INSTITUTIONAL FINANCE Lecture 06: Portfolio Evaluation and Hedge Funds

INSTITUTIONAL FINANCE Lecture 06: Portfolio Evaluation and Hedge Funds

TOTAL FINANCIAL ASSETS AS % OF GDP

WHAT ARE HEDGE FUNDS?
 private investment vehicles for individuals or institutional investors.
 Typically organized as limited partnerships, in which the investors are 
limited partners and the managers are general partners.
 As general partners, the fund managers usually invest in a significant 
portion of their personal wealth into the partnership to ensure the 
alignment of economic interests among the partners. 
 Investors to the partnership are charged a performance-based fee where 
the potential payout to successful managers can be significantly higher 
than the fixed management fee.
 A major difference in return characteristics between hedge funds and 
mutual funds is due to differences in their trading strategies. 
 Hedge funds deploy dynamic trading strategies whereas most mutual 
funds employ a static buy-and-hold strategy.
 Hedge funds typically leverage their bets by margining their positions 
and through the use of short sales. ∙ In contrast, the use of leverage is 
often limited if not restricted for mutual funds.

INSTITUTIONAL FINANCE Lecture 06: Portfolio Evaluation and Hedge Funds