The HFRI Event-Driven (Total) Index gained 6.9% this year through July.
DEFINE HEDGE FUND PLUS
Event-driven strategies that focus on companies in financial trouble are often referred to as distressed investing.Īmong event-driven funds are the Paulson Advantage and Advantage Plus funds run by billionaireĮvent-driven funds fared well in the first half, partly due to a dynamic merger-and-acquisition and corporate-actions environment, according to HFR. A manager may invest, for example, in the stock of a company that is being acquired while also selling short the stock of the acquiring company. Managers of these funds seek to predict the relative movement of the securities involved. Then there are event-driven hedge funds, which invest in securities that may be affected by corporate activity such as bankruptcies, mergers, reorganizations and hostile takeovers. This year through July, the HFRI Relative Value (Total) Index has gained about 3.6%, according to HFR.
Long-Term Capital Portfolio LP, which famously collapsed in 1998, was a relative-value fund. Relative-value arbitrage funds may employ lots of leverage, which can result in big gains or losses. But they also took bearish positions on longer-dated contracts, a bet that the prices would fall in coming months. in the summer of 2005, for example, some hedge-fund managers owned short-term contracts on oil and gas, a bet that prices would rise soon. Such strategies can be executed with convertible bonds, preferred securities, options, warrants and other instruments.Īs Hurricane Katrina bore down on the U.S. That allows the funds to generate returns with little correlation to markets. Managers of relative-value funds will simultaneously buy markets or investments expected to appreciate, while selling related securities expected to depreciate, seeking to profit from their relative value. "Relative value" arbitrage strategies account for about 27% of industry assets, according to HFR. "Investors have to judge each fund individually because fund managers may be doing vastly different things," says Mr. But prospective investors should understand that just as some hedge-fund strategies may enhance returns, they may also amplify losses, and some strategies are more volatile than others. Investors generally look to the funds to reduce volatility.
For the five years through August, the HFRI Fund Weighted Composite Index gained an annualized 3.4% while the S&P 500 index gained 7.3% with dividends. Hedge Fund Research Inc.'s HFRI Fund Weighted Composite Index, a broad proxy for the hedge-fund universe, gained 3.8% this year through August (net of fees), while the S&P 500 index gained 16.2% with dividends and the Barclays Government/Credit Bond Index shed 3.2% over the same period, according to HFR. In addition, the funds generally require minimum investments of at least $250,000 and limit how frequently investors may withdraw cash. In an effort to protect investors with limited means, hedge funds are closed by federal securities law to all but "accredited" investors-which includes individuals with an annual income that exceeds $200,000 for the past two years or a net worth exceeding $1 million excluding their primary residence. They may have higher leverage, for instance, or invest heavily in illiquid holdings such as art, antiques or thinly traded securities.įor these more aggressive tactics, the funds typically charge steeper fees than do mutual funds, generally an asset-management fee of 1% to 2% and a performance fee of 20% of the fund's profit annually. "That was the first purpose of a hedge fund, to hedge and offer some safety, but over time it has strayed from that original definition," he says.īut hedge funds still typically have more-flexible investment strategies than mutual funds. Today, hedge funds still generally employ a hedging technique-counterbalancing one investment against another-but even that is not always the case, saysĪ fund analyst at investment-research firm Morningstar Inc. Jones used leverage-that is, borrowing-to increase his investment exposure, and sold short what he believed to be overvalued securities in an attempt to "hedge" the market and profit regardless of whether it rose or fell. The term "hedge fund" was reportedly first used byĪ sociologist and financial journalist who created an investment partnership in 1952. Hedge-fund manager John Paulson reaped huge gains betting against subprime mortgages in 20.
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