Funds: Private Equity, Hedge and All Core Structures

Chapter 3

Hedge Funds

3.1 INTRODUCTION

A hedge fund can be used as a vehicle in relation to a wide scope of investment strategies. Broadly, this type of fund could be categorized as an actively managed portfolio of investments that uses a range of instruments and investment strategies with the goal of generating returns.

The returns of hedge funds generally fall into two broad categories of return type. Hedge funds may seek to operate an ‘Alpha’ return, namely an exceptional return that an investor or portfolio manager is looking to achieve due to the application of what is a unique market view, for example by exploiting a specified market inefficiency. A ‘Beta’ type return, meanwhile, is a measure of a hedge fund’s returns relative to a given index or benchmark. This approach exposes a fund’s portfolio value to asset price movements recorded on a given index or by a particular benchmark.

In terms of legal structure, hedge funds often use offshore structures to allow investors to create tax efficiencies and to provide managers with investment flexibility, which advantages would otherwise not be available if using the type of regulated onshore structure that is frequently designed to protect retail investors.

3.2 TYPES OF HEDGE FUND STRATEGIES

3.2.1 Market neutral or directional

Hedge fund strategies are described as absolute return strategies, in that they seek to deliver positive returns regardless of market performance, and can be described as directional or market neutral.