Hedge Fund Booklet
january 2009
in conjunction with
Alternative Investment
Managment Association
Australia
1. About AIMA 3
2. What are Hedge Funds? 5
3. The Hedge Fund industry 8
4. Hedge Fund Strategies 9
5. History of Hedge Funds 15
6. Regulation of Hedge Funds 17
7. Return attributes of Hedge Funds 19
8. Allocation to Hedge Funds in a Diversified Portfolio 23
9. Fee Structures 29
10. Hedge Funds in Australia 33
11. Hedge Fund Structure 35
12. Hedge Fund Risks 37
13. Hedge Fund Glossary 39
14. Appendix 46
contents
Disclaimer: This report has been prepared by Zenith Investment Partners (Zenith) with the assistance of the Australian Chapter of AIMA (AIMA Australia). The report may contain recommendations
and advice of a general nature and does not have regard to the particular circumstances or needs of any specific person who may read it. Each reader should assess either personally or with the
assistance of a licensed financial adviser whether any Zenith recommendation or advice is appropriate to their situation before making an investment decision. The information contained in
the report is believed to be reliable, but its completeness and accuracy is not guaranteed. Opinions expressed may change without notice. Neither AIMA Australia nor Zenith accepts any liability,
whether direct or indirect arising from the use of information contained in this report. No part of this report is to be construed as a solicitation to buy or sell any investment. The performance of
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About AIMA
As the only representative global hedge fund association,
AIMA, the Alternative Investment Management
Association, has over 1,200 corporate members worldwide,
based in 47 countries. Members include leading
hedge fund managers, fund of hedge funds managers,
prime brokers, legal and accounting services and fund
administrators. They all benefit from AIMA’s active
influence in policy development, its leadership in industry
initiatives, including education and sound practice
manuals and its excellent reputation with regulators and
policy makers, worldwide.
Its objectives are:
~ To provide an interactive and professional forum for
our membership and act as a catalyst for the industry’s
future development;
~ To be the pre-eminent voice of the industry to the
wider financial community, institutional investors,
the media, regulators, governments and other policy
makers; and
~ To offer a centralised source of information on the
industry’s activities and influence, and to secure its
place in the investment management community.
AIMA is a dynamic organisation that reflects its
membership’s interests and provides them with a vibrant
global network. AIMA is committed to developing industry
skills and education standards and is a cofounder of the
Chartered Alternative Investment Analyst designation
(CAIA) – the industry’s first and only specialised
educational standard for alternative investment specialists.
Investment (noun);
the choice by the individual to risk his/her savings with the hope of gain.
What are Hedge Funds?
1. Eurekahedge (www.eurekahedge.com)
Hedge funds are investm ent vehic les that
explicit ly pursue absolute returns on th eir
underlying investm ents. The appellation “Absolute
Return Fund” would be more accurate, not least as not all
hedge funds maintain an explicit hedge on their portfolio
of investments. However the “Hedge Fund” definition has
come to incorporate any absolute return fund investing
within the financial markets (stocks, bonds, commodities,
currencies, derivatives, etc) and/or applying nontraditional
portfolio management techniques including,
but not restricted to, shorting, leveraging, arbitrage, swaps,
etc. Hedge funds can invest in any number of strategies
and they are perhaps most readily identifiable by their
structure; typically a limited partnership (the manager
acting as the general partner and investors acting as the
limited partners) – although in Australia the trust structure
is common - with performance related fees, high minimum
investment requirements, restrictions on types of investor
and entry and exit periods.
To “hedge” means to manage risk. Any given money
manager may make an allocation/investment; if this
same manager simultaneously makes an allocation to an
allocation/investment specifically designed to balance or
counter-act any negative performance from his position
then this would be his hedging position.
There are many types of perceivable portfolio risk - Market,
Interest rate, Inflation, Sectoral, Regional, Currency to
name some (see a later section in this document). Hedge
fund managers can utilise the complete arsenal of financial
weapons (holding cash, short selling, buying selling or
swapping options, futures, commodity and/or currency
futures, etc.) and are expert in devising hedging positions
for most conceivable risks.1
The term hedge fund was originally used to describe a
type of private investment arrangement that charged
investors a performance fee, used leverage to magnify
returns and utilized short selling to limit market risk. This
description still fits many hedge funds but by no means all.
There is no legal or regulatory definition of a hedge fund
in Australia and the range of funds covered by the term
is very wide (see a later section in this document). Not all
use leverage. Not all engage in short selling. And a few are
now even quoted on the ASX and open to retail investors.
In contrast to traditional, long-only asset managers, hedge
funds manager tend to have a number of extra tools
in their toolkit, which they use to increase returns and
manage investment risk.
They include:
~ G oing short listed stock to generate returns and/
or hedge market exposure. Going short involves
borrowing stock and then selling it in order to profit
from the value of the security falling.
~ U sing leverage to magnify returns. Leverage in this
context means buying securities using borrowed
money.
~ E mploying derivatives to generate returns and/or
reduce risk. Derivatives can be a very efficient way of
increasing exposure and therefore potential profit/loss
or of hedging exposure thereby reducing risk.
~ Trading more actively than traditional managers.
But none of these characteristics define hedge funds
because, while some hedge funds will share some or all or
many of these characteristics, other do not. For instance,
as mentioned above not all hedge funds use leverage or
derivatives.
But there are some other common features that will assist
the reader to develop a working definition of hedge fund.
We list them below:
~ P erhaps the one feature that is common to virtually
all hedge funds is the fee structure. Typically hedge
funds will charge investors an annual management fee
of 1.5-2.0% and a performance fee of 20%. This means
managers are heavily incentivised to generate good
performance for investors. These performance based
fees may also be accompanied by a high watermark
and sometimes a hurdle rate of return.
~ S kill based investment strategy with less, if any,
emphasis on market movements to deliver returns:
~ Capacity constrained investment strategies;
~ Co-investment in the portfolio by the manager
~ The possibility of a lockup period and less frequent
fund liquidity
The major perceived attractions of hedge funds are their
ability to generate returns in a manner that does not
rely on the normal investment cycles, using proprietary
trading strategies, and their low correlation to normal
market movements. Hedge funds have shown the ability
to deliver consistent absolute returns, with less volatility
than traditional asset classes if the appropriate comparison
is made. Thus, hedge funds may be used as part of a wider
portfolio of conventional share, property and fixed-interest
investments to smooth out the volatility of overall returns.
Because they are not trying to outperform the benchmark
per se, hedge funds are also termed ‘non-benchmarkaware’
funds. But because they are seeking absolute
performance, hedge funds generally have fewer risk
constraints than traditional investment funds: they do not
have to construct their portfolios so as to reflect the index.
Portfolio (noun);
an appropriate mix
or collection of investments
The Hedge Fund Industry
According to Chicago-based Hedge Funds Research (HFR ),
there are nearly 10,000 hedge funds and fund of hedge
funds – funds that invest in hedge funds – worldwide, with
nearly one-third practising long-short equity investing, the
largest category.
HFR estimates that the industry has grown from a modest
US $39 billion in 1990 to $1,800 billion at September 2007.
In Australia, according to Hatfield Liptak Advisors, the
amount invested in hedge funds is estimated at A$87.5
billion at the end of 2007 up from A$63 billion (according
to Axiss Australia) in 2006. In 2006, according to Axiss
Australia, there were 66 single-strategy managers, offering
130 investment products, and 17 managers of fund of
hedge funds, offering 58 discrete products.
Hedge Fund Strategies
There is a plethora of hedge fund strategy classifications and
to say that, even within one strategy, any artificial hedge
fund grouping is homogenous would be misleading. There
is no such thing as an average hedge fund- the average
is merely an artificial amalgam of the universe’s strategic
eccentricities. The best that can be achieved is to broadly
define the strategic focus of various strategic groupings of
managers and the instruments they typically deploy in the
pursuit of these strategies. Below we have first outlined the
broad philosophies and constructs deployed across any
strategy and these should be born in mind as potentially
applicable on an either/ and/ or basis when addressing any
individual hedge fund strategy. These individual strategies
are further expounded upon below.
Broad Philosophies and Constructs across all fund manager
types are as follows:
Individual Strategies
We list the major strategies below, followed by fuller
descriptions.
Equity Hedge:
~ Equity Long/Short (special case market neutral):
~ Equity Event Driven: Merger arbitrage.
~ Equity Event Driven: Special situations
~ Equity Long Bias
~ Equity Short Bias
~ Emerging Markets
Fixed Income/ Credit Strategies:
~ Capital Structure Arbitrage:
~ Credit long/short strategies
~ Special Situations
~ Distressed securities strategies
Futures/ CTAs/ Options Trading/ Convertible
Strategies:
~ Volatility Arbitrage
~ Convertible bond arbitrage
~ Gamma trading
~ CTAs
~ Macro (Tactical Asset Allocation):
Multi-Strategy
Fund of Funds
Quantitative vs Qualitative
Quantitative Managers employing quantitative strategies
express their investment sentiment through statistical and
quantitative techniques and/or factor models. These model
driven strategies can exploit arbitrage opportunities as
they identify, or isolate them. They also have the capability
to place a high volume of trades in comparison to other
methodologies where orders need to be manually originated.
Qualitative Managers employing qualitative strategies express
their investment sentiment through fundamental, bottomup
and/ or macro analysis predicated on their investment
processes and philosophies. Whilst these processes will often
feed into protocols as part of the trade’s evolution these
protocols do not determine trade idea origin. It is worth
noting that whilst some strategies are often associated with
or deploy a more quantitative (Macro, Arbitrage, CTAs) or
qualitative (Equity Long/Short) bent, most strategies employ
some elements of both in the final iteration of their portfolio.
Directional vs Market Neutral:
Hedge Fund portfolio strategies can be directional or market
neutral in their exposure. This is typically in line with the
portfolio manager’s investment philosophy and can involve a
manager maintaining their net exposure within a certain range,
with 0% net exposure being the target level for market neutral
managers. The underlying logic underpinning a market neutral
strategy is often associated with the uncorrelated returns of
a market neutral portfolio in comparison to the directional
universe of its constituent positions.
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Fuller descriptions for the individual strategies are:
Equity Hedge:
Equity Long/Short (special case market neutral):
Equity Long/Short funds build their portfolios from long
and short positions in publicly traded equity securities.
Investment philosophies can address positions for
both directional and hedging sentiment. As a result
the portfolio may be net long or short and varies in
accordance with manager sentiment: Usually intended to
produce positive results irrespective of broader market
activity. Individual managers often specialise and this can
vary across sector, geography, market capitalisation or any
combination thereof.
If the manager runs the investment portfolio essentially
without long or short bias, namely a neutral market
exposure or a neutral dollar exposure or even a neutral
market beta i.e. zero, then the strategy is called market
neutral. Typically there will be tolerances that allow
variation from neutrality within limits.
Equity Event Driven: Merger arbitrage.
This strategy focuses specifically on announced merger
and takeover announcements and/or activity. One example
of positions taken is for a manager to take a long position
in the target company’s stock and, (dependant on the
corporate activity), a corresponding short position in the
acquirer’s stock. The goal of this strategy is capturing the
spread from original value to that which will crystallise,
post-event. There are various factors that will impact on the
probability of, and timeline for, the conclusion of each event.
Equity Event Driven: Special situations
Special Situations strategies involve trading securities of
companies involved in anticipated or actual capital market
corporate events. Examples include spin-offs, divestitures,
re-organisations, liquidations, restructurings, and share
buybacks.
This is similar to merger arbitrage in that various factors
can impact on the probability of, and timeline for,
conclusion of each event.
Equity Long Bias
Some managers seek to extract returns from both long
and short positions in individual equities. However, they
will have a structurally higher allocation to long positions
and will incorporate short positions as a means of hedging
or dampening volatility. Equity Long Bias managers
tend to show a stronger correlation to equity indices,
with this correlation increasing in line with their net
long directionality. Managers in less developed markets,
especially those with less developed stock borrowing
regimes, may often operate with a long bias.
Equity Short Bias
A few managers run hedge funds with a consistent short
bias. They vary the degree of gross and net exposure
according to their perception of individual opportunities.
Short biased funds deliver performance which tends to be
negatively correlated to markets and they often perform
well at times of high equity and bond market volatility.
They may be included in broader investment portfolios as
a perceived hedge to broader equity market performance.
11
Emerging markets
The term ‘emerging markets’ was coined 25 years ago
by the World Bank to refer to the markets of economies
that are industrialising but are still well below the Gross
Domestic Product (GDP ) per capita levels of the advanced
ones. But the term now covers a vast range of economies,
ranging from African basket cases to the second-largest
economy in the world, China. Since a pivotal report by
investment bank Goldman Sachs in 2003, emerging
markets has been heavily influenced by the acronym
Goldman Sachs gave to the big four emerging markets: the
‘BR IC’ nations, namely Brazil, Russia, China and India.
This strategy invests in equity and debt of emerging
markets, which are stock markets in countries that have
recently industrialised or become free markets. Emerging
markets are treated as a separate asset class, with its own
risk/reward profile. This asset class is considered the most
volatile of the mainstream asset classes, capable of giving
huge (50 per-cent-plus) investment returns in a good year,
but just as easily capable of losing 40 per cent in a bad year.
Fixed Income/ Credit Strategies:
Capital Structure Arbitrage
These managers implement strategies across a company’s
capital structure, seeking out any dislocations between the
constituent components. Any and all of the following may
be used: Debt versus equity, senior versus subordinated
debt, share class arbitrage.
Managers may use quantitative screens or fundamental
analysis to highlight trading opportunities, which may
exist either within the debt structure or across equity and
debt securities of the company.
Credit long/short strategies
This strategy involves taking long and short positions in
debt instruments, seeking opportunities between the
corporate credit of companies in similar sectors or that are
otherwise strongly correlated. Although often a relative
value play, predicated on mean reversion of credit spreads,
variable bias can allow for the strategy to have either
long or short net exposures which can be driven by either
bottom-up views or top down analysis of each position.
Special Situations
These managers seek out opportunities in the corporate
events that may affect the valuations of securities within
a company’s capital structure. These include mergers and
acquisitions, spin-offs, re-organisations, share buy backs,
bankruptcy, receivership and share class arbitrage. Given
the diverse and niche opportunity set involved, the fund
manager often operates within a broad mandate so they
can consistently find interesting opportunities in both rising
and falling markets. The broad mandate and specialised
nature of the strategy means they can deliver a portfolio
that is uncorrelated to that of many other managers.
Distressed securities strategies
These managers look to invest in securities (regular
bonds, debt and trade claims) trading at distressed levels,
where the company may be undergoing bankruptcy,
corporate restructuring or otherwise in distress.
Thorough analysis determines the recovery scenario
for each position and further risk analysis provides a
clear understanding of whether the securities’ price fails
to reflect the company’s intrinsic value. Timing, legal
expertise and corporate experience are all key in this
strategy and, as distressed funds will be predominantly
long a company’s debt, short positions in the equity or
debt of a company may also be taken.
12
Futures/ CTAs/ Options Trading/
Convertible Strategies.
Volatility Arbitrage
This investment approach seeks to exploit volatility pricing
discrepancies across related instruments. Managers
pursuing this strategy can express their arbitrage in a
number of ways: arbitraging implied versus actual option
volatility, volatility of similar options on different companies,
warrants and options across the same companies and
dispersion arbitrage across the difference between
volatilities of an index and its constituents. Frequently
quantitatively driven, some volatility managers combine
their models (often market neutral, seeking to profit from
volatility, mean-reverting tendencies) with a discretionary
fundamental perspective on future levels of volatility.
Convertible bond arbitrage
Fund managers engaging in this strategy look to buy
or sell convertible bonds with predetermined and fixed
conversion or redemption features. Where the price of the
convertible bond differs from the sum of the value of its
constituent instruments this spread can be captured via
an arbitrage: the bond can be bought or sold at discount
or premium to fair value and hedge one or more of its
components, often shorting the underlying equity of a
mis-priced equity option.
Gamma trading
Gamma trading hedge funds seek, through trading
derivatives, to take advantage of anticipated or
unanticipated significant dislocations in financial markets.
Gamma trading opportunities are sourced through the
comparison of the implied volatility embedded in an
option with recent realised volatility. Where there is a
disconnect, more fundamental analysis may uncover its
determinant therefore the potential catalysts for future
changes in volatility.
CTAs:
Commodity Trading Advisors seek to implement their
strategies via the global diversified futures markets, across
interest rates, equity indices, currency and commodities.
These managers often build their portfolios using midlong
duration position models (trend-following and/or
pattern recognition) or short-term, trading, strategies. This
investment strategy is heavily quantitative with integration
of factor models, protocols and automation across the
funds management structure.
Macro (Tactical Asset Allocation)
Macro funds express a directional sentiment through
positions based on their views of macroeconomic, market
trends and/or events. Whilst primarily associated with the
utilization of futures, forwards and options to implement
trades in currency, bond or equity markets, they can
deploy other instruments. Macro funds are usually global
in nature, but also operate geographical mandates.
The merits of a macro strategy lie in its perceived strong
and un-correlated performance, albeit delivered with
relative volatility. They are sometimes viewed as diversifiers
and potential out-performers in periods of market
dislocations and stress.
13
Multi-Strategy:
This group of hedge funds have a great deal of latitude
to express investment sentiment and strategy through a
variety of instruments, asset classes and geographies. The
multi-strategy model can work either through a single
portfolio with one portfolio manager/CIO making the
final allocational decisions or with multiple underlying
segregated portions of the portfolio run by multiple
portfolio managers/analysts, reporting up into a broader
CIO function/ investment committee (or a combination of
both of these). These strategies invariably have the ability
to increase and decrease exposure to any underlying
instrument, asset class, theme or view in line with macro
or micro strategic allocation decisions.
Whilst the merits of the strategy include some implicit
diversification and access to multiple areas of instrument
expertise for investors, this same broad mandate can be a
detracting factor for pools of capital that are allocated on
an instrument or geography-weighted basis.
Fund of hedge funds
The fund of hedge funds approach combines these
strategies: a single fund invests in multiple hedge fund
managers, often diversified across strategies, asset
classes and geographic regions, with the fund manager
‘managing the managers’ – choosing the managers,
and balancing the overall risk and return characteristics
of the fund. Investment returns, volatility and risk vary
enormously among the different hedge fund strategies.
Some strategies use leverage and derivatives, while others
are more conservative and use little or none of these
tools. Some strategies that are not correlated to equity
markets can deliver consistent returns with very low risk of
loss; other strategies may be as volatile (or more) so than
managed funds.
In the Australian landscape, the most popular single
strategies are global long/short equity and Australia long/
short equity.
14
Assets (noun);
all tangible and intangible property that can be converted into cash
15
History of Hedge Funds
The genesis of hedge funds fund lay in an obscure law passed by th e US Congress in 1940, ca lled th e
Investm ent Company Act , which sought to regulat e mutual funds, partic ularly to protect sma ll
investors agai nst unscrupulous mutual fund ma nagers.
However, Congress also decided that wealthy investors
– which it defined as anyone with more than a million
dollars of investable assets – presumably didn’t need
such protection. If a fund manager was discreet, dealt
with fewer than 100 such investors and didn’t advertise, it
would be largely exempt from the regulations.
The vehicle generally considered to be the first hedge
fund was started by Alfred Winslow Jones, an Australian
journalist living in New York, in 1949, to take advantage of
this loophole. Jones called his fund a ‘hedge’ fund because
it would not only buy stocks it liked, it would short-sell
stocks that it felt were over-valued.
The idea was to ‘hedge’ out the exposure to the
sharemarket by buying and ‘shorting’ (short-selling: selling
a stock without owning it) an equal number of stocks:
therefore having a portfolio that should have performed
well or badly depending on the stock-picking, not on
where the market went.
In this way, he reasoned, the fund would be less vulnerable
to big market moves than traditional funds.
Jones launched his first hedge fund with US $100,000. The
fund built around the concept of maximising exposure to
individual stocks and minimising exposure to market risk.
Jones set the standard for hedge fund fees, setting a 1 per
cent annual fee and 20 per cent of the profits generated.
Most funds follow that template to this day, although the
typical annual management fee is 2 per cent.
His funds flew largely under the radar until 1966, when an
article in Fortune claimed that Jones’ funds had returns
substantially greater than the leading mutual funds.
By 1968, there were 140 hedge funds operating in the
US . But the bear markets that prevailed in the 1970s
saw many funds suffer losses and capital withdrawals, to
the point that by 1985, there were only about 37 hedge
funds in the US .
16
However, revival was just around the corner. The 1990s saw
the heyday of the billion-dollar ‘macro’ funds that traded in
the world’s financial markets. Funds such as George Soros’s
Quantum Fund, Julian Robertson’s Tiger Fund and Long-
Term Capital Management (LTCM) became household
names, as their traders and portfolio managers roamed
the world’s financial markets looking for pricing anomalies
which they could exploit, sometimes using derivatives to
leverage their positions.
The macro funds’ heyday came in 1992, when a group
of hedge funds including George Soros’ Quantum Fund
forced the Bank of England to “depeg” sterling from the
Exchange Rate Mechanism of the European Monetary
System. The Quantum Fund alone was believed to have
made billions of dollars for its investors on this trade alone.
The hedge fund industry has grown dramatically this
decade both in terms of the number of hedge funds and
the amount invested in hedge funds. According to data
released by Chicago-based Hedge Fund Research, Inc.
the number of hedge funds grew from around fifty in the
’1980s to more than nine thousand today. In 2007, the
industry saw inflows of more than $60 billion in the first
quarter, bringing total assets under management to $1.6
trillion. Boutiques hedge funds have been a consistent
component of the growth of the industry as the ability
to outsource middle and back office functions makes it
feasible for the proprietors of the business to concentrate
on the portfolios and business aspects.
Today, despite the sub-prime turmoil emanating from the
US A, the hedge fund industry enjoyed a strong 2007. The
Hedge Fund Research, Inc. (HFR I) Weighted Composite
Index of all hedge funds in its database, returned 10.2 per
cent for the year. Another database measuring hedge fund
performance, the Hennessee Hedge Fund Index, advanced
11.6 per cent. This compares to the Dow Jones Industrial
Average, which increased by 6.4 per cent, the broader S&P
500 Index, which rose by 3.6 per cent, and the Nasdaq
Composite Index, which gained 9.8 per cent, and the S&P/
ASX 200 index of the Australian sharemarket, which added
11.8 per cent.
Today the hedge fund industry has some of the most
talented people in the financial industry among its ranks.
17
Regulation of Hedge Funds
Much has been made of the lack of regulation and
transparency in the alternative investment industry but
regulatory agencies are increasingly focused on this space
and much progress has been made with respect to ethical
standards, sound practices and risk management.
Regulation of fund managers and registered schemes in
Australia is extensive comparable to other jurisdictions and
seeks to offer investors sound protection. A reasonable
percentage of hedge fund investments available to
Australian investors are provided via a “feeder” fund type
arrangement where the Australian fund gains its access
via an investment in another underlying fund that is
often domiciled and regulated in an overseas jurisdiction.
This is particularly true for global fund of fund products
which are arguably the most common (by number) hedge
fund products offered into Australia. This can result in a
large portion of the fund assets being subject to lesser
regulation than Australian standards or being subject
to other comparable regimes such as the US and UK.
This is mitigated by the fact that the Australian hedge
fund managers are legally responsible for ensuring that
the investments of the fund are adequately monitored
and protected and that appropriate risk management
arrangements are implemented and maintained.
Australian Regulation
In Australia, hedge fund managers and hedge funds are
regulated in the same manner as other asset managers
and managed funds. This regulatory regime applies
to both the managers and funds that are domiciled in
Australia and funds that are domiciled outside of Australia
and offered into Australia. The Australian regulation
broadly speaking applies at three levels: manager
licensing, fund registration and investor disclosure.
Licensing
The hedge fund manager must hold an Australian financial
services licence issued by the Australian Securities and
Investments Commission (ASIC) or rely on an exemption.
Common exemptions apply where the manager is
appointed as an authorised representative of another
licensee or where the manager is authorised in a foreign
jurisdiction (e.g. Securities and Exchange Commission (US )
and Financial Services Authority (UK). Offshore hedge fund
managers relying on the latter exemption will in operating
in Australia be primarily governed by the regulations in the
country in which they are authorised to be an investment
manager.
Registration of the fund
Unless the fund is offered to only wholesale clients (e.g.
persons who invest more than A$500,000, high net worth
investors and institutional investors) it must generally
speaking be registered as a managed investment scheme.
Funds structured as companies or that are offered to only
wholesale clients are not required to be registered and
therefore are not subject to the same regulatory oversight
as funds that accept monies from retail investors.
Disclosure
In Australia, hedge funds structured as trusts (the most
common structure in Australia) that offer interests to retail
clients must do so via a Product Disclosure Statement
(PDS ) which includes content prescribed by the law and
ASIC. Hedge funds structured as companies that offer
interest to retail clients must do so via a prospectus which
also has prescribed content and has to be registered with
ASIC. A prescribed disclosure document is not required to
be provided to wholesale clients however they commonly
invest via an Information Memorandum/Private Placement
Memorandum.
18
US Regulation
To date, US hedge funds have not been governed by the
same regulations as other US managed investments or
mutual funds. In the US , where the majority of hedge fund
managers are domiciled, hedge funds are not supervised
like SE C registered mutual funds. Although hedge funds
are not currently required to register with the Securities
and Exchange Commission (SE C), many hedge fund
managers choose to do so.
US hedge fund managers generally structure their
investment vehicles as a “private offering” to sophisticated
investors such as high net worth individual investors,
banks, insurance companies and pension funds. Often
times the private offering is a Limited Liability Partnership,
with the hedge fund manager acting as the General
Partner and investors coming in as Limited Partners.
Hedge fund managers are not exempt from other forms of
oversight in the US . Any manager that trades on the New
York Stock Exchange or any of the US Futures Exchanges
is still bound by NYSE and CFTC (Commodity Futures
Trading Commission) rules and regulations. In addition,
as any other manager of a collective investment scheme
for US investors, a hedge fund manager is subject to state
and federal laws on fraud, misappropriation of funds, and
racketeering. The manager must also abide by the same
fiduciary duties to their investors as other adviser in a
collective investment scheme..
In the US , the Investment Company Act severely restricts
a mutual fund’s ability to leverage or borrow against
the value of securities in its portfolio. The SE C requires
that funds engaging in certain investment techniques,
including the use of options, futures, forward contracts
and short selling, cover their positions. The same rules do
not apply to hedge funds who are generally more active
users of these techniques.
Recent Developments
Liquidity
In response to recent issues in Australia, ASIC has focused
on withdrawal rights and liquidity of hedge funds. The
local regulator has examined hedge fund disclosure
documents and constitutions in order to produce a
Consultation paper that will propose minimum standards
for managing withdrawal and liquidity based on a concept
of “reasonableness”. The implications for hedge funds are
that there will be greater scrutiny of the description and
advertising of investment products, use of derivatives and
disclosure of risks.
Valuation
Valuation and day-to-day NAV calculation is increasingly
outsourced to an administrator. The net asset value
(NAV) of a fund is the basis for ascertaining the prices
applicable to investor subscriptions or redemptions. It
should be noted that there are certain limitations of NAV
information, and it is important that investors understand
that there are some strategies where hedge funds hold
illiquid investments for which a transparent, objective
price does not exist. In these instances “fair value” pricing
requires an element of commercial subjectivity, and even
then may not have universal application to all portfolio
and investment strategy types. However, “hard to value”
instruments are a minority, with one recent AIMA survey
indicating that only 14% of the aggregate value of the
funds managed by respondents fit into this category.
Disclosure
One of the most important aspects of reporting relates
to disclosures: allowing investors to properly evaluate
the risks inherent in any investment under consideration.
AIMA Australia has recently released guidelines relating
to risk disclosure for hedge funds. The guidelines relate
to disclosures made within fund offering documents and
seek to ensure investors make informed decisions when
acquiring interests in funds. While these guidelines are
voluntary, AIMA Australia strongly encourages members to
take them into account in their disclosure material.
19
Credit
Suisse/
Tremont
Hedge
Fund
Index*
MSCI
World
Index
JP Morgan
Global
Gov’t Bond
Global
Index
S&P 500
Total
Return
Lehman
Aggregate
Bond
Index
Dow Jones
STOXX 50
Citigroup
Euro Big Topix
MSCI World
Index 0.56
JP Morgan
Global Gov’t
Bond Global
Index 0.07 -0.03
S&P 500 Total
Return 0.43 0.96 -0.12
Lehman
Aggregate Bond
Index -0.01 -0.24 0.65 -0.26
Dow Jones
STOXX 50 0.58 0.90 0.06 0.81 -0.21
Citigroup Euro
Big 0.12 -0.01 0.91 -0.14 0.51 0.16
Topix 0.41 0.55 0.14 0.44 -0.03 0.38 0.02
JP Morgan Gov’t
Bond Japan -0.02 0.09 0.73 0.06 0.35 0.03 0.45 0.38
Diagram 1
Source: Credit Suisse Tremont Index LLC, Bloomberg
Return attributes of Hedge Funds
Diversification Benefits of Hedge Funds
One of the main attractions of hedge funds is the low to
moderate correlation they typically have with traditional
asset classes such as Australian & international equities,
property and fixed interest. As an example, the table
below shows the correlation of a Credit Suisse Tremont
Hedge Fund Index with the other major asset classes.
The Credit Suisse Tremont Hedge Fund index represents
a combination of the majority of hedge fund strategies
and is reflective of a fund of hedge funds product. As can
be seen from the table, the correlation with most other
major asset classes is low and in some cases negative
which means that the addition of a fund of hedge funds
exposure into a diversified portfolio will provide additional
diversification benefits and reduce overall portfolio risk
without reducing returns. (Refer Diagram 1).
20
Balance (verb);
to achieve or maintain a position of steadiness
21
Ranking 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
1
Managed
Futures
21%
Long/Short
Equity
47%
Convertible
Arbitrage
26%
Global
Macro
18%
Managed
Futures
18%
Emerging
Markets
29%
Event
Driven
14%
Emerging
Markets
17%
Emerging
Markets
20%
Emerging
Markets
20%
2
Long/Short
Equity
17%
Emerging
Markets
45%
Dedicated
Short
16%
Convertible
Arbitrage
15%
Dedicated
Short
18%
Event
Driven
20%
Emerging
Markets
12%
Dedicated
Short
17%
Event
Driven
16%
Global
Macro
17%
3
Equity Market
Neutral
13%
Event
Driven
22%
Equity Market
Neutral
15%
Event
Driven
11%
Global
Macro
15%
Global
Macro
18%
Long/Short
Equity
12%
Long/Short
Equity
10%
Mulit-
Strategy
15%
Long/Short
Equity
14%
4
Mulit-
Strategy
8%
Convertible
Arbitrage
16%
Global
Macro
12%
Equity Market
Neutral
9%
Equity Market
Neutral
7%
Long/Short
Equity
17%
Global
Macro
8%
Global
Macro
9%
Long/Short
Equity
14%
Event
Driven
13%
5
Global
Macro
-4%
Equity Market
Neutral
15%
Mulit-
Strategy
11%
Fixed Income
Arbitrage
8%
Emerging
Markets
7%
Mulit-
Strategy
15%
Mulit-
Strategy
8%
Event
Driven
9%
Convertible
Arbitrage
14%
Mulit-
Strategy
10%
6
Convertible
Arbitrage
-4%
Fixed Income
Arbitrage
12%
Event
Driven
7%
Emerging
Markets
6%
Mulit-
Strategy
6%
Managed
Futures
14%
Fixed Income
Arbitrage
7%
Mulit-
Strategy
8%
Global
Macro
14%
Equity Market
Neutral
9%
7
Event
Driven
-5%
Mulit-
Strategy
9%
Fixed Income
Arbitrage
6%
Mulit-
Strategy
6%
Fixed Income
Arbitrage
6%
Convertible
Arbitrage
13%
Equity Market
Neutral
7%
Equity Market
Neutral
6%
Equity Market
Neutral
11%
Dedicated
Short
6%
8
Dedicated
Short
-6%
Global
Macro
6%
Managed
Futures
4%
Managed
Futures
2%
Convertible
Arbitrage
4%
Fixed Income
Arbitrage
8%
Managed
Futures
6%
Fixed Income
Arbitrage
1%
Fixed Income
Arbitrage
9%
Managed
Futures
6%
9
Fixed Income
Arbitrage
-8%
Managed
Futures
-5%
Long/Short
Equity
2%
Dedicated
Short
-4%
Event
Driven
0%
Equity Market
Neutral
7%
Convertible
Arbitrage
2%
Managed
Futures
21%
Managed
Futures
21%
Convertible
Arbitrage
5%
10
Emerging
Markets
-38%
Dedicated
Short
-14%
Emerging
Markets
-6%
Long/Short
Equity
-4%
Long/Short
Equity
-2%
Dedicated
Short
-33%
Dedicated
Short
-8%
Convertible
Arbitrage
-3%
Dedicated
Short
-7%
Fixed Income
Arbitrage
4%
Diagram 2 Y early Return Table
Source: Credit Suisse Tremont Index LL C
Hedge Fund Strategy Returns
As detailed in chapter 2, there are many different types of
hedge funds investment strategies and processes. Each of
these strategies provide different risk and return profiles as
illustrated by the yearly return table (Refer Diagram 2)
The table shows the yearly returns of the different
hedge fund strategies since 1994. As with all investment
strategies, the table demonstrates that returns vary on a
yearly basis and no one hedge fund investment strategy
will provide the best returns year after year. This provides a
sound basis for combining different hedge fund strategies
in a portfolio for risk and return diversification benefits
2222
23
Inclusion of Hedge Fund in Balanced Portfolio
- Returns
7.00%
7.50%
8.00%
8.50%
9.00%
9.50%
10.00%
10.50%
11.00%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
Allocation to Hedge Fund (%)
Annualised Returns
(10 Years to 31-Dec-07)
Zenith Composite Balanced Benchmark HFRI Combined Portfolio
Allocation to Hedge Funds
in a Diversified Portfolio
The decision of how much to allocate to hedge funds
within a diversified portfolio is an often debated issue
within investment circles. While it may be difficult for the
average private investor to include multiple single strategy
hedge funds within their portfolio, the inclusion of a fund
of hedge funds into a portfolio provides access to a wide
range of hedge fund strategies within the one investment.
As discussed in point 7.1 above, the low correlation of
the typical funds of hedge funds with traditional asset
classes, means that by adding a funds of hedge funds to
a diversified portfolio is likely to enhance the risk / return
profile of the portfolio. Finally, a fund of hedge funds
offering typically conducts a lot of due diligence into
underlying hedge funds that the end investor may be
happy to have done on his behalf. Fund of funds can make
a useful proxy returns for hedge funds, but it should be noted
that individual hedge fund strategies will likely exhibit their
own performance characteristics.
The following chart illustrates the benefits of including a
fund of hedge funds in a balanced portfolio. This analysis
utilises the HFR I (Hedge Funds Research Inc.) Fund Weighted
Composite Index as the proxy for the fund of hedge funds
and the Zenith Composite Balanced Benchmark Index as
the proxy for the balanced portfolio. The Zenith Composite
Balanced Benchmark Index represents a portfolio consisting
of 30% Australian equities, 10% Australian listed property,
20% international equities, 20% Australian fixed interest,
10% international fixed interest and 10% cash.
As the HFR I Fund Weighted Composite Index has
outperformed the balanced portfolio over on a per
annum basis over the 10 year period measured (January
1998 to December 2007), the chart shows that adding
an allocation to the hedge fund in the portfolio clearly
enhances the portfolio’s return.
24
Inclusion of Hedge Fund in Balanced Portfolio
- Sharpe Ratio
Allocation to Hedge Fund (%)
Sharpe Ratuo
Zenith Composite Balanced Benchmark HFRI Combined Portfolio
0.54
0.56
0.58
0.60
0.62
0.64
0.66
0.68
0.70
0.72
0.74
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
The following chart demonstrates that the addition of
an allocation to the hedge fund within the portfolio up
to approximately a 30% allocation does not add to the
volatility as measured by standard deviation.
25
Inclusion of Hedge Fund in Balanced Portfolio
- Standard Deviation
Allocation to Hedge Fund (%)
Annualised StDev
(120 months to 31-Dec-07)
Zenith Composite Balanced Benchmark HFRI Combined Portfolio
5.00%
5.25%
5.50%
5.75%
6.00%
6.25%
6.50%
6.75%
7.00%
7.25%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
The final chart further endorses the benefits of including
an allocation to hedge funds within the portfolio. This
chart provides a measure of the portfolio’s risk / return
characteristics as measured by the Sharpe Ratio. The Sharpe
ratio measures the additional return generated by the
portfolio for the additional level of risk (standard deviation)
above that of the risk free interest rate. On this measure, the
Sharpe ratio is maximised with an allocation to the hedge
fund at approximately 50%. While this large allocation may
be impractical and the results of this analysis would vary
over differing time frames, it provides a compelling case for
the inclusion of hedge funds within portfolios.
2626
Performance & Risk Measures
The performance and risk measures commonly used and
published by hedge fund managers, while not unique,
are more extensive that that used by “mainstream”
fund managers. The more extensive measurement of
performance and risk by hedge fund managers has had a
positive influence on the broader managed funds industry,
with more mainstream fund managers now supplying
greater analysis of their funds performance and risk.
Performance Measures
~ Cumulative Return
Cumulative return simply measures the total return of
the fund since its inception. The return is a percentage
return that is not annualised.
~ Annualised Return
Annualised return expresses the return of the fund on
an annual or per annum basis.
~ Best Month Return
The best month return measures the highest monthly
return over the history of the fund.
~ Worst Month
The worst month return measures the lowest monthly
return over the history of the fund.
~ Maximum Drawdown or peak to trough
The percentage negative return that a fund incurs from
a peak in its net asset value to its lowest net asset value
thereafter. The maximum drawdown over period of
time is a useful statistic in measuring the absolute risk
of a fund.
~ Time to recovery (also change in glossary at back)
The number of months that a fund takes to recover to
its peak net asset value following a Drawdown.
27
Consistency Measures
~ Average Monthly Gain
The average of the profitable months of the fund.
~ Average Monthly Loss
The average of the negative months of the fund.
~ Percent Positive Months
The number of monthly returns (displayed as a
percentage of the total number of months in the
period) that were positive over a given period.
~ Percent Negative Months
The number of monthly returns (displayed as a
percentage of the total number of months in the
period) that were negative over a given period.
~ Longest Losing Streak
The longest number of consecutive months of
negative performance.
~ Risk Measures
~ Annualised Standard Deviation
S tandard deviation is a statistical measurement that
describes historical volatility. In mathematical terms,
Standard Deviation is a measure of the dispersion
of a set of data from its mean. Annualised Standard
Deviation expresses the standard deviation on an
annual or per annum basis.
~ Beta
B eta measures the risk of a particular investment
relative to a market or index. It describes the
sensitivity of the investment to broad market
movements. For example, in equities, the stock market
has a beta of 1. An investment with a beta of 0.5 will
tend to participate in broad market moves, but only
half as much as the overall market.
~ Sharpe Ratio
The Sharpe Ration is a measure of how well a fund is
rewarded for the risk it incurs. The higher the ratio, the
better the return per unit of risk taken. It is calculated
by subtracting the risk-free rate from the fund’s
annualized average return, and dividing the result by
the fund’s annualized standard deviation.
~ Downside Deviation
The downside deviation is similar to the standard
deviation but considers only returns that fall below
a defined Minimum Acceptable Return (MAR) rather
then the arithmetic mean. For example, if the MAR is
determined to be 10%, the downside deviation
would measure the variation of each period that falls
below 10%.
~ Sortino Ratio
The Sortino Ratio is a risk-adjusted measure of return
similar to the Sharpe Ratio. It is calculated in the same
way but replaces the annualised standard deviation
in the denominator with the annualised downside
deviation.
28
29
Fee Structures
In ma ny wa ys hedge funds ha ve revoluti onised
fee struct ures right ac ross th e ma naged fund
industry via th e use of performa nce fees, a
practic e that ha s now become more comm on in
th e “mai nstream ” ma naged fund industry.
From this perspective, hedge funds fee structures
generally include two components, management fees and
performance fees. These components are described below.
Management Fees
Like most managed investments, hedge fund managers charge investors a management fee for their services in managing
the assets of the Fund. This fee is usually a fixed percentage fee charged on the current market value of the assets of the
Fund and therefore in dollar terms, will vary as a function of the underlying value of the Fund’s assets. The Management
Fee is paid regardless of the performance of the fund. In practice the management fee is reflected in the fund’s unit
price and therefore would be calculated on the same frequency as the unit price calculation. An example of how the
management fee calculation is reflected in the unit price is as follows:
Net Asset Value of Fund: $50,000,000
Number of Units on Issue: 25,000,000
Unit Price (Before Management Fee): $2.00 ($50,000,000 / 25,000,000)
Unit Price (after Management Fee): $1.96 ($2.00 x 2.0%)
The frequency of valuation is where many hedge funds differ from that of managed funds in the mainstream asset classes
partly due to the less liquid nature of the underlying investments they invest in. This means that the frequency of unit
price valuations may be less frequent with monthly valuations being common for many hedge funds.
30
Performance Fees
The use of performance fees is commonplace within
hedge funds. In basic terms, a performance fee is a fee
that is charged by the manager of a hedge fund if the
returns of the fund are above the required hurdle rate or
performance benchmark. There are a number of different
components to performance fees which in practice, results
in many different performance fee structures. The different
components of performance fee structures include:
Performance benchmark (Hurdle Rate)
A performance fee requires the use of a performance
benchmark or hurdle rate of return above which the Fund’s
returns must be prior to the performance fee being paid.
The selection of performance benchmarks varies widely
and can range from:
~ P ositive Returns (returns above zero, i.e. no hurdle rate);
~ The bank bill index (UBS Bank Bill Index);
~ The official cash rate
(E.g. Reserve Bank of Australia cash rate);
~ A market benchmark (E.g. S&P/ASX 200
Accumulation Index);
~ A market benchmark plus a margin
(E.g. S&P/ASX 200 Accumulation Index plus 2.0%);
~ A specific absolute return (E.g. Above 10%)
These performance benchmarks or hurdle rates are examples of those used by hedge fund managers to measure the
returns of the fund against to assess whether the manager has met the criteria to be paid a performance fee. As an
example, a fixed interest based hedge fund manager using the UBS Bank Bill Index as their performance benchmark will
be entitled to be paid a performance fee if the return of the Fund is higher than the return over the specified period.
An example of a performance fee structure is provided below:
Performance Fee: 20% of returns above the benchmark subject to high water mark
Benchmark: RB A Cash Rate (Assume 6.75%)
Performance Fee Accrued: Daily
Performance Fee Paid: Quarterly
Assume the investor invests $50,000 into the fund on 1 October and units are issued based on the unit price of $1.00 per
unit on the previous day (30 September). Assume the High Water Mark is also $1.00 per unit.
The unit price then increases to $1.035 (before deduction of the Performance Fee but after all other fund fees and
expenses) at 31 December (a period of 92 days). This results in the value of the investment appreciating to $51,250.
The Performance Fee is then calculated in the following way:
Benchmark Value per unit: = $1.00 + 92 x (6.75% / 365) x $1.00
= $1.017014
Fund Outperformance per unit: = ($1.03500 - $1.017014)
= $0.017986
Performance Fee per unit: = $0.017986 x 20%
= $0.003597
Total Performance Fee Payable: = $0.003597 x 50,000
= $179.86
31
Measurement Period
The measurement period for the calculation of
performance fees also varies quite widely in Australian
hedge fund products, with periods ranging from as short
as 1 month to as long as 3 years being used. The most
common measurement period is 12 months however
according the Zenith Investment Partners there has been a
trend to shorter term periods for those managers seeking
to generate more performance fees.
Reset Periods
Reset periods are an occasional facet of performance
fee structures. Reset periods are designed to “wipe the
slate clean” in terms of historical performance thereby
resulting in the performance fee period and calculation
starting again. Reset periods are not as common as High
Water Mark structures (see below) and can significantly
benefit the manager by removing past underperformance
that would otherwise need to be recouped prior to a
performance fee being paid.
High Water Mark
High water marks are a common feature of performance
fee structures and attempt to ensure that all investors in
a fund are treated equitably in relation to the charging
of performance fees. A high water mark is a point at
which a fund must achieve, in addition to outperforming
its performance benchmark, to qualify for payment of a
performance fee. A high water mark is usually applied to
the fund’s unit price NAV. A high water mark means that
the fund unit price must be above its previous high and
beat its performance benchmark prior to a performance
fee being paid to the manager. The application of a
high water mark is a positive for investors as it means
that any underperformance following the payment of a
previous performance fee must first be recouped before a
performance fee can be paid again.
32
Risk (noun);
probability of an event occuring x impact of event occuring
33
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec 93
Jun 94
Dec 94
Jun 95
Dec 95
Jun 96
Dec 96
Jun97
Dec 97
Jun 98
Dec 98
Jun 99
Dec 99
Jun 00
Dec 00
Jun 01
Dec 01
Jun 02
Dec 02
June 03
Dec 03
Jun 04
De c 04
Jun 05
Dec 05
Jun 06
Dec 06
Jun 07
Convertible Arbitrage
Dedicated Short Bias
Emerging Markets
Equity Market Neutral
Event Driven
Fixed Income Artbitrage
Global Macro
Long/Short Equity
Managed Futures
Mulit-Strategy
Hedge Funds in Australia
Hedge Fund Investment
There is no doubting the fact that Australian investors
have discovered hedge funds. As was the case with the
growth of hedge funds in the US , this wave of investment
has been led by high-net-worth and retail investor money.
According to hedge fund research house LCA Group,
65 per cent of the assets of the Australian hedge fund
industry at 30 June 2006 were invested by high-net-worth
and retail investor money, with pension-fund money and
offshore institutional investors accounting for 20 per cent.
According to Axiss Australia, at 30 June 2006, the ten
largest superannuation fund allocations to hedge funds
and fund of hedge funds accounted for almost $7 billion,
led by (in order) ARIA, RES T, UniSuper, AustralianSuper,
Health Super, Telstra Super Scheme, QLGSS , Qantas Super
Plan, HES TA and HOS TPLUS .
The preferred institutional vehicle has been the
diversified fund of hedge funds. An AIMA survey of
superannuation fund trustees in 2006 and again in
2008 showed that around 50 per cent of trustees have
allocated money to fund of hedge funds, with about 27
per cent having allocated money to multi-strategy funds
and the same proportion reporting having used singlestrategy
managers.
Institutional investors have used fund of funds to gain
familiarity with the investment class by using a diversified
portfolio. This may be considered a more risk-averse way
to enter the hedge fund market: the investor gains the
benefit of a broad range of managers and strategies,
while employing a manager to monitor the underlying
managers and manage the underlying single-manager risk
associated with the portfolio. Many investors have found
that they have become comfortable in this way using
hedge funds, and have subsequently chosen a particular
manager or strategy.
Source: Credit Suisse Tremont LLC
The below diagram, although not specific to Australian
hedge fund investing provides an illustration of the
changing investment allocation to the various hedge fund
strategies since the early 1990’s. The changing allocation
to the different strategies has evolved as a result of new
strategies emerging and investor preferences changing
through differing market cycles.
34
Income & Capital Gains Tax Implications
The active investment process of most hedge fund
strategies tends to result in a high level of turnover of
the underlying securities within a hedge fund manager’s
portfolio. This results in the rapid realisation of capital
gains and losses on individual security positions. In
Australia, unless a security has been held for greater than
twelve months, any realised capital gains are treated as
income from a taxation perspective. With the majority
of unlisted managed funds in Australia being unit trusts
that must distribute all income within the financial year in
which it is earned, realised gains on security’s held for less
than twelve months will be treated as income in the
hands of investors.
These characteristics result in the majority of hedge
fund returns being in the form of taxable income rather
than capital growth for Australian investors. This can
impact materially on the after tax returns of investors,
particularly those on high marginal tax rates who will be
liable for higher levels of tax on the income distributions
paid by the fund.
35
INVESTOR
Hedge Fund
Hedge Fund
Manager
Fund Administrator Prime Broker
& Custodian
A typical hedge fund structure is illustrated.
The roles of each of th ese contributors to th e ma nagement of th e hedge fund are summa rised below:
Hedge Fund Structure
Role of the Hedge Fund Manager
The Hedge Fund Manager is responsible for the genesis, implementation and execution of the investment strategy of
the fund which involves buying and selling securities, managing the overall portfolio and risk management. As such, the
Manager is entirely responsible for the investment return produced by the fund for the investors.
Role of Prime Broker
The prime broker is a necessary function for most hedge
fund managers as it provides several key services to assist
with the management of their portfolios. These include:
Multi-asset class, multi-currency custodial, settlement
and clearing service, Margin Financing, Stock Borrow/
Loan and Synthetic (Swap) products, Business Consulting
Services and Capital Introduction Services
The prime broker facilitates custodial servicing and
reporting for a fund manager’s assets, integrating reports
within the fund managers existing architecture. The prime
broker also acts as a source of margin financing, for the
hedge fund. Hedge funds can use leverage as they deem
necessary and in line with the availability of financing
made available to them (typically in line with their prime
broker’s credit counterparty review). The prime broker
can then provide financing via collateralised lending.
Collateralised financing requires the prime broker to
hold stock as collateral plus a margin requirement, with
the margin requirement dependent on the perceived
quality of the counterparty and collateral (determined by
the prime broker) and the concentration and liquidity of
the portfolio. The prime broker also facilitates securities
lending; used when the hedge fund intends to hold short
sold positions in its portfolio. When securities are sold
into the market (i.e. short sold), delivery can be made by
borrowing the stock from a stock lender (which in this case
is the prime broker). The lender retains all the benefits of
ownership except voting rights and retains the right to
recall the security at any time.
Prime brokers will also provide business consulting services;
offering best practice commentary on fund structuring,
market practice, jurisdictional developments, tax, third party
vendors and resourcing. Furthermore, prime brokers provide
a capital introduction facility, through which they facilitate
the introduction of qualified investors to hedge fund
managers. This is done on a bespoke and ongoing basis and
in tandem with frequently organised capital introduction
events and educational forums.
36
Role of the Fund Administrator
The role of the Fund administrator broadly covers the
following activities:
~ Transfer agency and Registrar responsibilities, such
as subscriptions, redemptions, transfer requests and
maintenance of share registry.
~ Calculation, or striking, of a funds net asset value
(NAV), including the calculation and application of all
fees.
~ F inancial expertise and functions: Reporting and
provision of financial statements, liaising across the
audit confirmation process, provision of compliance
and regulatory duties and support.
~ Trade reconciliation and settlement processing in
tandem with the fund manager(s) and Prime Broker(s).
Role of the Custodian
Typically, the fund manager’s Prime Broker would act
as Custodian. However, in some regulatory jurisdictions
there is a requirement to appoint a Custodian in addition
to a Prime Broker. In these regulatory environments
the Custodian usually appoints the Prime Broker as
sub-Custodian, to enact in the typically provided Prime
Brokerage custodial functions.
Furthermore, a Prime Broker may appoint sub-custodians,
subject to internal review and due diligence processes,
where required by specific regulatory, operational or
jurisdictional requirements.
A fund may appoint a third party custodian should they
be required to take custody of securities that their Prime
Broker cannot custody, or in some instances where a
master-feeder structures exist, a separate Custodian may
service assets at the feeder level.
Role of the Auditor
Funds often provide indicative (unaudited) reports on a
regular basis to their share and unit holders. However for
regulatory and practical reasons (most third parties will not
work with, nor invest in, an un-audited entity) funds need
to engage an Auditor to provide fully audited reports. The
Auditor will ensure that the fund remains compliant with
any and all accounting guidelines and regulations as well
as the verification of financial statements.
Role of the Lawyer
The lawyer will typically assist the manager with the
process of AFSL licencing and contractual aspects of
running the business. For example, the service providers
discussed in this section will usually have contracts in
place with the hedge fund manager.
The lawyer may advise the fund in regard to any tax
regulations and legal matters, as well as ensuring the fund
remains compliant with the regulatory environment of
any jurisdiction in, or through, which the fund conducts or
solicits business.
The Lawyer will aid in the preparation, drafting and review
of all appropriate fund documents, including:
~ P rivate Placement Memorandum(s)
~ Information Memorandum(s)
~ P roduct Disclosure Statement(s)
~ S ubscription/ Redemption/ Application Document(s)
~ Third Party and Service Provider Agreements
37
Whi le hedge funds generally fac e th e sam e if not simi lar risks to oth er types of funds, depending on th e strat egy, th ere ca n be additi onal risks involved
with investi ng in hedge funds. Some of these additional risks include:
Hedge Fund Risks
Leverage Risk
A common characteristic of hedge funds is their use of
leverage as part of their trading strategy. Although not all
hedge funds use leverage, for many hedge fund strategies
such as arbitrage strategies leverage is an important
element as the alpha is relatively small and leverage may
be used to amplify the profit. Investors should understand
that leverage can also magnify losses.
In general, hedge fund managers can create leverage
within their strategies through a variety of means,
although the most common is through a borrowing facility
established with a prime broker.
Liquidity Risk
Liquidity risk is common to all investors and fund
managers who trade securities. However, due to the
specialist skills and strategies used, hedge fund managers
may operate in illiquid markets to a greater extent than
other fund managers. This can be a significant risk for
some hedge fund strategies particularly under adverse
market conditions where liquidity can reduce significantly.
Short Selling Risk
Short selling is a very common aspect of running a hedge
fund. A long position in a stock, can’t lose more than the
initial investment where the stock price declines to zero.
By contrast, a short position can lose an unlimited amount
as there is no theoretical limit on how high a stock can
trade. As a result many short positions will be subject to a
stop loss which is a pre-defined price above the initial sale
price at which time the stock will be bought back and the
loss thereby capped.
As some hedge fund strategies utilise short selling as a
component of their investment strategy, short squeeze
can become a risk. A short squeeze arises when short
sellers must buy back their short positions at rising prices.
Lenders can recall borrowed stock forcing a hedge fund
manager to find borrowed stock elsewhere or buy stock in
the market to deliver to lender.
Manager Operational Risk
In addition to the investment and financial risks, hedge
funds management faces a number of operational risks.
The Capital Market Company has shown that more hedge
funds close due to operational issues than investment
issues. The more common issues within operational risk
are: misrepresentation of investments, misappropriation of
investments, unauthorised trading and style breaches and
inadequate resources to fund the strategy.
Counterparty Risk
Counterparties involved in the running of a hedge fund
can include the prime broker who lends cash and or
securities and the other side of any over the counter (OTC)
derivative trade or credit default swaps (CDS s).
As many hedge funds invest or trade in OTC derivatives
and financial instruments with investment banks, brokers
and / or dealers, they are exposed to counterparty risk
which is the risk that the other party to the transaction will
not honour their obligations in relation to the security.
A particular counterparty risk is settlement risk, which
refers to the failure to deliver the specified security or
money by one of the parties to the transaction on the
settlement day.
Pricing Risk
Given that many hedge fund managers have evolved
from investment banks and / or broker proprietary trading
desks, there are a number of strategies that invest in
complex securities traded over-the-counter rather than
on any open or public exchange. Pricing these types of
securities can be difficult particularly in periods of high
volatility. Investors should make themselves aware of the
valuation policies of the hedge fund and administrator and
how they are governed and regulated.
38
Strategy (noun);
a long term plan of action designed to achieve a particular goal
39
Hedge Fund Glossary
Active premium
A measure of the Investment’s annualised return minus the
Benchmark’s annualised return.
Administrator
The entity that manages the back office work and
individual accounts for the hedge fund.
Alpha
A numerical value indicating a manager’s risk adjusted
excess rate of return relative to a benchmark. Measures a
manager’s “value-added” in selecting individual securities,
independent of the effect of overall market movements.
Annual rate of return
The compounded gain or loss in a fund’s net asset value
during a calendar year.
Arbitrage
To take advantage of disparate pricing between two
similar instruments in the same or different markets.
Average annual return
Cumulative gains and losses dived by the number of
years of an investment’s life, with compounding taken
into account. The measure is used to compare returns on
investments for periods ranging from partial to multiple
years.
Average monthly gain
the average of the profitable months of the fund.
Average monthly loss
The average of the negative months of the fund.
Average monthly return
The average of all the monthly performance numbers of
the fund.
Average number of positions
The number of securities that a fund holds on any given day.
Average portfolio turnover
The percentage of the portfolio that is bought and sold
each year.
Average rate of return
The mean average of a fund’s returns over a given number
of periods. It is calculated by dividing the sum of the rates
of return over those periods by the number of periods.
Benchmark
A reference (security or index) against which a comparison
and evaluation of performance of an investment portfolio
can be made.
Benchmark for correlation values
The benchmark that the fund has chosen to run
correlation values such as alpha, beta and R squared.
Benchmark for graphing
The benchmark that the fund has chosen to graph itself
against.
Beta
Measurers the sensitivity of the manager’s return to the
market return. It is the extent to which the manager’s
returns have varied in line with movements in benchmark
returns. A manager with a Beta greater than 1.0 is more
volatile than the market, while a manager with a Beta less
than 1.0 is less volatile than the market.
Bottom-up investment strategy
An approach that seeks to identify investments that will
produce strong returns, before assessing the influence that
economic factor will have on those assets.
Capacity of fund
An estimate of the size of the fund relative to the turnover
of the markets it invests in, with the aim of assessing when
assets under management become too large to effectively
execute the fund’s investment strategy.
Capital introduction (cap intro)
A service provided by prime brokers to introduce their
hedge fund clients to potential (institutional) investors.
Closed fund
A hedge fund or open-end mutual fund that has at least
temporarily stopped accepting capital from investors,
usually due to rapid asset growth. Not to be confused
with a closed-end fund.
40
CTA
Commodity Trading Advisor. CTA’s generally trade
commodity futures, options and foreign exchange and
most are highly leveraged.
Compounded monthly return
The compounded monthly return is the return that if
compounded over the life of the fund would lead to the
total return of the fund. For example, if a fund has 10
months of return equaling 100% as a total compounded
return. The compounded monthly return would be 7.18%.
Compounded annual return
The compounded annual return is simply the compounded
monthly return multiplied by the 12th power.
Convertible arbitrage investment strategy
A conservative, market-neutral approach that aims to
profit from pricing differences or inefficiencies between
the values of convertible bonds and common stock issued
by the same company. Managers of such funds generally
purchase undervalued convertible bonds and short-sell
the same issuers’ stock. The approach typically involves a
medium-term holding period and results in low volatility.
Correlation
A measure of how variables tend to move in relation
to one another. Variables that rise or fall in parallel on
average are positively correlated and those that move in
opposite directions are negatively correlated. Correlations
range from -1 to +1.
Credit Spread
The spread between Treasury securities and non-Treasury
securities that are identical in all respects except for
quality rating. For example, the difference between yields
on Treasuries and those on single A-rated industrial bonds.
Derivatives
Financial instruments whose value is derived from the
value of an underlying security, asset or variable. Examples
include options, warrants, futures, forwards and swaps.
Distressed securities investment strategy
Purchasing deeply discounted securities that were issued
by troubled or bankrupts companies. Also, short-selling
the stocks of those corporations. Such funds are usually
able to achieve low correlations to the broader financial
markets. The approach generally involves a medium- to
long-term holding period.
Diversification
Minimising of non-systematic portfolio risk by investing
assets in several securities and investment categories with
low correlation between each other.
Downside Deviation
Similar to the loss standard deviation except the downside
deviation considers only returns that fall below a defined
Minimum Acceptable Return (MAR) rather then the
arithmetic mean. For example, if the MAR is assumed to be
10%, the downside deviation would measure the variation
of each period that falls below 10%. (The loss standard
deviation, on the other hand, would take only losing
periods, calculate an average return for the losing periods,
and then measure the variation between each losing
return and the losing return average).
Drawdown
The percentage loss that a fund incurs from its peak net
asset value to its lowest value. The maximum drawdown
over a significant period is sometimes employed as a
means of measuring the risk of a vehicle. Usually expressed
as a percentage decline in net asset value.
Event-driven investment strategy
An approach that seeks to anticipate certain events,
such as mergers or corporate restructurings. Such funds,
which include risk-arbitrage vehicles and entities that
buy distressed securities, typically employ medium-term
holding periods and experience moderate volatility.
FIF
An Australian tax that may be levied on Australian
investors who invest in offshore vehicles.
Fixed income arbitrage investment strategy
An approach that aims to profit from pricing differentials
or inefficiencies by purchasing a bond, annuity or
preferred stock and simultaneously selling short a related
security. Such funds are often highly leveraged.
41
Forward contract
Agreement between two parties to buy or sell an
underlying asset at a specified future date for a specified
price. Not traded on an exchange, but between
specific parties.
Fund of funds
An investment partnership that invests in a series of
other funds. A portfolio will typically diversify across a
variety of investment mangers, investment strategies, and
subcategories.
Fundamental analysis investment strategy
An approach that relies on valuing stocks by examining
companies’ financials and operations, including sales,
earnings, growth potential, asset size and quality,
indebtedness, management, products and competition.
Futures contract
Standardised, exchange traded contract for the future
delivery or receipt of a specified amount of an asset at a
specified price.
General partner
The individual or firm that organizes and manages a
limited partnership, such as a hedge fund. The general
partner assumes unlimited legal responsibility for the
liabilities of a partnership.
Global macro investment strategy
An approach in which a fund manager seeks to anticipate
broad trends in the worldwide economy. Based on those
forecasts, the manager chooses investments from a
wide variety of markets -- i.e. stocks, bonds, currencies &
commodities. The approach typically involves a mediumterm
holding period and produces high volatility. Many
of the largest hedge funds follow global-macro strategies.
They are sometimes called “macro” or “global directionalinvestment”
funds.
Gross exposure
The exposure level of the fund to the market at the present
time - short positions are added to long positions to give a
sense of total exposure.
Hedge Fund Access
Investors’ ability to access hedge funds can be more
restrictive than for other “mainstream” managed funds.
Given the uniqueness of some hedge fund investment
strategies and / or the illiquid nature of the assets some
hedge funds invest in, funds under management capacity
constraints are more common with hedge funds. That
is, the volume of funds under management within some
hedge fund strategies can be constrained by the nature of
the investment strategy or the illiquidity of the underlying
assets they invest in. This often results in hedge fund
managers closing their hedge fund to new investment
once they reach a level of funds under management above
which their investment strategy and ability to buy and sell
assets would be impacted.
Hedge Fund Indices & Historical Statistics
There are many hedge fund databases in the world and no
one database captures all managers and funds. The reason
for this is that hedge fund managers report their returns
voluntarily and are not regulated or compelled to do so.
Hedging
Transactions entered into (usually opposite transactions
within the same asset class or market) that protect against
adverse price movements and limit the exposure to a
specific risk.
High Watermark
The assurance that a fund only takes fees on profits
once past losses are recovered. If an investment is made
and subsequently falls in value, the fund will only take
incentive fees if the investment grows above the initial
level of investment made.
Highest 12 Month Return
The best or highest 12 month period of a fund’s
performance.
Highest Monthly Return
The best or highest monthly return of the fund.
Hurdle Rate
The minimum investment return a fund must exceed
before a performance allocation / incentive fee can be
taken.
42
Incentive Fee
The fee on new profits earned by the fund for the period.
For example, if the initial investment was $1,000,000 and
the fund returned 25% during the period (creating profits
of $250,000) and the fund has an incentive fee of 20%,
then the fund receives 20% of the $250,000 in profits, or
$50,000.
Inception Date
The date that the fund began trading.
Leverage
The amount of leverage currently used by the fund as
a percentage of the fund. For example, if the fund has
$1,000,000 and borrows another $2,000,000, to bring the
total dollars invested to $3,000,000, then the fund is said to
be 3 times levered.
Limited partnership
Many hedge funds are structured as limited partnerships,
which are business organizations managed by one or more
general partners who are liable for the fund’s debts and
obligations. The investors in such a structure are limited
partners who do not participate in day-to-day operations
and are liable only to the extent of their investments.
Liquidity Gates
Related to lock-ups, liquidity gates are common practice
within the hedge fund industry. The term refers to the
practice of restricting the percentage of the fund that can
be redeemed by investors in a specific period. For example,
a hedge fund manager may restrict the total redemptions
to a maximum of 10% of the fund each quarter. This
practice is designed to control the level of redemptions
so that forced selling of securities, particularly illiquid
securities is kept to a manageable level and does not
impact on either the performance or liquidity of the fund.
Lockup
Time period that initial investment cannot be redeemed
from the fund.
Long biased investment strategy
An approach taken by fund managers who tend to
consistently hold a net long market exposure.
Long Position
Holding a positive amount of an asset.
Long / short investment strategy
An approach in which fund managers buy stocks whose
prices they expect will increase and takes short positions
in securities (usually in the same sector) whose prices they
believe will decline.
Longest Losing Streak
The number of consecutive months of negative
performance.
Lowest Monthly Return
The lowest or worst monthly return of the fund.
Lowest 12 Month Return
The lowest or worst 12 month period of a fund’s
performance
Management Fee
The fees taken by the manager on the entire asset level
of the investment. For example, if at the end of the
period, the investment is valued at $1,000,000, and the
management fee is 1%, then the fees would be $10,000.
Multi-strategy
An investment philosophy allocating investment capital to
a variety of investment strategies, although the fund is run
by one management company.
Market timer
A hedge-fund manager that selects asset allocations in
anticipation of movements in the broad market.
Market neutral investment strategy
An approach that aims to preserve capital through any of
several methods and under any market conditions.
Maximum Drawdown
The worst period of “peak to trough” performance for
the fund, regardless of whether or not the drawdown
consisted of consecutive months of negative performance.
Minimum Investment
The minimum initial investment for the fund.
43
Merger arbitrage investment strategy
Trading the stocks of companies that have announced
acquisitions or are the targets of acquisitions. Seeks
to exploit deviations of market prices from proposed
exchange formulas.
Mortgage backed securities arbitrage
investment strategy
An approach that seeks to exploit pricing differentials
between various issues of mortgage-related bonds.
Net market exposure
The exposure level of the fund to the market at the present
time. It is calculated by subtracting the short percentage
from the long percentage. For example, if a fund is 100%
long and 25% short, then the net market exposure is 75%.
Pairs Trading
Non-directional relative value investment strategy that
seeks to identify two companies with similar characteristics
whose equity securities are currently trading at a price
relationship that is out of their historical trading range.
Investment strategy will entail buying the undervalued
security, while short-selling the overvalued security.
Peak to trough drawdown
The worst period of return of the fund.
Percent long
The percentage of the fund invested in long positions
Percent short
The percentage of the fund that is sold short.
Prime Broker
The entity with whom a hedge fund has its financing,
stock borrowing, clearing, settlement and custody
arrangements.
Profitable percentage
The percentage of monthly returns that the fund
made money.
Options
A financial instrument that gives the holder the right but
not the obligation to buy (call option) or sell (put option)
the underlying asset up to (American option) or on
(European option) a defined expiration date for a
defined price.
OTC
Over-the-counter trading. Trading of products between
two parties outside of exchanges.
Rate of return
The annual appreciation in the value of a fund or any
other type of investment, stated as a percentage of the
total amount invested. Sometimes referred to a simply
the “return.”
Redemptions
Frequency at which fund redemptions are accepted by the
fund.
Redemption fee
A charge, intended to discourage withdrawals that a
hedge-fund manager levies against investors when they
cash in their shares in the fund before a specified date.
Relative-value investment strategy
A market-neutral investment strategy that seeks to identify
investments whose values are attractive, compared to
similar securities, when risk, liquidity and return are taken
into account.
Risk
Risk in a portfolio sense refers to the variation or volatility
of returns. It is generally measured by the standard
deviation of the portfolio returns.
Risk free rate
The theoretical return on a risk-free investment, usually a
U.S. security
Sharpe Ratio
An expression of the reward to risk ratio achieved with an
historical rate of return. Calculated as the excess return to
cash divided by volatility.
44
Short-biased investment strategy
An approach that relies on short sales. Such funds tend to
hold larger short positions than long positions.
Short Position
The sale of a security that was borrowed and not
previously owned in expectation of a fall in price.
Side-Letters
Side letters are designed to partly overcome the above
issue of access to hedge funds. A side letter is a letter
provided by a hedge fund manager to an investor stating
that they will provide them with a specific allocation
(usually a dollar amount) to their hedge fund within a
specific period of time. That is, an investor may have $10
million to invest in a specific hedge fund today but wish
to reserve a further $10 million of capacity in the fund in 6
months time.
Sortino Ratio
The Sortino Ratio is similar to the Sharpe Ratio, except that
instead of using standard deviation as the denominator,
it uses Downside Deviation. The Sortino Ratio was
developed to differentiate between “good” and “bad”
volatility in the Sharpe Ratio. If a fund is volatile to the
upside (which is generally a good thing) its Sharpe ratio
would still be low. To quote the Sortino web site: “A
comparable downside risk ratio that has come to be called
the Sortino ratio has for the numerator the difference
between the return on the portfolio and the MAR. The
denominator for the Sharpe ratio is standard deviation,
and for the Sortino ratio it is downside deviation.” The MAR
is the Minimum Acceptable Return (We are using 5%).
Special situations investment strategy
An event-driven investment strategy in which the manager
seeks to take advantage of unique corporate situations
that provides the potential for investment gains.
Standard Deviation
Standard deviation is a statistical measure of the absolute
variability of returns. It is the most commonly used
measure of the volatility of returns or investment risk.
Rolling 12 Month Standard Deviation
Standard Deviation of Rolling 12 Month Returns.
Statistical arbitrage investment strategy
A market-neutral investment strategy that seeks to
simultaneously profit and limit risk by exploiting pricing
inefficiencies identified by mathematical models. The
strategy often involves short-term bets that prices will
trend toward their historical norms.
Stop loss
Hedge fund managers who take short positions will
typically have a stop loss process, either rigorous or
subjective, in order to limit the losses of a short position
should it move too far against the portfolio.
Swap
An agreement between two parties to exchange cash
flows over time according to a predetermined formula.
Top down investment strategy
An approach that seeks to assess the influence of various
macro-and micro-economic factors before identifying
individual investments.
Total Return Since Inception
The total Cumulative return for the fund since inception.
Volatility
A measure of the variability of investment returns,
calculated as standard deviation.
45
46
AGORA ASSET MANAGEMENT
Main Contact: P ru Kirk
Email: pruk@agoraam.com.au
Head office: PO Box 18404, Collins Street East ,
Melbourne, VIC 8003
Country: Australia
Telephone: +61 3 9652 9700
Fax: +61 3 9652 9720
Website:
Area of Activity: Hedge Fund Manager / Adviser
ALLARD PARTNERS AUSTRALIA PTY. LIMITED
Main Contact: Joanne Braithwaite
Email: joanne@allardpartners.com
Head office: L evel 12, Royal Exchange Building,
56 Pitt Street, Sydney, NS W 2000
Country: Australia
Telephone: +61 2 9247 7888
Fax: +61 2 9251 2566
Website: www.allardpartners.com
Area of Activity: Hedge Fund Manager / Adviser
ARTESIAN CAPITAL MANAGEMENT
Main Contact: S uzanne Smith
Email: suzanne@artesianinvest.com
Head office: L evel 7, Alcaston House, 2 Collins Street,
Melbourne, VIC 3000
Country: Australia
Telephone: +61 3 9667 0500
Fax: +61 3 9654 4058
Website: www.artesianinvest.com
Area of Activity: Hedge Fund Manager / Adviser
ATTUNGA CAPITAL PTY LTD
Main Contact: Ian Gibson
Email: ian@attungacapital.com.au
Head office: PO Box 1356, Wahroonga,
S ydney, NS W 2076
Country: Australia
Telephone: +61 2 9397 7100
Fax: +61 2 9262 1125
Website: www.attungacapital.com.au
Area of Activity: Hedge Fund Manager / Adviser
Appendix
AIMA Australia Members - 2008
Fund Managers
47
BASIS CAPITAL PTY LTD
Main Contact: S teve Howell
Email: showell@basiscap.com.au
Head office: PO Box N115, Grosvenor Place,
S ydney, NS W 1220
Country: Australia
Telephone: +61 2 8234 5500
Fax: +61 2 8234 5501
Website: www.basiscap.com.au
Area of Activity: Hedge Fund Manager / Adviser
BORONIA CAPITAL PTY LTD
Main Contact: Angus Grinham
Email: angus.grinham@gmf.com.au
Head office: PO Box 744,
Crows Nest, NS W 2065
Country: Australia
Telephone: +61 2 8238 9400
Fax: +61 2 8238 9499
Website: www.gmf.com.au
Area of Activity: Hedge Fund Manager / Adviser
COLONIAL FIRST STATE INVESTMENT MANAGERS (AUS) LTD
Main Contact: D avid Bell
Email: dbell@colonialfirststate.com.au
Head office: L evel 29, 52 Martin Place,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9273 3018
Fax: +61 2 9273 3172
Website: www.colonialfirststate.com.au
Area of Activity: Hedge Fund Manager/Allocator Manager
DAWNAY, DAY WALDEN PTY LTD
Main Contact: L es Walden
Email: les.walden@dawnayday.com.au
Head office: D awnay Day House , Level-1, 117 Harrington Street ,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8915 9999
Fax: +61 2 8264 0353
Website: www.dawnayday.com
Area of Activity: Hedge Fund Manager / Adviser
DV01 FUNDS MANAGEMENT PTY LTD
Main Contact: G reg Madden
Email: greg.madden@dvo1.com
Head office: PO Box 5672, St Georges Terrace,
P erth, WA 6831
Country: Australia
Telephone: +61 8 9481 8695
Fax: +61 8 9481 8742
Website: www.dvo1.com
Area of Activity: Hedge Fund Manager / Adviser
EBC EQUITIES PTY LTD
Main Contact: John Carter
Email: j.carter@ebcapital.com.au
Head office: L evel 8, 25 Bligh Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9232 3957
Website: www.ebcapital.com.au
Area of Activity: Hedge Fund Manager / Adviser
48
ECLECTIC CAPITAL MANAGEMENT PTY LTD
Main Contact: D avid Somerton
Email: ds@ecmfunds.com
Head office: 171 Park Street, South Melbourne,
Melbourne, VIC 3205
Country: Australia
Telephone: +61 3 9685 8900
Fax: +61 2 9685 2000
Website: www.ecmfunds.com
Area of Activity: Hedge Fund Manager / Adviser
ELLERSTON CAPITAL LTD
Main Contact: Cathy Kovacs
Email: ckovacs@ellerstoncapital.com
Head office: L evel 3, 54-58 Park Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9282 8897
Fax: +61 2 9282 8818
Website: www.ellerstoncapital.com.au
Area of Activity: Hedge Fund Manager / Adviser
EVEREST BABCOCK & BROWN
Main Contact: Jeremy Reid
Email: jreid@everestcapital.com.au
Head office: L evel 35 AMP Centre, 50 Bridge Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8001 9100
Fax: +61 2 8001 9200
Website: www.everestcapital.com.au
Area of Activity: Allocator Manager
FINANCIAL RISK MANAGEMENT (AUSTRALIA) PTY LTD
Main Contact: D erek Goodyer
Email: derek.goodyer@frmhedge.com
Head office: L evel 33, Aurora Place, 88 Phillip Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9256 4900
Fax: +61 2 9252 1005
Website: www.frmhedge.com
Area of Activity: Allocator Manager
FIVE OCEANS ASSET MANAGEMENT
Main Contact: R oss Youngman
Email: ryoungman@5oam.com
Head office: L evel 10, 255 Pitt Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9994 7490
Fax: +61 2 9994 7654
Website: www.5oam.com
Area of Activity: Hedge Fund Manager / Adviser
FORTITUDE CAPITAL
Main Contact: Tim McGowen
Email: tim@fortitudecapital.com
Head office: S uite 2, Level 6, 10 Bridge Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9241 5573
Fax: +61 2 9241 4947
Website: www.fortitudecapital.com
Area of Activity: Hedge Fund Manager / Adviser
49
FUNDHOST LIMITED
Main Contact: Anne Ridgway
Email: anner@fundhost.com.au
Head office: PO Box N561, Grosvenor Place,
S ydney, NS W 1219
Country: Australia
Telephone: +61 2 8223 5400
Fax: +61 2 9232 8600
Website: www.fundhost.com.au
Area of Activity: Hedge Fund Manager / Adviser
GOLDMAN SACHS JBWERE INVESTMENT MANAGEMENT PTY LTD
Main Contact: Hylton Mathews
Email: hylton.mathews@gsjbw.com
Head office: L evel 17, 101 Collins Street,
Melbourne, VIC 3000
Country: Australia
Telephone: +61 3 9924 0144
Fax: +61 3 9679 0734
Website: www.gsjbwere.com
Area of Activity: Allocator Manager
GREEN CROSS CAPITAL PTY LTD
Main Contact: R aef Newitt
Email: rnewitt@greencrosscapital.com
Head office: 22/8 Victoria Parade, Manly,
S ydney, NS W 2095
Country: Australia
Telephone: +61 2 8213 7306
Fax: +61 2 8213 3595
Website: www.greencrosscapital.com
Area of Activity: Allocator Manager, Hedge Fund Manager / Adviser
H3 GLOBAL ADVISORS PTY LTD
Main Contact: D iana Price
Email: diana@h3global.com
Head office: L evel 1, Millions House, 122 Pitt Street ,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8221 0531
Fax: +61 2 9221 6308
Website: www.h3global.com
Area of Activity: Hedge Fund Manager / Adviser
HAWKESBURY ADVISORS PTY LTD
Main Contact: Mark Hodgkin
Email: mhodgkin@hawkcap.com
Head office: L evel 27, Grosvenor Place, 225 George Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9271 0500
Website: www.hawkcap.com
Area of Activity: Hedge Fund Manager / Adviser
IPAC ASSET MANAGEMENT LIMITED
Main Contact: Alison Tanswell
Email: alison.tanswell@ipac.com.au
Head office: L evel 31, 225 George Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9373 7000
Fax: +61 2 9373 7111
Website: www.ipac.com.au
Area of Activity: Allocator Manager
50
KAISER TRADING GROUP PTY. LTD.
Main Contact: Anthony Kaiser
Email: tony@kaisertrading.com
Head office: L evel 7, 417 St. Kilda Road,
Melbourne, VIC 3004
Country: Australia
Telephone: +61 3 9866 9301
Fax: +61 3 9866 9302
Website:
Area of Activity: Hedge Fund Manager / Adviser
MACQUARIE FUNDS GROUP
Main Contact: Jonathan Hall
Email: jonathan.hall@macquarie.com
Head office: L evel 8, 1 Martin Place,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8232 3327
Fax: +61 2 8232 4160
Website: www.macquarie.com.au
Area of Activity: Allocator Manager, Hedge Fund Manager / Adviser
MAN INVESTMENTS AUSTRALIA
Main Contact: U rs Alder
Email: ualder@maninvestments.com.au
Head office: L evel 21, Grosvenor Building, 225 George Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8259 9999
Fax: +61 2 9252 4453
Website: www.maninvestments.com.au
Area of Activity: Allocator Manager
MIR HEDGE FUND MANAGEMENT PTY LTD
Main Contact: Michael Triguboff
Email: mptri@mir.com.au
Head office: L evel 40, 50 Bridge Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8222 0800
Fax: +61 2 9230 0543
Website: www.mir.com.au
Area of Activity: Hedge Fund Manager / Adviser
NEWEDGE AUSTRALIA PTY LTD
Main Contact: Toby Lawson
Email: toby.lawson@newedgegroup.com
Head office: L evel 23, 400 George Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9235 6205
Fax: +61 2 9230 6817
Website: www.newedgegroup.com
Area of Activity: B anking Services (excl. PB ), Prime Brokerage Services
OPTIMAL FUND MANAGEMENT PTY LTD
Main Contact: Warwick Johnson
Email: warwickj@optimaljapan.com
Head office: L evel 5, 175 Macquarie Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8239 3300
Fax: +61 2 8239 3333
Website: www.optimalasia.com
Area of Activity: Hedge Fund Manager / Adviser
51
PENGANA HOLDINGS PTY LTD
Main Contact: N ick Griffiths
Email: nick@pengana.com.au
Head office: L evel 29, 20 Bond Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8524 9900
Fax: +61 2 8524 9911
Website: www.pengana.com.au
Area of Activity: Allocator Manager
PIONEER GLOBAL INVESTMENTS (AUSTRALIA) PTY LTD
Main Contact: N eil Wild
Email: neil.wild@pioneerinvest.com
Head office: L evel 31 Aurora Place, 88 Phillip Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8211 0555
Fax: +61 2 8211 0566
Website: www.pioneerinvest.com
Area of Activity: Allocator Manager
PMA INVESTMENT ADVISORS LIMITED
Main Contact: Trevor Easterbrook
Email: easterbrookt@pmaia.com
Head office: S uite 402, 35 Lime Street, King Street Wharf,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9262 5218
Fax: +61 2 9262 5190
Website: www.pmaia.com
Area of Activity: Hedge Fund Manager / Adviser
REGAL FUNDS MANAGEMENT PTY LTD
Main Contact: Andrew King
Email: andrew.king@regalfm.com
Head office: L evel 47, Gateway, 1 Macquarie Place,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8197 4333
Fax: +61 2 8197 4334
Website: www.regalfm.com
Area of Activity: Hedge Fund Manager / Adviser
SELECT ASSET MANAGEMENT
Main Contact: R obert Graham-Smith
Email: robert.graham-smith@selectfunds.com.au
Head office: L evel 10, 2 Bulletin Place,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8252 2200
Fax: +61 2 8252 2201
Website: www.selectfunds.com.au
Area of Activity: Allocator Manager, Hedge Fund Manager / Adviser
SHELL COVE CAPITAL MANAGEMENT LTD
Main Contact: P aul Brech
Email: paul.brech@shellcove.net
Head office: S uite 411, 15 Lime Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9299 3366
Fax: +61 2 9299 2800
Website: www.shellcove.net
Area of Activity: Hedge Fund Manager / Adviser
52
SYZYGIA PTY LTD
Main Contact: Tim Baker
Email: tim.baker@syzygia.com.au
Head office: L 17 BNP Paribas Centre, 60 Castlereagh Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9231 7632
Fax: +61 2 9231 7575
Website: www.syzygia.com.au
Area of Activity: Hedge Fund Manager / Adviser
TECHINVEST PTY LIMITED
Main Contact: R ick Steele
Email: rick@techinvest.com.au
Head office: L evel 13, 234 George Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8965 0480
Fax: +61 2 9475 0263
Website: www.techinvest.com.au
Area of Activity: Hedge Fund Manager / Adviser
TRICOM INVESTMENT MANAGEMENT LTD
Main Contact: Tim McNamara
Email: timothy.mcnamara@tricom.com.au
Head office: 1 Farrer Place, Level 27,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8336 7487
Fax: +61 2 8336 7687
Website: www.tricom.com.au
Area of Activity: Hedge Fund Manager / Adviser
TRIDENT PACIFIC CAPITAL
Main Contact: Jens Muenster
Email: jens.muenster@trident-pacific.com
Head office: 66 Hunter Street, Level 9, Suite 1,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8231 0168
Fax: +61 2 8231 0167
Website: www.trident-pacific.com
Area of Activity: Hedge Fund Manager / Adviser
VERTEX CAPITAL MANAGEMENT LIMITED
Main Contact: Kim Ivey
Email: kivey@vertexcapital.com.au
Head office: 50 Bridge Street, Level 34,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9251 1877
Fax: +61 2 8216 0701
Website: www.vertexcapital.com.au
Area of Activity: Hedge Fund Manager / Adviser
53
BLAKE DAWSON
Main Contact: R uth Stringer
Email: ruth.stringer@blakedawson.com
Head office: L evel 41, Grosvenor Place, 225 George Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9258 6000
Fax: +61 2 9258 6999
Website: www.bdw.com.au
Area of Activity: Legal Services
CLAYTON UTZ
Main Contact: John Moutsopoulos
Email: jmoutsopoulos@claytonutz.com
Head office: L evels 25-34, No. 1 O’Connell Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9353 4000
Fax: +61 2 8220 6700
Website: www.claytonutz.com
Area of Activity: L egal Services
DLA PHILLIPS FOX
Main Contact: Martin Jamieson
Email: martin.jamieson@dlaphillipsfox.com
Head office: L evel 38, 201 Elizabeth Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9286 8059
Fax: +61 2 9283 4144
Website: www.dlaphillipsfox.com
Area of Activity: L egal Services
lawyers
HENRY DAVIS YORK
Main Contact: John Currie
Email: john_currie@hdy.com.au
Head office: Henry Davis York Building, 44 Martin Place,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9947 6000
Fax: +61 2 9947 6999
Website: www.hdy.com.au
Area of Activity: L egal Services
MINTER ELLISON LAWYERS
Main Contact: N athan Cahill
Email: nathan.cahill@minterellison.com
Head office: Aurora Place, 88 Phillip Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9921 8888
Fax: +61 2 9921 8388
Website: www.minterellison.com
Area of Activity: L egal Services
54
advisors
APOSTLE ASSET MANAGEMENT LTD
Main Contact: D eon Joubert
Email: deonj@apostleam.com.au
Head office: L evel 11, 23-25 O’Connell Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8224 2900
Fax: +61 2 8224 2910
Website: www.apostleam.com.au
Area of Activity: Adviser/Third-Party Marketing Services
BROOKVINE PTY LTD
Main Contact: S teven Hall
Email: stevenhall@brookvine.com.au
Head office: S uite 2, 60 Moncur Street, Woollahra,
S ydney, NS W 2025
Country: Australia
Telephone: +61 2 9328 6445
Fax: +61 2 9326 1311
Website: www.brookvine.com.au
Area of Activity: Adviser/Third-Party Marketing Services
FINEANSWERS
Main Contact: Jon Glass
Email: jon@fineanswers.com.au
Head office: GPO Box R1895, Royal Exchange,
S ydney, NS W 1225
Country: Australia
Telephone: +61 4 0911 6766
Website: www.fineanswers.com.au
Area of Activity: Adviser/Allocator Manager
GROVE RESEARCH & ADVISORY PTY LTD
Main Contact: S imon Ibbetson
Email: simon.ibbetson@groveadvisory.com.au
Head office: L evel 3, 23-25 O’Connell Street,
S ydney, NS W 2000
Country: Australia
Telephone: +612 8246 8800
Fax: +612 8246 8899
Website: www.groveadvisory.com.au
Area of Activity: Adviser/Investment Consultant
HARBRIDGE INVESTMENT PARTNERSHIPS PTY LTD
Main Contact: Jenni Harding
Email: jenni.harding@harbridge.com.au
Head office: PO Box 2162, Boronia Park,
S ydney, NS W 2111
Country: Australia
Telephone: +61 2 9816 3186
Website: www.harbridge.com.au
Area of Activity: Consultant (Compliance, Investment, Other)
55
administrators
CITCO FUND SERVICES (AUSTRALIA) PTY LTD
Main Contact: D onna Hutchings
Email: dhutchings@citco.com
Head office: L evel 23, 45 Clarence Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9005 0400
Fax: +61 2 9005 0452
Website: www.citco.com
Area of Activity: F und Administration, Accounting & Custody Services
JP MORGAN CHASE BANK N.A. AUSTRALIA
Main Contact: D avid Edwards
Email: david.x.edwards@jpmorgan.com
Head office: L evel 36, 259 George Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9250 4000
Website: www.jpmorgan.com
Area of Activity: F und Administration, Accounting & Custody Services
KINGSWAY TAITZ FUND ADMINISTRATION PTY LTD
Main Contact: B rian Taitz
Email: btaitz@kingswaytaitz.com.au
Head office: L evel 2, 37 Bligh Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8257 3310
Fax: +61 2 8915 1620
Website: www.kingswaytaitz.com.au
Area of Activity: Consultant (Compliance), Fund Administration, Accounting & Custody Services
STATE STREET AUSTRALIA LIMITED
Main Contact: Chris Field
Email: cfield@statestreet.com
Head office: L evel 18, 338 Pitt Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9323 6000
Fax: +61 2 9323 6666
Website: www.statestreet.com.au
Area of Activity: F und Administration, Accounting & Custody Services
56
CITIGROUP GLOBAL MARKETS
Main Contact: John Gregory
Email: john.gregory@citigroup.com
Head office: L evel 21, 2 Park Street, Citigroup Centre,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8225 6424
Fax: +61 2 8225 5471
Website: www.citi.com
Area of Activity: P rime Brokerage Services
DEUTSCHE SECURITIES AUSTRALIA LIMITED
Main Contact: James Jennings
Email: james.jennings@db.com
Head office: D eutsche Bank Place, Corner of Hunter & Phillip Streets,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8258 3084
Fax: +61 2 8258 1400
Website: www.db.com
Area of Activity: B anking Services (excl. PB ), Prime Brokerage Services
GOLDMAN SACHS AUSTRALIA PTY LTD
Main Contact: Murray Chatfield
Email: murray.chatfield@gsjbw.com
Head office: L evel 48, Governor Phillip Tower, 1 Farrer Place,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9320 1365
Fax: +61 2 9320 1098
Website: www.gsjbw.com
Area of Activity: P rime Brokerage Services
PRI ME BRO KERS
MERRILL LYNCH EQUITIES (AUSTRALIA) LIMITED
Main Contact: P aul Thomas
Email: paul_thomas@ml.com
Head office: G overnor Phillip Tower, 1 Farrer Place, Level 38,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9226 5093
Website: www.ml.com
Area of Activity: P rime Brokerage Services
UBS AG
Main Contact: Colin Taylor
Email: colin.taylor@ubs.com
Head office: Level 25, Governor Phillip Tower, 1 Farrer Place,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9324 2000
Fax: +61 2 9324 2033
Website: www.ubs.com
Area of Activity: P rime Brokerage Services
57
exchanges accountants
Other
MSCI BARRA
Main Contact: Michael Anderson
Email: michael.j.anderson@mscibarra.com
Head office: L evel 9, 1 Castlereagh Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9220 9300
Fax: +61 2 9220 9399
Website: www.mscibarra.com
Area of Activity: D ata & Rating Services, Systems Vendor
WESTPAC INSTITUTIONAL BANK
Main Contact: S imon Gibbins
Email: sgibbins@westpac.com.au
Head office: Westpac Place, Level 3, 275 Kent Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8254 8215
Fax: +61 2 8254 6939
Website: www.westpac.com.au
Area of Activity: B anking Services (excl. PB )
CME GROUP
Main Contact: N ick Bolton
Email: nicholas.bolton@cmegroup.com
Head office: L evel 17, BNP Paribas Centre, 60 Castlereagh Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9231 7475
Fax: +61 2 9231 7476
Website: www.cmegroup.com
Area of Activity: E xchange / Clearing House
ERNST & YOUNG LLP
Main Contact: Mark O’Sullivan
Email: mark.o’sullivan@au.ey.com
Head office: GPO Box 2646,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 8295 6044
Fax: +61 2 8295 6300
Website: www.ernstyoung.com.au
Area of Activity: Accounting, Audit, Tax & Related Services
KPMG
Main Contact: Andrew Schofield
Email: aschofield@kpmg.com.au
Head office: L evel 11, 10 Shelley Street,
S ydney, NS W 2000
Country: Australia
Telephone: +61 2 9335 7000
Fax: +61 2 9299 7077
Website: www.kpmg.com.au
Area of Activity: Accounting, Audit, Tax & Related Services
For more information:
AIIMA Australia
44 Market Street, Level 24
Sydney, NS W 2000, Australia
ph. 02-8235-2530 ~ fax. 02-9299-3198
www.aima-australia.org