WHAT IS A HEDGE FUND?

UNDERSTANDING AN IMPORTANT TOOL THAT CREATES VALUE, DELIVERS RELIABLE RETURNS, MANAGES RISK, AND DIVERSIFIES INVESTMENTS

2 2

What is a hedge fund?

Contents

Table of Contents:

The Origin of Hedge Funds 3

Hedge Funds Defined 4

How Are Hedge Funds Regulated 5

Who Invests 6

How Do Hedge Funds Invest 8

Hedge Fund Types 9

How They Work 10

Who Benefits 11

The hedge fund industry has grown in recent

years to be a leading investment partner for

institutions and individuals around the world.

While hedge funds have become a popular,

often-utilized investment tool, the industry is

still misunderstood.

This presentation serves as a basic

introduction to the hedge fund industry,

answering the following questions:

• What is a hedge fund?

• What is their purpose?

• How do they work?

• Who do they benefit?

3

What is a hedge fund?

The roots of the modern day hedge fund industry date back to 1949 when a man by the

name of Alfred Winslow Jones began employing an investment strategy that offset long

equities positions with short positions in order to better manage risk. This balanced

approach now defines today’s hedge fund industry.

Over the years, hedge funds have evolved from an investment vehicle for wealthy

individuals to a tool used by pensions, corporations, unions, universities, non-profits and

high-net-worth individuals use to diversify their investments, manage risk and deliver

reliable returns so they can meet their financial obligations and goals.

The Origin of Hedge Funds

Portfolio Diversification Risk Management Reliable Returns

Hedge Funds Provide:

4 4

What is a hedge fund?

A hedge fund is an investment vehicle that can employ a wide range of investment and trading

activities to maximize performance returns while minimizing investment risk.

Hedge Funds Defined

Minimize Investment Risk Maximize Performance Return

5 5

What is a hedge fund?

Virtually all countries with significant financial markets have

regulatory authorities that regulate hedge funds and

managers. These include:

• In the United States, the Securities and Exchange

Commission and the Commodity Futures Trading

Commission regulate hedge fund managers and the managed

futures industry, respectively.

• In Europe, each country has its own regulator, which are then

complemented by the European Securities and Markets

Authority (ESMA) that provides a coordinating role among

competent regulators in the member states and technical

advice on hedge fund issues to the European Commission.

• Regulators in Asia with authority over managers include,

among others, Hong Kong’s Securities and Futures

Commission and the Monetary Authority of Singapore.

• International organizations play a role in assessing regulation

on hedge funds including the Financial Stability Board (FSB)

and the International Organization of Securities

Commissions (IOSCO).

How are Hedge Funds Regulated?

6 6

What is a hedge fund?

Because hedge funds are highly regulated, fund managers can only accept investment

capital from accredited investors or qualified purchasers, including:

Who Invests?

1. Public employee retirement plans

2. Corporate employee retirement plans

3. University endowments

4. Foundations and non-profit organizations

5. Family Offices and high-net-worth individuals. Regulatory qualifications for high-net-worth

individuals are outlined below.

An individual whose net worth, or joint net worth with the person’s spouse, exceeds $1 million at the time of

the purchase, excluding the value of their primary residence

Individuals with a yearly income of $200,000 or higher in each of the two most recent years or joint income

with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level

in the current year.

7 7

What is a hedge fund?

Who Invests?

More than half – 66 percent, according to research firm Preqin – of global hedge funds assets

are held by institutional investors including public and private employee pension plans,

university and college endowments and charitable organizations.

*Source: 2014 Preqin Global Hedge Fund Report, January 2014

8 8

What is a hedge fund?

Hedge funds invest in a wide range of assets across capital markets globally, including:

Diversification helps hedge funds to:

• Create a stable portfolio

• Avoid over-concentration in a specific type of asset

• Protect investments from risk in market fluctuations

How do hedge funds invest

Common Stock Bonds

Commodities Currencies

9 9

What is a hedge fund?

There are many unique types (commonly called strategies) among the 9,900* various hedge

funds active globally. Strategy examples include:

• Traditional

While each hedge fund calibrates its own degree of risk and return, their singular investment goal is to deliver

positive return to their investors while carefully managing away downside risk due to market fluctuation.

For a list of the various strategies common among U.S. hedge funds, click here.

Hedge Fund Types

Long / Short Hedge Funds

Global Macro Hedge Funds

Investing in equity securities, holding stocks for varying lengths of time to balance risk

and produce return on investment.

Evaluating economic variables to determine market impact and identify investment

opportunities

Event-Driven

Managed Futures

These funds maintain positions in companies involved in corporate transactions

including mergers, restructurings, financial distress, tender offers, shareholder

buybacks, debt exchanges, security issuance or other capital structure adjustments

Known as commodity trading advisors (CTAs), these funds invest in up to150 global

futures markets, trading in everything from grains to gold, currencies and stock

indexes.

*Source: Hedge Fund Research

10 10

What is a hedge fund?

Unique to the investment community, hedge funds are a partnership formed between the

fund manager and the investors.

Typically hedge fund managers invest a significant amount of personal capital - in some

cases in excess of 50 percent of the total assets in the fund - aligning their interests with

that of their investors.

How They Work

Hedge Fund Investment Capital

InvestorCapital

Managers'Capital

11 11

What is a hedge fund?

Who Benefits?

Hedge fund investments benefit local communities and residents in ways that are not

commonly explained or understood.

Institutions partner with hedge funds in order:

• Help strengthen retirement security for millions of public and private sector workers

• Provide funding for scholarships and research grants for colleges and universities

• Help fund critical economic, health-related and social development projects in local

communities across the nation.

Click here for an interactive map detailing how hedge funds benefit communities across the U.S.