What is a hedge fund? There is no exact definition of a hedge fund in the mature market, and sunlight private placements have been seen as a prototype for hedge funds. However, the industry scoffs at this: while sunlight private placements do strive to make absolute expected annualized returns, they lack the soul element of a hedge fund - hedging. So, what are the parts of a hedge fund structure that are needed?
One is a 20% performance commission - the fund manager's incentive is linked to the fund's performance; two is a form of private placement - putting your own money into a hedge fund so that the fund manager will be more concerned about losses; three is hedging - the ability to short; and four is leverage - using leverage to amplify a relatively large expected annualized return with certainty.
And what is unique about hedge funds? Hedge funds differ from traditional fund products in that they hedge against market risk through the mechanism of shorting, thereby taking advantage of excess expected annualized returns to achieve absolute annualized returns that are uncorrelated with the market. It is important to note that this 'absolute expected annualized return' is not what is commonly understood as 'absolute money', but rather what professional investors refer to as a non-market related, high value for money investment (expected annualized return/risk ratio) with a low probability of loss. Absolute expected annualized returns. The international experience shows that hedge funds lose money in only one year out of ten, with an average annualized expected return of around 10%.
However, it is a misconception to interpret hedge funds as products with a high expected annualized return, which, while not high, are characterized by low risk and a relatively high "value for money". As an example, the hedge-hedging strategy used by eFunds' range of hedge funds has two main features: "market neutral" and "hedge-hedging strategy". "Market neutrality" refers to the hedging of market risk by selling short equity index futures, for example, so as to protect the portfolio's expected annualized return from market volatility; "hedge arbitrage" refers to the use of multiple hedge arbitrage strategies to identify and capture pricing inefficiencies in the market, in order to achieve the same level of return as the market. Hedge arbitrage" refers to the use of multiple hedging strategies to identify and capture pricing inefficiencies in the market in order to achieve an absolute annualized expected return that is independent of the market. China's capital markets are immature, with large price/value divergences and opportunities for pricing inefficiencies, making it a great opportunity for hedge arbitrage.
Who are the right people to invest in hedge funds? The value of a hedge fund is that it is "cost effective (expected annualized return divided by risk)", which means that the probability of losing money is low; a hedge fund obtains an "absolute expected annualized return" after the ups and downs of the market have been removed.
It is therefore important for investors to understand that this "absolute expected annualized return" is not the same as "absolute money" or "outperforming the market" - when the market goes up, it will also hedge out the market When the market rises, it will also hedge out some of the upside. The reality of the Chinese market is that hedge funds are mainly aimed at institutional and individual clients with large amounts of capital, and hedge funds made by fund companies are mainly aimed at "one-to-one" dedicated clients and "one-to-many" clients. The demand of these high-end investors is to obtain a high level of certainty in terms of expected annualized returns with limited risk. The primary function of hedge funds is to meet this need.
