AIP Capital Management is a niche asset manager committed to transformation
We provide alternative investment solutions to institutional and retail investors including hedge funds.
A hedge fund is an alternative investment that endeavours to protect you from market uncertainty by generating positive returns in all market conditions.
Institutional and retail investors are increasingly using hedge funds to generate growth during volatile and low equity return markets.
Hedge Funds refer to the legal structure within which the funds sit, not the strategy or risk associated with the funds.
The benefits of having a hedge fund in your investment portfolio include:
Diversification of your investments beyond traditional
Superior risk-adjusted returns.
Greater predictability of returns to meet your specific investment needs.
Returns are uncorrelated to equity markets returns.
Greater flexibility in fund management (can use leverage and short sell).
No reliance on subjective forecasting.
Exploitation of opportunities in real-time.
Regulated by CISCA.
What are Hedge Funds
A hedge fund is an investment partnership between a fund manager and investors who pool their money together into the fund. A hedge fund’s purpose is to maximize investor returns and minimise risk.
The name “hedge fund” is derived from the trading techniques that hedge fund managers are permitted to perform. Regardless of whether the stock market has increased or declined, the managers can “hedge” themselves by going long (if they foresee a market rise) or shorting stocks (if they anticipate a drop).
Hedge funds form part of the Alternative Investments asset class. For retirement monies, Regulation 28 allows for 10% investments into hedge funds as an asset class, limited to 2.5% per hedge fund.
Key Hedge Fund Features
A wider investment spectrum
A hedge fund’s investment universe is only limited by its mandate. They can basically invest in anything – land, real estate, derivatives, currencies, and bonds and stocks. Traditional Long-Only Unit trusts, by contrast, need to stick to traditional asset classes such as shares, bonds, property and cash instruments.
Short selling is the practice where the fund borrows a stock that it does not own from another market participant. The Fund Manager then attempts to buy the stock back later at a lower price and thereby profiting from the decrease in the price of the stock.
This allows the fund to not only profit when stock prices increase in value, but also generate returns when stock prices decrease, decreasing the risk to the investor and providing downside protection.
Hedge funds can use leverage (borrowed money) to amplify their returns. This allows the fund to have exposure to positions in excess of the size of the fund. For example, while the fund size may be R100 million, the total exposure to positions can be R140 million.
The Fund Manager can use this feature to target trades with small mispricing and inefficiencies, and scale the trade up, to deliver sizable returns and profits to the fund. Small profits on a trade can become a much bigger profit in the hands of the investor.
A Hedge Fund may make use of derivatives, which is an instrument whose value is derived from the value of one or more underlying assets, which can be commodities, precious metals, currency, bonds, stocks, stock indices, etc.
The most common derivative instruments are Forwards, Futures, Options, and Swaps. These instruments allow the Fund to profit on opportunities not available to traditional investors.
Why Invest in Hedge Funds?
Hedge funds are uncorrelated to traditional asset classes, and the broader market. Adding hedge funds to your portfolio adds to the diversification of the fund.
Historically, hedge funds have outperformed traditional asset classes on a risk-adjusted basis. This means more return on your money for a given unit amount of risk.
Returns tend to be more predictable given the low volatile nature of hedge fund strategies, assisting your planning towards reaching your financial goals.
The ability to short protects your investment when the stock market decreases, which provides you with downside protection.