Hedge Fund Explained In 3 Minutes
Updated: Oct 3, 2021
Ever heard of Renaissance Technology’s Medallion Fund, which has for 33 years delivered an amazing 39% average annual return after fees since 1988?
$1,000 invested in 1988 in this fund would be worth $52 million today if all profits are reinvested! Acknowledged as the best fund in the world, the Medallion Fund resides in the exclusive realm of hedge funds which are reserved mainly for the rich or institutions.
While not all types of hedge fund strategies are implementable in retail accounts, there are those you can deploy with professional help from iFAST Global Markets through our portfolio outsourcing service. Now, if this is the first time you hear of the term hedge funds, not to worry. Here’s a quick 3-minute introduction to get you acquainted.
Hedge Funds aim to deliver positive returns regardless of the market
The performance of traditional funds such as unit trusts and ETFs hinges very much on how the market performs. If the market is good, they do great. If the market’s poor, they tend to do poorly too. Many hedge funds, on the other hand, target positive returns regardless of what the market is doing. During the Kuwait invasion from Jan 1990 to Sep 1990, hedge funds as a group weathered through the period with a positive return. And at the worst of the dot com bubble in 2000, they were close to flat as a group. Contrast these with the markets which are nursing losses exceeding 20% and 40% respectively. [See our earlier post on Hedge Fund Strategies Are Great Alternatives To Conventional Products]
Hedge Funds pursue non-conventional strategies
Hedge funds, unlike traditional funds, are not constrained by regulations in the strategies they use. Many moved beyond the simple buying-and-holding that traditional funds do. They specialize in tons of strategies doing all sorts of different things out there that are much less dependent on how the broad market performs. These strategies can range from market neutral, global macro, trend following, relative value, volatility trading, market-making, and more. Never heard of these before? That’s not a surprise. Because…
Hedge Funds don't market publicly
You will hardly come across any public advertisements from hedge funds. Instead of mass marketing, hedge funds would rather throw a private dinner function. Throughout history, hedge funds have commonly been an exclusive way of investing money that only financial institutions or high net-worth individuals take part in. To grow their client base, hedge fund managers rely on their own network and business partners such as prime brokers. So, if you’ve never heard of hedge funds, or find it hard to research about them deeply online, now you know why.
Hedge Funds charge higher fees and are much less liquid
Hedge funds typically charge an annual 2% for management and take a 20% cut of the profits they make for you. It can go much higher. Medallion charges 5% for management and 44% on your profits before they were closed to external investors. And established funds will only accept investments that are in the millions too. Neither can you redeem your shares in the fund anytime. Many allow only monthly or quarterly redemptions. Some may even impose a lockup period.
But we are breaking those barriers in our collaboration with iFAST Global Markets.