Stock Market Analysis and Personal Finance Mr. Bernstein Hedge Funds May 15, 2013

Stock Market Analysis & Personal Finance Mr. Bernstein What is a Hedge Fund? Pooled investment funds generally offered only to sophisticated investors Can use wide range of investment vehicles and techniques often not allowed in mutual funds Examples: Derivatives, Short Selling, Short-term trading strategies, High Leverage, Illiquid items Can engage in risky investments (high volatility) but often strive for low overall risk 2

Stock Market Analysis & Personal Finance Mr. Bernstein What is a Hedge Fund? Benchmark is usually “total return” rather than an index Investors seek high risk-adjusted returns and low “drawdowns” Exact holdings are often not shared with investors to protect proprietary strategies from being copied Typically set up offshore to avoid full SEC regulation 3

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Stock Market Analysis & Personal Finance Mr. Bernstein Hedge Fund fee structures “2% and 20”: 2% fee plus 20% of gains… Example: Return is 10%; manager earns 2% + 1% = 3% …Mutual funds typically 1%; index funds 20bps Only earns incentive above “high water mark” – encourages hedge fund to avoid losses 6

Stock Market Analysis & Personal Finance Mr. Bernstein Common Hedge Fund Strategies Long/Short or Market Neutral Risk Arbitrage Global Macro Convertible or Volatility Arbitrage Distressed Securities 7

Stock Market Analysis & Personal Finance Mr. Bernstein Why include Hedge Funds in a portfolio? Reduces risk – low correlation with stocks, commodities Investments usually made in a series of funds or a single “Fund of Funds” to further diversify …can the Hedge Fund investment process be packaged into a Mutual Fund for retail investors? 8