To many, hedge funds are a mysterious breed yet despite this the majority of pensions are choosing to stick with them. Here’s why.
Should we be afraid of hedge funds?
It’s easy to become wary of hedge funds. In the last 15 years alone, they’ve gone from being almost completely anonymous to being completely massive with some hedge fund managers are choosing to invest billions at a time!
Understanding hedge funds
It’s important to understand hedge funds prior to investing in them. Learning about who manages the funds and where the money comes from will undoubtedly unveil a little about how they earn their eye-watering figures.
The history of hedge funds
Hedge funds have been around for a number of years now. The man responsible for initiating the first hedge fund was Harvard graduate Alfred Winslow Jones. He managed to raise a massive $60,000 from investors along with $40,000 of his own money. He was then able to minimise his risk in the long-term stock spots by under selling others.
In order to further enhance his returns, he introduced a hedge fund trait in 1952 – all clients were to pay a 20% incentive fee based on performance.
The role of a hedge fund manager
The large majority of hedge fund managers are wealthy to begin with. They need to be in order to invest in the hedge fund in the first place.
They also earn a great deal from each hedge fund they have in place. For every £1 profit they get to keep 20p. Certain hedge funds will also charge their clients a yearly management fee.
Hedge funds and pensions
Whatever your views on hedge funds and their practices, there’s no denying they’re part of our retirement funds. When searching for diversification and returns, a great number of institutional investors are choosing to earmark certain assets to hedge funds.
This of course poses threats, especially when it comes to greater transparency, regulation and risk management. In recent years, money has been pumped into hedge funds and private equity funds. There has also been a great deal of money pumped into other alternative funds, which has caused them to increase in size.
In order to have the money required to pay the final-salary retirement benefits of teachers, fireman, policeman and other government employees, US public pension plans have been putting as much money into hedge funds and private equity funds as they can. Without these high returns, hundreds of thousands of beneficiaries would be without their cheques each month. This is one of the reasons pensions are choosing to stick with hedge funds.
On a whole, many still hold a negative reaction towards hedge funds, with a number of individuals being too afraid to invest. Despite this, the industry is attracting money at a continuously growing rate.
With global hedge fund assets increasing each and every year, certain individuals are willing to take the risk to push a return on their pension funds.