Brainstorming. Why hedge funds are earning more than others

Hedge fund
The biggest myth about hedge funds States, it "black boxes" — closed and non-transparent, and none of the clients don't understand, where their funds are invested. How to actually work in hedge funds and why they provide a high yield?

The first hedge Fund appeared in 1949 year. At that time its functions were limited to the hedging of the stock portfolio position to decrease, hence the name. This tactic allowed the successful funds to demonstrate indicators, ten times ahead of the market. To date, the industry has evolved greatly — much stronger, than industry as a whole. All the technological innovations in the field of investment originates in hedge funds.

Now in hedge funds holds about $3,5 trillion — a figure comparable to Germany's GDP and nearly one and a half times UK GDP. With approximately 50% assets are concentrated in the first hundred hedge funds, which constitute the cohort of the biggest names in the industry. For example, in Bridgewater Associates now $122 billion, in AQR Capital Management — $70 billion, and Two Sigma — $53 billion.

Hedge funds are widely known in narrow circles. Their clients are large institutional investors: pension and sovereign wealth funds, insurance companies and other large financial institutions. In addition, hedge funds are popular among wealthy customers around the world, who are able to invest in them through premium banks and family offices.

These funds are of interest primarily to its risk-return ratio. For example, one of the largest and most prestigious algorithmic funds Two Sigma Spectrum, and showed the same yield, and stock index S&P 500, but with much less risk. While the U.S. index was extremely volatile in some periods, the profitability of a hedge Fund is not just "punch", but growing. If you look at the graph with 2005 year of establishment of the Foundation, you can see, strategy Two Sigma Spectrum much ahead of the S indicator&P 500.

The yield of hedge Fund Paloma Partners, which works with 1985 year, ahead figure index S&P 500 on 1245%. Fund Millennium Partners with 1998 years bypassed the U.S. indicator on 815%, moreover, the maximum decline in the history of the Fund amounted to only 7,4%. And the hedge Fund D. E. Shaw Valence c 1999 years gained 1261%, while S&P 500 considering the dividends grew by only 121%.

This explains, why are hedge funds so popular among institutional investors, the stable positive returns in the long term. It's not just funds outperform index, but also show extremely high results on a volatile market. For example, during the dot-com collapse of the early noughties and the mortgage crisis 2008 year, the hedge Fund Winton Futures showed a yield of 40% and 21% accordingly.

"Quants" at the helm

Seven of the ten leaders in the industry with assets under management in $400 billion — algorithmic funds. The ability of machines to process huge amounts of information at a fantastic rate led to, that portfolio managers can no longer compete with them.

At the head of each major Fund are incredible people. For example, hedge Fund Two Sigma was created by David Sigel and John Overdeck. Before that they worked in the D. E. Shaw, at the same time worked and the Jeff Bezos — CEO and founder Amazon.com. Actually, Amazon Bezos created together with John Overdeck — he was his right hand and subsequently became Vice-President of the Corporation.

It should also be noted the Creator of the Fund D. E. Shaw David Elliot Shaw. He was educated computer engineer, and 1996 year Fortune magazine recognized him as the "quantum king" of the hedge Fund industry. If this Show hasn't abandoned his scientific work and after 2001 years started to devote more free time computational biochemistry.

Personnel departments algorithmic funds have long been competing not with wall Street, and with Silicon valley — Google, Amazon and other technology companies. 80% employees of modern hedge funds are mathematicians and programmers. There are portfolio managers, but they differ from traditional financiers. They have a rather mathematical background, and in most cases they know how to program it yourself.

These people develop strategies and models, experimenting, work with large amounts of information. The number of strategies Two Sigma up to several thousand. Among them are long-term, and those, living a few seconds. There are strategies, that is based on fundamental data, and there are those, caught a minor technical deviations of the market.

Algorithmic strategies more effective. People may well manage a portfolio of 40-50 securities. Of course, each Manager has its own approach and system, according to which he analyzes the facts and makes decisions, evaluates the fundamentals, looking at the dynamics of paper from a technical point of view, communicates with company representatives, reads public information and so on.

Almost the same makes and algorithmic Foundation, just in greater volume. True, to communicate with people, the algorithm can not, but he treats any reference to a company in the media, social networks and documents in tens of thousands of times more effective. With that it is not only text documents, but voice — many hedge funds have their own speech recognition. So, Two Sigma scans all the background information on 70 languages.

There are also more awesome ways of obtaining information. For example, with the help of satellite images algorithmic hedge funds can evaluate client activity. Before, to understand, how many customers come in monthly Vest Buy — a large American chain of electronics stores — you had to stand near the door to the stores and buyers to consider. Now information can be obtained by using satellite imagery of Parking lots in front of the hypermarkets.

Modern technologies allow us to literally dissect each company, to find out all about it. Moreover, they can do this quickly and on a large scale. The system works 24 hours a day in all regions, analyzes all, that said, voiced and recorded, checks, experimenting and producing a successful trading strategy. Of course, talented managers can bypass the hedge Fund expertise, but to cope with the same amount of information they are just not physically able.

If Google collects information, to sell effective advertising, the hedge funds to make money in the stock markets.

The secret of effectiveness

One of the main objectives of most hedge funds is to neutralize market risks. How this can be achieved? Briefly, you need to balance every position. If the paper Apple is in long (purchase), the Nokia company from the same sector, with similar characteristics, but much worse performance, — will stand to delete this chart (for sale).

Another example is the shares of General Motors and Ford. Shares of these companies behave very similar, and any serious deviation from the usual spread may be a signal to the transaction. In this case, the arbitration Fund will sell General Motors and buy Ford, because, most likely, quotes or Ford will catch up to the level Gеneral Motors, or value of securities of General Motors back down to Ford.

Here is another example of, how is the selection of the securities in the portfolio Two Sigma. The system evaluates each stock on the four types of parameters: fundamental, technical, event and the so-called alpha capture is a unique company models. Only if the system will evaluate the paper high enough in all respects — it gets to the attention of "the Manager". But the same conditional action Apple will not get into the portfolio, if your are a few strong technology companies. Hedge Fund definitely needs something to balance that position.

It is thanks to this principle, algorithmic hedge funds manage to keep a fairly smooth returns and to mitigate its volatility. In other words, for the Foundation no matter, where the market is heading. The fall in the price of one security or sector very often is balanced by the rising cost of other securities.

Perhaps, only one myth to dispel will not work — industry, do, very closed. Themselves hedge funds do not strive for full transparency. They work with large and proven institutional clients, so to get, what is called, "the street" in a hedge Fund with a big name is impossible, and through recognized investment representative — is extremely difficult.


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  • Oleg Andre

    To use or not hedge funds as an investment tool is a matter for each investor individually to decide independently. You can not advise in this matter, especially when it comes to this type of investment, where the terms should be long enough. It should also take into account the fact that the contribution to the hedge fund is not a freely traded security on the market. Naturally, it can not be acquired by anyone other than the fund itself. In addition, the necessary information about the financial institution, concerning which interest arose, can be obtained only as a result of direct contacts.

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