FAQ
- WHAT IS A HEDGE FUND?
- WHY FOREX?
- WHAT IS LIMITED POWER OF ATTORNEY (LPOA) AGREEMENT?
- WHAT IS A SEGREGATED ACCOUNT?
- WHAT IS HIGH WATER MARK?
- WHAT IS "REVERSE COMPOUNDING"?
WHAT IS A HEDGE FUND?
As you consider investing with Wisemann, it is important that you understand the key differences between a hedge fund and the more common mutual fund.
MUTUAL FUND | HEDGE FUND | |
1) Goal |
Relative Return Mutual Funds are measured on relative performance. Their performance is compared to a relevant index such as the S&P 500 Index or to other Mutual Funds in their same sector. |
Absolute Return Hedge Funds, on the other hand, are expected to deliver absolute returns by attempting to make profits under all circumstances, even when the relative indices are down. |
2) Strategies |
Highly Restricted Mutual Funds are highly regulated, restricting the use of short selling and derivatives. These regulations serve as "handcuffs", making it more difficult to outperform the market or to protect the assets of the Mutual Fund in a downturn. |
Unrestricted Hedge Funds, on the other hand, are unregulated and therefore unrestricted. They are allowed to short sell and are able to use many other strategies designed to accelerate performance or reduce volatility. |
3) Performance |
Market-Dependent The future performance of Mutual Funds is dependent on the direction of the equity markets. It can be compared to putting a cork on the surface of an ocean - the cork will go up and down with the waves. |
Manager-Dependent The future performance of many Hedge Fund strategies tends to be highly predictable and not dependent on the direction of the equity markets. It can be compared to a submarine traveling in an almost straight line below the surface, not impacted by the effect of the waves! |
4) Liquidity |
Daily liquidity |
Limitations on investment and redemption. Some very successful funds require that capital be committed for 2-3 years. Daily liquidity does not exist in the hedge fund universe. |
5) Business Relationship |
Agent-Client Relationship Mutual Fund managers typically do not have personal assets at all invested in the fund that they are promoting. The manager is merely an agent for the client. |
Co-Investor Relationship Hedge Fund managers often invest a significant portion of their personal wealth in the funds they manage. Manager and client co-invest as partners. Hence, the interests of the manager and his investors are completely aligned. |
6) Fees |
Asset-Based Only Mutual funds generally remunerate managers based on a percent of assets under management. As such, mutual fund businesses tend to be more focused on gathering assets than on managing assets. |
Asset-Based and Performance-Based The hedge fund manager’s compensation is directly related to his performance. Again, this helps to align the managers’ and investors’ interests. Therefore, the manager has a greater incentive to focus on managing assets rather than gathering assets. Management Fee ranges from 1%-2%. Performance Fee (on High Water Mark) ranges from 20%-50%. |
WHY FOREX?
Hedge funds invest in a variety of futures markets including currencies, interest rates, global stock indices, grains, softs, metals and energies.
Wisemann specializes in the Spot Forex market for the many benefits and advantages that it has over stocks and other futures markets.
Here are just a few of the major advantages:
ADVANTAGE | FOREX | STOCKS |
1) High Liquidity |
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2) No Market Manipulation |
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3) Low Complexity |
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4) Short Selling Allowed |
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5) Use of Leverage Allowed |
(Warning: leverage can benefit or harm you. Therefore, use leverage judiciously and always abide by money management rules.) |
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6) Less Risky |
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WHAT IS LIMITED POWER OF ATTORNEY (LPOA) AGREEMENT?
It is an authorization that you give to Wisemann, allowing us to manage your account (to trade your account). This authorization is limited only to trading. Transactions such as withdrawals, change of beneficiary and other actions are still available only to the account proprietor – you. The LPOA also defines the management fee and performance fee and the conditions according to which we are paid.
WHAT IS A SEGREGATED ACCOUNT?
Segregated accounts are dedicated client accounts which allow keeping client funds separated (segregated) from the brokerage company funds. By law, funds can only be transferred from the trading account to a bank account under the name of the investor, and vice versa.
The brokerage company is not allowed to transfer your funds to another account for whatever purpose.
WHAT IS HIGH WATER MARK?
The implementation of a 'high water mark' means that Wisemann will only receive a Performance Fee when the value of a client's investment is greater than its previous greatest value. Should the value of the investment subsequently drop in value, then Wisemann will only receive a Performance Fee again once the value of the investment has once again reached its greatest value.
Below is an illustration on how this works:
January 1, 2009 - Client invests $100,000
February 1, 2009 - Investment has increased to $105,000
Profit: $5,000
Performance Fee: $1,500 (30% of $5,000)
Closing balance: $103,500
March 1, 2009 - Investment has decreased to $101,000
Loss: $2,500
Performance Fee: $0
Closing balance: $101,000
April 1, 2009 - Investment has increased to $102,000
Profit: $1,000
Performance Fee: $0
NOTE: No Performance Fee is charged because the 'high water mark' of $103,500 (achieved in February) has not been surpassed.
Closing balance: $102,000
May 1, 2009 - Investment has increased to $107,000
Profit: $5,000
Performance Fee: $1,050 (30% of $3,500, not $5,000)
NOTE: The performance fee is only charged on the profit in excess of the 'high water mark', i.e. $103,500.
Closing balance: $105,950 (this becomes the new 'high water mark')
WHAT IS "REVERSE COMPOUNDING"?
Most investors are familiar with the "Magic of Compounding Interest", but what they fail to realize is that it works in reverse as well. This "Damaging Power of Reverse Compounding" graph (below) shows how much an investor must gain back at various levels of portfolio losses. With a 10% loss, an investor must gain 12% to be back to even. With a 20% loss, the gain must be more than two times that at 25%. As losses become more extreme, so does the reverse compounding. With a 60% loss, an investor needs to make back 150% to break even and with an 80% loss, they have to gain 400%!