Business I finance

Hedge Funds

They appeal most to sophisticated investors.

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standard equity and bond
nvesting in hedge
indexes with less volatility
funds tends to be
and less risk of loss than
favored by more
equities.
sophisticated investors
The first true stars of the
who have lived through
hedge-fund universe were
and understand the con-
experts in commodities and
sequences of major stock
currencies and figured out
market corrections.
how to exploit inefficiencies
A hedge fund is a
in those markets. Because
vehicle for investing, but
Norton Stern
they raised money privately
much less constrained
Columnist
— largely from friends and
than most. A mutual
business associates — they avoided
fund, for example, buys stocks and
most of the discloser requirements of
bonds, and that's pretty much it.
U.S. securities laws. That meant they
Hedge funds can employ whatever
didn't have to explain to anybody how
investing tools they want, including
much money they had or what exactly
leverage, the use of derivatives like
they did with it.
options and futures, and short sales.
People in the financial world
There are approximately 14 distinct
became enamored with investing
investment strategies used by hedge
superheroes. George Soros almost
funds, each offering different degrees
broke the Bank of England by short-
of risk and return. It is important to
ing the pound and Julian Robertson's
understand the differences between
Tiger Management was another firm
the various hedge-fund strategies
that nobody would bet against. Of
because all hedge funds are not the
same. Investment returns,
volatility and risk vary
enormously among the
different hedge-fund strate-
gies.
The popular misconcep-
tion is that all hedge funds
course, the more people out there
are volatile. In reality, less than 5 per-
tried to copy the Soroses and the
cent of hedge funds are global macro
Robertsons, the less well it worked out.
funds that place large bets on stocks,
John H. Makin, a principal at
currencies, bonds and commodities
Kovner's Caxton Associates, puts it
while using lots of leverage. Most
this way: "The extraordinarily high
hedge funds use derivatives only for
returns earned by hedge funds during
hedging or don't use derivatives at all,
their golden age in the 1980s and early
and many use no leverage.
'90s were not too good to be true.
Not everyone looks at hedge funds
They were just too good to be true for
in such a favorable light. According to
everyone."
Cliff Asness of AQR Capital, "Hedge
Today, hedge funds are estimated
funds are investment pools that are
to be a $1 trillion industry and grow-
relatively unconstrained in what they
do. They are relatively unregulated (for ing at about 20 percent a year. There
are approximately 8,350 active hedge
now), charge very high fees, will not
funds. 7
necessarily give you your money back
when you want it, and will generally
Provided courtesy of Norton Stern, a reg-
not tell you what they do. They are
supposed to make money all the time, istered principal with Franklin Financial
Investments, Southfield. (248) 262-8810.
and when they fail at this, their inves-
Investment products and services are
tors redeem and go to someone else
who has recently been making money. offered through Wachovia Securities
Financial Network, LLC. This material is
Every three or four years, they deliver
distributed solely for information purposes
a one-in-a-hundred-year flood."
and is not a solicitation of an offer to buy
Actually, hedge-fund managers are
any security or instrument or to partici-
generally highly professional, disci-
plined and diligent. Their returns over pate in any trading strategy.
a sustained period have outperformed

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A hedge fund is a vehicle
for investing, but much less
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64

September 13 • 2007

FD IC