Case analysis- hedge fund Essay
For most of us, hearing the word ‘investment’ is just like challenging the world’s champion boxer, something that is hard to beat and that left a question what to do. Fortunately, become a later mover in the matter of investing does not necessarily become the looser since we live in the information age that provide us with a plethora of tools and advices that will bring us to be the next Warren Buffet.
An important step to be successful investors is to keep learning. It means that we should pay attention to events that might affect us, what kind of investment fit our needs, understand the risks associated with each investment. If we are going to invest in stocks, for instances, therefore we should learn as much as we can about the companies we are considering.
For corporations, it is usual to employ hedging. It is activities conducted to reduce or eliminate risk of a certain investments or transaction. For example, a multinational corporation performing a cross-border credit sales transaction could take advantage of forward contract –an example of hedging instruments- to transfer the risk of currency fluctuation. The company could transfer the right of receiving future payment to a broker, while a broker pays the company today using a determined currency rate-which usually a little higher than current rate-. Thus, the risk of receiving more or less than the written contract is transferred to the broker at a certain fee.
Concerning the pros and cons of offering hedge fund to the customers of The Common Fund, there are several points that the non-profit consortium of more than 1,000 colleges, universities, and independent schools provide to urge the need to offer hedge fund to its clients as following:
Hedge fund is considered as investment vehicles that are very much in vogue. In addition, its number has also increased eight-fold during the past decades (Spitz, 1996). Similarly, Zimmerman (2002) says that the hedge fund market is estimated to have plentiful marketplace worth 7,000 with $600 billion of assets under management.
Hedge funds provide investors with high returns about 30%-70% in 1993 alone
Hedge funds have several structural issues of fiduciaries
Hedge funds turn out to have structural problems since there are limited exit provisions of hedge fund partnership agreements that effectively place constraints on the Common Fund
There are facts that hedge fund managers unwillingly disclose their holdings. This situation presents a big question mark since the Common Fund has policy to conduct an appropriate level of supervision
There is doubt over the use of leverage by hedge funds since it provides investors with undesirable level of risk.
Since the market of hedge fund is abundant, it makes sense if the Common Fund also offers hedge fund portfolio to its smaller investors.
Concerning the recommendation for The Common Fund to offer a hedge fund portfolio to its clients, I might say that it is a good idea for the Common Fund to offer such product. This is because the hedge fund marketplace is investment vehicle that shows fabulous growth within the past decade.
This is true that hedge fund has intolerable level of risk, but anyone at the Common Fund should realize the hedge funds have potential to give investors high return between 20%-30% per annum or 70% like happened in 1993 (Spitz, 1996). It means that members of the Common Fund should realize the jargon “high returns, high risks” when dealing with the investment vehicles they might take in the future.
In addition, to minimize unfavorable risks of hedge funds, the key factors that the Common Fund must do is to carefully discuss and select hedge fund managers. They can choose one of many hedge fund managers that suit the Common Fund’s investment philosophy. For example, Steinhardt Partners and Tiger are Market-Sensitive Hedge Fund managers that have above-average turnovers (Spitz, 1996).
From the exhibit 10 we found that Steinhardt also placed in the first number of Recommended Manager Weightings. It means that once the members of the Common Fund decide to take hedge fund with appropriate level of risk, they should take Steinhardt as their hedge fund manager.
Spitz, William T. (1996). The Common Fund Hedge Fund Portfolio. Harvard Business School
Zimmermann, Victor. (2002). Hedge Fund Marketing: Pros, Cons, and Structuring Agreements with Third-party Marketers. Retrieved February 23, 2006 from http://www.cm-p.com/pdf/hedge_fund_marketing.pdf