How to choose overseas hedge funds

Everyone knows about hedge funds. Let's learn how to buy overseas hedge funds.

While many people in China are still confused about "hedge funds", some high-net-worth people who get rich first have begun to steal the column and buy overseas hedge fund products.

According to an old friend of a Hong Kong stock broker, when we were still discussing the "Hong Kong stock through train" in 2007, many wealthy people in the Mainland transferred some of their funds overseas to speculate in Hong Kong stocks. At first, these people bought Hong Kong stocks themselves. Later, they gradually found that the Hong Kong market was different from the A-share market, so some rich people began to look for some hedge fund products, hoping to make money with the help of hedge fund managers' skills.

So, how to find excellent hedge fund products overseas?

Looking for fellow travelers.

To really choose a good hedge fund, in fact, the above factors are secondary. The most important thing is who the current fund manager is and what his investment philosophy is.

There are many professional FOF funds overseas, and they often look for suitable hedge funds to invest. In the early due diligence, the most frequently asked questions are the other party's investment ideas and related investment strategies. For example, they will judge what the investment philosophy of hedge fund managers is; Do you have your own opinions on China's national conditions and market judgment, and how to implement his hedging strategy?

For investors, comparing fund performance with its investment strategy is a good way to judge whether hedge fund managers are "consistent in words and deeds". If the fund manager claims to be a hedge fund and has long and short positions, but his performance has a strong correlation and linkage with the market, then investors will ask: where is his hedge?

The strategies of overseas hedge funds are ever changing. As far as hedge funds are concerned, there are many short positions, global macro, event-driven, quantitative arbitrage and so on. I have also seen several hedge fund products with completely different strategies under the same asset management company. Under each strategy, different directions can be subdivided.

In Hong Kong, there are many investment tools, such as stocks, bonds, options, warrants, foreign exchange, interest rate swaps and commodity futures. Hedge fund managers can use any combination of tools to hedge, as long as they find that there is enough probability of success, they can use it.

Sam, a senior hedge trader, has been an arbitrage strategy for many years. He said with a smile that many of his strategies seem quite meaningless and uneconomical, but they are effective in the short term, but his traders are still very keen to do so. The aforementioned Simmons Medal Fund only recruits top talents in the fields of mathematics, physics and statistics, and does not recruit economists. This is an extreme representative.

Some hedging strategies require quite expensive technical support. When Ben Si was still selling well in the mass computer market, Sam Sr had already imported dual-core PCs from the United States and hired a statistics professor from the Hong Kong Polytechnic University to design a model for him. He pointed out that there is no need for academic models, and economic variables are only one of the explanatory factors. What he requires is that the correlation and fitting degree are extremely significant and suitable for trading.

There are many ways to understand the strategies of hedge funds. Studying their fund documents is the most basic step, but the best way is to talk to the fund manager directly. I have seen mainland entrepreneurs ask questions when they subscribe for a fund. After asking questions, you can basically tell whether this hedge fund manager is your fellow traveler.

Understand hedge fund products

What is a hedge fund? I'm afraid it's really hard to put it in a word. Literally, hedge funds can hedge with various methods and investment tools, but in reality, hedge funds have long been divorced from the purpose of hedging, and most of them aim at pursuing long-term absolute returns. Because of the different strategies adopted, even in Hong Kong, if you ask 10 hedge fund manager what a hedge fund is, you may get 10 answers.

Many people mistakenly believe that hedge funds are managed by financial tycoons like Soros. In fact, a global macro fund like Suo Lao is just one of many types of hedge funds, which does not account for the majority in proportion.

In Hong Kong, the scale of most hedge funds is about $654.38 million to $50 million, and the hedge funds of $654.38 million to $500 million are regarded as large hedge funds. Those whose scale exceeds $ 1 100 million are usually global macro investments or group operations, and most of them are European and American institutional customers. Suo Lao's global macro fund has reached tens of billions of dollars, accounting for a small proportion in the Hong Kong market. Usually, only part of the funds are invested in Hong Kong to achieve the goal of diversified asset allocation.

For most domestic investors, hedge funds like Suo Lao are flowers in the water. If you want to buy a large hedge fund like him or Paulson, and associate with global financial tycoons, you need not only money, but also contacts and luck, otherwise it is futile to climb up their office in Hong Kong and Guo Jin Phase II.

Looking for real hedgers

After you have a general impression of hedge funds, what criteria do you use to find real hedge funds? Many people think that it depends on the performance rate of return, which is really direct, but a more professional judgment is: what is the long-term annualized rate of return of the fund, and is it in line with the hedge fund charter and the concept promoted by the fund manager? If fund managers really follow the rules of hedge funds, then in the long run, their performance should conform to the characteristics of their products.

In Hong Kong, hedge fund managers believe that real hedge funds have the following characteristics: first, there are few investment restrictions, and they can be configured in different tools and markets, such as freely switching between stocks, commodity futures, foreign exchange and other markets; Large funds usually bypass the exchange and use over-the-counter trading (OTC) or dark pools to make quick shipments. Some hedge funds will take the initiative to accept the lock-up period in order to obtain a higher IPO placement, but they will sell their shares backhand through the OTC market to achieve the purpose of hedging or arbitrage, which can also greatly tap profit opportunities.

Second, you can borrow a lot of leveraged transactions (similar to A-share margin financing and securities lending). The most talked-about hedge fund technique is "short selling". Short selling is often accompanied by high leverage, and excellent hedge fund managers are good at borrowing a lot of securities with limited collateral to make short profits.

The third feature is that management fees and performance fees are levied at the same time, and the latter is much higher than the former-this is an inherent feature of hedge funds and an important weight to encourage hedge fund managers to earn absolute returns.

When many hedge fund peers communicate with each other, apart from asking about performance, they often ask: What are the restrictions on your investment? What tools do you usually use to short circuit? What is your usual loan limit? What are your standards for collecting management fees and performance fees?

Familiar with the charging structure

When it comes to management fees and performance fees, in fact, the performance fee standards of hedge funds are very different. If investors want to make an accurate judgment, they need to further understand the charging structure.

The first is, of course, the rate of performance fees. For hedge fund managers, collecting management fees is not the main purpose, but the guarantee of survival, and performance fees are the real incentive. Usually 1.5%~3% management fee and 20% performance fee are the most common standards in the industry, but there are also some bullish medal funds like Simmons, which charge up to 4% management fee and 44% performance fee-it seems expensive, but even such a high fee can't be bought, and the funds no longer accept external subscriptions. What is its return to investors? It is said that after deducting all expenses, its annualized rate of return since 1988 is as high as 34%, which is higher than Soros and Standard & Poor's 500 by 10 and more than 20 percentage points respectively.

Some investors don't agree with the charging model of overseas hedge funds. In their view, investors have already paid management fees, so why should fund managers get a commission from profits? Why don't investors buy Public Offering of Fund directly?

This question is a matter of opinion. It is meaningless to compare the fees charged by public offering funds and hedge funds. They are completely different products. The former is mainly passive investment in strategy, and the goal is to keep up with the self-defined benchmark indicators (in fact, it means that the fund strategy is limited by the benchmark indicators); The latter will win with active investment, which requires fund managers to skillfully allocate between different markets and investment tools to obtain absolute returns. Different products naturally need completely different management skills, brains and supporting measures of software and hardware, and also have completely different requirements for fund managers' investment experience. To find the right candidate, it is obviously necessary to have a higher incentive mechanism.

In Hong Kong, most people who choose hedge funds are high-net-worth people who want to get long-term absolute returns, and are generally willing to pay a certain income as an incentive. According to the recent research results of the finance professor of the Hong Kong Polytechnic University, from the global fund sample, even considering the high performance fee, hedge funds still bring more benefits to investors than Public Offering of Fund.

Secondly, friends who want to buy hedge funds, it is best to see clearly the conditions for charging their performance fees, such as whether there is a threshold return or a high water level standard. Some small and medium-sized hedge funds in Hong Kong will take the initiative to propose a threshold rate of return before charging management fees, and some will also use high watermarks, that is, performance fees can only be charged when the net fund value (NAV) needs to exceed the historical high point.

For example, if a fund adopts the high water level standard and provides a threshold return of 8%, and its historical maximum NAV is $2, then the NAV must exceed $2 and exceed the annualized return level of 8% when the management fee is collected next time. This kind of hedge fund with high protection mechanism will certainly protect investors better.