DFI5002
International Financial Markets and
Institutions
Student’s ID:
Words: 1496
Slide 1
Welcome to my presentation on “Hedge Funds and Their Role in Generating Excess
Returns”. I will discuss the characteristics, implications, and challenges of hedging.
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Slide 2
First, I'll define hedge funds and contrast them with traditional investment funds. Flexible
hedge funds combine authorised investor and organisation resources for excellent
returns (Copeland, 2016). They invest in various assets and are less regulated than
mutual funds. Examples include stocks, bonds, derivatives, real estate, and
commodities.
Hedge funds require active management. Fund managers can choose investments and
adapt to market fluctuations. Use leverage and short selling to profit from rising and
declining markets (Hayes, 2023). This is another company hallmark. Arbitrage, event-
driven trading, and global macro investing are used.
This presentation discusses hedge funds' key advantages. Investment strategy, risk
management, global financial market participation, and challenges are covered here.
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Slide 3
Global financial markets allow hedge funds to access numerous asset classes and
regions. They invest in commodities, derivatives, foreign currency, shares, and bonds to
profit from market conditions (Huang and Wang, 2024). Global business flexibility is a
hedge fund advantage. Businesses can diversify risk and capitalize on good prospects
in many economies by dealing in multiple markets.
Hedge funds use market liquidity to enter and exit positions swiftly. Arbitrage and high-
frequency trading take time.
Hedge funds find undervalued assets to exploit market inefficiencies. Short-term news
may produce stock or currency rate volatility they can exploit (Chen, 2021). Thus,
Global financial markets benefit hedge firms.
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Slide 4
Executing hedge fund techniques requires significant resources. High-net-worth
individuals, pension funds, and institutional investors fund them for high profits. Hedge
funds vary from other investment vehicles by leveraging cash to increase exposure.
Risk management provides leverage. It can increase returns and losses (Chen, 2021).
Hedge funds also work closely with prime brokers. These provide loans, trade
execution, and risk evaluation. Hedge funds use prime brokers for liquidity and
leverage.
Here are several derivatives to reduce risk:
Options and futures reduce market volatility, while swaps reduce interest rate and
foreign exchange risks.
Short selling is another risk management method (FlexFunds, 2023).
These financial tools help hedge funds maximize rewards and minimize market falls.
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Slide 5
Hedge funds profit from market imperfections. Investment strategies are specialized.
These approaches differ from "buy and hold."
Equity long/short investing is popular. Longing cheap companies and shorting
overpriced ones helps hedge funds predict portfolio volatility (O'hara, 2019).
Many geopolitical and economic developments are assessed using Global Macro.
These funds invest in global equities, currencies, commodities, and interest rates using
macroeconomic estimates.
Companies profit from events-driven mergers, acquisitions, and bankruptcies. In merger
arbitrage, hedge funds short and buy firms. Pre-contract pricing disparities benefit
hedge funds.
Fourth, relative value arbitrage leverages small price discrepancies between identical
securities. Corporate bonds, convertible bonds, and business shares can do this
(O'hara, 2019).
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Slide 6
Large institutional investors, high-net-worth individuals, and pension funds are the main
hedge fund investors seeking returns. They have different motivations than other
investors (Khan, 2015).
Investors buy hedge funds for alpha, or gains above market benchmarks.
By diversifying across asset classes and worldwide markets, hedge funds reduce
portfolio risk. Risk-adjusted hedge funds aim to minimize losses and benefit consistently
during market stagnation. Optimizing profits and reducing losses achieves this. Hedge
funds' effectiveness depends on market dynamics, including:
Identifying underpriced assets in inefficient markets.
Investment decisions influenced by economic variables like inflation,
employment, and global economic policy.
Funding and leverage influenced by interest rates (Khan, 2015).
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Slide: 7
Now I will discuss risk management and return optimization. Hedge funds want high
returns, but risk management is necessary for growth. Hedge it offers more market
protection than traditional funds. Diversifying investments across asset classes,
locations, and other factors lowers market risk (Standards Australia International
Limited, 2019). A hedge fund may buy commodities, stocks, bonds, and currencies to
maximize profits. Hedge funds reduce market volatility using short selling, derivatives,
and other methods. Funds use these contracts to hedge and avoid market swings
(Christopher, 2024). To cut losses, hedge funds create exit points. Price thresholds
trigger automatic asset sales. However, Leverage raises hedge fund gains and risk.
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Slide 8
In turbulent or declining markets, hedge funds have performed well due to their risk-
hedging ability. However, their performance depends on the strategy and fund
managers' expertise (Chen, 2019).
Hedge funds that generate alpha outperform the S&P 500. The following often trigger
this outperformance:
Fund managers are good stock pickers and risk managers.
Market timing involves entering and exiting positions at optimal moments.
Private placements, distressed debt, alternative assets, and other investments
are available (Morgan, 2024).
However, several variables can limit performance, including:
Low investor earnings result from excessive fees, especially the "2 and 20"
model
Hedge funds adopt similar methods. Its outperformance becomes harder (Chen,
2019).
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Slide 9
There are a number of factors that are contributing to the development of hedge funds,
including trading that is driven by artificial intelligence, bitcoin, and alternative assets.
Those investors who are searching for decreased expenses and increased
transparency provide a threat to the existing corporate strategy that has been
successfully implemented. The development of funds continues despite the fact that
regulatory monitoring limits the amount of flexibility for investors. The objectives of
hedge funds are to generate future excess returns and to maintain a competitive
advantage over other investment vehicles. The utilization of markets and technical
breakthroughs is the means by which they want to achieve this goal (Neely, 2022).
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Slide 10
Hedge funds profit greatly. They may confront challenges. It lowers performance and
investor confidence.
Market volatility worries. Certain hedge funds like volatility. Others fail when the
economy changes abruptly. Numerous hedge funds lost money during the 2008
financial crisis (Hsbc.co.uk, 2023).
Regulatory restrictions complicate matters. Governments worldwide are monitoring
hedge funds more. Hedge funds may lose revenue and flexibility. Investment laws are
tougher (Cumming and Johan, 2021).
Exorbitant fees worry me. ETFs and passive index funds have "2 and 20" fees, making
them better than hedge funds.
Competition makes hedge fund earnings retention harder. As more funds follow similar
methods, outsized gains decrease, removing market inefficiencies (Hsbc.co.uk, 2023).
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Slide 11
Global financial markets have hedge funds as unique. They earn from smart investment
methods.
In this session, I explained hedge fund operations, characteristics, and strategies. Their
purpose is to exploit market inefficiencies. They manage risk and make big profits.
Risks are leveraged and hedged.
However, hedge funds may struggle. The market is hard for hedge funds to beat. High
fees, regulation, and market competition cause it. Investors must assess the fund's
performance and risk before investing.
Despite these challenges, hedge funds are vital to the global financial system. Their
offerings include liquidity, innovation, and alternative investing for institutional and high-
net-worth clients.
Much obliged for your time. I welcome questions.
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Reference
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Chen, J. (2021). Hedge fund definition. [online] Investopedia. Available at:
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Christopher (2024). What’s the Difference Between Short Selling and Put Options?
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Copeland, L.S. (2016). Exchange rates and international finance. New York, N.Y.:
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