factor analysis. Each portfolio is affected by a different set of market factors. A more traditional stock portfolio may have a somewhat different set of factors affecting it as compared to a hedge fund portfolio. Factor analysis tells you how a given portfolio performed in conditions most averse to it. This again is a great performance indicator.
Thus we find that hedge fund investment translates in to a high-risk-high-return scenario & therefore, the role of hedge fund advisors is not merely an add-on, its absolutely vital to success.
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