Hedge Funds: Structures

Structurally, a hedge fund has some similarities to a mutual fund. For example, just like a mutual fund, a hedge fund is a pooled investment vehicle that makes investments in equities, bonds, options and a variety of other securities. It can also be run by a separate manager, much like a sub-advisor runs a mutual fund that is distributed by a large mutual fund company. That, however, is basically where the similarities end. The range of investment strategies available to hedge funds and the types of positions they can take are quite broad and in many cases, very complex. We will focus on specific strategies later in this tutorial, so for now we'll focus on how hedge funds are structured.

Fee StructureHedge funds also differ quite radically from mutual funds in how they charge fees. Their fee structure is one of the main reasons why talented money managers decide to open their own hedge funds to begin with. Not only are the fees paid by investors higher than they are for mutual funds, they include some additional fees that mutual funds don't even charge.

Incentive Fee
Most if not all hedge funds charge an incentive fee of anywhere between 10-20% of fund profits, and some hedge funds have even gone as high as 50%. The idea of the incentive fee is to reward the hedge fund manager for good performance, and if the fund's performance is attractive enough, investors are willing to pay this fee. For example, if a hedge fund manager generates a 20% return per year, after management fee, the hedge fund manager will collect 4% of those profits, leaving the investor with a 16% net return. In many cases, this is an attractive return despite the high incentive fee, but with more mediocre managers entering the industry in search of fortune, investors have more often than not been disappointed with net returns on many funds.

Management Fee
The management fee for a hedge fund is for the same service that the management fee covers in mutual funds. The difference is that hedge funds typically charge a management fee of 2% of assets managed – and in some cases even higher, if the manager is in high demand and has had a very good track record. This fee alone makes managing a hedge fund attractive, but it is the next fee that really makes it a profitable endeavor for good fund managers.

Hedge funds often follow the so-called "two and twenty" structure – where managers receive 2% of net asset value managed and 20% of profits, though as mentioned, these fees can vary among hedge funds.

Organizational Structure
The typical hedge fund structure is really a two-tiered organization.

Figure 1: Hedge Fund Organizational Structure

The general/limited partnership model is the most common structure for the pool of investment funds that make up a hedge fund. In this structure, the general partner assumes responsibility for the operations of the fund, while limited partners can make investments into the partnership and are liable only for their paid-in amounts. As a rule, a general/limited partnership must have at least one GP and one LP, but can have multiple GPs and many LPs. There is an SEC rule, however, that generally limits investors to 99 in order to be excluded from SEC registration.

Safe Investment Options When You Can't Afford Losses

There are safe investment options available to investors that provide opportunities for some growth. These types of investments are important for those individuals who have a short time horizon (less than 5 years) and are looking to preserve capital as an investment objective. Investors who are nearing a life event such as retirement or funding a child’s college education are more likely to run to safer investments that provide some growth but are not as risky.
Cash and Money Market Instruments

Cash and money market instruments such as CDs are considered to be the safest type of investment. These investments offer safety of principal and liquidity and are appropriate for investors who are willing to forego returns in exchange for easy access to your money. This is important for retirees who need to protect their savings in order to fund retirement.
Risk Profile

When an investment account is established for an investor, a risk profile is determined. The risk profile allows an investment professional to determine which type of investment products are appropriate relative to an investor’s risk tolerance. Risk is ranked from low to high, with the end being an investor who is adverse to investment risk and high being an investor who is aggressive.

Investments are selected that are appropriate for the investor, after establishing the risk profile. Investment types including cash and money market instruments (i.e. treasury bills, commercial paper and certificates of deposit), debt instruments (bonds) and stock are ranked in terms of their possibility for loss relative to their investment return.
Stocks

Stocks are considered the riskiest of investment types. They offer the highest potential return but are the most volatile in terms of potential for loss. A portion of an investor’s portfolio should include stocks in proportion to other investments. Using a strategy of diversifying investment and allocating assets in proportion to risk helps an investor achieve a target rate of return and minimize some of the risks inherent to all investments.

An investor who is looking for safety should examine their investment objectives, goals, time horizon and risk tolerance carefully to determine what mix of investments provides the highest potential degree of safety. Using asset allocation and diversification, a higher percentage of cash and money market instruments would be sought to protect the portfolio’s principal amount.
Bonds

Bonds provide more investment return than money market instruments. They carry a modest level of risk depending on the issuer. U.S. Treasury bonds issued by the government carry the lowest amount of risk among all bonds followed by municipal bonds and finally corporate bonds. The average returns for these 3 types of bonds rages from 5-1/2 to 6 percent.

Dubai's Illusory Real Estate Rebound

In the past few weeks, several high-profile Dubai construction projects on hold since the global financial meltdown of 2008 have been revived. Among the eye-catchers: a skyscraper with nine swimming pools, a mile-long canal winding its way around office buildings, and a replica of the Taj Mahal a mere four times bigger than the original.
The commercial property market isn’t much better: About a third of the office space in the central business district is unoccupied, and the vacancy rate is much higher in other neighborhoods. New developments will add about 9.7 million square feet next year, equal to 13 percent of the existing space in Dubai’s business quarter. “The market has improved to some extent, but there isn’t enough to justify going ahead with all the projects that are now being talked about,” says Craig Plumb, Jones Lang’s head of research for the Middle East and North Africa. “They should be phased over a longer period and should be built in line with demand.”
Since 2008, $757 billion worth of projects have been delayed or shelved in the U.A.E., according to an October Citigroup (C) report. That’s more than the combined value of projects canceled in Egypt, Iraq, Kuwait, Saudi Arabia, and Qatar. Some developers continue holding on to clients’ cash as projects remain half-built and court disputes drag on.
The increased demand is mostly from Indian, Pakistani, and Iranian investors drawn to the relative stability of Dubai since the euro crisis and the Arab Spring, says Jan Pawel Hasman, an analyst at investment bank EFG-Hermes Holding in Cairo. Saud Masud, chief executive officer of New York-based investment firm SM Advisory Group, says the upswing isn’t sustainable without steady population and job growth. “The oversupply issue will probably not be resolved for perhaps another decade,” Masud says.
Dubai builders have deferred some dreams, but not all. The oversized Taj Mahal, dubbed Taj Arabia, was designed as part of the Falconcity of Wonders, a 41 million-sq.-ft. complex of homes, offices, hotels, and stores, along with replicas of the Pyramids, the Great Wall of China, the Eiffel Tower, and the Leaning Tower of Pisa. While the rest of Falconcity remains shelved, developer Link Global says the Taj Arabia, slated to include a 300-room luxury hotel, will cost about 1.3 billion dirhams and take two years to build. Chairman Arun Mehra declined to say how the company will pay for it.
Tightening credit may limit oversupply, says Dubai-based EFG-Hermes analyst Shabbir Malik, noting that lending to developers rose just 3 percent in the first quarter from the same period last year. New government restrictions on banking liquidity set to go into effect next year are also likely to hinder lending, Malik says.
The bottom line: Dubai builders have sidelined $757 billion worth of projects since 2008, and the local property market still faces an inventory glut.

Best ways to Invest in Gold and Silver

Gold and silver have been enjoying a quiet bull market from around 2001, a bull run that has almost tripled the price of gold, and quintupled (5X) the price of silver. There has been a lull in the price of these precious metals in the last year or so, but the fundamentals remain intact, and the Bull Run does not seem to have run its course yet. As the bull market has matured, more methods for investing in gold and silver have emerged allowing investors easy access to the precious metals market. Look no further than the following methods for the best ways to invest in gold and silver:
Gold and Silver Mutual funds: There are many mutual funds that specialize in the precious metals sector. They invest in gold and silver mining stocks or in the metals directly. Funds such as the Tocqueville Gold Fund are well known for tracking or sometimes exceeding the performance of the underlying gold price. Bernies Gold and Silver fund is an example of a fund that invests in both the metals, and does so internationally. 
Gold and Silver ETFs: Gold Exchange Traded Funds (GLD) are a relatively new phenomenon, but are an easy way for you to invest in gold directly. The prices of the gold ETF rises and drops in direct proportion to the underlying price of gold. The silver ETF (SLV) is even newer, and similarly, tracks the price of silver.
old and Silver coins: You can purchase gold and silver coins directly from brokers, or websites such as investmentrarities.com. Treat these as long term safe havens rather than investments, but it is good to be in possession of at least some. If you are not comfortable owning coins and putting them in your own safe-deposit box, you can use services such as goldmoney.com that will mark a certain amount of gold in your name in a safe in London based on your amount of purchase. It is easy to get your money out, or exchange your certificate for certain services at select merchant sites.
These cover some of the best ways to invest in gold and silver and participate in the ongoing bull market.

Gold and Silver Mining stocks: Buying gold and silver mining stocks will give you the most leverage from the current bull market. However these stocks are also the riskiest, as you take on all the risks associated with a mining operation. Moreover, you need to invest in those companies that are also exploring new areas for new finds of gold deposits - an inherently risky proposition - but one that will give your portfolio a serious boost.

Hedge Funds Lost 1.9% in October as Global Stocks Dropped

Hedge funds lost 1.9 percent in October as global stocks slumped after companies reported earnings that sparked concern the economy was slowing. “There were plenty of headwinds out there -- the S&P was down, that weighed on equities in total and most of the long- short equity players,” said Charles Mires, director of fixed income and alternative strategies at Franklin Street Partners Inc., the $2 billion Chapel Hill, North Carolina-based wealth manager and fund of funds.
The October results reduced hedge funds’ gains this year to 1.1 percent, compared with an advance of 13 percent for equities worldwide, including dividends. The index tracking performance in the $2.19 trillion industry is down 11 percent from its July 2007 peak. Paulson’s Advantage Plus fund, which seeks to profit from corporate events such as takeovers and bankruptcies and uses leverage to amplify returns, lost 3 percent in October and is down 17 percent this year, according to a person briefed on the results, who asked not to be identified because the information isn’t public. Paulson’s Advantage Fund, which employs a similar strategy, dropped 2.3 percent last month and 13 percent year-to- date, the person said.

Macro Funds

Macro funds, which bet on economic trends, fell 0.6 percent in October and 1.3 percent this year. Brevan Howard Management LLP posted a 0.2 percent decline last month through Oct. 19 in its flagship fund, bringing year-to-date gains to 1.5 percent, said a person briefed on the performance, who asked not to be identified because the fund isn’t public. Alan Howard founded $39 billion London-based Brevan Howard in 2002.
Multistrategy funds slumped 2.5 percent last month and 7.1 percent in 2012, according to data compiled by Bloomberg. Long- short equity funds, whose managers can bet on rising and falling stocks, fell 1.2 percent in October, paring gains this year to 1.5 percent. Hedge funds that beat benchmarks last month included Citadel LLC, the $13 billion Chicago-based firm founded by Ken Griffin; SAC Capital Advisors LP, the $14 billion Stamford, Connecticut-based firm run by Steven A. Cohen; and Daniel Loeb’s $9.6 billion Third Point LLC, based in New York.

Paulson’s Gains

The manager posted gains last month in several other funds, according to the person. Paulson Enhanced advanced 1.5 percent in October and 9.1 percent in 2012. Paulson Credit Opportunities rose 3.8 percent last month and 6 percent this year. Paulson Recovery gained 2.2 percent during the month and 2.6 percent year-to-date. Paulson’s Gold Fund declined 6.9 percent during the month as bullion fell. The hedge fund is down 11 percent in 2012.

Citadel, SAC

Citadel posted a 3.2 percent return in its main Kensington and Wellington funds, bringing year-to-date gains to 19 percent, according to a person familiar with the matter, who asked not to be identified because the information isn’t public. Katie Spring, a spokeswoman for Citadel, declined to comment on the returns.
SAC rose 1.1 percent in October and 10 percent this year, said a person briefed on the returns. Jonathan Gasthalter, a spokesman for SAC at Sard Verbinnen & Co., declined to comment.
Hedge fund assets grew 3.6 percent to a record $2.19 trillion in the third quarter, according to Chicago-based Hedge Fund Research Inc. Investors deposited $10.6 billion during the period, the firm said last month

Understanding the risk involved in gold investing

In any investment there is promise and there is risk. Understanding the risk involved in gold investing starts with knowing physical gold investment products. Managing risk in gold investing includes picking a reputable and professional dealer, having a clear idea about investment goals, and a firm knowledge of the history of gold markets in bullion and rare gold coins.

Who you deal with

A reputable deal will not promise that every investment will succeed and an honest dealer will not continually steer you towards bullion purchases with high markups. A long standing dealer with an A+ rating with Better Business Bureau a record will be a help in investing and not a risk.

Products

Investing in the right product for the right purpose will help reduce investment risk in gold. Gold bullion bars and coins are used for short to medium term investment in the gold market. These products track the price of gold bullion. Gold bullion can be bought for as little as 2% above the spot price of gold bullion, sometimes less. Certified gold coins have a higher cost of purchase so they need to be held longer to expect a profit. However, these physical gold investment products can substantially outperform bullion over a number of years.

Investment goals

Short term investors belong in gold bullion and long term investors belong in certified rare gold coins. The risk of buying rare coins short term is that the investor may not be in the investment long enough to recoup investment cost. The risk of investing long term in bullion is twofold. It may not do as well as a gold coin investment and it may be confiscated (see below).

History as a guide to the risk in gold investing

Markets rise and market fall. The investor does not need to be steeped in esoteric theories such as Elliot Waves and the like to see this. Over the last ten years when gold rose four fold it also dropped back substantially in both 2006 and 2008 before moving up again. Having a clear idea about how gold moves and how it correlated with the US dollar will help the investor improve the chances of profit and reduce the risk of gold investing. A long time ago, but in the memory of some still alive, is the confiscation of gold in 1933 by the United States government. Economic times were even worse than today and president issued an executive order against “hoarding” gold. But rare gold coins were exempted! This precedent has led many to invest in certified rare gold coins for the long term as they believe this reduces the risk of their gold investments being confiscated when the government comes again for your gold.

Is Real Estate Investment Best for 2013?

Investments in China real estate are still a promising picture, although Chinese investors themselves are still eager to buy in Canada, particularly Vancouver. The Canadian economy and land scarcity in Vancouver are still the best hedge for many foreign investors. That should keep the price of Vancouver property propped up despite the recent fall. The Canadian government has taken drastic measures to suppress the real estate market in Canada, but with the Canadian economy faltering, particularly in Ontario and Quebec, they’ll come under increasing pressure to stimulate the economy again and keep interest rates low. Imports of foreign goods is strong causing a rising trade imbalance and national deficits. This is about as bad as it can get for manufacturing economies such as BC, Ontario and Quebec.
With the US, China, European, and Canadian economies in flux, investors are in a quandary about whether Canadian real estate is a solid investment. Given market volatility, risk is on everyone’s mind. When it’s all said and done, hard assets are likely where everyone will go in 2013. And there’s nothing better with more upside than real estate.
Investing in REITs the Only Option?
You may be thinking of REITs, or Gold and even oil stocks as better investments, yet if the global economies get rolling again, gold is unlikely to keep its value and China REITS and Canadian REITs might not perform as well as they have. Oil is full of riks given the instability in the Middle East.
 The key to investing wisely in finding a property in an up and coming area that has proof of high demand. Certain communities in Vancouver are on the incline. Richmond and Surrey have done well of late and downtown Vancouver is almost always a key region for real estate investment. What types of services will be in continuous demand in future? Education and Tourism come out as two likely industries. The demand for Western education by Asians is very strong. And they have money to spend.
IF you’re thinking of buying REITs who have had a good record up till late, weigh them against buying a condo or other type of investment property. You have little control or input into a REITs performance. In contrast, buying a rental property gives you maximum control, and the renter will be paying your mortgage off plus more. Even with some REITs paying 25% ROI, that still doesn’t compare to a good rental property in a high demand area. Limited availability and rising rental prices puts the odds in favour of purchasing rental properties.
Investigate Vancouver real estate investment opportunities further. Learn more about the potential risks and return on your investment. This may be the right choice for you.  Need some rental property investment tips?  China visitors will be happy to know that the Chinese real estate weekly magazine was just launched and that a China Canada investment agreement has been signed by our government. Contact Joyce for more info about buying Vancouver rental properties.