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Truth of the hedge fund

- A Challenge to Wisdom -

Cat: ECO
Pub: 2007
#: 0315b

Hideki Wakabayashi (若林秀樹)


Truth of the hedge fund


  1. Introduction:
  2. What is hedge fund (HF)?:
  3. Strategy of HF:
  4. Business model of HP:
  5. How HF is operated?:
  6. Criticism of HF:
  7. Shift from analyst to HF:
  8. Stock Market Theory:
  9. Various HF:
  1. 序文:
  2. ヘッジファンド (HF)とは何か?:
  3. HFの戦略:
  4. HFのビジネスモデル:
  5. いかにHFは運用されているか:
  6. HFへの批判:
  7. アナリストからHFへの転身:
  8. 株式市場理論:
  9. HF会社紹介:

; ; Absolute return; Age of selection; Alpha/Beta; Alternative investment; Arbitrage; AUM; A.W. Jones; Basis point; Capital introduction; Cashability; Catalyst; Conflicts of interest; Contingency; Contrarian; Credit crunch; Custodian; Directional trading; Draw down; Due diligence; Earnings forecast; EPS; Event-driven; FUM; Fund of funds; Fundraising; Gatekeeper; Global macro; Gross exposure; Gross performance; Hard/soft close; High water mark rule; IBD; Investment manager/advisor; Keyman clause; Long position; Loss cut rule; Managed futures; Mutual monitoring; Net long exposure; PBR; PER; Prime broker; Probe buying; Relative value; Reward structure; Scale of HF; Security selection; Sharpe ratio; SHF; Stock lending fee; Stock neutral; Stop loss; Top-down/Bottom-up approach; Trading company vs. HF; Trust deed;

  • The financial crisis caused by the Lieman Shock occurred in 2008 became a divide of global economy.
  • This book written by a top HF analyst vividly explains function of the hedge funds (HF) acted during the historical period.
  • HF is a challenge to risk and take opportunity in rapidly changing market, or financial market, or society surrounding us.

>Top 0. Introduction:

  • Confusion of the market since 17/Aug/2007 was unforgettable, which was similar Black Monday in 1987, the Asian currency crisis in 1997, bankruptcy of LTCM in 1998, collapse of IT bubble in 2000, and 9.11 in 2001.
  • As a background concurrent and large scale actions of changing the positions of hedge funds occurred; sale of long position and purchase of short position.
    • Just a few days prior to 17 Aug., the Nikkei Average was just over ¥16,000; we evaluated it was time to purchase judging from the increasing trend of cheaper brands; but it was a backfire.
    • After the slump, we reduced the gross as we couldn't take risk which might expand our loss.
    • In case of credit crunch or contraction, a HF having 150-200% gross position tends to decrease about 80% after the slump. If it takes its gross position around $2T, it reduces to about $0.8T.
    • The world aggregate market price is about $50T; the HF reduced about $1T (2%)
      • The total subprime loans were about $1T.
      • The total bad loans at the Japanese bubble economy were about $1T.
  • Royal Road of the investment:
    • to buy good brand, and sell bad brand.
    • to concentrate one's own speciality.
    • not to be too optimistic in the bubble trend; to oneself.: Performance is the reflection of mindset.
  • Abnormal situation:
    • abnormal volatility (fluctuation width) of stock price
    • unprecedented M&A boom
    • soaring of commodity futures.
    • FX investment by housewives.
  • >Top Definition of HF:
    • an investment fund (pooled capital from accredited investors) to using long and short positions and leverage to achieve a positive return on investment regardless of whether markets (absolute return), including strategy of alternative investment.
      • Hedge is essential counter concept of high-risk & high-return.
      • investment manager; investment advisor; investment management compnay
      • HF managers often invest money of their own as a taster; get annual management fee (about 2%), and performance fee (about 20%) of increase of net asset value.
    • a kind of financial venture, like PC age in 1970s.
    • this book describes: 1) experience of a HF, 2) industry of it, and 3) definition of it.
  • >Top Strategy of HF:
    • Long/Short equity: or Market neutral
      • long positions in stocks that are expected to appreciate and short positions to decline.
      • It is trendy to take long position of MSB stocks expecting high growth, and short of matured large corporate stocks.
      • Market neutral aims to excess earnings only by α (operation skills), and has lower volatility to stock price fluctuation.
      • In case of same long/short positions, combination of long bullish stock and short bearish stock
    • Global macro:
    • Relative value: attractiveness measured in terms of risk, liquidity, and return of an instrument relative to another.
    • Top-down approach: mathematical approach using computer
    • Bottom-up approach: fundamentals approach by corporate analysis by way of interview, or legwork. Behavioral finance is also adopted.
    • Arbitrage:
      • Convertible Bond (CB) arbitrage; usually long CB and short equity of the same corporation; considering hedge ratio between CB and equity. Japanese corporation issued large CB in low-interest environment, which was then attractive.
        • CTA (Commodity Trading Advisor); similar to Global macro, but more focusing on volatite futures market based on chart analysis.
        • Variation factors: Yield curve, Volatility curve, Cash Flow, Credit rating, etc.
      • Bond arbitrage (G-Bond, corp bond, LG-bond, ABS, Sovereign bond)
        • LTCM failed (98); having long Italian GB and short German GB, but risk aversion expanded due to Russina crisis in 1998.
        • Is the market really effective?
        • Too big FUM: geopolitical risk and lack of liquidity.
    • Managed futures:
      • Probe buying; buy small lot to probe the market response by market view and/or system trade.
    • Fund of funds (FOHF): near end investor
    • Multi strategy:

0. 要旨:

  • long position: buying of a security with the expectation that the asset will rise in value.
  • global macro: a HF strategy in various equity, etc. on overall economic & political views of various countries.
  • investment trust: 投資信託
  • ロングポジション
  • 信用収縮
  • HF vs. Investment Trust:
Return absolute relative
Risk loss tracking error
Source of return mgr skill market raise
Strategy free
Market fall short sale under weight
Operation restriction off shore strict
Market restriction restricted (private invest) retail (public)
Liquidity restricted free
Incentive performance bonus managemt fee
Mgr invest mostly invest advice only
Corp culture select few; boutique type large scale



>Top 1. What is a hedge fund?:

  • HF award ceremony in Hong Kong, participated 300 people.
    • Panel discussion and forum about 1) flow of global fund, 2) perspective of stock market, 3) method of operating fund, 4) trend of restriction
    • Journal AsiaHedge says; Japanese HF's average performance in 2006 was -5%, being tormented by short position of large-capital stocks and long position of SMB stocks.
    • >Top Awards were catalyzed; 1) Japanese stock, 2) Asian stock, 3) Stock long-short positions, 4) Global macro; considering not only average return of the last 12 months, but Sharpe ratio.; The top fund realized the return 20% and Sharpe ratio 2.
  • Reputation of a HF:
    • Even the pension fund promoting steady operation began to utilize HF, which amounted ¥160T/2006 from ¥5T/1990. (☓30); the HF gained citizenship.
    • The share of HF scarcely exceeded 1% (about ¥5T); only about 10 hedges funds have managed asset exceeding ¥100B.
    • But function of HF is getting influential due to quick rotation of fund and swelling by leverage.
  • >Top HF and pension fund:
    • HF is not the final investor who aims high-risk high return, but rather an investor who dislikes high-risk investment; which has common interest with the pension fund.
    • more than half of employee's pension (welfare pension) challenge alternative investment.; due to smaller risk with good return, in particular, showing lower correlation with stocks.
      • (>Fig) HF is superior in return, and smaller in risk (=SD) compared with stock investment (MSCI index)
      • But defect is difficult to make modeling of risk and return, or difficult how to position HD in traditional portfolio.
      • Also investors tend to avoid operation risk and operation restriction.
    • Boom of HF:
      • HF abruptly swelled in scale in US; which is said age of selection.
      • While Jp-stocks long-short operation resulted 0% ± several %; mostly minus operation.
  • >Top Eg. of prime broker (PB):
  • PB increases fund under management (FUM) of ¥1B to ¥1.5B by leverage, and operate the portfolio of buying 1 brand and selling another 1 brand.
    • Here, private credit transaction is usually 3 times, while LTCM dit it several hundred times. Maximum would be 200 times. So, 1.5 times is lower risk transaction.
  • According to the market research, PB buys 1M shares of A stock at book value of ¥1K concurrently sells 1M share of B stock at book value of ¥0.5K, subject to PB's due diligence.
    • The portfolio is A-share ¥1000M long, and B-share ¥500M short against ¥1000M FUM.; here the gross exposure (or simply gross) is 150%. (usually 50-200%)
    • Net long exposure (or long bias) is ¥1000M - ¥500M =¥500M (usually from -50 to 80%, 0% means stock neutral position.)
    • Alpha (α): profit irrelative market impact.
    • Beta (β): profit depends on bull market.
  • After 1 year, fortunately, A stock price raised ¥1.2K, while B stock price declined ¥0.4K. After selling of A share and buyback of B share, PB earns ¥200M by long, and ¥100M by short; ¥300M in total, or gross performance ¥300M/¥1000M=30%
    • Usually asset management fee (1-2%) and success bonus (10-20%) are deducted from here; in addition there are stock lending fee and other fees; so actually gross profit would be ¥250M.
    • If the the management fee was 1%; FUM☓1%=¥10M, and the success bonus 10%; gross profit ¥250M☓10%=¥25M. Thus PB earns ¥35M.
    • The net profit would be ¥215M.
  • >Top History of HF: (>Fig.)
    • 1949 (Phase-I): Alfred Winslow Jones, Australian investor & sociologist, formed modern HF; father of the HF.
    • 1966 (Phase-Ⅱ): George Solos, Hungarian-American, became most successful investor (Quantum fund).; Carol Loomis published an article in Fortune, "The Jones nobody keeps up with," coined HF and lionized Jones.
    • 1970s (Phase-Ⅲ): selected HF in the declining market.
    • 1980s (Phase-Ⅳ): Julian Robertson founded Tiger fund, promoted Global macro portfolio.; HF expanded not only stocks, but bond, exchange, commodity futures, and financial futures; establishing offshore vehicle with clear disclose of information and reward structure, as well as outsourcing an external HF manager.
    • 1987/Oct: market crash of Black Monday, but HF survived such as Solos and Tiger, attained FUM about $100B.
    • 1990: G. Solos won England Bank by selling UK£.
    • 1995c (Phase-Ⅴ): golden period of HF, particularly by Global macro.
    • until 1995: presence of HF in Japan is small, but after 1995 it grew.
    • 1998 (Phase-Ⅵ): bankruptcy of LTCM (ex-Salomon Bro. )
    • 2000c: reevaluated period after IT bubble collapse and ultra low interest rate. Major HF was established. FUN probably exceeded $500B. Mashrooms of establishment of independent HF in Japan, including alternative investment. Even conservative pension fund accredited HF.
    • 2005: the first year of HF in Japan. Operation in 2005 is good, which worsened in 2006 due to harsh environment of emerging market. (Livedoor shock) Total SUM in the world is about $1.1T.

1. ヘッジファンドとは何か?:

  • Sharpe ratio: a measure of excess portfolio return over the risk-free rate relative to its standard deviation
  • >Top managed asset: 運用資産
  • =asset under management (AUM)
  • =funds under management (FUM)
  • employee's pension = welfare pension: 厚生年金
  • alternative investment: 代替投資; an investment other than stock, bond, & cash.
  • age of selection: 選択の時代
  • (business) due diligence (DD): 資産の適正評価・審査
  • drawdown: 負けがこんだ時期
  • 効率市場
  • Performance of HF: 1994-2006 annual rate
  • Stock index of MSCI=Morgan Stanley Capital International;
  • Bond index of JPM= JP Morgan


Sharpe ratio (r/σ)
HF index 11.4% 6.4% 1.8
MSCI index 6.7% 12.9% 0.5
JPM index 5.6% 2.9% 1.9
  • >Top Definition of Sharpe ratio & Draw down:
  • >Top Higher shape ratio operation:
  • Where, average monthly return was 20%, the overall return was 30%, and SD is 15%; then the Sharpe ratio would be 30%/15%=2.0
  • Or, average monthly return was the same 20%, but the overall return was 40%, and SD is 30%; then the Sharpe ratio would be 40%/30%=1.33. The former case was better.
  • Bigger SD (σ) means bigger volatility, and it is accidental that the the overall return was 40%; minus monthly return could be possible.
  • Sortino ratio: return divided by down side SD
  • Draw down: Drop from the return peak, which could not afford success bonus. (high water mark (HWM) rule)




>Top 2. Strategy of HF:

  • Variety of HF:
    • From aiming high risk high return to low risk low return HF.
    • Vehicle: 1) Single HF (SHF), 2) Multi Strategy HF which adopts multi strategies, 3) Fund of HFs (FOHF) which organize multi SHFs.
    • Multi Strategy HF adopts any kind of strategy, but is untransparent of their strategy.
    • FOHF is expected to have various dispersed effect due to having multi SHFs, as well as due diligence, monitoring services, and access to the best HF manager on behalf of the investor. But adopting multiple strategies means to multiply management fee and performance fee. Function of Gatekeeper to help the investor screen their options and find the best HF manager.
    • Antinomic investment may occur between SHFs under the FOHF. (selling & buying the same stock, etc.)
  • >Top Category of SHF:
    • Security selection: classic HF mostly handling long/short equity. Strategy of buying rising stock (higher β), and selling declining stock (lower β). Net long or long bias position aims to earn by not only α (transaction skill) but also β (sensitivity of stock price to market fluctuations)
    • Directional trading: top-down approach using technical analysis and quantitative model.
    • Event driven: considering credit risk of various events of such as M&A, low rated securities.
    • Relative value: considering price disparity of long/short position of stock, bond, exchange, commodity.; trend follower or contrarian.
  • HF Strategy Map (Each position): (>Fig.)
    • X-axis: High liquidity vs. Low liquidity
      • Leverage of GB or CB may be several hundred %, while that of Equity neural may be less than 100%; those of Managed futures or Event driven are around 60%. The lowest leverage is about less than 40% of Equity Long/Short and FOHF.
    • Y-axis: Active intervention vs. Passive intervention:
      • Lower operations are more active intervention: from above, Passive operation, Index, Active, Arbitrage, Equity neutral, Equity Long/Short, and the more active interventions are Activist, Private equity, and MBO.
      • Left-Up corner operations are traditional investment, while Right-Down are operations of more alternative investment.
  • HF Strategy Map-II (By approach): (>Fig.)
    • X-axis: Bottom-up fundamentals vs. Top-down chart
    • Y-axis: Market follower vs. Contrarian
      • 1990s: Global macro 70% or more.
      • 2005-2006: Equity Long/Short 30%
      • In Japan, FOHF and Multi strategy shares 70% or more (comparatively low risk low return), while in US, Equity Long/Short and Equity neutral share 60% or less.

2. HFの戦略:

  • CTA: Commodity trading advisor
  • contrarian: 逆張り投資家
  • α, active return: depends on the investor's ability
  • β, passive return: depends on the market trend
of HF
Multi Strategy
  Strat. Security selection
      Stock long/short
      Stock hedge
      Stock selling
  Strat. Directional trading
      Global macro
      Managed futures (CTA)
  Strat. Event driven
      Risk arbitrage
  Strat. Relative value
      CB arbitrage
      Stock neutral

>Top 3. Business Model of HF:

  • >Top Players related HF:
    Overseas financial organizations tend to use horizontal divided labors, while Japan tends to do integrated services by themselves. Such division of works enable to make services in small scale (Boutique management), with mutual monitoring to prevent conflicts of interest. There had been various scandals of HF, such as false operational performance, embezzlement of cash or securities. Distributed management of function or role is important to prevent such fraud or violation. This is the established standardized scheme for operation, which is acceptable by many prime brokers and investors, and is safer from the viewpoint of compliance.
  • >Top HF with SUM over ¥1T can get several billon yen as management fee. Most of HF's FUM is around several ten thousand yen.
    • Investment manager: gets manager's fee and success bonus.
    • Investment advisor: gets advisor's fee.
    • Prime broker: main bank of HF (such as Goldman Sacks, Citi Bank, UBS, but most of Japanese banks & securities are limited to be prime brokers.), doing execution of trading, loan of fund, loan of stock, and marketing services; also service of capital introduction, marketing advice, due diligent of HF.
    • Administrator: account of HF transactions, and calculate value, or operational performance for investor.
    • Custodian: maintenance management; mostly doubled by the prime broker.
    • Auditor: annual financial accounting.
    • Legal office; make trust deed, prospectus, application requirements as well as legal advisor contract, administration contract, and custodian contract.
  • Major players related HF are 1) Investment manager, 2) Investment advisor, 3) Prime broker, 4) Administrator, 4) Custodian, 5) Legal office, all of which are specialists and relate closely each other. (Horizontal specialization)
    • These organization are rather small-scaled organization, unlike those of Japan.
    • They are
    • Japanese major corporation want to do everything by themselves.
  • Who provide fund?
    • 1) Family office of wealthy people in US, Hong Kong, etc, 2) Fund of university and financial combine, 3) Private bank in Switzerland, 4) Banks, insurance corp., securities corp., 5) Japanese Pension fund.
      • Japanese pension fund invests lower risk, unlike overseas pension funds.
      • Family office invests 50% for alternative investment, and US pension fund also invests 20% for alternative investment.
  • >Top Scale of HF industry:
    • amount of FUM: $0.2T/1995→$1.6T/2007 (around 1% of total transaction)
    • frequency: 10K times by several thousand HFs.
    • Sales of HF: about 2% of FUM=$40B; comprises 1-2% of management fee + about 10% of success fee (≒ one electronics industry)
    • Scale of Investment Trust: $160T ☓ 0.5 (annual turnover) ☓ 1 (leverage)=$80T
    • Scale of HF: $1.6T☓ 5 (annual turnover) ☓ 2 (leverage) =$16T (20% of IT)
    • Rather small scale: unique strategy & operating know-how; just like embedded SW in 1980s, game SW, fabless of semiconductor, IP provider. (decline & rise)
    • Traders came from: Quantitative strategist, Economist, Analyst, Sales division, Invest Banking division (IBD).
    • Income mechanism (=investment performance): FUM ☓ Turnover ☓ Leverage ☓ Basis point
    • Fundraising: about $1-10M; Hard close or soft close in more than $100M:
    • HF Business model:
      • Office Operating cost: office rental ¥5-10M/y
      • Seed money needed: around ¥50M + own investment ¥50M
      • Time needed: preparation 0.5y + no pay practice 0.5y
      • Critical point: FUM ¥3-5B
      • Trend wave of strategy: good strategy will be imitated soon; Equity Long/short → SMB Long & Large short→Large Long/short→Quantitative trade Long/short
      • Actual situation: Sales ¥500M with 5-6 staff; HF advisor 2 staff (Fund manager+assistant); around 40 years old
      • Keyman clause: subject to a certain keyman's involvement.

3. HFのビジネスモデル:

  • basis point (bp): 0.01%
  • keyman clause: キーマン条項

Size of HF:
Finan. asset Size $T
Equity (world) 50
Bond (world) 20
Real estate (w) 20
  Invest Trust (w) 20
  HF 1
  HF☓Lev☓Turn 20
  REIT 1.5
  PE 0.2
    J. HH F-asset 15
      J-Post 2
      J P-fund (JPIF) 1.2
      US P-fund 1
      CalPERS 0.3
      SovWF (SWF) 2
  • HFの規模

>Top 4. How HF is operated:

  • One day of HF manager:
    • 06:00: I usually get up, and go to bed around 24:00 caring about Dow-Jones average in NY. Lack of sleep is a taboo, in particular after 1:00.
      • The trend of watching news has changed from focusing high-tech industry to watch wider news of economics, politics, and society; concurrently reviewing validity of ratio of the portfolio.
    • 07:30-08:00: I arrive at the small office, checking mails from analysts from securities companies; making questions to rival analysts over telephone.
      • I attend the investment committee of HF managers after 08:00; analyzing NYSE, and Nikkei Average, whether to take ¥or avoid more risk, to increase or decrease of long position, or to review new individual brands which should to included in the portfolio; sending various advice to the operating company in Singapore.
    • Around 09:00: opening time of the market approaches, I feel nervous; confirming the policy with the operating company, checking fundamentals, chart, supply & demand, and other companies trends. Particularly, in down trend period of market, my stomach is in knots by adverse factor, on the contrary, in up trend of the market, I simply become very happy.
    • When I attend a company introduction meeting, or factory tour, I never forget about the trend of stock market, checking the latest situation every one hour. It is useful for me to visit medium-sized companies in various districts to know them and their industry as well as local environment.
      • The target of research of companies became expanded and diversified than the time of being an analyst; which are not only high-tech companies but also other industries. In an interview with new companies, I try to be all ears to the management in listening their corporate philosophy, motto, or composition of shareholders, etc, rather than the financial data, which could be available later. To have an objective stance is important and useful in making evaluation of the company. Q&A are important, which reflects level of the attendants; which will result a victory or defeat from the opportunity.
      • But there still remains compatibility or familiarity about the brand in making the decision; which could not be like-dislike, but hit-miss. Timing may be also important than value of the stock then.
    • Weekend: It is also a key acknowledge the way to spend the weekend; trying to pay more attention to mental and physical health; thinking about the middle or long view of changes.
    • Whenever I compare the target companies with my own company, I ask myself that there might be anything to learn from them. On the other hand I assure that it's a joy for me to be able to continue stable management of my company; accumulating capital, paying salary to the staff and paying dividend and tax, and so on. To keep PL, BS, CF is getting more serious and realistic than before. To be a good owner should lead be a good analyst, too.
  • >Top How to select the brand:
    • Decide the category of the industry or sector, estimating target price from the earnings forecast of main companies, comparing the quarterly corporate report, getting comments from the sell side analyst of securities company.
      • Consider the theme of the market; positioning cheaper but promising brand long position, and expensive & sluggish brand short, as well as consider a certain coverage.
    • Or consider wide rage of brands, or select a certain promising brand of medium-sized companies which the securities company doesn't cover.
      • Or more generally, segmenting cheaper sector and expensive sector; then select typical and the most sensitive brand in the cheaper sector brands.
      • Or segment and evaluate cheaper or more expensive brands based on the database.
    • In all cases, screening (selecting), valuation based on earnings forecast, and valuation and catalyst which affects stock price.
    • Contingency: it needs to assume responsive actions; change long or short position, take profit, or close the position.
    • >Top PER (Price Earning Ratio)= Stock price divided by per share profit; which is not an universal index, which is changeable according to Nikkei Average or interest rate.
      • POR (Price Order Ratio), PCFR (Price Cash Flow Ratio), EV/EBITDA Ratio
      • PBR (Price Book-value Ratio)=Stock price divided by BPS; BPS (Book-value Per Share);
      • EPS (Earnings Per Share)= current net earnings divided per share.
      • Loss Cut Rule: compulsory transaction to close a customers's position when the amount of loss has reached the amount computed by the method agreed with the customer in advance.
    • PER is changeable:
      • Higher PER shows the indication of high growth which many investors believe.
      • If A company's profit per share is ¥20, and the stock is ¥400, the PER PER 20 times. If the profit per share of the next term is expected ¥30, then the stock price raise up to ¥600 as long as PER remains 20 times. If the industry average PER is 30 times, this company's PER 20 times indicates lower stock price, which may raise up to ¥600.
      • The industry which tends to change profit level tends to reflect bigger PER.
      • PER 20 times means the same profit level will continue 20 years, or this means yield 5%.
      • Considering stock is risky, risk premium = Risk free rate + Risk premium: GB 10year 1.5%+ Japan risk premium 3.5% = 5%.
    • Defect of PER:
      • comparison between industry or country is difficult due to difference of tax rate and depreciation method.
      • PCFR or EV/EBITDA are used instead of PER, particularly in US & EU, but this index is effective as long as capital investment affects positive; which is useless after collapse of IT bubble economy. Also these indexes reflect PL only, not reflect BS.
      • DCFV is usually used in the case of M&A. But it needs to watch the latest CF whether it may not be too much.
    • In making portfolio:
      • Consider such as target stock price, estimated risk, total market value and volatility, correlation with Nikkei Average.
      • One brand should be less than 10%; brands which have higher correlation make more risk.
      • Total balance is essential; consider appropriate gross exposure and net long position.
      • Consider appropriate leverage ratio; or decrease the ratio under the situation of more uncertainty of the market. (credit shrink or crunch situation)
      • Consider raise the level of Net Long position in bullish trend.
      • Check performance of the portfolio, including gross amount, or long/short position.
      • HF usually handles 30-50 brands as the portfolio.
    • Loss Cut Rule: unique in HF.
      • a company has no such a rule: but empirically electronics industry applies this loss cut rule in a division which exceeds cumulative loss more than ¥200B, causing withdrawal or sales of business of the division.
      • Value at Risk (VaR): maximum loss estimated by its past volatility. Risk does not distribute according to normal distribution; rather to power distribution.
        • Any program or model calculating risk is changeable according to market, or corporate strategy.
    • Investment advisor vs. Investment manager:
      • sell side advisor of securities company vs. buy side advisor of the client investor.

4. HFの運用はいかになされているか:

  • quarterly corporate report: 会社四季報
  • earning forecast: 業績見通し
  • catalyst: 変化の要因
  • contingecy: 不測の事態
  • valuation: 査定、評価額
  • PER: 株価収益率
  • total market value; market capitalization; 時価総額

Process of HF operation:


  • Service value of operator:


  • Comparision HF vs. Conventional operation






  • PERの見方

  • ポートフォリオ戦略



  • 損切り



  • 投資顧問と投資マネジャー

>Top 5. Criticism of HF:

  • HF is small scale:
    • deregulated private fund; is considered rather low risk if the leverage is not so high. Even pension fund is a client. The client for the rich is limited.
  • HF is private placement:
    • upper limit is 49, then minimum unit is ¥10M, which means number of client limited (not necessarily the rich only). The total FUM is less than ¥50B; HF's sales is less than ¥n00M.
  • HF is affected by foreign capital:
    • Actually analyst personally involves and changes investment policy, which is different from other securities company.
  • HF vs. Individual day trader:
    • FX trade by individual who use more bigger leverage has more impact in the market.
  • Risk of HF vs. risk of other company:
    • Quality of management and labor is more or less the same. HF is small-scaled company; small company is not risky due to its smallness.
    • Risk of HF is derived from leverage, gross exposure, ratio of long/short position, each component brand of the portfolio.
    • the leverage of long/short position is averagely 2 times, which is lower than 3 of the average of individual credit transaction. This 2 times risk is the same of Debit/Equity ratio 2 of a company's finance.
    • the leverage ratio depends on the decision of prime broker and its strategy.
  • Liquidity of HF:
    • Cashability is less than 2 months, including operating procedure.
  • Transparency (information disclosure):
    • Transparency is checked by the gatekeeper in the case of due diligence.
    • IR (Investor Relations): HF disclose total asset and PL of total FUM, and issues monthly policy of selling & buying of typical brands, showing the scale of total market value of the investing sector; i.e. about 60% would be disclosed.
    • HFOF or multi strategist is a kind of conglomerate, which is difficult to disclose each risk.
    • Too much disclose worries that 'private placement' may be public one.
  • Long term continuity:
    • Operation of HF depends on mostly individual manger/advisor, who could not work as long as 30-40 years. About 10 years or so is practical limit as manger/advisor of HF.
  • Short position (short stocks):
    • Long position will be zero at the worst, but short position will be theoretically unlimited minus, so the short position needs to be operated in most prudent stance.
  • Abnormal expensive stock value is very risky:
    • Every stock should have its affordable range of price.
    • At the case of bubble economy in late 1980s, most of the investors, including even government and scholars agitated the bubble economy by applying 'Q-ratio' (include latent or unrealized price) theory.
  • Tax haven:
    • HF based on tax haven country like Cayman Islands to function as a global HF.
    • But HF operation company is mostly located in financially advanced countries like Singapore, Hong Kong, or Switzerland.
    • Also HF advisor company, who is registered and is located in Japan
  • Operation check:
    • Daily operation of HF is checked by major securities companies and prime brokers based on the agreed contracts.
    • Investment advisor is mostly non-regulated. But if it operates investment trust as a vehicle, which is subject to the Investment Trust Law in Japan.

5. HFへの批判:

  • HFは小規模
  • HFは私企業

  • 外国HFとの競争

  • デイトレーダーとの比較


  • HFのリスクの取り方



  • 流動性
  • 情報公開


  • 長期視点
  • 株式のShort position





  • 異常な高値はリスク


  • タックスヘイブン

  • Qレイシオ


  • 運用のチェック




>Top 6. Shift from analyst to HF:

  • The author's experience; shift to HF:
    • I have studied science & technology (spray combution) at University and master course.
    • experienced intership at a Japanese major electronics; which employs around 1,000 scientific graduates. I worried the future carieer pass as an engineer.
    • have an overall interest of science & technology which should be applied in the whole industry, rather than deeping knowledge in a certain limited area of science.
    • was facisnated to pursue an interdiciplinary area of natural and social science, and chose to enter NRI; actually I joined research divison of NRI.
    • forecast around 1990 the market volume of liquid crystal will be: ¥1T in 1995, and ¥2T in 2000; and flash memory business ¥0.3T in 1995, and ¥1T in 2000.
    • Since mid 1990s, decline of Japanese electronics industry began. One of the reason is the weakness of financial market, which mostly falled behind in raising fund. Overseas competitors once bankrupted will revive by using fund or M&A, as well as commodity futures. US makers tend to take over competitors, while Japanee makers are reorganized in a convoy integration guided by J-government, which is losing global competitiveness.
    • Lack of pension fund problem; the Pension Fund considers HF as a means of minimize risk rather expect higher return.
    • HF takes own risk, partially invest by themselves; which is totally different from morgage on real estate policy of the conventional financial organizatons.
    • Analysts Ranking (Institutional investors, II), every Mar-April. The author is awarded in 2005 in the field of industrial electronics.
    • Sell side analyst (who belongs to securities company) and buy side analyst (who belongs to an institutional investor); anlysts are segmented in each industry, domestic stocks, overseas stock, global technology, major stocks, SMB stocks.
      • There are analyts about 5K in sell-side, and 5K in buy-side, and 3K in banks, and 6K in usual companies.

6. アナリストからHFへの転身:

  • 理系出身
  • 電機業界で工場実習
  • 技術を産業全体の中で評価
  • 野村證券調査部


  • 1990年代中葉以降、日本のハイテク産業劣化
  • 金融市場の弱点


  • 年金機構の対応
  • HFのリスク感

  • アナリストランキング
  • 売り側アナリスト、買い側アナリスト



>Top 7. Stock market theory:

  • Social function:
    • Contribution of proper supply of fund and liquidity (including pension fund) via stock market.
    • Not necessarily short sighted: investment to VC is more than 3 years
    • But function of manufacturer is the main player: PL, environmental measures, intelligent property, employment
  • Capitalism:
    • Who owns a company? Labor union should be a substantial shareholder.
    • Contributed lifetime employment and pension fund operation.
    • Management style vs. corporate culture
    • Company without continuous profit is expelled
    • But restructuring or bankruptcy promoted liquidation of personnel.
    • Profit pursuing is not evil. Stable profit, dividend, tax, continue employment are necessary for sustainable management of the company.
    • It can't be stated unconditionally that investors with frequent turnover are short-viewers. HF always considers return ratio, avoids loss cut rule.
    • HF also regards long-term growth potential as important, then considers the impact of medium-range economic cycle, and determines long/short position.
    • General economic trend is getting shorter, by using IT technology.
      • Eg.: Silicon cycle had been every 4 years, but now it is about 2 years cycle.
      • Now, quarterly settlement became popular; for which every 1.5month data check is needed.
      • Is short-tem is unstable, while long-term is stable? Consider visibility.
      • Planned economy tends to be successful in relatively short-term (5-10years), but may collapse in medium and long term over 10 years. Thus, capitalism focusses short-term result on the assumption that long-term is uncertain.
      • Fund manager's working life has the lime about less than 10 years.
    • Quantum mechanical forecast is needed, which may drastically changes by the initial condition. (Newton mechanical forecast extrapolating future plans will fail surely.)
      • Both finance and human will not be fixed in a long-term jail.

7. 株式市場論:

  • 社会的機能:
    • 株式市場を通じた資金配分、流動性の供給
  • 製造業は主役


  • 資本主義:
    • 会社は誰のものか
    • 継続的利益を出せない企業は退場
    • 高ターンオーバーは短期指向とは言えない
  • 金儲けは悪にあらず。安定利益・配当・納税・雇用は重要
  • 短期は悪、中長期は善ではない。


  • 経済変動の一般的な短期化傾向
    • シリコンサイクルも、以前は4年だったが、現在は2年
    • 計画経済は短期はうまく行くが、長期的には失敗する。
  • 量子力学的予測:
    • ニュートン力学的外挿予想
    • 資金も人材も長期という名の牢獄につながれべきでない

>Top 8. Various HF

  • Japan Securities Dealers Association (日本証券業協会)
  1. SPARXS Asset Management: Macro is accumulation of short.: 1989
  2. Tower Investment Management Co., Ltd.:
  3. FuNNeX Asset Management Inc.: 2000
  4. Axies Investment Fund Inc.: 1996/10
  5. Simplex Asset Management Co., Ltd.: 1999/11
  6. GCI Asset Management, Inc.: 2000/4
  7. Moonlight Capital: 2003/1
  8. Myojo Asset Management: 2003/1
  9. Alfex Investments Ltd.: 2003
  10. Proud Investments: 2004/8
  11. United Managers Japan Inc.: 2004/12
  12. 21st Century Asset Management: 2005/2
  13. Epic Partners Investments Co., Ltd.: 2005/4
  14. Stats Investment Management Co., Ltd.: 2005/4
  15. Gaia Capital Management Co., Ltd.: 2005/9
  16. Monterey Asset Management: 2006/3
  17. Route Asset Management: 2006/4

8. HF会社紹介:

  • a
>Top Function of HF resembles a trading company in the following aspects: probably because both organizations have developed through global competition.
Feature Hedge Fund Trading Company
Small boutique organization Section/Dept centric business
Private organization Non-regulated/Absolute profit Political neutral/aim Gross profi
Global Global macro, Tax haven Global office/Chuuzai-Shukko-Shuccho
Intelligent Own analysis & monitoring Research function/Idea & challenge/Field information
Multi viewpoint Equity long/short position Export/Import/Offshore/Dometic
Future Invest on futures (stock, finance, commodity, exchage) Develop & import/invest R&D/new project/emerging market
Leverage Leverage/Due diligence JV/Consortium
Risk Loss cut rule/Sharpe ratio (r/σ) Credit line/Loss cut (Songiri)/Exchange risk hedge/Counter purchase/Insurance/Contract
Field/Site centric Reserch/hearing/survey Do it oneself/field feasibility report
Foreign Language English English/Chinese/Spanish/French/Russian/Arabic/...
Fee Management fee + Success bonus Agent commission + Equity profit

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