Alternative Investments

Business - April 7th, 2006
Magellan Japan

Provided by MAGELLAN JAPAN:
THE FINANCIAL PLANNING COMPANY
Tel. 03-3769-5511

Time to consider hedge funds

Investors today are seeking more sophisticated meth­ods of making money from their investments other than cash, stocks, bonds and property. The use of hedge funds has gained ground in recent years with over $1 trillion under management currently.

What are hedge funds?

Hedge funds are one of the fastest growing investment alternatives to traditional equity and bond portfolios. The term hedge fund is applied to investment vehicles with a wide range of aggressive investment strategies and objectives. Until recently, investing in hedge funds has only been open to the wealthy investors. Now you can invest in a hedge fund with as little as $5,000.

What is the difference between a hedge fund and a mutual fund?

The main difference between hedge funds and mutual funds is how they are regulated. Mutual funds are one of the most highly regulated investment instruments on the market, while hedge funds have virtually no regulation and investment restrictions. As a result, hedge fund managers have more flexibility than tra­ditional mutual fund managers in structuring their portfolios. Strategies such as futures and currencies can also be used with hedge funds. These riskier strategies give them the potential of earning a higher return than traditional mutual funds. Of course, this can also result in a greater loss than what one might traditionally find with mutual funds.

What are the most popular hedge fund strategies?

Equity hedge long/short is one of the most popular hedge fund strategies, where long and short equity se­curities positions are taken. The overall portfolio may have either a long or a short bias. Equity hedge long/ short relies on superior stock selection. Typically, a low degree of leverage is used.

Futures are also popular. They are financial con­tracts for buying or selling a financial or physical com­modity, like currencies, stock indexes or oil at a future date. Long and short futures contracts can act to hedge aspects of many fund portfolios. High levels of leverage are often involved in futures.

And lately, with fund of funds, a hedge fund invests in other hedge funds rather than directly in stocks, bonds, or other securities. Hedge funds utilized may be of similar strategies, such as equity hedge long/short; or the hedge funds employed may have different strat­egies. Generally, funds of funds are less volatile than single manager funds.

What are other types of alternative investments?

One of the more popular alternative investment types is private equity funds. These funds typically invest in companies that are not available on the public market. Private equity investments range from financing star­tups to debt investments in larger companies. Private equity funds generally acquire large stakes in their in­vestments to take control of the companies. This al­lows them to take an active role in monitoring and ad­vising the companies in which they invest. Watch out for a number of private equity funds that may make an offer for Vodafone Japan.

Real estate funds offer equity and debt investments in real estate assets. This can include everything from full portfolios to operating companies.