Hedge funds in Russia and in the world: rating, structure, reviews. Hedge funds are ...

A peculiar shadow of a wide variety of conjectures and theories has been stretching for every organization called a hedge fund for several decades. Unfortunately, this is still not surprising, and the true essence and specifics of the work remain a kind of dark horse, even for experienced economists. This is largely ensured by the term “hedge” in the name - in the financial management environment, this, in general terms, means ensuring coverage of financial risks.

Of course, the clients’ misconception about such organizations, which many people somehow perceived solely as insurance against various problematic situations in the field of finance, were generously supplemented by numerous positive reports from the funds themselves about the successes of their activities. However, in reality, this financial mechanism does not work as it is supposed to be, and this is clearly what every investor interested in profit should know.

The essence and purpose of the organization

Hedge funds are a private investment partnership, the purpose of which is to maximize the return on invested funds for given risks or to reduce risks for a given return (this is what the term “hedge” in the name explains - from the English word for protection, insurance ). The very essence of such funds lies in one simple idea of ​​making a constant profit on the basis of investments of investors, regardless of the current market situation: whether it is an unprecedented decline or tangible growth. For such tasks complex financial strategies are used, often including leverage, buying shares in long or selling in short and many others.

The whole range of various financial operations that the fund can undertake is extremely wide. And exclusively risk management in the market is rather the prerogative of only certain hedge organizations, for the most part this aspect is only one of the possible tools for working with finances, but it is not the only function.

Mostly funds of investors are invested by managers in publicly traded securities, however, in essence, they are able to invest literally in everything that, in their opinion and strategy, is capable of further profit: land, real estate, commodity market, currency, etc. The only restriction in this regard is prescribed directly in the investment declaration of the fund.

Moreover, such a wide range of investment opportunities is not available to everyone who wants to increase their fortune: access to the hedge fund is open to either "accredited" or professional investors whose net worth must exceed at least $ 1 million (excluding the cost of their main housing). This limitation exists in view of the fact that professional investors are already sufficiently prepared for the difficulties and risks that a wide investment declaration of hedge funds implies. The limit on the number of investor participants is determined by the US Securities and Exchange Commission and is 99 people maximum, among which at least 65 must be, as mentioned at the beginning, “accredited” (an investor whose net income, according to US law, should be at least $ 200 thousand). Given the breadth of possible actions of the fund, the risks can be extremely high, which at the legislative level requires investors to invest in such a way that their complete loss does not entail any damage to the family budget.

The birth of the revolution and its indelible mark in the global economy

A profit-generating strategy unique to its time and generation was invented by the American economist Alfred Winslow Johnson, who founded the first hedge fund in history in 1949. The authorship in the name hedged fund, likewise, belongs to him. He published the results of his work only six years later, in 1965, which made a lot of noise and interest in the market. In it, he described in detail the entire strategic mechanism for earning in a falling and growing market by using combinations of selling revalued and buying undervalued shares.

The former are securities, the current value of which is high, but at the same time there are some signs - factors that foreshadow that their price will collapse in the future. Undervalued - exactly the opposite, when the value of the shares is low, but they have any prerequisites and potential for growth.

Using the generalized features of the strategy described above, Jones achieved impressive results - the value of his investments over the ten years of the fund's existence reached 670%.

The successful strategy was enormously widespread, and by 1968 in the United States, the Securities and Exchange Commission had registered about 140 investment partnerships that fell under the definition of “hedge fund”.

However, a revolutionary financial idea for its time, closer to 2008-2009, turned into a real financial catastrophe, referred to in wide circles as the “great recession”. Generated to a greater extent by numerous and constantly complicated financial speculations, the global crisis of those years received considerable influence from hedge funds themselves, and hedge funds are, in essence, speculative organizations. However, for the sake of objectivity, it is worth noting that the housing bubble was the first bursting bubble of this financial storm. Outstanding mortgage loans, which were issued at an astronomical scale for literally everyone at that time (in considerable numbers and for those whose solvency could not close the executed debt obligations at all), dragged the entire financial and credit sector to the bottom, after which the crisis was complete least spread to the real economy of the United States and countries of other continents.

Playing a fall in shares of banks, investment hedge funds thereby only exacerbated the growing financial panic, significantly catalyzing the economic collapse of a global scale. And at least part of the guilt of these organizations for everything that happened at that time is undeniable, but still not only they influenced those events. The greed of the consumers themselves, which is in no way inferior to the thirst for profit on the part of economists, attracted huge credit debts to the masses, which in general were absolutely disproportionate to their solvency.

To date, the world has recovered after the dire consequences of the crisis, and control over the activities of hedge funds has been significantly updated after a barely fixable blow to their image as financial organizations. In total, the global market has about 12,000 hedge funds, whose management assets are in the trillions of US dollars. However, due to the complex and extremely confusing in most cases the legal structure of these organizations, it is extremely difficult to calculate the more accurate sizes of the assets of specific funds.

Structural components of a single mechanism

Hedge funds are in most cases unique in their organization partnerships with many features and nuances. Some are incredibly complex and confusing, while others cost as simple and transparent structure as possible - all this depends solely on the goals, strategies and working methods of the fund. However, almost any hedge fund structure consists of the following key links:

• Investors are precisely those people without whose assets the existence and activity of the fund itself is impossible. The organization offers investors its services, those, if agreed, invest some part of their capital. After which, as a result of its correct use, profit on the market is obtained on this basis, both for the client and for the fund.
• A guarantor bank, or a custodian, is a bank whose main task is to ensure reliable storage of investors' assets, be it currency, securities, precious metals, etc. In some cases, the fund may attract "its" bank for conducting and / or execution of transactions (however, this is mainly a task for the primary broker) . In addition, the custodian is also involved in preparing reports on transactions completed through the fund's account; checking compliance with the real policy of the manager with the list of goals stated in the charter of the fund. Of course, a large bank with a solid positive reputation usually plays such a role.
• Manager - a person or, as a rule, a company that determines the entire investment strategy, being responsible for each of the decisions made by the fund. In addition, the hedge fund manager also manages all operations.
• Board of Directors - monitors the activities of the manager, as well as the companies that provide services to the fund. The Council is authorized to resolve controversial and controversial issues between shareholders and managers, to appoint personnel for key positions of the fund. It is the members of the council that bear personal responsibility (even criminal) for the observance by the fund of all the principles and rules prescribed in the memorandum.
• Administrator - determines the net asset value of the fund, regardless of the manager, which gives a significant reduction in risk in the event of an estimated error of the latter. However, most administrators assume the functions of accounting, paying bills, notifying shareholders of activity reports, distributing profits between shareholders, and subscribing and redeeming stocks / shares of the fund.
• Primary broker - this role is usually played by a large investment bank that does not perform one-time transactions on behalf of a hedge fund as an ordinary broker. The primary broker provides the fund with a number of professional services related to clearing (cashless payments between enterprises / companies / countries through goods / securities / services), custody services and operational support.
• Auditor - a person who checks the compliance of stock reporting with accounting standards and financial legislation. The manager usually conducts an audit annually, but even such rare inspections do not detract from this position in the organization structure - without an auditor, other service companies or third-party agents are unlikely to agree to serve the fund.
• Legal adviser - necessary to ensure the licensed status of the fund, which is issued by authorized regulators subject to a number of certain requirements. The license opens up much wider scope for opportunities and a set of investor base, but, in addition, the consultant is often used to conclude various contracts and agreements.

This is what the hedge fund structure looks like. Again, in various cases, this scheme in practice can be even more simplified (even with the absence of any of the above frames) or much more winding and complex.

“Typical fund”: varieties and classifications based on the ongoing investment strategy

In addition, despite the structural component, the International Monetary Background identifies three types of hedge funds:

1. Global funds - their activities extend to the entire global market. However, this type of fund usually develops its strategy on the basis of analysis and forecasts of stock dynamics of individual companies.
2. Macro funds - work exclusively within a specific national market. Usually based on the macroeconomic and financial characteristics of a particular country.
3. Relative value funds are the primordial classic type of hedge funds that they were at the very start of their existence. Carry out financial transactions within the framework of the stock market of any one country, using the good old strategy of selling revalued and buying unvalued shares. At the same time, the manager constantly monitors the current situation in the market in order to choose the most suitable moment for the transaction and get the maximum profit.

Of course, in the official classification, the whole variety of hedge funds in the world market does not end there, because little prevents managers from creating many additional subspecies and branches, if necessary.

Learn More About Hedge Funds

The partnership policy of the vast majority of hedge funds is aimed at long-term membership of investors, so that their contributions remain at the disposal of the fund for long periods. This mainly concerns the exit rules: the investor needs to warn the organization about such a decision in advance, while the interval between notification and termination of membership can reach up to 2-3 months (depending on the established regulations). Another alternative that is often encountered in practice is the immediate withdrawal of the entire deposit in cash, however, the price for the purchase / sale of assets is determined directly by the fund itself. And, of course, in most of these cases, the difference between them reaches very significant indicators.

So, upon entry, exit or a partial decrease in their contribution, the entire investment volume of each partner is reviewed and, accordingly, the share ratio also changes. The termination of the membership of a certain number of investors can significantly increase the total amount of profit among the remaining: management can pay off with the outgoing investors by far not the most successful investments, leaving more promising assets in their portfolio. Thus, after some time, the hedge fund may receive a sharp increase in return on capital due to the contribution that previously participated in the creation of income and was subsequently withdrawn for outgoing investors, but who had not yet managed to get the percentage of profit due by that moment. However, while in the hedge fund environment there is a persistent tendency for investors to actively exit, then no one is safe from the completely opposite effect in the form of a mass panic exit of partners. Often this is fraught not only with a drop in returns on capital, but also with the complete bankruptcy of the entire organization.

More controversial than the wide area of ​​investment in working with finances is the expanded system of commissions. Hedge funds receive not only one coefficient of transaction costs, but 2% for managing the assets themselves and 20% of any profit received. Moreover, even if the manager suffers losses and does not bring any income at all, he, according to the memorandum of association, in any case relies on these 2% of the total volume of controlled assets (such a system was given the corresponding name "2 and 20"). Such a system of commission charges is practiced by the vast majority of hedge funds on the planet. However, many analysts today especially emphasize the trend of a gradual transition of funds to the "1 and 10" system. In the case when the manager does not charge at all charges just from the disposal of assets, this is covered by a higher percentage of the commission on profit.

Chasing Big Profits: Modern Investment Strategies

Extremely diverse investment opportunities and areas, as well as the influence of many different factors, constantly contribute to the generation and implementation of new earnings technologies for hedge funds. However, despite this, the current basic financial strategies can be classified into several general types:

• Long / short position - usually hedge funds using this strategy work with 40% of their assets. It consists in the acquisition of undervalued assets (long) and the sale of revalued assets (short).
• Market-Neutral Arbitrage - works only when the same assets diverge in value on different exchanges. The manager enters a long position on revalued assets on one exchange and a short one on another, where these same assets are revalued.
• Reaction to events (Event Driven) - the strategy is based on the unfair value of the shares of any enterprises that have undergone certain changes (be it mergers, acquisitions, reorganizations, etc.). The manager catches a profitable moment for the operation (purchase / sale) before these unfair prices are balanced by the market.
• Short positions (Short Bias) - with this strategy, the fund mainly holds short positions, making money on falling markets.
• Real value (Value) - investment is carried out in securities sold at a discount to the main assets or in the market underestimated.
• Crisis Securities (Distressed Securities) - a purchase with a big discount of shares and liabilities of companies that are on the verge of bankruptcy or restructuring. Investing according to this strategy assumes that as a result of internal changes, the selected companies will become more powerful, bringing profit along with this.

Often, funds resort to mixed strategies, using several of the above working methods to profit at once.

Regulatory: What are the rules of the game and leverage for hedge funds?

For a long time, hedge funds stood apart in the world market due to their closeness and poor regulation of financial transactions. However, complete anarchy and freedom of action, of course, could never be discussed - the normative regulation of funds was, is and always will be. Nowadays, given their rapidly growing influence on the world market and the increasingly frequent manifestations of various violations and insider trading, special commissions and bodies monitor and control them even more carefully than ever before.

In particular, the JOBS Act (Jumpstart Our Business Startups Act) introduced in March 2012, after a while, had quite significant changes in the work of hedge funds. Developed as a measure to encourage financing by various small business institutions, this act has weakened the control of the securities market. Thanks to the new law, hedge funds, given their wide investment opportunities, have become almost the main suppliers of capital for startups and small enterprises. Subsequently, this act had a great impact in September 2013 on the lifting of the ban on advertising hedge funds and firms offering individual placement of securities.

In many countries, hedge funds are required to report to state financial authorities at the first request for large positions on foreign currency contracts, as well as to inform about their positions on recently issued or upcoming securities. Such measures are introduced specifically to limit money laundering and to strengthen capital controls so that large players do not infringe on the interests of small players in the market.

In addition, the state control policy of hedge funds is also aimed at reducing the systematic risks of destabilizing the financial system as a whole. This is reflected in the regulation of margin requirements, collateral and limits that financial intermediaries open to individual customers.

In order to prevent risks with hedge fund lending, the largest primary brokers and banks daily reassess their positions relative to positions at market prices of credited funds. These loans must be secured by an appropriate collateral in the form of valuable assets. In addition, banks are entitled to set lending limits for each fund separately, based on their own monitoring of the investment strategy, monthly income, cases of investors leaving and the history of business relationships.

The most successful hedge funds in the world today

Meanwhile, not the best times for hedge funds continue to drag on since last year. The total profit indicator was below the average recorded value over the past few years: last year, the largest hedge funds earned $ 517.6 million, what? According to some experts? better than the results of 2014, however, as much as 40% worse in comparison with the profit earned in 2013.

At the same time, the price of all assets involved in one way or another in the activities of hedge funds rose by approximately $ 51.7 billion, reaching a total estimated value of $ 2.97 trillion.

The negative downward trend in profits is clearly reflected not only in the tangible financial losses suffered by even the best hedge funds in the world, but also on the obvious changes in the ratings of the strongest market participants. Such famous figures as John Paulson from Paulson and Co., Leon Cooperman from Omega Advisors, and Daniel Loeb from Third Point lost their positions. Players such as Ken Griffin from Citadel and James Simons from Renaissance Technologies have firmly established themselves in their former places. Both in 2015 managed to earn a record $ 1.7 billion, thereby deservedly climbing the podium of the strongest hedge fund managers.

The rating of hedge funds can change beyond recognition, ruthlessly throwing to the bottom already seemingly time-tested leaders and the market. Will the current top players remain at their positions without suffering significant losses by the end of the year - only time will tell. In the meantime, the top ten managers among all hedge funds on the planet are:

Hedge Funds of Russia: Ratings, Prospects and Trends

Not the most profitable times for hedge funds also affected the Russian colleagues of American traders. Demonstrating negative profitability, the situation with domestic funds in general looks less colorful than in the Western market, where such institutions are considered one of the most reliable financial instruments that consistently bring up to 20% of investment returns with minimal risks in most cases.

In Russia, investment funds are mainly represented by mutual funds (Mutual Investment Fund) and OFBU (General Funds of Banking Management). Especially Moscow hedge funds quite often have trust status. The total number of domestic hedge funds is now about six dozen. A similar indicator was recorded in the mid-eighties in the United States, where the market in those days already really appreciated hedge funds. In Russia, the legislative framework significantly limits the tools of the funds, not allowing the use of a wide range of strategies for working in the market. For the same reason, a huge part of Russian investment partnerships is registered in offshore zones.

Therefore, the adoption of a number of legislative changes on this issue can significantly stimulate Russian hedge funds and their economic growth, allowing them to adopt a much wider range of strategies.

And although hedge funds in Russia are not as widespread as in the West, we still have impressive examples of leaders able to compete with competitors at the international level. The most productive of them turned out to be the VR Global Offshore Fund, whose profit for the year was 32.32%. But such a record-breaking return for the domestic market, the VR Global Offshore Fund managed to achieve a blocking of funds: the fund has the highest percentage of penalties for investors for early exit - 4.5%. Diamond Age Atlas Fund earned less - 22.92% of total profit, leaving the Copperstone Alpha Fund on the third line of the rating. The bronze medalist managed to grow by 22.06% over the year.

Finally, Burnem Asset Management, whose income over the past year was 17.63%, is in fourth place.

In the hands of all four of the above funds, approximately 80% ($ 3.425 billion) of all assets are concentrated in comparison with other competitors in the Russian market. Moreover, more than half of these funds - 1.644 billion - belong to the VR Global Offshore Fund.

Personal experience with hedge funds in reviews of market players themselves

Today, hedge funds are one of the most profitable and at the same time the most stable investment partnerships among many other investment options in the modern market. Large professional entrepreneurs and businessmen, in search of profit, as a rule, always note as a top priority financial institution to which they will entrust their hard-earned money, namely a hedge fund. The reviews are negative, the reviews are positive - hardly anyone will trust the opinion of strangers who are “contributors” to the Web when fraudulent accounts have become almost one of the main tools of commerce.

Another thing is that there have always been risks, there are now and will be in the future, especially in the economy. Thus, not every hedge fund can actually be an investment partnership, but rather creates a fake around its name for the sole illegal purpose - fraud.

One of the most notorious cases was a Bernard Madoff scam , which cost Madoff Investment Securities investors about $ 50 billion. His investment fund, the cost of entry into which amounted to several million US dollars, was known to many people from high society. Madoff himself was also known for his generous charitable donations to research on cancer and diabetes, on the election costs of the US Democratic Party, and on the development of cultural and educational institutions.

However, this did not save the fund from the inevitable after the crisis of 1995 restructuring from an investment partnership to a financial pyramid. However, the bubble he created burst at the end of 2008, after which Madoff was sentenced to 150 years in prison.

Truly experienced players (people who have already earned more than a million by investing funds) primarily recommend looking at the minimum amount for admission. If it is equal to or even less than $ 50,000, then be sure - you are faced with a hype disguised as a hedge fund. For example, foreign hedge funds tested by time and dozens of clients accept investments from at least $ 100,000.