Every year there are over 30,000 new hedge funds created in the US, and Alta Trust provides a very attractive way to manage the assets in these vehicles.
Hedge funds are alternative investment vehicles that are only available only to sophisticated investors and institutions with significant assets. While they are somewhat like mutual funds in that they are a pool of managed securities, they are different in many ways.
Hedge funds are not currently regulated by the U.S. Securities and Exchange Commission (SEC), as mutual funds are. They are considered exempt from Regulation D of the SEC which provides rules for public offerings of securities. As a result of being relatively unregulated, hedge funds can invest in a wider range of securities than mutual funds can. While many hedge funds do invest in traditional securities, such as stocks, bonds, commodities and real estate, they are often known for using more sophisticated (and riskier) investments and techniques.
Hedge funds typically use long-short strategies, which invest in some balance of long positions (which means buying stocks) and short positions (which means selling stocks with borrowed money, then buying them back later when their price has fallen). Additionally, many hedge funds invest in “derivatives,” which are contracts to buy or sell another security at a specified price, such as futures and options.
Many hedge funds also use an investment technique called leverage, which is essentially investing with borrowed money—a strategy that could significantly increase return potential, but also creates greater risk of loss. In fact, the name “hedge fund” is derived from the fact that hedge funds often seek to increase gains and offset losses by hedging their investments using a variety of sophisticated methods, including leverage.
Hedge funds are typically not as liquid as mutual funds, meaning it is more difficult to sell your shares. While mutual funds have a per-share price called a net asset value (NAV) that is calculated each day, so you could sell your shares at any time, most hedge funds seek to generate returns over a specific period of time called a “lockup period,” during which time investors cannot sell their shares. Private equity funds, which are similar to hedge funds, are even more illiquid because they tend to invest in startup companies, so investors can be locked in for years.
Finally, hedge fund managers are typically compensated differently from mutual fund managers, who are paid management fees regardless of their funds’ performance. Hedge fund managers, in contrast, receive a percentage of the returns they earn for investors, in addition to earning a management fee, typically in the range of 1% to 4% of the net asset value of the fund. That is often appealing to investors who are frustrated when they have to pay fees to a poorly performing mutual fund manager. On the down side, this compensation structure could lead hedge fund managers to invest aggressively to achieve higher returns—increasing investor risk.
As a result of these factors, hedge funds are only open to a limited range of investors. Specifically, U.S. laws require that hedge fund investors be “accredited,” which means they must earn a minimum annual income, have a net worth of more than $1 million, and possess significant investment knowledge.
Alta Trust provides a layer of security for these investors with its directed trustee services in which it provides a trading platform for different kinds of investment managers, oversees the trading activity and reports the viability of the funds to investors, separate from the investment manager. Alta Trust may also work with a prime broker to verify all trading and settlement of accounts.