Frequently Asked Questions

1. What is a hedge fund?
Hedge funds are often categorized as alternative investments, focusing on wealth creation. Hedge funds use the opportunity to hedge a high risk, through leverage or a low risk, through hedging. A hedge fund has the ability to go short, as well as long. This ability to go short enables the fund to hedge its investment exposure. Therefore, the fund is able to make money in a falling market, unlike a conventional long-only investment vehicle, such as a unit trust or mutual fund.

2. Which hedge strategies are there?
Hedge funds are mainly divided into three categories: 
= Relative-value: convertible arbitrage, fixed income arbitrage and equity market neutral.
= Event driven: risk arbitrage and distressed securities.
= Opportunistic: macro,short selling, managed futures and long/short equity.

3. What are the risks, when investing in a hedge fund?
This depends on the strategy of the fund. A hedge fund with an equity market neutral strategy has a lower risk than a fund with a more opportunistic strategy.

4. What is the performance of a hedge fund against for example the MSCI Europe index?
The average return of hedge funds in 2000 was 20% (MSCI Euro: -3.6%) and in 2001 4% (MSCI Euro: -16.9%) source: Financieel Dagblad & Bloomberg. The average return of hedge funds in the period 1990 - 2000 was 14%, while the S&P 500 had a return of 15%. But the average standard deviation for hedge funds was 6.9% and for S&P 500 13.9%. This means that the risks of investing in hedge funds is subsequently lower than investing in equities and comparable to a 10-year T-Bond (Source: CSFB)

5. What is the difference between an offshore hedge fund and a Dutch domiciled (onshore) hedge fund?
On-shore hedge funds are regulated by national institutions such as Central Banks, Security and Exchange Commissions etc. and are subject to capital tax whereas offshore hedge funds often do not have to comply with rules set by these regulators.

6. What are the charges involved when investing in hedge funds?
Most hedge funds charge 1% management fee and 20% performance fee. But this fee structure may vary from fund to fund. There are many variations, some fairly common. For instance, most funds observe a "high-water mark". This means that when a fund loses part of its investor's money during a certain performance fee period, the investors will not be charged in later periods until the losses have been recovered.Another common variation is the "preferred return". This means that a fund will not collect a performance fee until a certain return is achieved. This is often fixed, say at 10%, or 'floats' along with some risk-free interest rate indicator.