As we gradually approach the hedge fund era in Ghana, I'll be writing series of articles on hedge fund management and how fellow investors can take advantage of the opportunity.
The most popular structured investment known to the common investor is the bank of Ghana Treasury bill. Perhaps because of its near zero risk feature. However, some other options exist such as the mutual funds and shares/stocks. All other investment options are mostly a variation of the three above and a typical example is the fixed deposit which takes after the T-bill.
In other jurisdictions, several more options are available with varying degrees of risk. Examples include bonds, hedge funds, derivatives etc. several variations of the above options exist and this largely depends on the investors risk level.
This piece however is to explore how we can add another investment option to the existing few, thus the Hedge Fund.
As implied by the name, a hedge fund is supposed to hedge against a particular risk. Thus, its purpose is to maximize investor returns and eliminate risk regardless of the whether the market is bullish or bearish.
Wikipedia defines a hedge fund as “at its most basic, a hedge fund is an investment vehicle that pools capital from a number of investors and invests in securities and other instruments” It is similar to mutual funds in many ways but is operationally different.
The following is worth noting about Hedge Funds:
1. Hedge fund managers usually target high net worth individuals. Thus to invest in them, one has to meet certain net worth requirements making this type of investment only for the rich and wealthy.
2. Unlike mutual funds that are limited by regulations as to where and what to invest in (which are mostly shares, money market and bonds) a hedge fund's investment portfolio is limited only by its own policy. It can basically invest in anything anywhere - land, real estate, stocks, derivatives, currencies anywhere in the world
3. Hedge funds have evolved from their traditional risk reduction to investor return maximization and therefore employ very sophisticated and sometimes aggressive investment and portfolio management strategies in order to achieve this objective. Their strategies are mostly speculative in nature and as they aim to always be ahead of the market. This activity increases their risk exposure in the market.
4. Unlike mutual funds that rely exclusively on funds contributed by shareholders of the fund, a hedge fund may borrow funds to invest. This investment technique is called leveraging or gearing and it could significantly increase return potential of the fund but also cause a greater risk of loss.
5. Mutual fund managers are paid fees regardless of their funds’ performance. Hedge fund managers however receive a percentage of the returns they are able to generate for investors in addition to a fund management fee.
Hedge funds are known to have the ability to raise billions of dollars and are very efficient at investing. They return very high proceeds to investors and have become very popular in developed countries. Because they are not limited by geographical location, they are able to take advantage of financial markets all over the world.
Hedge fund industry has grown tremendously in the last decade from $625 billion in assets under management in 2002 to an industry record of $2.01 trillion in the closing months of 2011. This growth has been fueled mainly by investors who seek to diversify and manage their risk while ensuring that their returns are reliable overtime and Institutional investors have had the most impact for obvious reasons.
Indeed, institutions like SSNIT, insurance companies, investment firms, banks, and certain government intuitions will be key in the embellishment of a hedge fund in Ghana. The nature of the Ghanaian financial market and the of the entire sub region for that matter may require that most of the greater percentage of the hedge fund portfolio be done in highly developed markets like the US, Europe and Asia.
Courtesy: Abekah-Brown Abdallah K