What problems does a Hedge Fund solves?
https://www.mas.gov.sg/news/media-releases/2020/mas-and-acra-launch-variable-capital-companies-frameworkYesterday, i shared about what is a Hedge Fund, who is the "Big Daddy" and "God Father" of Hedge fund. Do you know what problems does a hedge fund solves? Do you need a hedge fund?
Some labelled Hedge Fund as "More Money than God", there's so much wealth to manage that the line between integrity is so fine. When so much wealth is presented right in front of the fund manager, do they get shaken, do they feel that they are on top of the world, many have dreamt of it but few have been able to attain it and preserve it, needless to say to have a proper governance and risk management over the massive asset under management by the hedge fund managers.
Source: Amazon. Book written by Sebastian Mallaby, More Money Than God
Let's just for discussion purposes, focus on a simple long/short strategy of hedge fund without any form of leverage. So, really, what problems does a hedge fund solves? Plenty! but today, we will go thru only 4 of these pains.
Problem 1: Individual Risk and emotion
The article is real, it was from Bloomberg in Dec 2020, imagine the son going to the billionaire father, saying this "DAD! I just lost 1% of your fortune!" his Dad might go, "well, its okay Son, i will earn it back today!" $50M DOLLARS! majority of us would not have this fortune in this entire lifetime, maybe not even $1M.
Solution 1: Risk diversification
Let's revisit the initial idea of Mr Alfred Winslow Jones, his idea was simple and yet difficult to implement by all, to mitigate the risk of market risk and the risk in specific equities. Imagine his dad puts the $50M in a hedge fund manager and ask the hedge fund to educate his son on how a fund is managed, this is pure education and can save the lost of the $50M while his son learns.
Problem 2: bank and brokerage fees
For personal investments, through a brokerage or through a bank, we heard of heavy charges, hidden cost, sales fees, all these adds up and it can "eats" into your investments overtime.
Solution 2: transparency and standard fees
One of the key features that distinguishes hedge funds from mutual funds is their ‘2/20’ fee structure, comprising two key components: A management fee: annual fee charged by a manager to cover the operating costs of the investment vehicle. The fee is typically 2% of a fund’s net asset value (NAV) over a 12-month period.
A performance fee: also known as an incentive fee, this second fee is viewed as a reward for positive returns. Performance fees are typically set at 20% of the fund’s profits.
Problem 3: Privacy and hacking
Source: BBC news.
For personal investments, through a brokerage or through a bank, we heard that banks got hacked, accounts got stolen, not only from outside hackers, but inside within a bank, employees stolen data, as long as it qualifies for them! They know you have the money in your account, they have your address and phone numbers. Scary! Above is just 1 article, if you are keen to know more, pin my email at the end of the article and i can show you.
Solution 3: Setting a Trust to invest
One possible ways is to establish a Trust with a trustee to perform an omnibus investment with a hedge fund. Trust is protected by state laws, this way, the investment is invested under a Trust and the identity and privacy is protected from hacking by hackers. When a hedge fund invest, it is in the form of a fund, the identity of the investors are protected.
Problem 4: filing of tax is a hassle
Different countries have different tax filing and trading laws, rules around day trading, swing trading are always not clear, the difference between a day trader and a swing trader is that a day trader do about 20-45 trades a day whereas a swing trader does about 10-15 trades a month. Investment is mainly for long term holding but there are some investments that does a portion in trading as well. These personal taxes can range from 0% up to 22% depending on which region you are in and how much you have profited from your trading/investment. Paying more taxes also means you are making good money!
Solution 4: Umbrella and tax incentive structure
Source: MAS website
By having a umbrella tax incentive structure, you do not have to worry about taxation and which region you are investing in. The Hedge Fund structure takes care of it for you. Whatever gains you received from the hedge fund are tax exempted.
The above problems are what you experienced? Do you invest in Hedge Fund? What is the minimum investment in a Hedge Fund and are you consider qualified in this elite class? Stay tune for the next couple of series for my discussion.
I will talk about What are the fees in Hedge Fund? in my next article.
Entail Holdings is a hedge fund platform, if this article adds value to you and you would like to find out more about Entail Holdings Hedge fund, what we invest in and how you would like us to help you on your investment, drop me an email at email@example.com
𝘋𝘪𝘴𝘤𝘭𝘢𝘪𝘮𝘦𝘳: 𝘛𝘩𝘪𝘴 𝘮𝘢𝘵𝘦𝘳𝘪𝘢𝘭 𝘴𝘩𝘢𝘭𝘭 𝘯𝘰𝘵 𝘣𝘦 𝘤𝘰𝘯𝘴𝘵𝘳𝘶𝘤𝘵𝘦𝘥 𝘢𝘴 𝘢𝘯 𝘰𝘧𝘧𝘦𝘳, 𝘳𝘦𝘤𝘰𝘮𝘮𝘦𝘯𝘥𝘢𝘵𝘪𝘰𝘯 𝘰𝘳 𝘴𝘰𝘭𝘪𝘤𝘪𝘵𝘢𝘵𝘪𝘰𝘯 𝘵𝘰 𝘤𝘰𝘯𝘤𝘭𝘶𝘥𝘦 𝘢 𝘵𝘳𝘢𝘯𝘴𝘢𝘤𝘵𝘪𝘰𝘯. 𝘛𝘩𝘪𝘴 𝘪𝘴 𝘱𝘶𝘳𝘦𝘭𝘺 𝘴𝘩𝘢𝘳𝘪𝘯𝘨 𝘰𝘧 𝘧𝘳𝘦𝘦 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯 𝘵𝘩𝘢𝘵 𝘪𝘴 𝘢𝘷𝘢𝘪𝘭𝘢𝘣𝘭𝘦 𝘧𝘳𝘰𝘮 𝘵𝘩𝘦 𝘸𝘦𝘣𝘴𝘪𝘵𝘦 𝘢𝘯𝘥 𝘤𝘰𝘯𝘴𝘰𝘭𝘪𝘥𝘢𝘵𝘦 𝘧𝘰𝘳 𝘦𝘥𝘶𝘤𝘢𝘵𝘪𝘰𝘯 𝘢𝘯𝘥 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯 𝘱𝘶𝘳𝘱𝘰𝘴𝘦𝘴.