As the hedge fund industry has grown from a few hundreds managing a few billion in the 1990s to presently tens of thousands managing trillions of dollars, more monitoring regulations are coming into place, not only to monitor their activities and to limit any unethical or illegal manipulation of markets, but also to advance and promote risk disclosure to institutional and retails clients alike. Richard Cayne Meyer International believes that these risk disclosures will be extremely positive, as they will increase awareness on how to understand and measure risk, especially for retail clients. Therefore, an enhanced level of transparency will be implemented, instead of trying to avoid the topic altogether, which is when something usually goes wrong. There is no way of avoiding risk in life and therefore only if one understands it, they can effectively learn how to manage and minimize it.
The strong performance results of hedge funds can be linked to two major aspects, the flexibility of the investment and the performance incentives. Richard Cayne Meyer Asset Management Ltd explains how, unlike many mutual fund managers, hedge fund managers are usually heavily invested in a significant portion of the funds. They run and share in the rewards, as well as the risks with the investors. “Incentive fees” remunerate hedge fund managers only when returns are positive, whereas mutual funds pay their financial managers according to the volume of assets managed, regardless of performance.
This incentive fee structure, which is heavily weighted towards performance incentives tends to attract many of Wall Street’s best practitioners, best brains in the investment business and other financial experts to the hedge fund industry. The popular misconception is that all hedge funds are volatile, in the sense that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities and gold, while using lots of leverage. The same Richard Cayne of Meyer International shed light on the matter, revealing that, in reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don’t use derivatives at all, and many use no leverage.
The end performance of many hedge fund strategies, particularly relative value strategies, does not depend on the direction of the bond or equity markets, which is what happens with conventional equity or mutual funds, or even unit trusts for that matter, which are generally 100% exposed to market risk. Their returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities. Richard Cayne Meyer Asset Management Ltd states that investing in hedge funds tends to be favored by more sophisticated investors, including many Swiss and other private banks, who have lived through, and thus understood the consequences of, major stock market corrections. Many endowments and pension funds allocate assets to hedge funds. This flexibility, which includes use of hedging strategies to protect downside risk, gives hedge funds the ability to best manage investment risks.
Richard Cayne is also Managing Director at Meyer International Ltd based in Bangkok, Thailand and like Meyer Asset Management Ltd is also part of Asia Wealth group Holdings a PLUS Stock Exchange listed company in London UK.