Hedge Funds
What is a Hedge Fund? Nowadays, hedge funds play a significant and influential role in the financial world and command a great deal of attention. They are usually formed as private partnerships by large-scale investors with stable financial record and high professional skills and reputation. They are obliged to meet specific criteria, set up by each fund, in order to participate. As a rule, the initial investment is substantial and cannot be withdrawn for at least a year. In return, participants receive a performance fee and are able to take advantage of the lighter regulations in comparison to those in an ordinary investment fund. Although the hedge funds, as their name suggests, apply different methods to reduce potential risks, their main prerogative is to maximize the return on the investment as much as possible, using a wide range of strategies. Hedge funds operate in domestic and international markets, aiming to generate higher returns on the investment.
Hedge Fund Strategies Before investing in a hedge fund, it is crucial to know the investment strategies used in a hedge fund. The type of strategy has an impact on the level of risk, the profit return, and the predictability of future results. Some of these strategies are:
• investing in emerging markets – this is a risky strategy because high levels of inflation and rapid changes are typical for such markets;
• aggressive growth – investing in equity which has the potential to increase the growth of earnings per share. The level of risk is substantial as earning from these funds are highly dependent on the stock market and the current economic situation;
• distressed securities – purchase at a considerable discount; buying the debt of companies that face potential bankruptcy or are already in default;
• macro – the investment is influenced by fluctuations in the global economy and takes place in all major markets;
• discretionary macro – the investments are chosen and run by investment managers;
• systematic macro – the investments are a result of software program selection;
• fund of funds – collaboration between hedge funds and other pooled investment vehicles, aiming (via the use different strategies) to lower the risk and maximize the profit in the long term.
What Are the Potential Risks while Investing? Although the subsequent profit could be considerable, investing in a hedge fund is sometimes a risky business because of certain characteristics such as:
• short selling – the sale of assets that are borrowed from a third party. The idea is to purchase new ones later and at a better rate, returning the borrowed asset to the original lender. The risk of loss is high, especially if the price before the new purchase rises;
• lack of regulation – the hedge funds’ management is subject to less supervision from financial regulators than the regular funds;
• appetite for risk – hedge funds are more likely to be involved in high-risk investments, such as distressed securities, collateralized debt obligations, etc.;
• leverage – except for the initial investment, hedge funds usually borrow additional and even greater amounts of money.
Holding Company
Holding company is a legal entity which owns the outstanding shares of other companies. Moreover, this company disposes of sufficient stock in another firm, possessing voting rights over the latter. The voting stock grants to the holding company the right to exert control over the management and the operational activities of the other company. The holding may impact on the decision taking process and elect a board of directors of its own choice. Holding companies are sometimes referred to as parent companies. These entities have enough voting stock of their subsidiaries. Companies that are owned by holdings in their entirety are known under the name ‘wholly owned subsidiary’.
Typically, these types of companies are not engaged in the actual production of goods or services. Their purpose is the acquisition of shares in other companies. The ownership of diversified stock reduces the risk of potential losses on the part of the owners of the holding company. Legal entities, functioning as holdings, sometimes distinguish themselves by including the title ‘Holding’ in their company names.
The US holding company Berkshire Hathaway, owned by Warren Buffet, is one of the most cited examples of large holdings. The company has voting stock in the Government Employees Insurance Company (GEICO), the fast food restaurants Dairy Queen, the flight company Executive Jet, the manufacturer of candies and chocolate products See`s Candies, and many other businesses. Another large holding company is the headquartered in Deerfield Fortune Brands. The company owns subsidiaries which engage in the production of alcohol (such companies are DeKuyper, Jim Beam, and Ronrico). In addition, Fortune Brands owns subsidiaries which specialize in the production of golf equipment, office equipment, and home products. Titleist, Cobra, and Pinnacle are subsidiary companies engaged in the produce of golf equipment. Aristokraft and Master Lock are subsidiaries which specialize in the production of home equipment. Fortune Brands has acquired companies which focus on the manufacture of faucets, cabinets, and padlocks. Finally, ACCO, Day-Timers, and Swingline focus on the development and production of office products.
What is a Hedge Fund? Nowadays, hedge funds play a significant and influential role in the financial world and command a great deal of attention. They are usually formed as private partnerships by large-scale investors with stable financial record and high professional skills and reputation. They are obliged to meet specific criteria, set up by each fund, in order to participate. As a rule, the initial investment is substantial and cannot be withdrawn for at least a year. In return, participants receive a performance fee and are able to take advantage of the lighter regulations in comparison to those in an ordinary investment fund. Although the hedge funds, as their name suggests, apply different methods to reduce potential risks, their main prerogative is to maximize the return on the investment as much as possible, using a wide range of strategies. Hedge funds operate in domestic and international markets, aiming to generate higher returns on the investment.
Hedge Fund Strategies Before investing in a hedge fund, it is crucial to know the investment strategies used in a hedge fund. The type of strategy has an impact on the level of risk, the profit return, and the predictability of future results. Some of these strategies are:
• investing in emerging markets – this is a risky strategy because high levels of inflation and rapid changes are typical for such markets;
• aggressive growth – investing in equity which has the potential to increase the growth of earnings per share. The level of risk is substantial as earning from these funds are highly dependent on the stock market and the current economic situation;
• distressed securities – purchase at a considerable discount; buying the debt of companies that face potential bankruptcy or are already in default;
• macro – the investment is influenced by fluctuations in the global economy and takes place in all major markets;
• discretionary macro – the investments are chosen and run by investment managers;
• systematic macro – the investments are a result of software program selection;
• fund of funds – collaboration between hedge funds and other pooled investment vehicles, aiming (via the use different strategies) to lower the risk and maximize the profit in the long term.
What Are the Potential Risks while Investing? Although the subsequent profit could be considerable, investing in a hedge fund is sometimes a risky business because of certain characteristics such as:
• short selling – the sale of assets that are borrowed from a third party. The idea is to purchase new ones later and at a better rate, returning the borrowed asset to the original lender. The risk of loss is high, especially if the price before the new purchase rises;
• lack of regulation – the hedge funds’ management is subject to less supervision from financial regulators than the regular funds;
• appetite for risk – hedge funds are more likely to be involved in high-risk investments, such as distressed securities, collateralized debt obligations, etc.;
• leverage – except for the initial investment, hedge funds usually borrow additional and even greater amounts of money.
Holding Company
Holding company is a legal entity which owns the outstanding shares of other companies. Moreover, this company disposes of sufficient stock in another firm, possessing voting rights over the latter. The voting stock grants to the holding company the right to exert control over the management and the operational activities of the other company. The holding may impact on the decision taking process and elect a board of directors of its own choice. Holding companies are sometimes referred to as parent companies. These entities have enough voting stock of their subsidiaries. Companies that are owned by holdings in their entirety are known under the name ‘wholly owned subsidiary’.
Typically, these types of companies are not engaged in the actual production of goods or services. Their purpose is the acquisition of shares in other companies. The ownership of diversified stock reduces the risk of potential losses on the part of the owners of the holding company. Legal entities, functioning as holdings, sometimes distinguish themselves by including the title ‘Holding’ in their company names.
The US holding company Berkshire Hathaway, owned by Warren Buffet, is one of the most cited examples of large holdings. The company has voting stock in the Government Employees Insurance Company (GEICO), the fast food restaurants Dairy Queen, the flight company Executive Jet, the manufacturer of candies and chocolate products See`s Candies, and many other businesses. Another large holding company is the headquartered in Deerfield Fortune Brands. The company owns subsidiaries which engage in the production of alcohol (such companies are DeKuyper, Jim Beam, and Ronrico). In addition, Fortune Brands owns subsidiaries which specialize in the production of golf equipment, office equipment, and home products. Titleist, Cobra, and Pinnacle are subsidiary companies engaged in the produce of golf equipment. Aristokraft and Master Lock are subsidiaries which specialize in the production of home equipment. Fortune Brands has acquired companies which focus on the manufacture of faucets, cabinets, and padlocks. Finally, ACCO, Day-Timers, and Swingline focus on the development and production of office products.