Figuring out how to invest your money can be a very complicated matter. Joining Chicago Tonight to take a look at the world of hedge fund investing is author of Hedge Funds for Dummies and consulting analyst Annie Logue.
Ann C. Logue’s “Hedge Funds for Dummies” sets out to tell readers what they need to know about hedge funds in a simple manner, whether the investment is personal, for an endowment, or a foundation. Logue geared the book toward a reader without much pre-existing knowledge of hedge funds—providing straightforward explanations of what a person needs to know. Below is a list of general topics addressed in the book’s first chapter, “What Is a Hedge Fund, Anyway?”
A Glossary of Hedge Fund Terms
Information taken from “Hedge Funds for Dummies”, by Ann C. Logue
Hedge Fund: A limited partnership, using a range of investment techniques, in hopes of producing large gains
2 and 20 Arrangement: When a fund manager receives an annual fee that’s equal to 2 percent of the assets in the fund and an additional bonus equal to 20 percent of the year’s profits
Absolute-Return Fund (or Non-Directional Fund): Designed to generate a steady return, no matter what the market is doing.
Accredited Investors: Those with a net worth of at least $1 million, or an annual income of $200,000 ($300,000 for a married couple)
Alpha: The return over and above the market rate that results from the manager’s skill or other factors
Beta: The sensitivity of an investment to the market
Directional Funds: Hedge funds that don’t (or at least not fully) hedge
Due Diligence: Doing homework when buying into a hedge fund—asking the tough questions about who the fund manager is, what she/he plans for the fund’s strategy, and who will be verifying the performance numbers
Fund or Portfolio Manager (PM): The person who organizes the hedge fund and oversees its investment process. She/he might make all investment decisions, or oversee a staff of reliable advisers
Hedging: Reducing risk. An opposing strategy to speculating
Leverage: Hedge funds borrow plenty of money in order to increase returns—a method that can also increase risk. Leverage separates hedge funds from most other types of investments.
Long-Short Investing: Buying shares of stocks expected to go up, while selling short stocks expected to go down—removing much of the risk of the market, creating a fund with steady performance year in and year out
Qualified Investors: Individuals, trust accounts, or institutional funds with at least $5 million in investable assets
Return: A function of risk. Eliminating some risk while gaining return on investments is the challenge for hedge fund managers.
Speculating: The process of seeking a high return by taking on a greater-than-average amount of risk. An opposing strategy to hedging