Average hedge fund annual return = 1.3%

Trading Discussion
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From Bloomberg

Three of the top five funds in the Bloomberg Markets list invested in mortgage securities, and two of them are run by Minnetonka, Minnesota-based Pine River Capital Management LP. Betting on mortgage securities outpaced every other strategy, with an average return of 20.2 percent, [B][I]against an industry average of just 1.3 percent[/I][/B], according to data compiled by Bloomberg.

Rejoice, traders. If you’re breaking even, you’re just as good as the “pros”. Anything above 2%, you’re killing it.

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I think most of the Aussie hedge funds did do reasonably well though :15:

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The fund I am invested in returns 1.3-1.8% per month with not a single negative month since inception.

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I want to know where they pull the 1.3% figure from.

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Confirms what I thought…:slight_smile: We all want to be pro traders, but forget that we probably already are…:slight_smile: They aren’t that good…

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is that trading forex? or just the stock market?

secondly a 1.3% doesn’t seem like much especially if you’re trading.

Which fund are you invested in?

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Please don’t be fooled… Hedge funds don’t use ridiculous leverage levels like we do; you will find that the average hedge fund leverage is between 2:1 and 3:1, unlike the 200:1 most newbies apply to their trading.

Also, it makes a massive difference when you are trading another person’s money. Some clients of hedge funds are pension funds and medical schemes - they don’t require 1000% return p.a and would rather have a low level of risk, particularly in today’s markets.

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Ok I understand that they may not require that type of return per annum but still can’t hedge funds keep profits?
Example: I own a forex hedge fund, if my system is giving me a gauranteed 40% compound interest per month. me being a hedgefund cant I give my client 6% per month for one year and keep the remaining profits? I would think that this is how hedgefunds operate. I am a bit suprised

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That isn’t how a hedge fund works. Your clients provide you with money and specific directives on what level of risk they are looking for, which will of course dictate the anticipated return they will receive. The fund manager invests client funds and earns a return - this belongs entirely to the clients. The fund manager is paid a specific % or a fixed fee based on the original agreement that he entered into with the client. A hedge fund isn’t like a company where they can pay out whatever the shareholders decide and retain the rest. All earnings accrue to the clients’ accounts.

It would be highly unethical to make use of client funds to earn 20% and then only accrue half of that to the client’s account - don’t you agree?

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I have to disagree a bit. That isn’t how a hedge fund works – at least in the U.S. Clients of hedge funds are generally individuals and must usually have a net worth of $1 million. You will not find pension funds, which aim for steady, low-to-moderate rates of return, using the high risk services of a hedge fund.

Typical investors buy appreciable securities such as stocks. Mutual funds also buy appreciable securities such as stocks. The typical investor or, contrary to one of the above examples, a pension fund, only BUYS securities. A pension fund is risk averse, mutual funds are prohibited by law from taking short positions in equities (their primary focus) and the typical investor is clueless about shorting (which has nothing to do with the term "shorting"as it is used in forex).

None of the above utilize forex to any great extent for investments.

Enter the hedge fund. With very little in the way of regulation (other than who may or may not participate) the hedge fund is able to enter into any markets and take both long and short positions (which mutual funds may not do and the typical investor does not understand).

The original purpose of the hedge fund was to do just that – act as a hedge in down markets. The typical wealthy investor, invested heavily in stocks, would hate to see the value of his portfolio decline in down markets. He would then make use of hedge funds which could short in down markets, acting as a hedge, to lessen the decline his portfolio would experience compared to the market in general.

Hedge funds still serve that same fundamental purpose but over the years they have also become high risk/high reward ventures in both up and down markets and attempt to beat quarterly benchmarks such as the S&P 500 every quarter to make their clients happy again, in up markets as well as down.

As far as fees, the typical hedge fund charges a 2 to 5% management fee assessed on all investor monies brought into the fund and then a rather hefty success fee of 20% or more which is assessed on all profits made by the fund over a quarterly basis. Investors are usually locked into a fund for a set period of time, usually a quarter.

As far as what kind of leverge they use, it will vary on the goals of the fund and the market. In equities, they usually are limited to 4:1. In forex, they can use the same as individuals and will vary their leverage based on expected market duration. If they are looking for short term trades then 50:1. If they are position trading then much, much less.

I have no idea where the statement [I]“Your clients provide you with money and specific directives on what level of risk they are looking for”[/I] came from. A financial adviser or investment firm? Sure. A hedge fund? Never. By definition a hedge fund is an extremely high risk/high reward enterprise.

Remember, the fundamental purpose of a hedge fund is to profit when equities markets are down. This past year the equities markets were up so hedge funds would naturally struggle a bit more. The OP quoted an industry average of 1.3% for the past year. Add on 3% for management fees and 20% for success fees based on profits and the funds actually did pretty well if they stuck to their originally intended purpose. The average return to investors was a bit anemic and these same investors will, no doubt, start looking for new hedge funds to make them money since they do not fully understand what they are there for to begin with!

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Apologies, but you don’t seem too well informed on hedge funds either. Pension funds almost always invest in hedge funds to some degree - please Google that or research it otherwise.

As an investor, when you invest in a hedge fund you provide them with your desired risk appetite and they invest it accordingly. Whether or not you believe that is up to you. Once again, Google or research it.

You pretty much repeated what I said about the fees earned by the fund managers, which is what the previous poster’s query concerned.

If you can honestly prove to me that a hedge fund investing in currencies can use the same leverage as an individual, then I am utterly stunned. Imagine using 200:1 leverage on a $10m investment. Who is the counterparty to that??

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A pension fund exists for employee retirement, usually with an investment horizon over of 20 to 30 years. They invest primarily in annuities, bonds and equities and are usually managed by pension fund management firms or divisions of companies such as Charles Schwab or T. Rowe Price. They have have no need for short term, high risk vehicles such as those provided by hedge funds except to limit some downward market exposure. Current U.S. public pension funds have an average 6% allocation to hedge funds. Private sector pensions are not much more. That is a far cry from “exclusively.”

Most hedge funds are not very large (some are, of course). If a typical fund is looking to invest $10 million in currencies it will not be for a quick move on a 5 minute chart at high leverage which could easily wipe the fund out – it will be for longer term moves and, as I said, they will use much, much lower leverage.

An individual can choose a hedge fund based on risk appetite but cannot dictate what kind of risk exposure the fund will or will not expose the individual to. Hedge funds do not segregate their investors based on the individual risk appetites of its investors. That is an investment firm – at least in the U.S., a completely different animal.

As you finish your 35 years on the job and get ready to retire the boss comes and says, “Sorry, we directed all of our pension funds into a small hedge fund which was over-exposed on shorting micro-caps and Yen pairs on high leverage instead taking the reasonable long-term investment approach of accumulating annuities, municipal bonds and dividend-producing utilities equities the way the pension division of Morgan Stanley suggested.”

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I understand but, I am looking at it from the standpoint where “you’re money is working for you and my system is earning enough money for me to offer you double your money with low risk because I am that good of a trader.”

Yes it is definitely possible. You can look at it one of two ways (thats risky!) or its all in the skill. Of course you’re not putting the whole account on margin, no successful hedge fund does that. But its a 4 trillion dollar market, why wouldn’t you be able to successfully trade 10m on 500:1 leverage? If the broker offers it fine! After all, thats what ECN brokers are for (plus they offer high leverage)

But another question I wanted to ask, is there a difference between a hedge fund or a forex fund? What about a hedge fund that specializes specifically in trading forex? It should be an individual right to start a company trading forex exclusively and offering returns for clients, especially if my system proves its stability, and as long as my client agrees to their return I should be allowed to keep exceeding profits. They are not doing anything. This is what im still trying to understand.

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Yes, you can start a hedge fund. Just form an LLC with a cool sounding name, open a bank account and a trading account. You are all set. You have a few inconsequential forms to submit to the IRS and the SEC. You are now, offfically, a fund manager. Set up shop on Wall Street (just don’t tell anyone it’s Wall St, East St. Louis, Illinois) and you can really impress the women.

Your fund can have its primary or exclusive focus be stocks, forex, venture capitalism or trading comic books. You can lay out whatever fees you wish, after all, it is YOUR fund. Most hedge funds charge 2% of all money recieved from investors and then charge 20% of profits made. YOUR fund can charge an 89% success fee if you wish. The only ongoing requirement is that you may only solicit clients who have a net worth of $1 Million or more.

Hedge funds are not some super-duper, must be worshipped sacred entities. They are a dime a dozen. Most quickly fail and go under. Some excel and become legitimate billion dollar entities but these are quite rare. There is a saying on Wall St (the one in NY, not E St Louis) that saying you are hedge fund manager is the same saying you are a consultant – meaning it’s nothing special.

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Dude…anyone who thinks they’re the cat’s meow can set up a “virtual” hedge fund. It’s called a PAMM account. They don’t have real PAMM accounts here in the US anymore (from what I can tell) but alpari and pepperstone offer them. Of course they don’t take US traders which leaves you with…FinFX. And guess what? They offer true PAMM over there. How nice is that?

You set up the compensation scheme and the timeframe in which investors can withdraw money without penalty and all the money is pooled into one “virtual” MT4 account. From there you just go and trade like a boss.

As long as you’re profitable, the broker makes sure you get yours. You don’t have to fiddle with the accounting, with opening a segregated account at an investment bank with which to warehouse customer funds. You don’t have to worry about printing out monthly statements and sending them to clients as the broker does all that.

Heck…you don’t even have to worry about that whole pesky “Only High Net Worth Accredited Investors” can invest with you rule which is the plague of hedge funds. Clients send their money to the Forex broker, sign the limited power of attorney, and BOOM…they’re in.

Of course you probably can’t take out an add in the Wall Street Journal touting your uncanny success…but who the heck cares? Word spreads fast and you only need to get one rich person to win with you and they start squawking to other rich people and on and on it goes. Soon the grapevine has people beating down your door to invest with you.

Now you know the truth. You can setup your own hedge fund with all the upside and none of the down…go forth and conquer.

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I’m looking at offering a 6% compound interest rate every month for 12 months. Any amount that exceeds the balance over the 12 month period is considered profit for the fund. Can I do that? and also charge say, 20% of profits made per month as well. (The system makes well over 25% per month, and its not indicator or mechanical based in case you’re wondering)

Also, when you mention forms to submit to the IRS and SEC, which forms are you specifically referring to. Another thing, from my understanding if I have traders trading for the fund will they need to have a CTA? or Since I am the owner (not trading the fund’s money, only my money of course :slight_smile: ) will I have to get the CTA and place it with the company?

Hmmm… sounds very appealing, sounds like you’re speaking from experienced there. I visited the finfx site and I’ll have to say FinFx is nice, only thing I dont like is the clients withdrawing money themselves. Also I would like to have the ability to transfer excessive profits from the investor account to the Funds account. The Investor is already locked in at a specific compound interest rate. I hope both you guys get the picture im trying to paint. The idea is to give the investor a nice locked-in compounded profit every month for 12 months but also charge a percentage on profits accrued every month for 12 months. At the same time at the end of the contract term if profits have exceeded the 6% compound interest rate for 12 months the exceeding profits should be directed under the Funds control. The point of this is just in-case the client’s agreed overall return is reached on the 3rd or 4th month. (Leaving 8 more months of straight profit trading for the fund) We should be able to allocate those assets under our control.

It doesn’t seem like FinFX will have a solution tailored to that specific model, however I can still be wrong. Same goes for anyone who has some insight on this type of model.

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John: Although you are right… leverage is irrelevent. The size of the position you take is relavant. High leverage just gives you the opportunity to open larger positions ( since it uses less margin ), but it does not force you to. If you have high leverage and still open the same size positions, you really have almost the same risk.

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FXrenegade:

I talked with CitiFX last week. They will allow a PAMM account in the US. You need to register a company as an FX company, register with the NFA with your series 3 license and introducing broker license. Then you need at least $100,000 in client capital.

But hey, its still doable.

BTW, i use finfx for my PAMM account that i host, and they are a great company to work with. I wish their stuff was more public like fxopen, but it is what it is.

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Hedge funds are non-regulated. You can do almost anything you want with them. If you want to hire only crack addicts to staff your analysis department or have your four year old niece pick your investments there is nothing to say you cant. You can trade forex one day and invest in a new company that wants to make contact lenses for cats the next. Again, hedge funds can do almost anything.

There are a few exceptions, of course. You may only target and accept high net-worth individuals and/or entities. You may not guarantee profits. You may not provide profits to existing clients from the incoming funds of new clients – unless you want to be Bernie Madoff’s bunkmate or that hedge fund manager from that short-lived Wall Street Warrior show.

The people using hedge funds are usually somewhat business/investment savvy. They are not millionaires for nothing (well, some are but you get my point). The standard management and success fees of a profitable hedge fund are enough to make scores of people that work for the fund millionaires many times over. If you are trying to squeeze out every drop of profit above 6% month then you better have wealthy relatives willing to help you out because the rest of your potential client base will take their chances with the Nigerian princess who needs help transferring $35 million out of the country and just happened to send them an email – or another hedge fund that charges industry standard fees.

Give the PAMM route a go. As FXrenegade pointed out, all the benefits and none of the hassle.

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What makes you say that? Are you assuming that this is ‘too good to be true’? If so why? I am not taking offense by the way. It’s interesting to hear other points of view.

I will definitely check it out