Martin Lee @ Sg
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Why a Hedge Fund Should Not Be Called a Hedge Fund

I feel that the term hedge fund is an misnomer. Why?

Whenever we use the word hedging in investments, it usually means the taking up of new positions to reduce or eliminate the risks (or volatility) in the positions we were already holding.

While hedge funds might take up positions for hedging at certain times, most hedge funds are also highly leveraged funds.

Using leverage multiples both profit and losses. This increase of beta is the exact opposite of what we would expect when we hear the word hedging.

Here are some interesting numbers showing the 6-month returns of both locally registered and international hedge funds.

Singapore Registered Hedge Funds

Top Three

  1. Quadriga Superfund Futures C EURO Class R : 19.80%
  2. Quadriga Superfund Futures B EURO Class R : 18.37%
  3. Castlestone Aliquot Gold Bullion A USd : 17.96%

Bottom Three

  1. Penjing Asia A : -38.46%
  2. Platinum Turnberry USD : -36.59%
  3. Platinum Dynasty USD : -35.08%

International Hedge Funds

Top Three

  1. Aster-X Europe Fund : 830.13%
  2. Clarke Global Basic Program: 85.10%
  3. RAM Agressive : 82.25%

Bottom Three

  1. Sprott Hedge LP : -98.92%
  2. India Synthetic Warrant : -74.40%
  3. Zanett US Equity Hedged Ltd : -63.19%

Just look at the top result for the international funds.

Over leveraging is like playing showhand in poker. Double your money, or lose everything you have.

If you play showhand long enough, it is almost certain that you will end up broke.

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1 comment
Jason says 11 years ago

Therein lies a deep misconception about hedge funds always being highly leverage instruments. The truth is this. On the average, hedge funds are only leveraged up to 2X of investor capital. Often, where such funds are leveraged, they are intended to take advantage of price movements in financial assets, where without leverage, returns would not be really meaningful. e.g. arbitrage situations, intra-day FX movements. I suggest you read A Roadmap to Hedge Funds, which is published by the Alternative Investments Management Association (AIMA) for a better understanding of hedge funds.

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