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HEDGE FUNDS
WE HEAR A LOT ABOUT
HEDGE FUNDS, SHOULD
I BE INVESTING IN ONE?
byIAN BLAC
Dir
KM
ector
AN,
,
I T
UBS AG, Jersey
f
h
u
t’s probably best to start by describing what a hedge
ex
h
a
e
m
w
in
a
e
y i
t
n
he
w

h
q
i
u
c
a
h
li
w
ty
e

t
o
e
f
nd
th
t
e
o
r
l
e
o
t
o
u
k
rn
a
s
t
,
in
b
v
e
e
c
stments is to
n
e
n
o
d
d
rm
ge
is.
al
f
l
u
Whilethereisnostrictdefinition,inbroadterms
y
n
in
d
c
s
o
d
rp
if
o
fe
r
r
a
from mutual funds in that they are concerned about how m
ause we are
the investment man
te
a
d
ge
in
rs
a
m
noffshorelocation,providing ach
uch volatility is involved in
money is managed, and
o
t
r
h
e
ey
free
c
d
an
om
not
as
b
t
e
o h
b
o
r
w
oad
the ach
i
i
e
e
v
v
i
e
ng
a
th
re
e
tu
re
rn
turn. What hedge funds try to do is to
marketed to the public. Rathe
ly e
eq
xp
u
e
it
c
ie
te
s
d
.
when in
w
v
i
e
th
stin
le
g
ss
in
vo
t
l
r
a
a
ti
d
li
i
t
t
y
ion
th
a
a
l
n
bo
w
n
o
d
u
s
ld
an
b
d
e
i
t
n
h
v
em
es
s
tm
elv
en
es
t
,
s.
r, they are private
a
T
n
h
d
at
t
s
h
a
e
id
ir
, t
i
h
n
e
ve
i
s
nvestment managers
companies,willmostlikelybeloca
t
t
m
ed
en
ei
t
the
m
ri
anagement O
the
in
f
di
c
c
o
a
u
ti
r
v
s
e
e,
of
p
f
a
u
s
t
t
ur
p
e
er
p
f
e
o
r
r
f
m
or
a
m
nc
a
e
nc
s
e
h
a
o
n
u
d
ld
it’
n
s
o
n
t
ot
be
jus
s
t
een as
a
U
a
K
n
,
d
a
C
lth
o
o
n
u
ti
g
n
h
en
t
t
h
a
e
l
r
E
e
ntheUSor
Asi u
a
r
r
o
e
p
s
e
o
.
me hedge funds run from returnandvolatility.
about
T
G
m
h
a
e
n
d
ag
if
e
fe
d
r
.
en
B
ce
ec
in
au
in
se
vestmenttermsishowthemoneyis In
l
d
o
e
b
x
a
,
l
h
e
a
q
v
u
e
it
r
i
e
e
t
s
u
,
r
a
n
s
e
m
d
e
a
a
c
s
o
u
m
re
p
d
o
b
u
y
n
t
d
h
6
e
.1
M
%
SC
p.
I
a
W
.b
o
e
r
t
l
w
dEquity
g
they are private investments, period of January 1990 an
eenthe
fr
o
e
v
e
er
t
n
o
ed
us
b
e
ytheirofferingdocuments,themanagersare volatil
d September 2004, with a
fortwo
ity
in
o
e
f
v
1
e
4
r
.
y
6%
t
p.a. In simple terms this means that,
pr
Theageold
shorting of st
i
o
n
c
v
k
e
s
s
,
t
l
m
ev
e
e
nt techniques that involve the
T
beeninarangeof
h
6
r
.
e
1
e
%
y
p
ea
lu
rs,thereturnfromequitieshas
m
h
in
es
d
e
s
a
o
r
f
e
m
p
a
r
n
o
y
ba
in
b
v
ly
es
w
to
o
r
r
r
a
s
d
g
,a
s
e
n
t
d
h
an
a
in
t
d
d
r
t
e
i
h
n
e use of derivatives.
from –8.5% to + 20.7%.
s
B
o
y
rm
c
i
o
n
m
us
p
1
a
4
ri
.
s
6
o
%
n
,sotherefore
bank-own
oblemwith
e
g
dt
a
h
la
e
r
y
m
sh
b
o
e
u
lls in the
measured by the JP Mor
, bonds, as
companies
ed
is
Trust
that
the wrong hands they ca
ld,forin
corr
n result in heavy losses. But retu
gan Global Bond Index, have
draw
ect
a
l
n
y
a
u
n
s
a
e
l
d
o
,
gy
th
w
ey are very powerful tools. We can equi
r
v
n
a
e
l
d
en
7
t
.8
r
% p.a. with a volatility of 6.3% p.a. So their
criminal it’s an offen
it
s
h
iv
a
e
s
w
h
e
a
a
r
p
p knife; in the hands of a +1.5% to +1
a
4
n
.1
g
%
e
.
f
I
o
f
r
w
tw
e
o
ta
in every three years is within
skilledsurgeonit’sascalpel.
on, but in the hands of a Inc. Fund of Funds Com
k
p
e
os
th
it
e
e
H
In
e
d
d
e
g
x
e
a
F
s
un
a
d
p
Research
hedgefunds,thenhedge
roxy for
w
fundshavereturned10.0%p.a.
point
to
ther
be
etends
of
a
cont
single
act
T
us
h
e
ek
th
ey
es
w
e
o
t
r
e
d
ch
h
n
er
iq
eis‘skill’.Skilledmanagersareableto ev
i
e
th
ry
a
t
v
w
o
o
latilityof5.6%p.a. Theirequivalentrangefor
capturing investm
u
e
e
n
s
t
to
re
l
t
i
u
m
rn
it
s
d
w
ownside risk, while over the la
i
s
n
t n
th
e
r
a
e
r
e
ly
y
f
e
i
a
ft
rs is from +4.4% to +15.6%. So
p
volatile than either e
e
q
e
u
n
iti
y
e
e
s
ars
o
,
r
th
b
e
o
y have been less
fu
r
n
es
d
en
m
t
a
th
n
e
a
m
ge
s
r
elv
m
e
e
s
a
.
n
L
s
im
p
i
r
t
e
in
s
g downs
h
id
en
e ri
o
s
p
k
p
to
or
a
tu
h
n
e
i
d
ti
g
e
e
s
generatedahigherreturn.
nds, and have
cou
erving investor capital. Of
t
B
c
he
rs
id
e
e
h
a
ed
is
ge
th
fu
a
n
t
d
l
s
o
lose money from time to time, but
d
u
iv
t
e
i
r
t
s

i
s
fy
no
a
t
p
ju
or
s
t
t
fo
a
l
b
io
ou
a
t
n
r
d
et
r
u
e
r
d
n
uc
and volatility. In order to
th
o
e
nt
l
a
o
i
n
n
g
ed
ru
,w
n.
hilethe
s
r
s
e
e
t
s
urn
ar
i
e
sp
re
re
la
d
t
o
iv
m
e
i
l
n
y
an
fe
tl
w
yp
a
o
n
s
d
itiv
w
e
e
in
ll
to find investments that are l
e
ow
th
l
e
y
v
c
o
o
l
r
atility, you need
other.Hedgefundshaveastrongadvant
r
a
e
g
la
e
t
i
e
n
d
th
to
at
each
are lowly correlated with e
they
correla
quities, and tend not to
the effe
t
c
e
t
w
o
i
f
th
bl
b
e
ondsatall. Weillustrateinthediagram
that would oth
n
e
d
rw
in
i
g
se
20
b
%
e
h
5
e
0
d
/
ge funds into a portfolio
reducing the bond and equity c
5
o
0
m
b
p
o
o
n
n
d
en
s
t
a
b
n
y
d
1
equities,
Theeffectistoincreasethereturnfrom7.0%p.a
0
.
%
to
e
7
a
.7
ch.
p.a.,
f
b
o
u
li
t
o
m
fr
o
o
r
m
ei
8
m
.4
p
%
or
p
ta
.a
n
.
t
t
l
o
y,
6
to
%
port .9%
red
p
u
.a
c
.
ethevolatilityofthe
S
co
o
m
h
b
e
i
d
n
g
e
e
d
f
w
un
it
d
h
s
a
te
t
n
r
d
ad
t
i
o
tio
h
n
a
a
v
l
e
p
a
or
b
tf
e
o
n
l
e
io
fic
o
ia
f
l
e
e
q
f
u
fe
i
c
t
t when
bonds. One important pro
ies and
tha
viso, though, is to make sure
mo
t
st
t
i
h
n
e
ve
h
s
e
t
d
or
ge fund portfolio is well diversified. For
fundsinorder
s
t
,
o
th
p
i
r
s
o
m
vi
e
d
a
e
ns investing through a fund of
alowerinvestmentthresh
t
o
h
l
e
d
necessarydiversificationat
n
20/20 ten
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