What is a Hedge Fund?
Like mutual funds, hedge funds invest in traditional markets (stocks and bonds) but also have the flexibility to invest in non-traditional markets. A hedge fund can basically invest in anything — land, real estate, stocks, derivatives, and currencies.
Using leveraged, long, short and derivative positions, hedge fund managers are marked by a few key features, including:
- Skill-based strategies: the skill of the manager (alpha) drives returns, as opposed to the performance of the market of asset class (beta).
- Absolute returns: generated gains are not marked by indices or benchmarks.
- Diversity: trade across multiple markets (e.g., equities, bonds, currencies).
- Flexibility: options for long and short trades in a portfolio.
- Interest alignment: managers often invest their own capital aka “skin in the game”.
Who is Investing In Hedge Funds & Which Hedge Funds?
From the first hedge fund in 1949, the industry has grown to approximately $3.32 trillion in global assets under management in 2019.1 Historically those asset have come from institutional investors such as Ivy league universities and endowments. So, while many individuals do not invest in hedge funds directly, they benefit indirectly through their pension plans, college scholarships or charitable work.
Hedge fund managers with large asset bases dominate the industry. Those who have more than $1 billion in asset manage nearly 30% of the industry’s assets, and those with more than $5 billion manager over 60% of the industry.2
Traditional Investments Work Well for Your Clients, So Why Invest In Hedge Funds In The First Place?
Traditional asset managers generally allocate capital on a ‘long-only’ basis to stocks, bonds and cash. Portfolios are managed against a passive benchmark which they aim to outperform. The relative weighting of positions tend to have little deviation from the benchmark itself, often resulting in similar return profiles. Consequently, this tends to make it difficult for traditional managers to make money when markets are falling.
Hedge funds are usually included as a medium to long-term investment in a traditional portfolio of stocks and bonds. As the performance of hedge funds in general tends to be less correlated to traditional investments – especially in declining markets when correlations tend to be low – they offer a unique source of diversification for most investment portfolios. By blending a variety of skill-based approaches to investing in a diverse range of financial instruments and markets, a hedge fund portfolio construction process aims to achieve a specific return/risk profile, as well as proper diversification and balance in the overall portfolio.
How Hedge Funds Make Money3
Hedge fund managers make money using a variety of strategies. However, since the strategies and manager incentives vary so widely, it is important to take the time to evaluate the hedge fund industry and find one that matches your clients’ objectives.
Macro Funds – As the name suggests, such funds trade on macro views and global events. Famous ones include Soros Fund, Tudor Investments.
Long/Short Funds – Such funds usually trade in equity markets and will hold long, short positions or some both in accordance to their strategies and views.
Quantitative Funds – The fund managers will employ program/technology strategies and tactics to manage their positions with little human intervention. Notable ones are Renaissance Technologies, Quantedge.
Arbitrage Funds – Markets are imperfect, (at least these managers believe so to a certain degree), and they seek to arbitrage the pricing discrepancies that exist due to market imperfections. Sometimes, such pricing discrepancies might exist in milliseconds, at times a few days or weeks.
Distressed Funds – At every crisis, there are opportunities. These hedge funds seek to find value in assets that are mired in distress and are under market pressures. Not a style for the faint-hearted. Famous ones are Oaktree Capital, Elliot Management.
Leverage – Investing in hedge funds relies on leverage to increase the range of market bets managers will invest. This works by borrowing secure capital on a margin to strengthen purchase power. This margin also cooperates with derivatives high leverage swaps contracts and futures.
Relying on leverage opportunities generates the high risks and rewards associated with hedge funds. Heavy reliance on leverage causes even higher chances of credit risk and lost investment than other strategies.
Bridging the Gap for Advisors and Their Investors
In a universe of 10K+ hedge funds, where do you begin?
With 25 years of alternative investment experience, we utilize our experience and deep network to provide exposure to third-party institutional private equity and hedge funds for your clients' portfolios.
We seek to identify managers with a proven track record, a dedicated risk management process, deep teams and institutional safeguards.
Furthermore, we are not compensated by any hedge funds on the platform, creating a direct alignment of interests.
High investment minimums
The biggest challenge in creating a diversified portfolio is meeting the initial minimum investment requirements of each fund (up to $20M per fund).
We have satisfied the investment minimums for over 40 institutional quality hedge funds across all strategies and sectors. Our platform allows financial advisors to build customized hedge fund portfolios with no per-fund minimums for their clients.
Technology & research
How can you convey the value a fund offers your client’s portfolio, in the grand scheme of all their portfolio holdings?
Crystal provides financial advisors with web-based access to CrystalTools©, our proprietary suite of quantitative analytics and portfolio construction tools. CrystalResearch™ provides web-based qualitative research and operational due diligence on all available funds. These comprehensive due diligence resources provide the enhanced transparency necessary to analyze, construct and monitor customized hedge fund portfolios that meet clients' unique investment needs.
How can you deliver comprehensive portfolio proposals, monthly reporting, and consolidated Schedule K-1s, without incurring costly fees and/or losing clients to large institutions or competitors?
Consider us your outsourced alternative investing engine. We provide you with client-facing portfolio proposals, enhanced transparency for each underlying investment, monthly account information, all in your brand identity.
Investing in individual feeder funds is time consuming and overwhelming.
Our efficient investing solution minimizes administrative burdens for you and your clients.
- A simple, one-time, online subscription process for a diversified portfolio with multiple funds.
- Safeguard client assets with top-tier institutional providers.
- Integrated with all major custodial platforms.
Post investment support
Investing in hedge funds is a long-term journey that requires ongoing management.
Our seasoned team of investment professionals are readily available to support you. Rely on us for portfolio liquidity and rebalancing, and regular fund updates such as:
- New fund opportunities.
- Limited capacity opportunities.
- Changes in buy/hold/sell recommendation by our investment committee and more.