The Nuts & Bolts of Hedge Funds

THE NUTS & BOLTS OF HEDGE FUNDS

Part of the ALTERNATIVE INVESTMENT BASICS SERIES 2015

Series

Premier Date: November 12, 2015


MEET THE FACULTY

PANELISTSDavid Coggins Coral Gables Asset ManagementDavid Karp Schulte Roth & Zabel LLPJames Suh DarcMatter


MODERATORChris Cahill,

Lowis & Gellen, LLP

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Practical and entertaining education for business owners and executives, Accredited Investors, and their

legal and financial advisors.

For more information, visit www.financialpoisewebinars.com

DISCLAIMER:

THE MATERIAL IN THIS PRESENTATION IS FOR INFORMATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL ADVICE. YOU SHOULD CONSULT WITH AN ATTORNEY TO DETERMINE WHAT

MAY BE BEST FOR YOUR INDIVIDUAL NEEDS


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http://www.financialpoise.com/

ABOUT THIS EPISODE


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Why care about a hedge fund if you are not super wealthy? What are the standards for investing? This webinar will help to explain how hedge funds work and what you need to know before investing.

ABOUT THIS SERIESTHE NUTS & BOLTS OF HEDGE FUNDS

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The personal investment landscape in the United States is undergoing the greatest transformation since the popularization of the mutual fund. The JOBS Act of 2012 lifted the ban that previously prevented private placements from being advertised. At this point, millions of accredited investors are only beginning to understand that there are investment options available to them that they never before considered. This webinar series was created for those millions of Americans who meet the federal government’s definition of “accredited investor,” to help them decide if some of their investment dollars should be allocated away from stocks, bonds, mutual funds, and the like and into the asset class that is commonly referred to as “alternatives,” which includes PE, VC, hedge funds, private placements, and hard assets (things like gold, land, comic books, and much else). Like all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes: think sitcom rather than soap opera.

EPISODES IN THIS SERIES

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(Dates below are premier dates; all webinars also available on demand)

#1 Are you an Accredited Investor, and if you are, so what? 5/7/15

#2 What is the JOBS Act and Why Should You Care? 6/4/15

#3 What is Equity Crowdfunding and Should it Matter to You? 7/9/15

#4 The Nuts & Bolts of Investing in a VC Fund 9/10/15

#5 Angel Groups vs. 506 Platforms 9/17/15

#6 The Nuts & Bolts of Investing in Pre-IPO Share 10/8/15

#7 The Nuts & Bolts of Investing in a PE Fund 10/29/15

#8 The Nuts & Bolts of Hedge Fund 11/12/15

#9 Basic Investment Principles- from Asset Allocation to Z Scores 12/3/15


What Is a Hedge Fund?

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Privately-offered

Pooled Investment vehicle

Not widely available to the public

Assets managed by a Hedge Fund Manager

Many investment techniques in vast array of assets

Not VC, PE, or a real estate fund


Hedge Funds Loom How Large?

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(Per 2013 data (US)

9,966 Hedge Funds with 2.8 trillion AUM

Banks 13.8 trillion Mutual Funds 15.0 trillion


What is a Hedge Fund Manager?

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Entity that serves as investment manager for a Hedge Fund Often itself a substantial investor in the Hedge Fund Compensated in part based upon performance of Hedge Fund Not usually constrained by diversification requirements applicable to mutual funds


Hedge Fund Limited Partnership Structure

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Hedge Fund is often an LP, and most often organized in Delaware

Hedge Fund Manager is General Partner

Flow-through of items of taxable income and loss to GP and LPs, including long-term capital gains and certain qualified dividend income

Assets in custody of Prime Broker, which handles record-keeping and reporting, clearing and settlement


Hedge Fund Manager Compensation

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Carried Interest plus management fee

Variable, but can be similar to “2 and 20” arrangement of PE Fund managers

2% management fee

20% performance fee – not payable unless performance reaches benchmarks

For LP/Investors, fund performance minus “2 and 20” is the key


Who Invests in Hedge Funds? I

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Before the Jobs Act: onlythrough existing relationships.

Now, they can solicit accredited investors.

How do Hedge Funds

find their accredited investors?

Accredited Investors:


Who Invests in Hedge Funds? II

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Qualified Purchasers

Institutions with total assets exceeding $5 million or no less than $25 million in investments or investable assets

Per 2014 Prequin Global Hedge Funds Report, 66% of global hedge fund assets come from institutional investors such as pension funds, university endowments, and non-profit endowments


Why Invest in Hedge Funds?

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Returns Uncorrelated

to public equity markets

Higher absolute returns

in all markets

Diversify portfolio

Reduce Portfolio volatility


Investment Strategies

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Absolute Return Funds Directional Funds

Long Only

Long/Short (aka Equity Hedge)

Market Neutral

Relative Value

Short-Bias

Global Macro

Sector

Convertible Bond and Convertible Arbitrage


Investment Strategies

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Fixed-Income Arbitrage

Credit Funds

Event-Driven Arbitrage

Distressed Securities

Energy Funds

Emerging Markets

Crossover Funds

Managed Futures (CTAs)

Quantitative Funds

Multi-Strategy Funds


Investment Strategies Examples

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Long Only: Purchase and sell specific securities for upside from share price increases

Long/Short: take long and short positions based upon FM’s view of undervalued and overvalued assets instead of on overall direction of market

Short-Bias: invest primarily in short positions, focused on overvalued stocks


Investment Strategies Examples

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Event-Driven Arbitrage: profit from price differences of securities involved in specific announced or likely corporate events (mergers, acquisitions, restructuring), facing transaction risks and possibly diversifying across sectors and transactions

Distressed Securities: “Vulture Funds,” somewhat like PE turnaround investments seeking profit from special opportunities (must also lock up investors for long period of time) -- may use “loan to own strategies or “fulcrum” lender strategies

Managed Futures (CTAs): also known as commodity trading advisors, going long and short on gold, currencies, grains, and government bond via futures, forwards, and options contracts


Regulatory Oversight I

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State and federal laws against fraud and insider trading

State and federal laws covering trading and reporting requirements of investors in publicly traded securities

Federal laws regulating trade in commodities (Commodity Futures Trading Act of 1974)


Regulatory Oversight II – Dodd-Frank Wall Street Reform and Consumer Protection

Act (2010)

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Hedge Funds with over $150 million in assets must register with the SEC

Most commodity pool operators and commodity trading advisors must register with CFTC

Financial Stability Oversight Board created to monitor systemic risk in the marketplace


Vetting Hedge Fund Managers

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Large Hedge Funds: see SEC’s Investment Advisor Public Disclosure website (background, disciplinary record)

Small Hedge Funds: search state securities regulators via North American Securities Administration Association website

MORE ABOUT THE FACULTY

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CHRISTOPHER CAHILL

Mr. Cahill is counsel with Lowis & Gellen LLP, in Chicago, Illinois. He guides secured lenders, creditors, debtors, creditors’ committees, potential purchasers and others through bankruptcy cases, out-of-court workouts, assignments for the benefit of creditors, and receiverships. Mr. Cahill has substantial mega-case experience at national law firms representing very large debtors, and has counseled and litigated on behalf of manufacturers and secured lenders in large and middle-market cases.

Mr. Cahill also publishes frequently and speaks regularly on commercial insolvency issues. He is an executive editor of Commercial Bankruptcy Litigation, 2d Edition (Jonathan P. Friedland, Elizabeth Vandesteeg & Christopher M. Cahill eds., 2015) and is the host of Accredited Investor Markets Radio, a weekly broadcast for investors, on accreditedinvestormarkets.com.

[email protected]

http://www.accreditedinvestormarkets.com/aimkts-radio/

mailto:[email protected]

MORE ABOUT THE FACULTYDAVID COGGINS

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[email protected]

Mr. Coggins serves as the COO of Coral Gables Asset Management and Director of Investor Relations. He has worked in the financial services industry for over 10 years, working in portfolio management and investment management as VP, SVP and Director. Mr. Coggins has a deep knowledge and understanding of quantitative and fundamental equity strategies and systematic trading. He has been associated with several successful start-ups within the hedge fund community and has been a member of the board for several investment funds. Mr. Coggins earned his M.B.A. from the University of Miami School of Business and a B.A. from the University of Hartford Barney School of Business in Finance and Economics.

MORE ABOUT THE FACULTYDAVID KARP

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[email protected]

David J. Karp is a partner at Schulte Roth & Zabel LLP. He is in the New York and London offices and leads the firm’s Distressed Debt & Claims Trading Group, which provides advice in connection with U.S., European and emerging market debt and claims trading matters. His practice focuses on corporate restructuring, special situations and distressed investments, distressed mergers and acquisitions, and the bankruptcy aspects of structured finance. David also provides advice in connection with oil and gas royalty investments.


MORE ABOUT THE FACULTYJAMES SUH

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[email protected]

James Suh is the head of business development at DarcMatter, where he coordinates partnership endeavors and client acquisition strategies. In addition to providing critical commentary on the JOBS Act during its early development, James currently works closely with alternative asset managers seeking to streamline their fundraising endeavors. James graduated from Duke University with a B.A. in Political Science and English.


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IMPORTANT NOTE:

THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY. IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS. 31

The Nuts & Bolts of Hedge Funds

Education

Transcript of The Nuts & Bolts of Hedge Funds