Common Misconceptions About Hedge Funds

It is unsurprising when the media and countless people paint hedge funds in a negative light, because they are thought to be incredibly risky, unregulated, and operate in a volatile market. But once people see past misconceptions about hedge funds, they would see the potential of this investment vehicle to optimize and balance one’s portfolio.

                         Image source: hedgethink.com

Some of the myths surrounding hedge funds are the following:

All hedge funds are risky

First of all, it is important to be aware that every investment vehicle inherently carries a unique set of risks. Secondly, there are various ways to define risks. And if riskiness is expressed in terms of standard deviation of performance, then stocks and private equity have actually been riskier than hedge funds the past two decades.

Having said that, there are more than 10 types of hedge funds, and not all of them have the same level of risk. Depending on their correlation to the overall market movement, some hedge funds have low-risk expectancy, while some have high-risk expectancy.

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Hedge funds are only accessible to institutional investors or high-net-worth individuals

There are actually many ways to enter hedge fund investments, and one does not even have to shell out hundreds of thousands of dollars to do so. Some hedge funds are traded on exchanges, while some can be accessed through pooling of investor money together. There are even fintech startups that use hedge fund strategies to invest.

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Investment ideas for the high net worth individual

Alternative investments generally have a higher minimum investment requirement compared to traditional investments. They are also less liquid. However, alternative investments can be very lucrative for investors, and may even turn a profit during down markets. 

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Let’s take a look at some of the more popular alternative investments for high net worth individuals in the world today. 

Real estate 

Real estate is probably the most well-known of all the alternative investments. It is also both dependable and profitable. A lot of developers who started out in real estate back in the middle of the 20th century are now multi-millionaires. There are however, a lot of bases to cover and principles to study before going all-in in real estate, but once an investor hits his stride, it can be extremely lucrative. 

Managed futures 

Managed futures are indeed for the high net worth. What happens with managed futures is that funds and assets are handled by managers (sometimes firms for entire families), and are invested in different businesses. Managed futures are sensibly considered because people aren’t confident in their own business acumen. High net worth individuals then rely on and trust fund managers to make the right decisions. As such, becoming a fund manager takes a lot of accreditation, and only the best are trusted. 

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Scott Tominaga is the Chief Operating Officer of PartnersAdmin LLC. He has almost two decades of experience in the hedge fund and financial services industry. His company was established in 2008 with the intent to provide quality, outsourced solution to the dynamic back office needs of alternative fund industry. To know more about Scott and PartnersAdmin LLC, click here.

The role of the back office in private equity

In an investment business such as private equity, there are three parts; the front office, the middle office, and the back office. The front office is in charge of dealing with consumers and clients upfront, like having face-to-face meetings with clients, and other client-facing roles. The middle office is in charge of risk, credit, and strategic management. For employees in this sector, the back office is simply a trap everyone wants to get out of. 

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It’s a talk among employees that those who are working in the back office always dream of having a role in the front office. Front office roles have higher pay as these are revenue-generating, unlike the back office. However, all operations of an investment bank or a finance company will be impossible without the force of the back office. Although it doesn’t directly generate income, it provides crucial support and administration. 

The back office carries out functions like settlement, record maintenance, clearances, regulatory compliance, accounting, and IT services. The operations run by the front office depends highly on the back office. Its staff focus on designing the computer systems, handling the company finances, maintaining the databases, and seeking out new talent.

Jobs in the back office are as important as jobs in the front office and middle office. Its support is needed for two offices to run smoothly. It’s more concerned with internal efforts, unlike the front office, and is more distinct than those of the middle office. 

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Scott Tominaga is the Chief Operating Officer of PartnersAdmin LLC. He has almost two decades of experience in the hedge fund and financial services industry. His company was established in 2008 with the intent to provide quality, outsourced solution to the dynamic back office needs of alternative fund industry. To know more about Scott and PartnersAdmin LLC, click here.

Best practices for hedge fund performance reporting

When doing a hedge fund report, the most important thing to remember is the current industry standard. And that is that the performance numbers must comply with GIPS and AIMR. AIMR stands for the Association of Investment Management & Research, while GIPS refers to Global Investment Performance Standards. 

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GIPS is essentially the internationally acceptable standard of the AIMR PPS (Performance Presentation Standards), and since 2006 has replaced the AIMR-PPS. In short, while AIMR is a talking point in the industry, any best-practice methodology is now based on GIPS. 

In order to be in line with the demands on GIPS, performance reports must allow easy tracking of cash flows from investors for various accounts with different beginning and ending dates and asset sizes. These composite returns must address computation standards, from input data and calculation methodology to disclosures and the actual presentation. 

The key output here is a transparent fund-administration document from the input data and calculation stage. These explain crucial variables like trade date accounting, time-weighted returns, valuation, and accruals of income and expense. Disclosures and reportage sections are mainly for firm-level needs; a good report must be clearest at the fund level. 

Finally, remember that a hedge fund is a single portfolio with individualized fee arrangements; it is not a composite, so there’s no need to aggregate the participants’ returns in performance reports. 

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Scott Tominaga is the COO of PartnersAdmin LLC. He has over 17 years of experience in the hedge fund and financial services industry. For similar updates, follow this Twitter page.