Hedge fund Marshall Wace braces for debut

Hedge fund Marshall Wace braces for debut

London-based equity hedge fund group Marshall Wace Asset Management LLP, one of the largest hedge funds in the world with over $2 billion in assets under management, has registered itself with the Securities and Exchange Board of India (Sebi). The hedge fund got its registration on August 5. Incidentally, the hedge fund has registered itself as an foreign institutional investor, taking the total number of registered foreign institutional investors (FIIs) to 594. Current Sebi regulations do not allow hedge funds to register. Sebi is working on a concept paper for allowing hedge funds to register, and the final guidelines are expected soon.

Marshall Wace also manages the award-winning Eureka Fund and Eureka Interactive, Europe's largest tech, media, technology (TMT) sector hedge fund. Though there are some smaller hedge funds registered with the capital markets regulator as foreign portfolio investors , none of them has the asset base to match Marshall Wace's, which is among the more prominent and reputed entities in this category to enter India in recent times. During this month itself two more FIIs have registered themselves Frank Russell, a pension fund, and Goldman Sachs Asset Management.

The hedge fund was founded in 1997 by Paul Marshall and Ian Wace. They are ranked No.9 in London capital markets' richest list with both owning 162 million in assets each. Marshall was formerly a director with Mercury Asset Management, which he joined in 1995. Wace is a financier. In fact, last year both founders shared 26 million in wages and dividends which resulted in around a couple of dozen employees in the hedge funds turning into millionaires. According to information from the fund's website, the hedge fund investment strategy is based on a complex mathematical model, which a number of other hedge fund managers have been trying to emulate.

The Eureka Interactive Fund follows a long-short equity strategy which essentially is a directional strategy involving equity-oriented investing on both the long and short sides of the market. The objective is not to be market neutral. Managers have the ability to shift from value to growth, from small to medium to large capitalisation stocks, and switch from a net long position to a net short position. Managers can also futures and options to hedge. The focus may be regional or sector specific.
Can someone throw more light on what are hedge funds, how they function and their advantages when compared to mutual funds?

What is a Hedge Fund ?

What is a Hedge Fund ?

A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.

Hedge fund strategies vary enormously -- many hedge against downturns in the markets -- especially important today with volatility and anticipation of corrections in overheated stock markets.

The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

Advantages of Hedge Funds

1) Many hedge fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets.

2) Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns.

3) Huge variety of hedge fund investment styles many uncorrelated with each other provides investors with a wide choice of hedge fund strategies to meet their investment objectives.

4) Academic research proves hedge funds have higher returns and lower overall risk than traditional investment funds.

5) Hedge funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets.

6) Adding hedge funds to an investment portfolio provides diversification not otherwise available in traditional investing.

Characteristics of Hedge Funds

Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets.

Many hedge funds are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc.).

Hedge funds vary enormously in terms of investment returns, volatility and risk. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded.

Many hedge funds have the ability to deliver non-market correlated returns.

Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns.

Most hedge funds are managed by experienced investment professionals who are generally disciplined and diligent.

Pension funds, endowments, insurance companies, private banks and high net worth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns.

Most hedge fund managers are highly specialized and trade only within their area of expertise and competitive advantage.

Hedge funds benefit by heavily weighting hedge fund managers remuneration towards performance incentives, thus attracting the best brains in the investment business. In addition, hedge fund managers usually have their own money invested in their fund.

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