Textbook Notes (367,979)
Canada (161,540)
RSM230H1 (34)
Chapter 21

CSC_Chapter 21 Hedge Funds.pdf

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Rotman Commerce
Laurence Booth

Chapter 21: Hedge Funds December-13-11 1:26 AM HedgeFunds • A private investmentfund that does not need to conform to the rules for publicly available mutual funds  Hedge fund managers have much greater freedom to follow aggressive orunusual investmentstrategies.  High leverage (borrowing) enhances potential returns,and risks  Little or no regulation  High minimum investment,averaging around $1 million  Long-term commitment of funds is required  High fees: 1% to 2% of assets plus 10 to 20% of profits  Not generallyopento the public and notoriously difficultto gather informationon Overview of Hedge Funds ○ Hedgefunds are lightly regulatedpoolsof capital whose managers have great flexibility intheir investment strategies ○ Not constrainedby the rules that apply to mutual funds or commodity pools (can take short positions,use derivatives for leverage and speculation,perform arbitrage transactions,and invest in almostany situationin any market) ○ A manager's skill is more important in hedge funds than for almost any other managed product ○ Comparison to Mutual Funds  Are pooled investmentsthat may have front and back-endsales commissions  Charge management fees  Can be bought and sold through an investment dealer  Comparing Mutual Funds to HedgeFunds Mutual Funds HedgeFunds Can take limitedshort positionswhen regulatory authority has No restrictionson short positions been granted Can use derivativesonly to hedge Can use derivativesin any way Are usually liquid May have liquidity restrictions Are sold by prospectusto the general public Are generally sold by offeringmemorandumsto accreditedor sophisticatedinvestors  Are subject to considerableregulatory oversight As private offerings are subject to less regulation Charge management feesbut usually have no performance fees Charge management feesand usually charge performancefees "relative"return objective; performance isusually measured "absolute" return
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