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1. What is a hedge fund?

- A hedge fund is an investment vehicle that pols capital from a number of investors and invests in
securities and other financial instruments
- HF managers typically engage in a wide variety of investment styles and strategies to achieve
superior return for their investors
- HF may be aggressively managed or make use of derivatives and/or leverage in both domestic
and international markets
- Doesn’t actually need to have anything to do with hedging
- Additional features of HF
o Free choice of investment categories, markets (including emerging markets) and trading
methods (e.g. global macro, long-short)
 Long: Buy low sell high
 Short: Sell high, buy low (when IR expected to fall)
o Use of leverage (often a lot)
o Use of derivatives (options, futures)
- Invented by Alfred Jones in 1950s, he introduced something called the performance fee (20% of
the profits)

2. Target investors and fee structures


Target Investors Hedge Funds’ fee structure
- HF are made available to certain - What does 2/20 mean?
sophisticated or accredited investors and o Annual management fees: 2%
institution investors o Performance fees: 20%
- The minimum investible sum is significant, - Some funds charge one-time subscription
but may not be as high as PE funds fees
- They cannot be offered or sold to the - Redemption fees or penalty fees may also
general public in most countries be imposed for hedge fund redemption
- In Singapore, an accredited investor is within a defined period.
defined as someone who has either:
o An income of SGD 300,000 over the
past 12 months; or
o Net worth of at least SGD 2 million

3. Key benefits and risks of investing in HF


Benefits Risks
- Many HF strategies have the ability to - Illiquidity: HF do not typically provide daily
generate positive returns in both rising or even monthly liquidity to investors,
and falling equity and bond markets often with long notice periods
- Academic research proves hedge funds - High fees/complex incentive structure:
have higher returns and lower overall risk some fee structures potentially provide an
than traditional investment funds asymmetric pay-out to the manager and
- Adding hedge funds to an investment can induce excessive risk taking with the
portfolio provides diversification not aim to generate greater performance fees
otherwise available in traditional investing. - Deviations from stated strategies and
Many of the strategies used by hedge funds misrepresentations
benefit from being non-correlated to the - Frauds and misappropriation
directions of equity markets
4. What are Private Equity Funds
- PE is the provision of equity capital by financial investors, with the aim of developing the
business and creating value to private companies or investors. This capital may be used to
develop new products and technology, acquisitions, increase working capital or expand the
business in new geographies
- PE fund is a collective investment scheme used for making investments in various equity (and to
a lesser extent debt) securities according to one of the investment strategies associated with
private equity.
- Typically PE funds have a long investment horizon of 10-12 years.
- Focus more on the later stage, already making money but want to make more

This is compared to Venture Capital funds, for earlier stage

5. Target investors and fee structures for VENTURE CAPITAL FUNDS


Target Investors VC fund fee structure
o VC funds are made available only to -
certain sophisticated or accredited
ivnestors and institution investors
o Minimum investible sum is high but
not as high as PE funds

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