Hedge funds: Are they a good bet?
For many investors looking to broaden their portfolio, the topic of hedge fund investing will likely come up. Hedge funds can be a useful tool to diversify a portfolio as many of these funds have low correlations with traditional stock and bond markets based on the strategies they employ.
What Are Hedge Funds?
At their core, hedge funds are similar to mutual funds in that they are pooled funds that use varying strategies to generate returns for investors. Where hedge funds differ is how broad those strategies can be and to what extent they may utilise alternative investments such as options or commodity contracts.
Often hedge funds are far more restrictive in who is allowed to participate in the fund, requiring large investments and coming with strict limitations in terms of when and to what extent withdrawals from the fund can be made. This is also an area where they differ from mutual funds, which are typically fairly easy to invest in or sell a position in.
One approach that many hedge funds take in order to maximise the returns they can generate is through leveraging themselves. By borrowing money on top of the funds pooled by investors, the fund can reinvest the money and as long as the returns generated exceed the borrowing costs there will be an increase in returns for investors. This also increases the risk hedge funds face as any losses are incurred on the borrowing costs still need to be paid, creating an even larger loss for investors.
Evaluating Hedge Funds
When evaluating a hedge fund, the single most important issue investors need to consider is how the strategy of the fund aligns with their investment goals and risk tolerance. It’s not uncommon for hedge funds to see substantial (30% or more) swings in their value over relatively short periods of time. This can be difficult for many investors to accept, particularly considering the high initial investment that most hedge funds require. Seeing hundreds of thousands of dollars disappear, or appear, over a period of months can be shocking for many.
Additionally, the time horizon that the hedge fund strategy is aligned towards is important to consider when choosing a fund to invest in.
Another key issue when evaluating a hedge fund is to compare its existing fee structure to the returns that the fund has generated historically. Fees for hedge funds are often far higher than those for other managed investments due to the very active nature of many funds. This fee structure may be justified based on performance, but it still needs to be clearly understood by an investor. Even if a fund sees significant losses, the fund management fee can still be fairly high and some investors can find this troubling.
Singapore-based Hedge Funds
Singapore’s role as a key financial market in Asia has led to the country having some of the larger hedge funds in the region. Some of the largest hedge funds include:
- AR Capital – Manages multiple major funds, with a focus on Asian markets. There are options provided in terms of a fund that aligns with an investor’s strategic goals, such as a US dollar fund.
- RCMA Asset Management – Formerly Aisling Analytics, this group focuses on commodity trading.
- Arisaig Partners – A group with 20 years of experience in Asia that focuses on consumer staples in emerging markets. This group also has Latin America- and Africa-focused funds for those looking to invest in non-Asia fund.
- Quantedge Capital – A quantitative focus hedge fund that has grown from $3 million in initial capital in 2006 to over $1 billion in 2014. Its Quantedge Global Fund was named Asia’s best-performing macro hedge fund by Bloomberg in 2014.
- Dymon Asia Capital – A fund that focuses on utilising low-cost long-term options to take advantage of emerging trends in Asia. The fund has seen significant growth and has one of the best track records in Asia.
These are just a sample of the hedge fund options that exist in Singapore for investors looking to diversify their portfolio. As with any investment decision, investors should always perform their own research to ensure they find the right fit for them.