Hi all, I'm new to the US and recently came across a few long-only hedge fund.
I'm a bit confused about this terminology, I thought hedge fund by definition means you need to short, so how come a long only fund is a hedge fund?
What's the difference between long only hedge fund vs. long only mutual fund?
I noticed most of them only take institutional money, not retail or wholesale money, so does it mean the distinction lie in investor profile?
Lastly, how does fee structure / economics differ to hedge fund or long only mutual fund? I guess they won't charge hedge fund fee? but just wanted to confirm from someone more knowledgeable.
Thanks
In my experience, long only hedge funds can have a significantly more concentrated portfolio than that of say a mutual fund. Imagine your parents or grandparents looking at their holdings and seeing 25+% of their portfolio in one position; they would probably freak out because of the prevailing belief that diversification = more safety in a portfolio - not so much of an issue at a HF.
(The HF structure is also a compensation structure)
You can generally look up their fee structure in their Form 2 filing. And I have seen 2&20 before.
Just my $0.02
Have had same question and now work at one. I think the answer is basically just fees. Friends at true LOs get paid fees benchmarked to an index. We get fees on absolute returns (with a hurdle). The reason LPs pay us that, idk
Mutual funds typically have a benchmark, are much more diversified and they charge only management fees. Long Only HF can have much more concentrated portfolio (less than 10 names), typically they engage with the companies they buy (activism or something close to it), and charge performance fees. One good example is TCI, The Children’s Investment fund run by C Hohn, where also current British prime minister was working.
Another example is the Activist HF Cevian, they prob have 10 ish positions overall, they could not run a UCITS fund (typical European mutual fund) with such concentration.
Even if they don’t have benchmark they are obviously highly correlated with equity markets and with very similar beta, this can create issue to justify incentive fees, particularly considering that 90/95% of equity funds over the long term do not beat benchmarks. In the case of TCI, I think they are doing pretty well, but it’s more unique than rare.
Another difference is the structure, the required reporting to investors, and liquidity features. HF are less liquid as the underlying portfolio might be more difficult to liquidate quickly and investors can get out only every month or every quarter
Will just add that there are some smaller LO HFs that focus on more illiquid stuff where the structure is there to avoid liquidity issues from daily redemptions.
The term hedge fund (especially these days) is really more a definition of the fund's compensation structure and the regulatory oversight under which it operates. Because of the restrictions on the types of investors who can put money in them (HNW individuals and institutions) the funds are allowed to charge performance fees and can run 'riskier' strategies like shorting, concentrated books etc.
Plenty of funds don't really short and just run concentrated long books. Ackman has basically given up single-name shorting and I don't think TCI/Hohn really does it either.
Consequatur et nihil nulla sapiente. Occaecati asperiores illo consequatur quas ipsa et veniam.
Minima praesentium architecto dolor ipsum facilis. Et praesentium harum eos doloremque temporibus doloribus voluptas. Sint impedit ut quia adipisci officia. Earum in possimus qui voluptas.
Repellat voluptas enim provident qui totam. Ad sit placeat exercitationem ut.
Ab a voluptatem et mollitia quos vero. Maiores nam ratione aut ea eum molestiae in. Velit doloribus autem provident aut. Temporibus ut ut non nostrum distinctio dolorem odio. Nostrum id dolores saepe beatae. Quae impedit qui omnis molestiae.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...