What are Hedge Funds?
Hedge funds are investment funds that are managed by professional money managers. Typically more aggressive than traditional fund managers in stocks and bonds, hedge funds are used by wealthy individuals and institutional investors to increase their returns while reducing their risk.
Hedge funds are not open to the public in most jurisdictions and are only available to a select group of accredited investors. Registered with authorities such as the US Securities and Exchange Commission (SEC) and the Monetary Authority of Singapore, hedge funds are subject to stringent regulations and oversight.
Often marketed as absolute returns funds, as opposed to relative benchmarking in traditional unit trust funds, hedge funds have clocked negative returns as well and are therefore may not be among the best-performing financial instruments. However, hedge funds do offer high-net-worth investors access to a wide range of investments that are not available to the public including private equity, distressed assets, downside protection instruments, etc.
Differences Between Hedge Funds and Index Funds
Understanding the differences between hedge funds and index funds enables one to make an informed decision about which is best for one’s objectives and risk appetites. The major differences between hedge funds and index funds are in their accessibility, strategies, instrument types, fee structures, liquidity, and regulatory oversight.
Hedge funds are usually open to accredited investors who may be high-net-worth individuals and institutions. To generate out-sized and absolute returns, hedge funds employ strategies not used by traditional long-only unit trusts, such as long/short equity, merger arbitrage, convertible arbitrage, fixed income arbitrage, event-driven, market neutral, global macro, etc.
Specific strategies employed will depend on the fund's investment objectives and the fund manager's particular expertise and risk tolerance. Hedge funds charge management fees as well as performance fees, which means that investors are paying for the expertise of the money manager as well as sharing the investment profits. Many hedge funds adopt a "2 and 20" annual fee structure - a management fee of 2% of the fund’s net asset value and a performance fee of 20% of the fund's investment profits.
Unlike hedge funds, index funds are open to all investors. Structured as either unit trusts or Exchange-traded Funds (ETFs), index funds track a specific benchmark index such as the , the Dow Jones Industrial Average, the Straits Times Index, and more. Benchmarked relative to these indices, index funds do not promise absolute returns. Typically, index funds have lower risks and lower returns profiles as they rely on long-only strategies that move in tandem with the market. Index funds also typically have low or close to zero management fees. Investment profits are not shared with the fund manager but remain in the fund.
Pros and Cons of Investing in Hedge Funds
From an asset class perspective, hedge funds are alternative investments that are not correlated to mainstream investment classes such as stocks and bonds. Non-correlation fits neatly into the desire of investors to be well diversified in their portfolio allocation so that drawdowns in one asset class may be compensated by gains in another.
The promise of absolute returns versus relative returns helps hedge funds stand out from traditional funds like index funds and other mainstream investment vehicles structured as either unit trusts or ETFs. Absolute returns mean beating high watermarks and hurdle rates before the fund manager can share in the profits. Relative returns mean a fund has outperformed if it beats its benchmark indices even if both the fund and benchmark have lost monies.
The potential for higher and absolute returns stems from the differing regulatory oversight that hedge funds and traditional funds are subjected to. Traditional funds typically have mandates to invest only what investors have put into the fund, and to invest only on the long side and to stay fully invested.
Hedge funds, on the other hand, have the advantage of leveraging i.e., borrowing to invest over and above what investors have pumped in, to invest in both the long and short side to benefit from both rising and falling markets, while also keeping a strong position in cash or cash equivalents to pursue their investment strategies.
Despite the relative advantages of hedge funds over traditional funds, the well-known rule of high risks accompanying high rewards must not be overlooked by any investor. Returns from aggressive strategies can cut both ways and greater volatility can result in investors suffering large losses in a short timeframe. Well-known hedge fund blow-ups include the Bernie Madoff scandal, Steve Cohen’s SAC Capital, Long-term capital Management, etc.
Liquidity, or the ability to enter and exit from a hedge fund, can also be an issue. During financial crises, hedge funds have been known to shut their doors temporarily to prevent investors from leaving. By preventing withdrawals, the hedge fund avoids having to sell its investments at rock-bottom prices during tough financial conditions.
Top Performing Hedge Funds in Singapore
Singapore has long been a hub of global financial activity, and there has been an influx of hedge funds taking advantage of the country’s attractive tax structure, regulatory environment, and economic stability. As of December 2022, Singapore is the second-largest hedge fund centre in Asia, after Hong Kong which boasts a 44% market share. There are currently over 300 hedge funds registered in Singapore with assets under management of over US$210 billion.
So, which are the top-performing hedge funds in Singapore? Bear in mind that hedge funds are restricted in marketing to the public, so up-to-date performance listings are hard to find. Eurekahedge is one of the few companies that track hedge fund performances. Their most recent published listing was for Eurekahedge Asian Hedge Fund Awards 2020 which included a listing titled Best Singapore-based Hedge Fund, and this included:
● AVM Global Opportunity Fund - Class A
● ChapelGate Credit Opportunity Fund Ltd - Class A
● FengHe Asia Fund
● Fund One
● Perseverance DXF Value Fund LP
● PruLev Global Macro Fund - Class B
● QQQ Capital Fund
● Quantedge Global Fund
● R-SQUARED Fund - Class B JPY
● RV Capital Asia Opportunity Fund - Class B
● Vanda Global Fund Ltd - Class A
Other reports of the top-performing hedge funds in Singapore include:
1. Dymon Asia Capital - Founded in 2009, it focuses on long/short equity and event-driven strategies to return more than 40% since its inception.
2. Lion Global Investors is one of the largest asset management companies in Southeast Asia. Founded in 1998, it has averaged annual returns of more than 10% since its inception. The firm focuses on both traditional and alternative strategies, including event-driven, macro, and global equity strategies.
3. Rockfield Global Investment focuses on Asian markets. The firm boasts an average annual return of more than 20% since its inception. It focuses on investments in equities, fixed income, and derivatives.
4. Octagon Capital Management invests in Asia and emerging markets, utilizing long/short equity and event-driven strategies that have delivered 19% average annual returns since inception.
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