What are funds of hedge funds?Funds of hedge funds invest in selected hedge funds. The goal of these hedge funds is to achieve a positive performance that is independent of the development of traditional investment categories (i.e. equities, bonds etc). This involves a bundle of different strategies as well as the attempt to achieve a certain risk-return profile by means of diversification. Funds of hedge funds make hedge funds accessible to private investors by requiring a lower minimum investment. The Austrian government made Austrian funds of hedge funds possible by passing sec 20a Austrian Investment Fund Act. These funds are characterised by stricter regulations and better transparency. |
How do funds of hedge funds work?In so-called selection meetings, the Alternative Investments team of Erste Group Bank selects hedge funds that fulfil the criteria of the portfolio. Not only is the favoured strategy and the know-how of the hedge fund manager taken into account at this occasion, but the funds are also subjected to a set of stringent risk evaluations. Hedge funds are generally less dependent on the overall market by relying on unconventional instruments such as short-selling or leverage and can achieve profits even if markets are falling. |
Selected strategy descriptions:“Distressed securities“ – seizes opportunities in relation to distressed companies Managers invest in bonds or equities of companies that have got into financial distress but whose intrinsic value is higher than their current market value. This would for example include bonds that are backed by assets such as property and that would fall to the creditor in the event of default. “Fixed income arbitrage“ - exploits price differentials on bond markets This strategy exploits price differentials in interest curves and fixed income investments of similar structure (“arbitrage”). For example, upon thorough fundamental analysis of a company a manager may come to find that the 5Y bonds are undervalued in comparison with 10Y bonds. He would then proceed to buy the 5Y bonds and sell the 10Y ones short. This way he would generate arbitrage among fixed income investments. “Global Macro“ – exploits opportunities arising from global economic development Global macro managers take investment decisions on the basis of macroeconomic analysis and forecasts concerning interest, currency, and stock exchange development. They invest on a global scale in equity, bond, currency, and commodity markets, and use all sorts of investment techniques and instruments. “Emerging Markets“ – invests in developing markets This strategy involves the investment in bonds and equities of developing and emerging countries such as for example Argentina, Brazil, Turkey, Russia, Indonesia etc. Emerging markets are at an early stage of their development cycle, which is why they offer chances that are not existent in developed markets any more. “Equity hedge strategies“ – invests in shares by opening long and/or short positions The return structure correlates a bit more strongly with the development on the financial markets. There is a vast array of methods available for share selection; some of them include fundamental analysis, technical analysis, quantitative programmes, and macro or sector approach. They focus on global, national or regional equity markets, on specific industries or different classes of capitalisation within the same market etc. The manager would tend to open a net long position (“long bias”), i.e. by buying more shares then selling, he would generally be exposed to the market risk. |
Your benefitsWe recommend funds of hedge funds especially if you wish to diversify an existing portfolio with alternative investments. This way you are even better shielded against unexpected market scenarios and you diversify your risk. You have the chance to earn attractive returns at a balanced degree of risk. |
Your advantages
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Details you should be aware of
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How do funds of hedge funds react to…… rising markets? … stable or falling markets? |