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Hedge means a very diverse set of methods or strategies rather specialized asset management, technical and focused on a very specific niche market. The hedge itself the following objectives to achieve a level of absolute performance, preferably stable, uncorrelated with the overall trend of the market, while minimizing risks and ensuring capital invested. We will see below examples of alternative management strategies.

Short selling (short selling) involves selling securities that one does not own, hoping to buy them cheaper later. To do this, the manager borrows the same securities over the period. (Indeed, in a securities lending there is a transfer of property to the borrower, so that it has the right to sell, he must only make sure that you have purchased the securities at the time it must make them!)

The arbitration is to exploit price differences unjustified, for example by buying convertible bonds supposedly undervalued while selling short the underlying stock.

The search for leverage (leverage) is to borrow the cash to increase the effective size of the portfolio (initially consists only of funds contributed by investors).

The use of derivatives: options, futures contracts or OTC is common, either for speculative purposes, or rather to hedge the portfolio.

Hedge funds also draws on research and analysis micro or macro economy, which should help find opportunities either in the basic trends of the economy or financial markets, or by identifying companies with strong potential or rather distressed.

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Different strategies are characterized by ratios return / risk greatly. There are many different presentations of alternative strategies. See for example the site http://www.magnum.com/

Convertible Arbitrage (convertible arbitrage): invests in convertible bonds listed on the market badly. Typically, this strategy is to buy convertible bonds, while selling the underlying stock short.

Stock selection (Long Short Equity): involves taking positions both long (buy) and short (sell) on selected actions in the same sector or geographical area, with a resultant net position rather long (long bias ), or rather selling (short bias) or neutral (market neutral). Needs to master the tools of stock selection (stock picking).

Macro / opportunistic (global macro): trying to take advantage of changes in the global economy, particularly changes in rate result due to the economic policies of governments. Use instruments that reflect the global economic situation: currencies, indices, yield curves, commodity ...

Arbitrage fixed income (fixed income arbitrage): seeks to take advantage of movements and deformations of the curve. Vehicles used as government securities, futures and interest rate swaps.

Arbitration on mergers and acquisitions (merger arbitrage): the possibility of arbitration in these situations (OPA, OPE) results from the difference between the price announced by the purchaser and the price at which the target is treated in the market.

Special Situations (event driven): the manager looks for opportunities generated by events occurring in the lives of companies: subsidiaries, mergers, or difficulties (distressed securities)

Emerging Markets (Emerging Markets): investing in developing markets. High-risk strategy as hedging instruments are not always available on this type of market.

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Etc, etc. ...
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Hedge funds

A hedge fund or hedge fund is a collective management organization, operating on the same principle as the U.S. mutual funds or mutual funds, but invested in an alternative strategy. Unlike funds "classic", hedge funds usually get disconnected performance of the general trend of the market shares or bonds.

Note: to hedge means covering position by taking another position symmetrical. This does not mean that all hedge fund strategies practiced "safe" that does not allow them to get the performance they boast.

The hedge fund business is highly technical and specialized, generally practiced by experienced managers, entrepreneurs, whose personal fortune is often partly involved in the fund. The managers are usually paid on performance merits.

Due to the non-diversified portfolios (choice of a single strategy) and the use of possibly massive derivatives, hedge funds escape the traditional categories of Mutual funds. It is therefore also a poorly regulated profession: hedge funds have grown in the United States and in areas known as "offshore." A hedge fund typically specializes in a specific alternative strategy, which is why there are so many types that alternative strategies.

Hedge funds are attracting wealthy investors and informed by the perspectives they offer results, whatever the overall market trend.

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Expected of a hedge fund that focuses on strategy and take it with constancy is a matter of transparency, and risk associated with the investisement in the hedge fund is just a style change management of covert ("style drift"), if the strategy announced at the start does not work.

The performance of hedge funds are highly variable, and second is often high volatility, investors may wish to bring to a fund providing long-term outlook less favorable, but with more stability, allowing it to exit at any time of the fund.

Therefore the funds of hedge funds were created. The funds raised are invested by the manager in a range of hedge funds, spread over all the strategies. Contrary to what one might believe it is not only to create a sort of "melting pot" of funds, then let the managers of each fund. A real work of research and financial engineering is required to select the managers, assessing risk and choosing the asset allocation between various funds.

A feature of the yield curve of a fund of hedge funds, compared to the growth curve of the market is that the fund of funds is not "" never any increase in the growth period, but limits the decline in capital invested in times of crisis.
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Further Reading

Until recently, we could not find a French teaching resources of interest on the Web about hedge funds, except obviously fimarkets! The Bank of France has just remedy this by publishing a "sum" on the subject, as a full number of very serious "Journal of Financial Stability". Special issue on hedge funds that can be downloaded free at the BoF.

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The hedge fund assets are at their historic record

These funds now manage over 2000 billion dollars and entice new investors.

Hedge funds have never been so powerful. For the first time in their history, they manage more than 2000 billion (approximately $ 1.365 trillion euros), according to the latest report HFR (Hedge Fund Research), the leading provider of data on the industry. They even exceeded the record levels achieved before the bankruptcy of Lehman Brothers.

The crisis of 2008-2009 had yet been severe for these hedge funds. The stock had slumped to 1,330 billion at the end of first quarter 2009. Some managers had to close shop. Others had been forced to impose restrictions on investors who wished to withdraw their capital.

But it is more than bad memories. Since the amounts they manage jumped 50%. "This increase is largely explained by their strong performance. They won, according to some indices, over 20% in 2009 and 10% in 2010, "recalls Lawrence Dupeyron, president of hedge Olympia Capital Management. In the first quarter of 2011, growth has been more modest (from 1% to 2% on average).

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Great performance

These performances are automatically boosted assets under management. They also reassured investors. After suffered significant withdrawals in 2008 and 2009, hedge funds have begun to attract capital last year (55.5 billion dollars).

And the movement is accelerating. For the first quarter of 2011 alone, 32.5 billion dollars in new sales were recorded. The highest figure since the third quarter of 2007. "This collection comes mainly from institutional investors Anglo-Saxon and northern European. CalPERS, for example, one of the largest U.S. pension funds, has increased its investments with certain hedge funds and funds of funds since the spring of 2010, "said Cyril Julliard, president of Eraam, which selects the best hedge funds for its European customers.

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Concerned by the crisis in government bonds, reluctant to increase the equity weighting in their portfolios, investors are turning back to these funds, which promise more consistent returns than stocks. "In 2008, hedge funds have lost 20%, but stock markets fell twice. Investors have realized that this type of management was still protective, "says Shiblee Alam, director at Axa Funds of Hedge Funds. The largest hedge funds, who manage more than $ 5 billion, are the primary beneficiaries of this renewed interest. According to HFR, they have attracted more than half of sales in the first quarter.

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