Hedge Funds Conquer Equities Like the Rising Stars of 2018

Hedge funds win the championship for the first time in a decade.  When the underdogs rise to the top of their game in sports, the players are draped in fame and glory.  Hedge funds, equities, and the financial game might not play quite as loudly or popularly as most sports teams.  But the competition is ferocious.

Hedge Funds Claim the First Victory in a Decade

Hedge Fund Beats the Market in 2018

The first victory over equities was claimed by Hedge Funds for the first time in ten years.  Gavrilov & Company wants you to know this year marks the first time since 2008 that the $3.2 billion Hedge fund industry is a winner.

You might remember 2008, financially or personally.  It was a real crisis year in financial history.

That was the year the mortgage, housing, and banking industries buckled and nearly fell into ruin.  Now, in our recovering economy, we see quite a different picture.

And so, recently we discovered the hedge fund industry “is beating the S&P 500 index, according to industry tracker HFR and as reported by CNBC.”

Gavrilov & Company Keeps You Fiscally Fit

You might not own any hedge funds, but in our interest of keeping you financially informed, we wanted you to know the big news about them.  Now let’s take a quick look at what has caused this trending victory.

Reasons for the Recent Victory By Hedge Funds

CNBC recently reported the facts of this financial victory:  This type of fund is up about 0.4 percent this year through April.  Ironically, the S&P 500, declined about 0.4 percent.  Those basic statistics make it the “first time the $3.2 trillion industry has beaten stocks since the financial crisis.”

To put it briefly, there are multiple reasons for this:

1. First, the market has been increasingly volatile.
2. Second, energy prices have risen.
3. And thirdly, bond markets have registered some success.  Thus, these factors combined to set the stage for this type of Funds to perform.

Equities Vs. Hedge Funds

Risky Business

In the final analysis, the equities and the Hedge Funds were very close so that the margin was narrow.  Still, a win is a win.

1.  The above mentioned positive factors “helped the hedge fund industry posted a 0.38% gain in April. ”  At the U.S. time, “equities market, reflected in the S&P 500, posted a loss, including dividends, of an equal magnitude through the same first four months of the year.”

2.  Thus the conclusion has been a little like that of two well-matched Super bowl teams thus far in 2018.  No one denies that both of these teams “suffered through a weak start to the year.  This was thanks to a wave of uncertainty and volatility injected into the global markets.

3.  Likewise, Gavrilov & Company notes that “Though the overall hedge fund performance was muted and the beat narrow, it was the first time the industry has outperformed the basic stock market index since 2008.”

4.  Recently managers in the $3.2 trillion hedge fund industry posted a 0.38 percent gain in April that brings the total return for the year to 0.39 percent, according to industry tracker HFR.

5.  Back in 2008, the financial crisis bashed both this type of funds and stocks.  But the hedge fund industry’s “loss of 19.03 percent wasn’t as dramatic as the 37 percent decline in equities during the worst of the financial crisis.”

Hedge Funds Are the Champions of the Year—So Far

Having a Championship Title for One Year is no guarantee what will happen the next.
For 2018, “We are the Champions. No Time for Losers.”

CNBC wrapped up a few more interesting facts and figures.  Here’s a little summary:

  • “The biggest contributors to this year’s run have been health-care and technology stocks, which combined have netted a 4.54 percent gain.
  • The fixed income-asset backed strategies, with a 3.12 percent gain, and active trading has “produced a 3.12 percent return.”
  • Then they added, “In April, though, the big mover was energy and basic materials, which easily outdistanced other indexes with a 4.46 percent gain, according to HFR.”  

Given this level of excitement, Gavrilov and Company predict it is going to be an interesting summer.  And we’ll keep you posted.

Hedge Funds:  A Little Bit of Back Story

You may be a new player, just arriving on the hedge fund scene or an old faithful friend of the industry.  Either way, Gavrilov & Company thought you’d like a little background about this type of investment.  So, below you will find a few terms and tips about hedge funds.

According to the experts, hedge fund “pools the money of contributing investors and attempts to achieve above-market returns through a wide variety of investment strategies.”

Investing In Hedge Funds 101

Some larger investors sink money into hedge funds due to their promises of higher returns than found on the market.  And we define the market rate of return as “the earnings from an investment, stated as a percentage of the invested amount.  The rate of return is typically calculated and presented on an annualized basis–as in stocks and bonds.”

Historically, actual fund returns do not necessarily achieve better than the average market rate of return.  That’s where strategy comes in.  Investors use Hedge fund investment strategies like these:

  • Lively Leverage…   They might utilize a considerable quantity of leverage.  This means the investment of “borrowed funds to achieve outsized returns on a relatively small capital base.”
  • The Risky Business of Short Sales…  Hedge funds might borrow shares and turn around and sell them.  They expect or hope the price of a security will drop.  Then they can nab the securities on the open market and “return the borrowed securities.”  As you might imagine, this is a very risky strategy.  On the one hand, the share price increase might net a profit.  On the other hand, the share price increase could introduce unlimited, cringe-worthy losses.
  • Daring and Darling Derivatives…  Wealthy investors can make investments in many derivatives.  They can make money “based on a vast number of possible underlying indices or other measures.”

Speculative Strategies and a Haunting Probability of Loss

Gavrilov and Co want you to know that the substantial use of leverage, as well as other speculative strategies, brings with it a higher probability of loss than a traditional investment fund with interest in the securities of exclusively well-established companies.  Add to that risk, the requirement that, in a hedge fund, the rules do not permit you to withdraw your money for at least a year.  Now you have a formula that is not really for a faint-hearted investor.

The rule is necessitated by the fact that it is difficult to liquidate investment “to a cash withdrawal demand by an investor.  The requirement also allows a hedge fund manager to employ longer-term investment strategies.”

No one harnesses Hedge funds to one solid and particular investment philosophy.  They ramble around the investment landscape, searching for opportunities.

Hedge funds and the Securities and Exchange Commission (SEC)

Managers of Hedge Funds may Be Very Successful, But they Run Terrible Risks.
Hedge Fund Managing is Often Profitable, But Not for Faint of Heart.

If these funds are like the wild mustangs of the American West, then the SEC is the sheriff who keeps them on the range but away from trouble.  You see, the SEC only allows large institutions and accredited investors (with large net worth) to invest in hedge funds.  Basically, you need large investments, sometimes as much as $1 million dollars to ride the range with these fund investing cowboys.

Likewise, “Hedge fund managers are compensated with a percentage of the total assets in the investment pool, as well as a percentage of all profits generated.  For example, a fund manager could take 2% of all capital under management, as well as 20% of all profits earned.”  (This may be a stressful but thrilling existence, perhaps…)

Do Not Misunderstand the Hedge Fund Name

You cannot help but grin at the misnomer, “Hedge fund.” To the financial novice, it sounds like it’s a fund that might lessen risk.  However, the backstory is, “This term comes from the early days when funds attempted to reduce the risk of securities price declines in a bear market by shorting securities.  Nowadays, the pursuit of outsized returns is the primary goal, and that cannot usually be achieved while risk is also being hedged.”

In view of all this backstory, the success of this year’s Hedge fund champions shines even brighter.

Thank you for reading the Blog at Gavrilov & Company.  And we hope you enjoyed learning the big news about hedge funds.

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