Rayroy

Archive for the ‘Hedge Funds’ Category

Investors are always looking for the best investments that will yield the most profit. Any investor who can afford the extra cost should consider investing in Hedge Funds. Hedge Funds were started in 1949 by Alfred Winslow Jones, who pioneered non-traditional investment strategies. Jones innovated this new investment strategy by selling short stocks, while buying other stocks (long stocks). Hedge Funds are very similar to Mutual Funds, except that there are fewer regulations on Hedge Funds. As a result, Hedge Funds usually require a much larger investment.

What Are Hedge Funds?

Hedge Funds can help investors make more money with higher-risk investments. Other techniques used in Hedge Funds include “leverage,” which is borrowed money to trade in addition to the capital provided one’s investors. The usage of Hedge Funds also requires an incentive fee. An incentive fee is a fee based on a portion of the client’s profits as opposed to a fixed percentage of assets. This fee is then invested and ideally will gain the investor more money.

Generally, companies are the owners of Hedge Funds because most people do not have enough money to meet the minimum investment required to have a Hedge Fund. In 2004, Hedge Fund investments passed the $1 trillion dollar mark. In mid-2004 about 39 companies shared the total Hedge Fund values of 1.1 trillion dollars.

Common Techniques for Investing

There are also other techniques for investing with Hedge Funds. One way is to invest in a company just before a major merger. If one gains knowledge of a merger, and buys large amounts of share in a company that is about to merge, the shares go up greatly once the merger occurs. This is, unfortunately, a very high-risk investment strategy because some mergers may not occur.

Other techniques include selling short, which is where one invests in seemingly undervalued securities, trading commodity and FX contracts, and taking advantage of the separation between the current market price and the highest purchase price in events such as mergers.

Why are Hedge Funds Beneficial?

Hedge Funds are also beneficial because of their high level of security. Hedge Funds are private, between individuals, and do not have to be made known to the government or other companies. Currently, Hedge Funds do not need to be registered with the SEC. Hedge Funds are also based in places with less regulations (I.E. The Cayman Islands, The Virgin Islands, etc). However, one drawback of Hedge Fund security is the fact that it looks suspicious to have secretive investments. For this reason, many companies and investors are criticized for being involved with Hedge Funds.

Conclusion

Hedge Funds are a very risky investment, with a large payoff. In order to invest in Hedge Funds, one must be prepared to make a very large investment. Hedge Funds are similar to Mutual Funds, except there are less regulations on Hedge Funds. Less regulations lead many people to be suspicious of investors who invest in Hedge Funds. However, if one is willing to take the risk, Hedge Funds can certainly pay off!

Incoming search terms:

Hedge funds, mortgage pools, private equity firms and even wealthy individual investors all make private commercial mortgage loans against income producing real estate. While these loans are not inexpensive, they can be a valuable resource to a property owner or commercial real estate investor who needs to close a deal fast or has credit or documentation issues.

Private lenders can close loans fast and with much less bureaucratic red tape and paperwork than institutions require. Securing a private loan can sometimes be the difference between making a huge profit and losing large amounts of money.

Almost all successful real estate investors have at least one reliable source of short-term private capital available to them so they can jump on opportunities when they pop-up or get them out of trouble when cash becomes tight. The key to getting a loan from a hedge fund or other private commercial mortgage lender, is knowing exactly what these savvy investors look for in a deal.

When evaluating a loan application for private funding there are several key factors that hedge fund managers, private equity executives and other lenders look for before they agree to fund a deal.
Exit Strategy

Private commercial mortgage lenders are, first and foremost, opportunistic investors. Before they will even consider getting into a deal they will demand to know how they are going to be able to get out. A borrower’s exit strategy must be well thought out and must be realistic. Be prepared to demonstrate the viability of the exit. If you are planning on refinancing into a permanent, conventional loan it will help to have lenders already lined up. If you are planning to sell the deal, you will need to have a well researched marketing plan. To get a loan closed, it is imperative that you prove to the lender that they will get their money back, with interest and on time.
Equity

Hedge funds do not exist to make you money; they exist to make themselves money. Loan-to-value (LTV) ratios in the private money industry are much lower than you will find in institutional lending. The best you can expect from a private lender is 65% LTV, and that is only for properties with sufficient cash-flow. For loans on underperforming assets LTV ratios will be around 50%-60%. Protective equity must be present or private lenders will simply not be interested. Attempting to talk a private lender into relaxing their LTV requirements is a fool’s errand.

Further, it is important to note that private lenders base their valuations on their own assessment of what a building is worth. They are not required to accept or rely on any third party opinions or appraisals. The guy with the check book is the guy who gets to assign value, borrowers can take-it or leave it.
Cash in the Deal

The days of 100% financing (or anything close to it) are long over. No responsible private lender will do business with a sponsor who does not have a substantial hard equity (cash) investment in the deal.

Most private mortgage originators today will look for borrowers and sponsors to have at least a 20% cash stake in any deal they fund and will never agree to be the sole financial contributor. They will sometimes allow a reasonable second mortgage but won’t allow borrowing to account for more than 80% of a deal’s capitalization.

Don’t ask a hedge fund for a loan when you are really looking for a well heeled partner.
Experience

Hedge fund managers and executives at private lending firms are real estate finance professionals and will only work with other professionals. They are in business to make money not to give anyone a shot at the big-time. Investors, developers and deal sponsors will need to be able to demonstrate a track record of success in commercial real estate if they expect to get a loan approval.

Entrepreneurs with less than the requisite experience level, but with desire, ambition and a great deal, are advised to partner with a proven commercial real estate pro before submitting a loan proposal to a hedge fund.

Private lenders can be a very valuable capital resource for real estate investors, but their lending standards are fairly strict and they are not prone to deviate from their protocols.

The key to doing business with these unique lenders is to know in advance what they are looking for and to structure your deal to meet their criteria. Bring them deals they already want; don’t waste your time and effort trying to sell them a deal they are not inclined to accept.

Incoming search terms:

What is an incubator hedge fund?

Simply put an incubator hedge fund is an investment vehicle designed for you (or you and your partner) to trade your own assets to establish a track record for trading. Incubator hedge funds are a low cost solution to beginning the process of starting and growing a full fledged hedge fund.

What types of incubator hedge funds are available?

There are many different types of incubator hedge funds which you can start up. Basically an incubator hedge fund can be started for any specific strategy and it will be based on the investment program you will use in the future to trade outside money.

One very popular type of incubator fund is a forex incubator hedge fund. In the forex incubator hedge fund the manager will trade in the off-exchange foreign currency markets. Because of the high leverage involved in forex trading, managers of forex incubators often have volatile returns. A forex manager should note that there is likely to be registration rules for managers in the future. The CFTC is working on proposing these rules and the NFA has already produced a test for the registration of managers – the Series 34 exam which is a 40 question, 1 hour exam for forex managers.

What are the biggest issues with the incubator hedge fund?

The single biggest issue with the incubator hedge fund is that you must trade only your own assets in the vehicle. The reason is that the interests in any type of fund are securities and if you “sell” interests in the fund to a party who does not have an active roll in the management of the fund, you will need to go through the whole hedge fund formation process and produce lengthy offering documents. This process is, necessarily, more costly and time consuming than starting an incubator hedge fund and it is a deterrent for those managers who simply want to establish a track record of their trading for later on.

Additionally, if there are outside investors in any type of fund structure there are potential investment adviser issues at the state level.

What is the incubator process like?

The incubator is a relatively simple process. You will start off by talking with a hedge fund attorney who has specialized knowledge of hedge fund formation. After the discussion, the attorney will begin to form the incubator entities and then help you to establish your trading account. The attorney will also provide you with background on all of the important rules you will need to know about creating a marketable track record.

This may be deemed to be attorney advertising in some jurisdictions.

Incoming search terms:

For thousands of years investment advisors have been asking investors to give them money so they could invest it for them. Even after Charles Ponzi in the 1920′s, investors have continued to give investment advisors money to invest. The mutual fund industry has been the largest vehicle, but is highly regulated and has produced few frauds. Unregulated investment schemes, such as PONZI schemes and its brother, pyramid schemes, have been the most prolific types of investment fund frauds. Hedge funds could be the next significant vehicle. Hedge funds have gained in popularity to a staggering investment amount of over $2 trillion, according to the SEC. Over 2,400 investment advisors have registered 11,500 hedge funds with the SEC this year.

So why would hedge funds produce the next really big fraud? According to the Association of Certified Fraud Examiners and Financial Accounting Standards Board, the environment for fraud includes three factors, “incentives/pressures, opportunities, and attitude/rationalization.” The hedge fund manager certainly has the pressure from his investors to produce results. He also has an unregulated environment to work in producing the opportunity. Additionally the high risk/high reward attitude of the manager makes him more likely to take the risk of defrauding his investors.

A quick review of the SEC litigation releases in the past year shows increased activity against hedge funds, including: altering audited financial statements, concealing losses, creating a fictitious auditor, insider trading, market timing (mutual funds), misappropriation, misrepresentation to investors, non-disclosure to the SEC, and stock manipulation. These frauds were not limited to small or offshore funds, but included funds with hundreds of millions of dollars operating throughout the US. Are these all of the frauds occurring? No, but these are simply the ones which the SEC has litigated against. No one knows in this unregulated environment how many frauds are occurring today.

Since hedge funds are still a popular investment vehicle, how can an investor protect against these frauds? Like any investment, the investor must do due diligence before investing in a fund. The investor should review the funds offering materials, investment objectives, audited financial statements, background of investment advisors and other documentation provided by the fund. He should verify the size of the portfolio with the fund’s custodian. He should check the background of the personnel of the investment advisor working on the fund. He should check for regulatory action against the investment advisor and its personnel. He should evaluate the ability of the outside auditor. He should determine who prepares the periodic financial statements provided investors and whether there is third-party oversight. He should determine if the fund has registered with the SEC. He should check with others in the industry that have knowledge about the fund.

After the investment is made the investor’s due diligence should not stop. Many of the documented hedge fund frauds have not started in the beginning of the fund, but after the investors became comfortable. The investment advisors continue to be pressured to produce results or lose their investors. The investor should continue to review the reports sent to him by the fund. He should verify the size of the portfolio with the custodian on a periodic basis. He should watch for changes in auditors and other third parties. He should be alert for any regulator action against the fund or its advisors. He should not let the early withdrawal penalties deter him from withdrawing at the first sign of trouble. In most of the documented cases, there is little left, after discovery of the fraud and the litigation to recover from the fraudsters and third parties.

The answer is that some hedge funds are defrauding their investors while they are not more closely regulated. With the increasing popularity and size of some of these unregulated funds, one of these may be the next really big fraud. Don’t be the investor caught in it!

Investing in hedge funds is not for everyone. To be eligible to invest in a hedge fund, you must be either an accredited investor or a qualified purchaser. To be an accredited investor you must have a net worth of more than one million, and to be a qualified purchaser you must have five million in investments not including property used for business or primary residence. To be allowed to invest in a hedge fund, the fund must reasonably believe you meet these requirements.

Typically, they require potential investors to fill out a questionnaire that asks questions designed to determine whether or not the requirements are met. In the end, however, eligibility is on the honor system, as not much back up is required for the answers given on the questionnaire. For example, you might have to provide a financial reference, but it is not likely that anyone will ask to see tax returns.

Those new to hedge funds should visit with counsel to determine which funds are legitimate and stable. It can also help to review financials, and note well known CPA and law firms affiliated with the fund. There have been funds crash and burn in the past that had big name affiliation, but it is much more comforting to see names that are in the public eye rather than unknowns. Also, ensure that the fund undergoes a regular audit before investing.

Fund managers are allowed to accept thirty-five non accredited investors. However, the only way a non- accredited investor might be accepted into the fund is if they know the manager. This is because it is highly unlikely that a non-accredited investor would hear about the fund anyway. The SEC restricts hedge fund advertising, including public websites.

Some worry that the one million net worth for accredited investors and the five million in investments for qualified purchasers is not strict enough. This could be, as these numbers were set in 1982 and have not been changed since. The accredited investor qualification is not as difficult to meet as it might at first sound. This is a combined net worth between spouses, that can include the estimated value of your home. There is also a requirement for an income of $200,000 for an individual, or a joint income of $300,000 if married. In the end, hedge funds are not for everyone, but if you meet the qualifications, and research possible opportunities well, they can be profitable investments.

Incoming search terms:

Hedge Funds have been gaining more attention in the investment world lately, likely due to the volatile state of the market. Hedge funds have been around since 1949-when journalist Alfred W. Jones created the first one.

The name “hedge fund” was coined because these funds are notorious for “hedging” off losses in unstable markets by implementing a variety of methods, the most common being shorting stocks. The term is somewhat of a misnomer; however, some hedge funds use short selling and other hedging tactics as a way to actually increase return, as opposed to reducing it.

While many people assume hedge funds are a variation of mutual funds, the two are actually quite different. Mutual funds are registered by the Security Exchange Commission, while hedge funds are private, unregulated investment vehicles. Another key difference is that mutual funds are available to the general public, where hedge funds are only available to accredited investors with a net worth exceeding $1 million. Also, partnership is limited in a hedge fund whereas with mutual funds it is not.

There are 14 different types of hedge funds, each with their own strategies. A macro fund, for example, aims to profit on shifts in interest rates and economic policies, while an equity hedge fund uses the strategy of short selling overvalued stocks.

Primarily, most hedge funds seek to reduce risk while delivering positive returns in varying market conditions. Because hedge funds are so diverse, investments can be in stocks, bonds, private companies, real estate, commodities, etc. This diversity is largely what allows them to deliver positive returns most of the time.