Hedge Fund Managers - Essay Example

Hedge Fund Managers Introduction As hedge funds play an import part in the financial world, the managers responsible for bringing in the positive returns on investment have a major role in the function of these funds. High net worth investors keep a track of individual hedge fund managers, which helps them in choosing the right manager for taking care of their capital investment. The prime objective of any hedge fund is to earn maximum profits with minimum risks. Therefore, the hedge fund managers must be emotionally detached from the daily fluctuation of the financial markets. In addition, the responsibility of the manager includes analyzing all types of asset classes, like derivatives, securities and commodities. This helps in preparation of a balanced portfolio mix. Defining Hedge Fund The management of assets portfolio, which is unregistered and private, can be done through the establishment of an investment structure called hedge fund. These funds are asset classes that use different strategies like hedging and leverage involving placing bets on commodities, interest rate and currencies, based on the prevailing macroeconomic conditions. These funds do not follow the market directions. However, there main aim is to generate the profit by aiming at mobilizing steps to attain positive return on the invested fund. Hence, these funds operate with the view of generating absolute returns, instead of relative returns, regardless of the rise or fall in the stock market indices or directions taken by the financial markets, during a particular period. Accordingly, hedge fund managers need working diligently in this direction. They expect and get the monetary compensation for meeting theset targets. This compensation comprises of the high fee structure that involves profit participation by the hedge fund manger. Considering this, a hedge fund manager entertains only the wealthy investors, which may include cash-rich corporations and individuals along with pension funds, who wish to hedge their investments against any negative correlation with the financial markets. For this purpose hedge fund managers label such customers as ‘accredited investors’. Hedge Funds can fail to deliver The basic strategy adopted by hedge fund managers is to look for high rewards, which also carry the chances of high risks. While doing so, any oversight on the part of hedge fund managers can result in financial catastrophes of large scale. The example of two collapsing “Bear Sterns” hedge funds during the year 2007 is significant in this direction. These funds are not allowed for individual investors, as they are governed by strict regulations, in order to avoid any drastic financial mishaps like the failure of “Long-Term Capital Management” in the year 1998. Hedge funds are very risky for any type of investors. It is essential that the investors put their money in such funds, only after thorough investigation into the worth of the concerned hedge fund. The investors should also consider hedge fund manager’s expertise as well as history regarding performance of the particular fund. Above all the prospective investors should determine the success rate of fund manger along with the fee structure and any possible profit sharing plan. Hedge fund is the most risky type of investment that carries the possibility of earning high rewards also. However, the rewards may not fructify, always. Investors should remain prepared for any major loss, regardless of the experience and sophistication level of the concerned hedge fund manager. (Hedge Fund, nd) Role of Hedge Funds in Financial world The aim of hedge funds is to make considerable gains with the possibility of lesser risk. Accordingly, these funds are involved in the buying and selling of market securities, bonds and options, taking long or short positions in stock or commodity markets. The hedge funds are categorized according to the strategy employed by each fund to perform these functions. The investment in bond and stock markets or currencies, in order to optimize the profits, is an example of a macro hedge fund. They depend on the expected policy announcements and interest rate changes in the country or globally. Similarly, an equity hedge fund believes in the strategy of buying undervalued securities, while covering the risk with sale of over-valued stocks. However, the level of under or overvaluation of securities is always debatable. Hedge fund strategies However, hedge funds employ different investment strategies, which depend on the return on investments, risk involved and related volatility. Hence, it is important to analyze these strategies individually in order to achieve the set targets. While some hedge funds carry low risks with lower returns, other hedge funds may use the strategy of combining different asset classes to achieve consistent returns over the desired period. While most of the hedge funds are volatile, certain funds use global macroeconomic strategies to place bets on commodities, securities, and currency as well as stock indices. However, many hedge funds do not rely totally on such strategy as they use the derivatives very rarely, only for hedging purposes. Hedge funds use many strategies like buying or selling securities, trading in future and options as well as bond markets. Smart hedge fund managers aim at achieving the consistent returns, instead of one-time huge profits that may erode the total invested capital. As few hedge fund managers are well-experience and follow a disciplined investment policy, pension funds, insurance companies, high net-worth individuals and private banks prefer utilizing the services of such managers. This ensures good returns on their investment with minimum loss due to possible volatility.(Friedland, nd) There are around 8300 hedge funds, which is a $1 trillion industry, growing annually at the rate of almost 20 percent. While some hedge funds are simple and plain, engaged in the activities of buying and short selling of derivatives and securities, there are other specialized hedge funds, which depend on the expertise of the manager to achieve the expected rewards against high risks of financial markets. Relative value hedge fund strategy does not depend on the volatility of the bond or equity market, like mutual funds. Similarly, arbitrage strategies of many hedge funds are limited to the capital invested, as the concerned manager has to decide about pouring in more investment until the returns start showing the diminishing trend. Hedge funds play an important role in the capital utilization of big corporate banks and pension as well as endowment funds, as these funds prefer allocation of their capital to the hedge funds. However, the Hedge fund managers need understanding the risks involved in the financial markets, while they should diligently work towards getting the maximum possible return on the invested capital. The hedging strategies are connected with the financial market functions. For example, the most common strategy adopted by a hedge fund manager involves selling shares at the high price, with expectation of buying them back, later, at lower prices. Arbitrage strategies involves selling short a security in a particular stock exchange at the prevailing higher price, while buying them from a different stock exchange, at lower price. However, this needs the chosen security being actively traded in both the exchanges. Options trading strategies involves entering into contracts of buying or selling a particular derivative, based on its future expected performance in the market. Certain hedge funds make investments in a particular asset as they expect some major event happening with that asset. For example, buying or selling Gold can be done in anticipation of a shift in gold import-export regulations. Similarly, expectation of a merger can trigger trading in a specific asset. Some hedge funds use the strategy of buying heavily discounted shares, when there is a bad news concerning such shares. The same shares are cashed later on much higher values. However, most hedge fund strategies are not vulnerable to the market volatilities, as they do not correlate their investments with the market driven equity fluctuation. Since there are varieties of hedge fund strategies, these funds provide different choices for the investors. Further, the addition of hedge fund in the portfolio of any investor results in investment diversification, aimed at minimizing the market risks. Such diversification is not usually available in the conventional financial markets, which operate on daily basis. The hedge funds provide the investor a long-term solution for the portfolio investment, which eliminates the frequent checking of market rates. Requirements for becoming a hedge fund manager As this is one of the highest paid careers in the financial world, the job requires highest level of diligence and discipline, without falling into any emotional or sentimental trap. Being focused and determined to achieve the targeted results must remain the only aspiration of any hedge fund manager. In addition, the prospective manager must spend considerable time in studying the market conditions, particularly during any major fluctuation. Analyzing the investment pattern and trading style of high net worth investors also helps in this direction. The aim should be to understand the tact of earning money, irrespective of market falling or rising. This needs thorough understanding of the market mechanism. Starting the career as a learner with any established hedge fund organization helps. While doing so, prospective managers should expand their networking through social sites to remain in touch with the wealthy investors. Preparation of a business plan along with the relevant marketing structure comes next. The business plan must consider the requirement of human and other resources to run the business successfully. In addition, the marketing plan should involve preparation of attractive brochures, letterheads, business cards; as well as email campaign. This helps in the direction of getting good investors, who are ready to pour in the money. Selecting an efficient prime brokerage helps in getting the initial capital money.(Oleinic, 2013) Hedge fund manager’s compensation structure These managers shall be able to earn their handsome package only after the concerned hedge fund has earned substantial profits. Hence, these funds usually charge management and performance fee from the investor. This can be in the range of 2 percent to 20 percent of the total invested value, depending on the type of investment fund and expected return on investment. It also depends on the particular strategy adopted by the concerned hedge fund. The management fee is usually paid on quarterly or monthly basis, meant to take care of running expenses of the fund operations, as well as its overhead expenses. Management fees generally range from one to four percent of the total invested capital value. Performance fee is also called incentive fee. This fee is payable only when the fund manager is able to bring in the profits and good returns on the invested capital. The performance fee is divided into two categories for the fund manager’s pay. The composite performance fee is paid as a bonus, which depends on the overall profit made by the concerned fund for a particular investment. However, the fund manager is paid only part of this profit, related to the particular investment portfolio being followed by the manager. Such bonus usually forms around 50 percent of the total package. The base salary and other incentive fee are paid to the fund manager in the normal routine. The pay package enhances with the number of years spent by the hedge fund manager in following this profession. Longer experience in a particular asset class management means higher salary for such manager. In addition, the title and working location also has an impact on the pay package. For example, a CEO can also be a hedge fund manager. However, the title of CEO can help the person in commanding more monetary compensation. Similarly working in areas like New York will fetch better than working at locations like Pittsburg in USA.(Kapur, 2014) Conclusion Hedge fund managers are responsible for the total performance of the concerned hedge fund. A diligent and disciplined hedge fund manager can brighten the business prospects of the fund, while a careless hedge fund manager can destroy it. Therefore, many hedge funds employ different hedge fund managers to manage the portfolios of various wealthy investors. Hedge fund managers need better networking with big corporate banks and enterprises to capture the business for the concerned hedge fund. A successful manager can expect the highest pay package, which is always linked with the performance. Works-cited Friedland. D, . (nd). About Hedge Funds. , Magnum.com, Retrieved on 02 Dec. 2014, from: http://www.magnum.com/hedgefunds/abouthedgefunds.asp Hedge Fund, (1988) investinganswers.com, Retrieved on 02 Dec. 2014, from: http://www.investinganswers.com/financial-dictionary/investing/hedge-fund-1988 Chopra, Rohan . (2014). This Is How Much Average Person Can Make Working For A Hedge Fund, Business insider, Retrieved on 02 Dec. 2014, from: http://www.businessinsider.in/This-Is-How-Much-The-Average-Person-Can-Make-Working-For-A-Hedge-Fund/articleshow/33518623.cms Oleinic. A, . (2013). What is a Hedge Fund Manager, Insider Monkey, Retrieved on 02 Dec. 2014, from: http://www.insidermonkey.com/blog/what-is-a-hedge-fund-manager-heres-how-to-be-one-192752/ Wooldridge, M.B., & Shapka, J. (2012). Playing with technology: Mother-toddler interaction scores lower during play with electronic toys.Journal of Applied Developmental Psychology, 33(5), 211-218. http://dx.doi.org/10.1016/j.appdev.2012.05.005 Read More