Investing in Hedge Funds

"Since the term hedge fund describes an investment structure, not an investment approach, to understand hedge funds it is necessary to separate the structure of the investment from the investment strategy."

"An investor can access a hedge fund manager in one of two ways: (1) by investing in an existing investment vehicle or (2) by placing assets in a separate managed account and hiring the hedge fund manager to invest them."

"Hedge funds come in a variety of legal forms depending on where they are located and the type of investor that the fund organizer wishes to attract."

"A broad range of strategies are operated under the hedge fund structure. This spectrum includes non-leveraged hedged styles and highly leveraged directional approaches."

"By purchasing cheap fixed-income securities and selling short an equal amount of expensive fixed-income securities, fixed-income arbitrageurs attempt to protect themselves from changes in interest rates."

"Equity-market-neutral strategies are not without risk; they merely neutralize one kind of risk in favor of another."

"Investment managers identify mispriced convertible bonds that they judge to have a favorable total-return profile."

"Merger arbitrage specialists do not try to anticipate possible mergers. Instead, they research announced mergers and acquisitions to reduce uncertainty about possible outcomes."

"Distressed securities specialists find investment opportunities in companies undergoing financial or operational difficulties."

"Significant corporate events create profit opportunities because the outcome of the proposed changes is uncertain."

"The art of macro investing lies in determining when a process has been stretched to its inflection point and when to become involved in its trend back to equilibrium."

"Many sector specialists try to identify growth stocks with earnings and cash flow numbers that are selling at a significant discount to the company's intrinsic value."

"Equity hedge strategists combine core long holdings with short sales of stock or stock index options."

"Emerging markets specialists usually concentrate on analyzing company fundamentals to identify investments that will allow them to extract the most value from inefficient emerging markets."

"Short selling strategies provide a yield regardless of capital gains or losses, a high level of liquidity, and can produce high investment returns in bear markets."

"The planning process is the critical first step in making a hedge fund investment."

"Although the large number and diversity of hedge funds that must be analyzed may seem to be a daunting task, identifying the structure and strategies that are acceptable focuses the choice of possible funds and managers."

"Most investors are aware that blind faith creates a foolhardy investment strategy. Without transparency, they can only determine actual risk exposure and risk/reward prospects from secondary sources."