Finclub

Part 1

Analogue of the cash spot market on the futures market is the market for managed futures (narrower term "managed futures" means the special account through which funds and various organizations operate in the market of commodity futures contracts). With this market are connected such important classes of managed funds such as funds of funds and hedge funds.

Managed Money Markets

Hedge funds are the most important variety of specific segments of the global financial market - the cash markets, more precisely, the managed futures.

Term "managed money markets" came into wide usage for more than 15 years ago as an alternative to "normal" financial market. The new term was intended to reflect the fact that in this sector of the market's most popular funds are essentially ersatz conventional financial instruments that govern this market segment highly professional managers from various financial institutions and are very good at tactics and strategy of diversification and hedging of open positions on chosen market segments.

Managed Funds, the financial markets are different from each other - they are for all tastes. The question is, how to choose the best of the category of fund that matches your investment strategy. When you select a fund should be guided by different criteria, depending on the individual preferences of the investor. The most important of them - the fund's performance, expense ratio, the presence of additional fees. Significant role played by the experience and impact of selected fund managers. Managed futures on various financial instruments give the managers and their investors a number of advantages compared with operations with the same asset in the spot market

- Futures allow investments in these markets without any difficulties and overhead associated with the acquisition of shares or other financial instruments;

- Keeping trading on margin gives the opportunity to participate in the fluctuations of the market, not limiting themselves while any obligations in terms of capital;

- Transactions on the futures market is much cheaper than the deal on the spot market securities;

- On the futures market is much easier to put a warrant Short Sell;

- The fund managers responsible for large-scale portfolio investments, can hedge their cost of defending itself from short positions occupied speculators and not making the actual sale of the assets themselves.

Two examples

Hedge Funds (Hedge Funds) - these are managed funds that hedge most of their open positions in the financial market. The term hedging is generally used in connection with operations on the futures market, although it is applicable also in the spot market. Hedging - the process of opening a position (usually in the futures, or options market segments), approximately equal to the potential yield, but the opposite direction with respect to already available on the spot market. In other words, when it comes to the futures market, futures (optional) deal acts as a replacement later a deal on the spot market.

Example 1 . The spot FOREX market, you bought the USDCHF at the amount of 1.25 million Swiss francs, and then hedge the (opened in the opposite direction) that position the purchase of ten futures contracts on the Swiss franc. You can hedge the open position on the spot market opening another, opposite positions in the same market. This is done mostly to reduce the risk or immunization (Immunize) open positions against adverse changes in that variable on which the trader is not going to bet.

Example 2 . Anticipating the growth rate yield curve Tbonds, a trader buys a 3-year Notes, and immediately sells the 30-year Bonds. In this case, the bet is placed on the growth of long-term bonds relative to short-term.

In this situation, a short position in T-bonds hedged long position in T-notes. This step virtually eliminates the dependence on the various changes in the volatility of the bond market (the whole trade is based on the spread in yields T-bonds and T-notes).

In Western Europe - boom as investment companies managed by hedge funds have a relatively long history. The first hedge fund was created by the founder of the magazine Fortune Magazine Alfred Jones (Alfred Winslow Jones) in 1949 (while the fund was engaged in buying and selling shares on the stock market).

Twenty years later, George Soros has created world-renowned hedge fund Quantum Fund (now known as the Quantum Endowment Fund). Famed funds may also be called funds Shteynharda Michael (Michael Steinhardt) - Steinhardt Partners - and Julian Robertson (Julian Robertson) - Tiger Fund.

After 1972, when the term derivatives markets have become part of the financial market instruments, hedge funds have been actively trading in all segments of the financial market, seeking to maximize profits while substantially reducing risk. In those days, the services of such funds in the U.S. market could really take advantage of investors with a capitalization of not less than $ 1 million for small private investors to the door of the hedge funds were shut down.

With the liberalization of U.S. and European laws, hedge fund clients are now able to become investors and with fewer resources. However, the main clients of funds - it is institutional investors. In the past ten years, growth in assets of this type of managed funds averaged 25% per year. Approximately the same proportion has increased and the number of hedge funds. Currently, the number of active hedge fund close to seven thousand. According to Morningstar Inc., Their total market capitalization is much higher than $ 600 billion.

Known that in periods when the stock market is dominated by the bears, many investors are getting rid of desheveyuschih assets. In order not to lose its customer base and attract new prospective investors, and various brokerage firms, banks and other financial institutions have begun to actively introduce new tools and ways of investing. In the first half of 2001, one of the most effective investment tool steel products and services offered by hedge funds.

In Western Europe, hedge industry is booming in the first half of 2001 the capitalization of the integrated European hedge funds increased by 60% (according to www.k2kapital.com). There is an explanation over the past half year hedge funds helped to keep capital in the bearish trend in most segments of the financial market. Their superiority over traditional mutual funds and manifested during the tragic events of September 11. Financial results of the hedge funds were much better, even compared with stock indices, the S & P and DJI (which, in fact, provided a subsequent increase in the number of contributors). Alternatively, the possible content and structure of the hedge fund portfolio, we consider an example that allows you to better understand the methodology and technique of selection of appropriate financial instruments fund managers.

Based on several real

Example of a generalized hedge fund based on several real-world European funds, which have demonstrated excellent financial results in the late 90's, presented in Tables 1, 2 and Figure 1.

Fig. 1. Growth dynamics of stock returns in the two years since 1998

Decision to invest in various financial instruments based on careful analysis of fund managers expected returns and possible risks. The fund invests in growth stocks U.S. stock market to hedge more than 90% of open positions option contracts, and transactions in the money market. If the stock market shows a positive development, the selected growth stocks usually show a positive return during the fiscal year. Choosing the right of corporations based on the analysis of economic indicators, carried out economic policy and growth prospects of the stock market. Selected the ones that have the greatest prospects for growth in the economic sector for medium and deep investment horizons. The portfolio consists not only of ordinary shares, but of their substitutes (futures and swaps).

Purpose of the fund - the preservation and augmentation of capital through active management to limit risk. Figure 1 shows the dynamics of the growth yield fund for two years starting from 1998 we see satisfactory growth in profitability of the hedge fund, despite all the market turmoil and storms for this period. Helped properly selected portfolio of assets whose structure is also shown in Fig. But the question of calling to his side an additional number of institutional investors is still open. One way of solving this problem - the wide advertisement of traditional risk and return characteristics of hedge funds instruments. But this - the theme of the next publication.

Part 2

In the previous issue of The Sun "talked about managed money markets - in particular the hedge funds. Despite the boom industry of hedging in the past two years, the issue of attracting new institutional investors is still relevant. One way to achieve this goal - a wide advertising of traditional risk and return characteristics of hedge funds instruments. About it - in a new paper by Yakimkina.

Which one to choose?

Large investors are usually unwilling to invest in assets that do not have a quantitative assessment. With the development of a system of indexing diversified portfolio of instruments hedge funds by institutional investors, there are numerical data that you can always compare with the results of investing in financial instruments other classes.

These indices allow us to construct models of past portfolios containing instruments of hedge funds, which once again shows the positive aspects of this type of tools that will improve to the same and very diversified. The creators of the index of hedge funds also receive the opportunity to offer a secondary market for financial instruments created on the basis of this index. Currently, the most common hedge fund indices are CSFB and Van Hedge Fund Index. Their high liquidity allows institutional investors to play each index by buying its individual components. Weight in the index as a whole based on the level of the market capitalization of the major hedge funds included in the index.

Currently, many hedge funds have provided to ordinary investors access to its tools. Investors who are seriously interested in the activities of hedge funds, and they want to invest in their funds, it is worth pre-understand for a number of things:

- What is the level of liquidity instruments chosen fund?

- What is the qualification of fund manager, what are its achievements and tactical plans?

- Are the fund custodian in possession of the largest clearing houses of the U.S. (eg, Donaldson, Lufkin & Jenrette)?

- Who administered the fund (well, if, for example, the world famous Amsterdam Trust Company)?

- By audited (for example, by Deloitte & Touche, a member of the "Big Five" auditors of the world)?

- Is there an off-shore status of the selected fund (which greatly improves the flexibility and confidentiality of investments compared to direct investment in the U.S.)?

Should not forget that the good results of hedge funds is achieved by ensuring that their managers have a direct motivation to successfully trade: they invest their money in their managed funds.

On the other hand, for the unscrupulous manager there, though ephemeral, but nevertheless the possibility of positive transactions refer to your account and negative - on the customer's account. In addition, fees of hedge funds and more than one and a half times the normal fee managed funds. If successful trade transactions fees of hedge funds may increase much as 7 percent or more!

Investing in health ...

Investment strategies of most of these hedge funds have long-term approach, not burdened by destabilizing the need to respond to short-term stock market volatility and exchange rate bursts of individual companies. Of the variety of investment strategies, hedge funds can be divided into two areas, which in the past decade have shown their best not only in the growing market, but also in the correction period and the stagnation of the world's leading economies.

In the first direction control this type of fund focuses on key technological and socio-economic trends that define the main strategic ways of development of humankind in the foreseeable future. They invest in companies that are engaged in these areas leading position.

This fund managers are closely watching the changing balance of power in their chosen sectors. If necessary, they adjust the portfolio of hedge fund, getting rid of stocks of corporations that are losing market share due to one or other subjective or objective reasons. At any given time in the Fund's portfolio includes only corporate leaders with a steadily increasing turnover and market share, the positive dynamics of profitability, strong state finances and a huge potential for innovation, promising in the foreseeable future a significant commercial impact.

Hedge fund managers continuously monitor and analyze all the new trends in the economy, technology and lifestyles of industrialized countries, identifying promising new areas of investment.

As a result, this type of portfolios of hedge funds are composed of dozens of authentic leaders of the most dynamic sectors of world economy.

One of these sectors is the pharmaceutical industry, more precisely - what the West called the term "quality of life» (life sciences). As soon as the population of industrialized countries is becoming more secure in material terms, consumers in the West are willing to spend huge money on maintaining and improving their physical condition.

Concern for public health comes to the fore the social policies of Western countries and is becoming a priority of their budgetary allocations. As a result, companies are able to develop and implement market pharmaceuticals that address serious medical problems that are rapidly expanding circulation, a manifold increase in profits, have unparalleled potential for growth and, consequently, the most progressive equity exchange rate dynamics.

All this makes the leaders of the world pharmaceutical industry - companies like Merck, Pfizer, Eli Lilly, Pharmacia & Upjohn, and Schering-Plough - attractive investment funds. From January 1990 to November 1999 the stock of such firms increased by 6.9-fold. Taking into account the dividends paid to investors, they brought about 700% of net profit (23.5% per year), which is 300% ahead of the profitability of the U.S. stock market as a whole, which during this period grew at an average annual 17.6%.

Particularly impressive was the growth of shares of leading U.S. pharmaceutical corporations since 1995, when they have developed new drugs are allowed to qualitatively improve the effectiveness of treatment in a number of key areas of medicine. In just five and a half years - from May 1994 to November 1999 - the shares of these companies have brought to investors 422% profit (39.2% per year) and ahead of the market more than half.

... And in the technology of the new century

Equally attractive is the investment and other areas of this type of hedge funds - the latest telecommunications and computer technologies, serving the primary means of communicating the XXI Century - the Internet. Will integrate the transfer of huge volumes of text, graphics and audio from its computerized sorting and handling and turning in the most operational infrastructure of commerce, the Internet is exponentially increasing scale of business and income related companies. From August 1994 to November 1999 the shares of 13 companies that are leaders in this field - such as Netscape, America OnLine, Yahoo, Amazon.Com, E-Bay, CMGI, Cisco Systems, Ascend Communications, Network Associates and 3Com Corporation - increased by 3845%, 4 times outperforming the market and bringing investors on average 100.2% APR. Since the beginning of 1998 the index of internet companies has increased by 364% (128% per annum). From April 1994 to June 1999, 100 companies, leaders of American hi-tec, included in the NASDAQ 100, brought investors 662% of net income, an average of 43.5% per year, almost twice the average annual increase in the leading index The U.S. stock market - S & P and NASDAQ. By investing in these companies, hedge funds offer investors with a long-term approach, able to calmly endure the temporary market fluctuations, a virtually unlimited profit potential.

Direction - for "special situations»

Second direction of hedge fund managers of this type - the investment banking operations. The object of attachment of these funds are shares and / or debentures of the leading multinationals United States, Western Europe and Southeast Asia are on the eve of (or in) various kinds of corporate restructuring - mergers, spin-off divisions and subsidiaries, the division into several independent companies, bankruptcy reorganizations. Prior to the beginning of similar events (and often - up to their end) the true value of these companies is difficult to assess the majority of portfolio managers of investment (not to mention individual investors), using standard methods of fundamental and technical analysis.

Investment banking approach, based on a specific methodology for assessing the companies responding to a "special situation" makes it possible to respond flexibly to the developments and profitably seize the opportunities for investment. As a result of what is hidden from the eyes of most investors, become the subject of this type of fund managers and a source of profit. For example, the new intrinsic value produced as a result of a merger or acquisition may be substantially higher than the mechanical sum of market values ​​of the merging firms.

On the other hand, overly diversified companies are often traded with the so-called "conglomerate discount", and their market value falls below the long amount of intrinsic value of their component parts. Once the company as a result of spin-out or crushing of the parent company became independent, conglomerate discount disappears, and those investors who bought shares before the reorganization process, receive very high profits.

Discharge or absorbed most profitable (and least risky) are often situations where a wave of mergers and acquisitions entirely covers a particular industry. Such was the case in the global automotive industry and in banking in the second half of 1998. Any major merger (eg, a relatively recent Daimler-Chrysler) are usually boosts the stock price the rest of the industry. Quite often, the "special situation" arise as a result of certain macroeconomic or political trends, when entire economic sectors or regions are undervalued stock market (such as happened in early 1998 with the Korean industrial groups).

Risk skillfully invests in "special situation" is minimal. In the worst case - is not reorganization is expected by the fund managers. Then, instead of "special situation" in the fund's portfolio are just a blue-chip stocks - companies like General Motors, DuPont, Fiat, Volvo, Deutche Bank, Daewoo, - the strength of the technological, commercial and financial positions are not in doubt. Thus, the maximum risk, which is subject to the fund - to get average market growth and dynamics.

But if the expected reorganization nevertheless begins, the stock of these companies rise sharply upward, to reward fund managers for foresight and patience, and providing low-correlated with the stock market.

The more undervalued the shares of a company before the reorganization than aggressively set its leadership, the more likely that the predicted changes will occur and make a profit, professional financiers.

Example, happened with the German chemical and pharmaceutical concern Hoechst, standing on the threshold of the spin-off of its chemical industry and becoming a pure pharmaceutical company. Prospects for elimination of a substantial (30-60%) "conglomerate discount" defined the positive dynamics of shares of Hoechst in the middle of 1998, despite the correction of global stock markets. Having bought the shares on May 5 at $ 40, the managers of this type of hedge funds a month later implemented a 24% net profit, while the U.S. stock market fell over the same period from 2.5% (S & P) to 4.6% (NASDAQ).

Bonds Transactions

In recent years, hedge funds have a significant influence on the behavior of financial instruments virtually all major market segments. For example, in the capital market these funds carry the largest contract for the sale of convertible bonds and simultaneously carry the game on the reduction of the corresponding shares of the corporation, stimulating the discharge papers and a drop in prices.

Clear that this is a key for traders in the capital market convertible bonds. After all, this tactic is because hedge funds are oriented to receive interest on convertible bonds and thus operate with two components: a bond on which interest is paid, and option contracts, giving the right to exchange the bond for stock. By selling the option contracts, funds are beginning to play on the slide, which makes the growth of quotations and the achievement of the established conversion rate. This means that as long as the bonds are not converted into shares, the companies will be forced to pay interest on it, which, in fact, expect to hedge funds. Some analysts point to the operation of hedge funds as one of the reasons for which the shares of most companies, announced the release of convertible bonds, begin to lose in price.

Unlike private investors who have recently been trying to invest their capital in a proven hedge funds, large institutional investors are increasingly placing their funds in the so-called funds of funds ". But it is - a topic for another conversation.