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The first hedge fund appeared more than 60 years ago, but for obvious reasons they came to the post-Soviet space much later. Therefore, domestic private investors are poorly familiar with the specifics of their work. What kind of funds are these and how do they make money?

Story

Alfred W. Jones is believed to be the inventor of hedge funds. It was his company that opened the fund in 1949, which was first called a hedge fund. But there is another point of view. Warren Buffett thinks differently: despite the fact that a completely different name was used, this work scheme was first used by his teacher Benjamin Graham. And he did this back in the twenties of the last century. He was prevented from gaining fame as a pioneer only by the general market distrust of mutual funds and the Great Depression. Buffett argued this so fiercely that one of the journalists even wrote a rather caustic article in which he tried to prove that Aristotle was the first to use hedging. All this is really not that important. Regardless of who came up with them, hedge funds now occupy a very important place in the investment business.

Their heyday began in the 80s of the last century. It was then that the name hedge fund was heard not only by professionals, but also by ordinary people. And this despite the fact that in the United States the opportunity to invest in it is limited: only qualified institutional investors who manage assets of more than one hundred million dollars can do this. Their popularity is due to several factors. First of all, due to the fact that, with a well-chosen strategy, they can make a profit not only when the market is growing, but also when it is falling.

Did a lot to popularize George Soros, or rather the activities of his foundation Quantum and the profits he earned. Now everyone knows that he earned a billion dollars by betting on the devaluation of the pound.

In Russia

For a long time, legislation did not allow the opening of hedge funds. But even before their opening was allowed, the first offer appeared on the market. In 2007, the Otkritie corporation formed a hedge fund in Andorra, where it offered to invest money to Russians. They were officially allowed in 2008, and the first funds appeared only in 2009. There are currently 27 hedge funds operating. A little.

What is a hedge fund

What is a hedge fund? How to invest in a hedge fund?

The first thing to understand is that hedge funds are not complicated. They are based on a fairly simple and logical principle: they operate in all markets and invest in all securities and their derivatives. If an ordinary fund is legally quite limited, then a hedge, by the nature of its activity, forms its assets from the entire range of available financial and exchange instruments. This gives a huge advantage, as it allows you not to depend on the market, but to go where there are prospects for high income. In a classic fund, if the market falls, then the shares in which you invested money depreciate - there is nothing you can do about it. You have only one thing left to do, sell depreciating assets in order to fix losses at some manageable level. A hedge fund, using various derivative financial instruments, can make money even on falling quotes. Now most These funds keep their assets in derivatives.

“But what about hedging? - a question arises for many beginners. Hedging is a risk management system. Its simplest definition is: this is the use (purchase) of one instrument, which is interconnected with the negative impact of the market on another instrument. A simple example from everyday life. You take out a loan from a bank in dollars, but your income is exclusively in rubles. When the time will come The loan repayment rate may change significantly. If the ruble strengthens, you will suddenly receive additional income, since you will have to pay off less debt. However, if it is devalued, you incur losses. To the common man you have to come to terms with these risks. Investment funds, hedge funds, corporations use hedging. If you could go to an exchange, you would buy a futures contract that would sell you a currency at a certain price. At the same time, you need to understand that hedging does not completely eliminate risks; it is a kind of insurance with which you minimize your losses.

How does a hedge fund make money?

What is the secret to hedge fund success?

The ability of hedge funds to generate income in any market situation directly affects their profitability.

The already mentioned Quantum earned an average of $900 million per year. Of course, there are failures in this industry, too, but in general the indicators are higher than in other areas. For example, in the pre-crisis time of the early 2000s, they earned 10-15% per year in the USA, and some managed to give a return of 500% and even 1000% in 10 years. How do they achieve this?

The principles they apply have been known for a long time:

Buy undervalued securities and sell overvalued ones.

Undervalued paper- this is a situation when they are cheaper on the market than they could be based on their existing potential. Therefore, we can assume that they will soon grow. Respectively overvalued securities, are quoted on the market above their real value.

This is one of the simplest examples of the strategies used, in reality they great amount but she demonstrates it perfectly common system. It should be borne in mind that they rarely work exclusively with their own funds, actively use loans and borrow securities from brokers.

Surely, you have heard such terms as short and long position. Short position means that the fund borrowed the securities for a certain period of time, subject to their further sale. For example, taking a thousand shares at a price of $1,000 per share, he sells them for 100,000. After some time, the price of the shares drops to, say, $900 per share. The hedge fund buys them and returns them to the broker. As a result, the fund earns ten thousand, of which it pays the broker a certain amount. Long position means that the fund, expecting the shares to rise in price, buys them back from the broker (or borrows them again). After that, he waits until they rise in price to $1,100. Then he sells them, making a profit of $100 each.

The emergence of the fund initiates Management Company. She begins to attract investors, negotiates with banks and brokers, unless of course they create a fund themselves, which happens quite often. It is the specialists of the management company who directly carry out all operations for the purchase and sale of securities.

The fund begins to work when it manages to attract interest investors. They bring their capital, transfer it to the management of the fund and receive most of the profits.

Plays a very important role guarantor bank. It is where all investors' capital (money, gold, securities) is stored. Sometimes he, and not the primary broker, is involved in concluding all transactions. Therefore, the requirements for the bank are quite serious: it must be large and have a high reputation.

Administrator (auditor) performs the function of overseeing the activities of the hedge fund. He evaluates the value of his assets independently of the management company. This is aimed at reducing all kinds of risks. In addition, he maintains accounting and prepares reports, including those sent to investors. Sometimes he subscribes to the fund's shares and deals with their redemption.

Functions performed prime broker, very diverse. In fact, if the management company gives an order for an operation, then the entire technical part of the operation remains on it, from direct transactions on the stock exchange to depository activities and lending. Taking into account the fact that a hedge fund can operate in a wide variety of venues and countries, the primary broker must have the ability to carry out transactions wherever it may be needed. Therefore, they are large international banks, for example, Merrill Lynch, Goldman Sachs or Morgan Stanley. In Russia its functions are quite for a long time is trying to take over VTB, but so far not very successfully.

Types of Hedge Funds

There are a huge number of classification options, but most focus on the one proposed by the IMF. There are three main types of hedge funds:

Global funds – these are funds that carry out their operations in the markets of all countries. However, they base their investment strategy on the basis of studying the behavior of quotes of individual companies.

Macro funds work in the market of a specific country, for example, exclusively in Russian or Chinese. They make decisions about opening a particular position based on the macroeconomic situation in it.

Funds relative value - These are classic hedge funds that operate on national markets and use a standard operating scheme. It relies on the existence of differences in relative prices of assets that are interrelated. It is these funds that use the same principles that were used by the first funds that we talked about above.

How are hedge funds different from mutual funds?

IN general outline, we have already said how hedge funds differ from mutual funds. For clarity, all the differences can be summarized in a table:

Comparison options	Hedge fund	mutual fund
What it invests in:	All securities, their derivatives, property assets, currencies, precious metals and options.	Exclusively securities and property assets.
How much is the minimum deposit:	From one hundred thousand $, but large funds will require investments from several million $.	In Russia from 1000 rubles.
Investment strategies:	Open both long and short positions.	Open only long positions
State control:	Practically not regulated.	Strict regulation.
Who can become an investor:	So-called “accredited” or qualified investors.	Anyone who wants.
How income is distributed:	Retains part of the profit received (20-25%)	Withholds the agreed amount from the value of the share (2-5%).
How to exit the fund:	Units can only be sold within the fund.	The sale of shares on the secondary market is permitted.

As you can see, by their distinctive features, hedge funds are more free. The main limitation for them is the amount of deposit with which an investor can enter them.

Features of the work of Russian hedge funds

A feature of Russian legislation is that according to it it is separate category mutual funds. However, as elsewhere in the world, they can invest in almost all instruments on the market. To create such a fund, a license from a professional management company is sufficient. There is also a strict requirement for investors; they must be qualified investors who own securities worth at least three million rubles. They must also have experience in the market and make at least ten transactions worth 300 thousand or more within a year, or five transactions worth 5 million or more within three years.

The opportunity to organize hedge funds in Russia appeared with the release of the corresponding regulation only in 2008, quite late, which no doubt hindered their development.

How to invest your day in a hedge fund?

Does it make sense to invest in foreign hedge funds or stick to Russian ones?

As you can see, becoming a participant in a Russian hedge fund is quite difficult. But the problem is not only the existence of qualification barriers; in the USA, where the requirements are no less stringent, this does not prevent it from attracting thousands of investors. The problem is largely that investors do not have full confidence in domestic managers. And this despite the fact that national leaders are represented on the market: Sberbank Management, VTB Capital and Alfa Capital. Most likely, it is due to a lack of experience in this market.

For those who want to try investing in a foreign hedge fund, they must first accumulate a fairly large amount there. Usually we are talking about a million dollars or more. Many American and European large banks have their own funds with which they cooperate. You can use their services, or you can look for an alternative offer.

Some advise using the services of Russian intermediaries who will buy a share for you in some foreign fund, but we do not recommend you go down this path. This made sense while the operation of hedge funds was prohibited in Russia; now the need to open a fund in Europe in order to manage it from here has largely disappeared. But you'll also run into some nasty risks. Firstly, such a scheme weakly protects your rights. Secondly, it will be quite difficult for you to monitor this fund.

Over the past two decades, hedge funds have been one of the fastest growing financial vehicles. However, for those private investors who do not have the opportunity to invest in them, the nature of these funds remains a mystery.

Learn what hedge funds are, how they work, why taxing these funds results in higher taxes for you, and how hedge funds affect the stock market.

What are hedge funds, when and how did they arise?

Hedge fund– these are investment organizations with equity participation, created to most effectively preserve and increase the capital of their clients by investing in any profitable, in the opinion of the fund managers, instruments.

Today, in most countries, the legislation in relation to them is quite flexible and practically does not limit such investment organizations either in the choice of assets for investment or in methods of capital management, which allows you to make good money not only in bullish, but also in bearish markets.

The first organization of this type is considered to be “ A. W. Jones & Co" - Alfred Jones Foundation, created in 1949. Alfred managed his own money and the money of his friends, and as a reward he took 20% from the income received. The initial goal was just to earn enough profit to live comfortably freely and do what you love without spending most of your time on work you don’t like.

However, by the mid-60s, the success of this investment model had a huge impact on the market and became obvious to everyone, and by the early 70s, there were already about one and a half hundred similar funds in America alone.

Indeed, in just the first 10 years of operation, A. W. Jones & Co increased the funds of its investors by 670% , and over the next 5 – by another 325% .

Alfred's strategy was simple: he purchased those securities that he considered promising and undervalued, in anticipation of an increase in their prices, and at the same time sold those shares that, in his opinion, would fall in price. Thus, Jones managed diversify risks and achieve good profits, which, of course, found a lot of imitators.

However, at that time in the United States and most other countries, there were serious legal restrictions that allowed only large institutional investors owning 100 million dollars or more. This led to hedge funds moving to offshore jurisdictions, where financial regulation was much less stringent.

For comparison, even now US hedge funds are legally allowed to accept investments of at least 5 million dollars, while in offshore companies the entry threshold is usually only $ 100 thousand. (some hedge funds in Russia and other developing countries accept investments from as little as $10 thousand).

In the 1980s and 90s, these structures became widespread and well known among the public and non-professional financial markets, and it was also at this time that their further development and differentiation.Funds have appeared that study not only the prospects of any individual company regarding the profitability of buying or selling its securities, but also analyze the global economic and political situation generally.

Watch an educational video about what it is hedge funds:

Classification, structure and management

Classification can be carried out according to many indicators, such as:

working method(relative value, macro or global hedge funds);
type of investment strategy (market-neutral when a fund operates in one economic sector, making money on the inefficiency of market prices, regardless of the direction of their movement in this moment; promotion/demotion– one of the most popular strategies that does not need a detailed description; " emerging-market» the strategy involves investing in the markets of developing countries, etc.);
entry threshold and the amount of remuneration for capital management;
minimum investment period funds (short-term allowing investments for less than 3 months, medium-term - from 3 months to 3 years and long-term with investments for more than 3 years).

The structure of hedge funds is a partnership with equity investment ( often closed), where the company " main partner» manages common funds. Conditions and obligations are usually individual for each fund and clearly stated in the contract, however, there are practically unchanged conditions and standards characteristic of most such organizations, for example, the amount of remuneration for asset management in 2% And 20% from any income received, but there are other rates, such as Centaurus Energy (3% and 30%).

Whatever the structure and type, the principle of operation of a hedge fund is almost always the same and comes down to a simple formula: analysis of the situation in the industry in which the fund specializes, selection and purchase of undervalued assets and sale of overvalued ones, both actions can be performed simultaneously.

The largest hedge funds in the world and in Russia

According to experts, at the beginning of 2011 there were more than 12 thousand organizations falling under the definition of “ hedge fund» in total, managers are almost 2 trillion dollars However, as in every business, there are also leaders here.

There could be no talk of any hedge funds in Russia before 1991, even theoretically, due to the existence of the USSR. However, even after the collapse of the Soviet Union until 2008, official legislation also did not facilitate the creation of hedge funds in Russia; nevertheless, Russian investment companies registered them in offshore jurisdictions ( for example, Otkritie Bank created a hedge fund under the jurisdiction of Andorra in 2007). Today, there are already several dozen similar partnerships operating in Russia ( Aton-Light, VTB Capital, Equinox Russian Opp Fund and etc.).

However, despite significant progress, even the largest Russian investment funds of this type look like dwarfs compared to the world's largest.

The largest hedge funds in the world primarily refer to the UK and the US, which account for 31% And 24% all organizations of this type. The ranking of English hedges is headed by:

AHL And GLG from Man Group plc., under whose control is 52.9 billion. dollars,
Standard Life Investments (37.6 billion.),
Winton Capital Management Ltd. (35 billion.),
Marshall Wace (26 billion.),
Lansdowne Partners (15-16 billion.),
The Children's Investment Fund Mgmt about 7.5 billion
and etc.

US hedge funds are represented by such giants as:

Bridgewater Associates(150 billion)
AQR Capital Management(84.1 billion)
Och-Ziff Capital Management(42.4 billion)
Renaissance Technologies(34.7 billion)
Millennium Management(33.3 billion)
Baupost Group and Viking Global Investors with a little more than 29 billion.
Elliott Management(28.8 billion)
« Alternative Investors» from BlackRock from 28.6 billion
Two Sigma Investments(27.6 billion)
and others.

How much profit do hedge funds make?

To fully understand what a hedge fund is, it is not enough to know just one encyclopedic definition; you also need to understand how this organization works, how much profit it makes and from what. The profitability of these financial organizations is also very different and largely depends on what assets a particular fund invests in, the state of the economy as a whole for the specified period, the skill of the manager, etc.

To make it clearer, let's first take a look at the report Hedge Fund Performance Report for the first quarter of 2017, as well as for the year. So, in the first case we see a profitability equal to 2,63% (I quarter of 2017), and in the second a little less 8,5% (behind Last year), while the previous figure for 12 months was even less - 5,61% . Why is it so little, do the hedge funds of the world really earn such a pittance?

Everything is explained very simply, the fact is that the presented report shows the total average profit of all funds in total, but not each one individually. If we look specifically, the organizations that invested in the purchase of Indian andChinese securities were able to earn in the first quarter of 2017 15% And 9% accordingly, while funds specializing in investments in commodity markets reported symbolic losses in -0,75% .

These are the numbers that make up “ average value” does not allow you to actually see how much hedge funds earn in reality, so it is much better to study the indicators of each specific partnership and preferably from among the most successful ones, such as, for example, Quantum, bringing on average 900 million – 1 billion dollars profit per year ( Since 2011, Quantum has managed only the personal funds of Soros and his family.).

You should not confuse profitability and total asset size, since it is often small funds with a few tens of millions of dollars that show the best performance, and not large multi-billion dollar organizations.

Research by some economists even shows that as the number of partners increases, the fund's efficiency and effectiveness decreases. For example, according to Bloomberg highest profitability in 305,29% for 2016 showed quite modest Market Tactical Fund under the control of which is only 13.86 million.

Hedge Fund Incentive Fees

If a hedge fund has $100 million at the beginning of the year and $125 million at the end, then the manager has the right to receive a portion of the profits. Thus, with an incentive fee of 20%, he gets the difference between 100 million and 125 million, multiplied by 20%, namely 5 million dollars(100 million is subtracted from 125 million and multiplied by 0.20). Why should a private investor worry about these rewards?

To be able to earn these gigantic sums, fund managers risk a lot ( often with borrowed capital) in the hope that their efforts will be worthwhile. Taking these high risks, hedge funds drive the value of stocks, debt, commodities, and other collateral to extremes (both high and low).

It is very common these days for the activities of some (but not all) hedge funds to " winding up"prices are called" soap bubbles " This “build-up” can impact the retail investor as he is drawn into trading. When a fund uses a retreat strategy, it often comes at a cost to the same private investor.

Some unscrupulous managers exorbitantly inflate incentive fees, and then, if the year ends with a negative balance, they close the fund and create a new one with fresh investments.

On this topic, you can watch a video about how a hedge fund operates and its rewards:

Taxation of American hedge funds

One might follow some members of the US Congress in saying that the burden of paying profits to hedge fund managers and their investors falls on all private taxpayers.

Why? Everything is very simple.

The Ministry of Finance is forced to compensate for losses due to the fact that it does not fully receive taxes on income large funds, which are formed unclear Of what. Incentive fees paid to hedge fund managers may be subject to capital gains tax (this really depends on the "nature" of the gain realized by the restricted investors) rather than ordinary income taxes. The difference between income tax and capital gains tax is quite large.

What would happen if incentive awards/performance fees were subject to ordinary income taxes? This would result in lower taxes for investors in other funds.

The opposing side's argument is that these amounts are insignificant and the nature of the profit is determined once and remains unchanged. Private investors cannot directly deduct investment expenses from investment profits, and this does not depend on the nature of the profits.

Private investors must enter this information on the Tax Form A and may be subject to restrictions. However, fund managers can deduct certain expenses as ordinary losses. The arguments in this case may be different, but in the end the interests of private investors are not taken into account.

US Hedge Fund Interest Rates

Interest rates and solvency go hand in hand, and they are at the center of the hedge fund business model. These funds strive for high solvency at the lowest possible interest rates. Retail investors need to be careful. Here's what you need to know.

When an individual makes an investment using margin, he or she is subject to the Regulation T Federal Reserve System.

According to it, the leverage for private investors is 2:1. Hedge funds can expect a much higher figure. How? By structuring offshore loans or entering into complex contracts such as swaps, hedge funds can negotiate changes in leverage to values significantly different from 2:1. And in the case of the fund Long-Term Capital Management this indicator has reached unlimited values.

And again let us turn to the question of why a private investor should pay attention to these aspects of activity?

When investors make a 2:1 margin call, they reduce the leverage for hedge funds, the funds receive redemptions from restricted investors, then they go into liquidation mode. In this case, hedge funds panic and sell stocks and other assets at unreasonably low prices.

While this certainly does not account for all weaknesses in credit and equity markets, such liquidations certainly exacerbate market downturns. They increase instability and can create panic. A private investor with a long-term focus may suffer collateral damage as a result of fund liquidation or deleveraging.

How hedge funds achieve better margins

Any investor looking to borrow money from a broker-dealer will first ask about the margin. The private investor will pay the broker's current rate.

Right now the company Morgan Stanley(MS) has set the margin lending rate at 7,25% . On the other hand, hedge funds can negotiate rates. Typically, these rates are 25-50 basis points higher than the LIBOR. Currently the monthly LIBOR rate is 2,85% , and the margin size is approximately 3,10-3,35% .

While hedge fund managers can be unscrupulous, most are very honest. The purpose of the above was to show how hedge fund transactions can affect a private investor. With this information and increased vigilance, the next time there is any hedge fund activity, you will immediately understand how it could affect you, especially in short periods of time.

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Greetings! Today we will talk about another way of investing - hedge funds (not to be confused with hedging). True, for Russia this is still more of a sophisticated curse than an investment option. But who knows what will happen in five to ten years?

What is a hedge fund? This is a special type of private investment fund. English word "hedge" can be translated as “protection, insurance or guarantee”. But this is a trap for dummies! Investing in a hedge fund is considered one of the riskiest investments.

In essence, this is a good old association of investors committed to collective investments. The main difference between a hedge and a regular one is wider opportunities. Hedge funds work in stocks, bonds, futures, options and currencies. Moreover, managers of such a fund can make a profit in both a growing and a falling market!

Hedge funds in Russia

In Russia, a hedge fund is one of the formats. To gain access to the entire “range” of instruments, managers register them offshore (for example, in the Cayman Islands).

The first Russian hedge fund was created relatively recently - in 2009. Founded the “Private Investment Fund 05.09” of the Alfa Capital Management Company in the form of a closed mutual fund.

Another “pioneer” appeared in Russia in the same year with the support of Europe Finance. The DRG fund operates using the Managed Futures strategy, which is very popular in the West.

A kind of analogue of a classic hedge fund in Russia can be considered OFBU (general funds of bank management). Unlike mutual funds, these types of funds can use an aggressive investment strategy and invest money in.

But in Russia the hedge fund industry is still in its infancy, and therefore is not very popular. Our managers lack basic experience, and Russian legislation has not yet definitively established the rules of the game. It is still too early to judge the effectiveness of Russian funds - there is too little statistical data for serious analysis.

For comparison, the first hedge fund in the United States was created in 1949 by Alfred Winslow Jones. It was he who first guessed to combine long positions (playing for a rise) with short ones (playing for a fall).

The main differences between a hedge fund and a mutual fund:

The minimum entry amount into a hedge fund starts from several hundred thousand dollars (from a thousand rubles in a mutual fund)
Through a hedge fund, an investor can invest in dozens of instruments (in a mutual fund, his choice is limited to securities, gold and real estate)
The hedge fund works with both long and short positions (only long positions in the mutual fund)
The activities of a hedge fund are practically not regulated by the state (the mutual fund is under strict government control)
Only qualified (accredited) investors can invest in a hedge fund (anyone can become a participant in a mutual fund)
The hedge share is sold only within the fund (mutual fund shares are allowed to be sold on the secondary market)

What does a hedge fund consist of?

In any hedge fund, firstly, there are investors. Without which, naturally, there would be no fund at all. It is the investors’ money that is invested in various instruments, providing profit to both the participants and the hedge itself.

Secondly, the structure of any hedge fund includes a guarantor bank (or custodian). It is in this bank that investors’ assets will be stored: money, precious metals and securities.
Third, the development of a hedge investment strategy is undertaken by the asset manager. Specialists of the management company are responsible for the operating activities of the fund: purchase and sale of shares, bonds, futures, options and other financial instruments.

Fourthly, in a hedge fund there is still such a “position” as an auditor (or administrator). It is needed for an independent assessment of the value of assets in order to reduce the risk of mistakes on the part of the manager from point No. 3. In Russia, the administrator often also plays the role of an accountant: he maintains accounting records, sends out reports to investors, pays bills, and subscribes to fund shares.

And finally, any large hedge fund has a prime broker (an investment bank can also play this role). The primary broker's task is to help the fund quickly solve a variety of problems.

How much can you earn with hedge funds?

I will give you several relatively recent examples published in Forbes.

In 2013, the family hedge fund Soros Fund Management of “retired” George Soros brought him a return of 22%. That year, the founder of the fund earned about $4 billion on investments. Moreover, most of the profit was brought to him by playing to reduce the Japanese yen.

David Tapper, a former Goldman Sachs trader, made $3.5 billion that year (a 42% return on investments through his Appaloosa Management fund). By the way, over the past five years, David Tapper's fund has shown a net average annual profit of 40%.

How to buy shares of a foreign hedge fund?

First, accumulate several hundred thousand dollars (the minimum amount of investment in Western hedges).

And secondly, purchase units or shares of the hedge through (you will have to open an account there) or through a Russian intermediary agent with access to large hedge funds abroad.

According to Bloomberg, at the end of October this year, hedge funds began betting on the strengthening of the ruble for the first time since July 2015. Let's hope they're not wrong.

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It’s difficult to surprise the average Russian investor, but only a few are familiar with how hedge funds work.

To fill this gap, we will take a closer look at what hedge funds are, how they work, and how this financial instrument can be used to make a profit.

What is a hedge fund?

Hedge funds can be called one of the most popular financial instruments among American and European investors. According to statistics, the total number of hedge funds in the world today exceeds 10 thousand, of which about a third are European funds, the bulk are registered in the United States and offshore zones.

The name of these funds comes from from English “hedge”, which translates as barrier, protection, insurance or guarantee. That is why many domestic people mistakenly believe that this form of investment is less risky than, for example, investing in mutual funds or gambling. However, hedge funds, on the contrary, can be considered one of the riskiest modern forms of investment.

In general, the essence of hedge funds is that they are a kind of association of investors who make collective investments - an analogue of the investment funds we are used to, which are created with the aim of increasing investors’ funds. However, they wider investment opportunities, hedge funds can work with both and and currencies, and . In addition, through the use of special investment strategies, such a fund is able to make a profit not only in a growing, but also in a falling market. We'll talk more about strategy a little later.

The possibility of organizing hedge funds appeared only in 2008

In Russia, the possibility of organizing hedge funds appeared only in 2008, when the regulation on the composition and structure of investment funds came into force. Before legal basis there was simply no room for their creation in our country.

Here I would like to note that, according to Russian legislation, a hedge fund is one that works on the principle of collective investment.

The objects of investment are not only securities and derivative financial instruments, but also raw materials, artistic values, real estate and other assets.

Hedge funds, as well as other investment funds in Russia, should be managed only by professional management companies that have the appropriate license from the Federal Financial Markets Service.

The law establishes that an investor who owns securities is considered qualified in the amount of more than 3 million rubles

Only . can participate in Russian hedge funds. The law establishes that an investor is recognized as qualified if he owns securities worth more than 3 million rubles, or has experience working in companies trading securities, or during the last 4 quarters has made at least 10 quarterly transactions worth more than 300 thousand rubles, or made at least 5 transactions in the amount of 3 million rubles over three years.

In the West, a hedge fund is always a private investment partnership, most often created in the form of an LLC. Based on this, the American Securities and Exchange Commission has limited the number of possible investors - only a maximum of 99 people can enter the fund. Moreover, at least 65 of them must be “accredited”. The status of “accredited” is assigned to the investor based on the criterion of the net value of his equity contribution. As a rule, this indicator is fixed and can be quite high, for example, to obtain accreditation, you must invest at least $1 million in the fund.

The history of hedge funds and how they work

The first hedge fund was founded in 1949 by American financier Alfred Winslow Jones. It was he who came up with the name “hedged fund” and developed an investment strategy that was unique for that time. When he published the results of his work in 1965, his strategy became a real discovery for the global financial market.

Jones, by using a combination of short and long positions, was able to profit in both falling and rising markets. The essence of his method is to buy undervalued and sell overvalued shares.

Undervalued shares– this is when the shares of a company have significant growth potential. For example, it costs 50 rubles, but in your opinion, soon it will cost 100 rubles.

Overvalued shares– on the contrary, when the value of the shares has soared very high and all the evidence suggests that their value will soon fall.

Using this strategy, Jones did well in any direction the market moved. When the market is falling, overvalued shares lose a lot in price; when the market is growing, undervalued shares grow more actively than others.

Now, let's take a closer look at the terms short and long positions.

Short position involves borrowing a certain number of shares from a broker for a certain period of time for a set fee and selling them on the market.

An example of a strategy for a falling market (using a short position).

The fund borrows 1,000 shares of Company A from the broker at a price of $100. Those. his debt will be $100,000 + $1,000 broker's fee for the service. Having received the securities, the fund sells them on the market for $100,000. After some time, the market sank and shares fell in price by 20%. The fund buys the required thousand shares for $80,000. After repaying the debt to the broker, the fund is left with $19,000 in profit ($100,000 - $80,000 - $1,000).

Long position involves the purchase of securities during a growing trend and their subsequent sale at a higher cost.

An example of a strategy for a growing market (using a long position).

The fund buys with its own funds, or similarly borrows from a broker, 1,000 shares of Company B at a price of $60. Those. his debt amount is $60,000 + $1,000 broker's fee. Since this is done during a growing market trend, the fund holds the securities for some time. Gradually, the market rises, and shares increase in price. Let's say the increase in their value was 20%. The fund sells its thousand shares for $72,000. After repaying the debt to the broker, the fund is left with $11,000 in profit ($72,000 - $60,000 - $1,000).

Thus, the fund, by combining these strategies, makes a profit both when the market falls and when the market rises. Provided that modern hedge funds operate with amounts an order of magnitude larger than hundreds of thousands of dollars, they can make impressive profits. The use of borrowed funds is also a kind of additional tool for hedge funds, which allows them to obtain greater profits.

Of course, the success of the Jones Foundation attracted the attention of American financiers. The number of funds began to grow rapidly, and even despite the failures that many hedge funds suffered during financial crises, by now there are incredibly many of them in the world. A variety of hedge funds now manage more than $1 trillion. It is thanks to the success of such funds that such personalities as George Soros, Michael Steinhardt, Julian Robertson and others have become world famous and successful.

Hedge fund structure

The general structure of a hedge fund is as follows:

Investors. Without investors there will be no fund. The fund offers them services, and they bring capital, thanks to the correct use of which the fund then receives income and provides profit to its clients.

Bank-guarantor. He is also sometimes called a custodian. This role is usually played by a large bank with a good reputation. Its main task is to store investors' assets: money, securities, precious metals, etc. Sometimes he may also be involved in processing and conducting transactions. But this function is most often assigned to the primary broker.

Asset manager. Typically, this is a company whose function is to determine the hedge fund's investment strategy. It is the specialists of this company who are responsible for making specific investment decisions. In addition, the management company manages all operating activities of the fund, i.e. submits applications for the purchase and sale of shares, bonds, futures, options, currencies and other financial instruments.

Administrator (Auditor). The administrator's activities are aimed at determining the value of the fund's assets regardless of the manager. Such independent assessment is needed to reduce risks, you never know, what if the asset manager made some kind of mistake? The administrator will detect such an error and take all necessary measures necessary actions to fix it.

In addition, administrators are often tasked with accounting and compilation responsibilities. financial statements, sending reports to investors, paying bills, etc. The administrator can also perform the functions of a payment agent - subscribe to fund shares and deal with issues of their redemption.

Primary broker (prime broker). A large investment bank can play this role. While a regular broker simply makes one-off trades on behalf of a hedge fund, a prime broker performs a much wider range of functions. Since the structure of a large investment bank includes a trading division, a brokerage company, a management company, and an operational office, it helps funds quickly solve a variety of problems.

Types of Hedge Funds

According to the classification of the International Monetary Fund (IMF), there are 3 main types of hedge funds:

Global funds. They open positions in the markets of different countries; in fact, they work all over the world. However, investment decisions are made based on an analysis of the dynamics of the shares of individual companies, based on the forecast of their behavior in the future.
Macro funds. They differ in that they operate within a specific national market, such as the US or Chinese market. They make decisions based on an analysis of the financial and macroeconomic characteristics of a particular country.
Relative value funds. This classic type of hedge fund, which operates within stock market one country and uses the difference in relative prices of related assets. In fact, such a fund uses the strategy of the first hedge funds unchanged - it buys undervalued securities and sells overvalued ones. At the same time, the manager must constantly monitor the market situation and choose the right moment to make a transaction in order to get maximum profit.

Of course, the strategies of modern funds are incredibly diverse, so within these generalized types there are many subtypes.

The main differences between hedge funds and mutual funds

To make it more clear how hedge funds differ from other investment methods, let's look at their main differences from such a popular collective investment instrument as.

For clarity, all the parameters by which these investment funds are compared are placed in a table.

Comparison parameter	Hedge fund
Assets with which the fund works	Stocks, bonds, futures, options, precious metals, currencies, various property assets	Securities and property assets, such as real estate.
Minimum entry amount	From several hundred thousand to a million dollars.	From 1000 rubles.
Investment Strategies	Works with both short and long positions	Works only with long positions
State regulation
Who can become an investor	Only “accredited” investors. In Russia they are called qualified investors. This means that only large, experienced investors are allowed to participate.	Anyone who wants
Exit procedure	The share is sold only within the fund	You can sell your share on the secondary market

How to become a member of a hedge fund

There are still very few domestic hedge funds; they can be counted on one hand. Russian managers also do not yet have enough experience with such funds and strategies, which is why domestic investors often prefer to invest in Western funds.

How to become a member of a foreign hedge fund? Firstly, you must have impressive free capital, since the minimum investment amount is several hundred thousand dollars. Secondly, you need to buy shares or shares of a hedge fund. This can be done in two ways:

Open an account with a large Western bank and instruct it to buy a share or shares of a hedge fund. You can either choose a fund yourself or entrust it to the bank.
Conclude an agreement to purchase a share in a hedge fund through a Russian intermediary agent. For example, among such agents we can distinguish financial company EuroTrust, which helps investors enter into an agreement with a large investment company, Man Investments, which manages several hedge funds at once.

Now let's look at Russian hedge funds.

The first domestic hedge fund, “Private Investment Fund 05.09,” was founded by Alfa Capital Management Company in 2009, it was created in the form of a closed-end mutual fund. Later, the same management company created another hedge fund, “Corporate Investment Fund 09.10.” As a rule, you can enter such a closed-end fund only at the stage of its formation. You can find out more about investment conditions by contacting the managers of the management company. Official website http://www.alfacapital.ru

(may also be useful, but information on funds is closed, there are no statistics

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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The concept of “Hedge” is translated from English as a hedge, obstacle or barrier. 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:

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.
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.
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:

Direct execution of a contract in the future at an agreed price.
Inclusion in the contract of insurance conditions, for example, on the division between the parties of both profits and possible losses;
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 financial pyramid. 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:

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.
At the other extreme: hedge funds carry excessive risk loss of capital. 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 portfolio with low level risk.

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. You can decide on the selection using specialized services, for example, europe-finance.ru, Barclay Hedge, Morning Star (the last 2 are on English language) 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) under a trust management agreement in the form of Money, securities, and various derivatives. 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!