What Is Hedge Fund?

ahooWhat is hedge fund? Fund that can be used for hedging? No no no my dear. Basically hedge fund is very close to being a mutual fund (aka unit trust). The main different is that hedge fund is not regulated by the local investment regulatory authorities. In our case is the Securities Comissions (SC).

Investment Mandate

Since it's not regulated also means that hedge fund has more flexible investment mandate. For example a unit trust in Malaysia can't hold more than 15% of its portfolio on a single stock while hedge fund does not has this regulation. In another word, a hedge fund can invest all into just a few stocks. On an extreme example is less than 5 stocks.

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Leveraging (Borrowing)

Hedge fund can borrow to invest. Don't be suprise to find hedge funds that borrow up to 1000% of its initial capital to invest. Alternatively hedge fund also can invest into derevative only which eventually leverage its position without owning the underlying asset.

Profit Sharing

Most hedge funds practice profit sharing as part of their management fees. For example a hedge fund can set a minimum benchmark of 5%. Any return of the fund above the threshold of 5% will be split at 80:20 (invester:manager) with the hedge fund manager.

Example:-

Benchmark (Threshold) = 5%

Fund performance = 30%

Profit sharing (investor:manager) = 80:20

Thus the performance bonus for the manager is 20% of 25% (30%-5%) which is 5%.

There are very important point to take note:-

1) there is no loss sharing with the manager

2) normally there is a minimum or fixed management fees (eg 1% per annum of the asset under management) despite the performance of the fund

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Fund Manager Commitment

Due to the profit sharing feature, some fund manager might tend to take higher than normal risk because he will be awarded for the extra gain but won't be penalise for the lose. Therefore some company actualy enquire the manager themself to invest into their own fund (certain % of the fund's net asset value) so that the fund manager will be more cautious to manage its own money which is part of the fund itself.

Valuation and Liquidation

Most hedge fund do not practice daily valuation. They are either priced twice monthly, once monthly or even quarter yearly (rare case). This is due to the reason that some of the instruments that the fund invest into might not be liquid enough to be valued daily. Logically if there is not liquidity (no transaction) on the instrument, its difficult to get the most accurate price on the daily basis.

Liquidation (or redemption) on the fund is also done according to its valuation frequency, among the other reasons to do that is due to the ease in managing its cash flow. A fund which has a stable NAV (less unit creation or unit redemption) is easier to manage because you can plan when to realise your profit or gain.

Fund of Hedge Funds

This is a mutual fund which invest it's asset into many other hedge funds. Due to the nature of hedge funds which are unregulated, thus naturally imposed a higher risk to the investors. Therefore to reduce risk, a mutual fund is created to invest into a few other hedge funds and their performances are monitored by a mutual fund (regulated) manager. Not all countries allow Fund of Hedge Funds ( a type of FOF - Fund of Funds ).

Hedge Funds in Malaysia

Basically there is no pure hedge fund to date in Malaysia. Due to its high risk level and the complicated instruments used by hedge funds. Infact in Singapore, hedge fund is a niche product but globally hedge funds activities have grown substantially. But the feature of hedge fund can appear in many different form of mutual funds such as fund of fund, capital protected fund or structured products.

Risk Level of Hedge Funds

Hedge fund do not necessary means higher risk, but due to it's unregulated nature, investors tend to be more keen on the higher risk (focused portfolio and leveraging) hedge funds. As pre-mentioned, there are capital guaranteed hedge funds.

Bursa Malaysia Trading Halted

Malaysian stocks fell the most in a decade after the ruling coalition's worst election result in fifty years put Prime Minister Abdullah AHmah Badawi's position in doubt and raised questions about his spending program.

Trading on the Kuala Lumpur stock exchange was halted for an hour after the Kuala Lumpur Composite Index tumbled by the 10 percent limit as opposition parties took control of almost half the states contested in March 8 elections. This is an automatic protection mechanism to protect the investors so that market might oversold or unreasonable selling due to panic in the market. Thus a down of 10% will automatic suspend the market and halt all trading activities. The market is close about 2:58pm Malaysia time. Till now Malaysia is the biggest drop market in Asia Pacific.

Most goverment linked company (GLC) stock prices are badly hit due the the uncertainties in their projects due to the change in the goverment especially the few main states such as Selangor, Penang and Perak. Foreign investors has been selling down the market since month ago and have been selling furiously today.

I Have The Cash, Should I Pay Off My PTPTN Immediately? Should I Even Take The Offer At The First Place?

I had come across friends, whom refuse to accept the PTPTN loan or some whom actually borrow from their parents to settle off all the PTPTN loan as soon as after their graduation.


Some doesn't even pay which I had read in newspaper about some local self made millionaires in Malaysia whom hasn't pay off their PTPTN. Please do not do that.

Anyway a few simple issue that I wish to share with you are below:-

1) Why you should accept the PTPTN offer

PTPTN is consider the cheapest source of financing that you can get. Refer the table below. There is none financing products that offers you a loan at 4%. More over getting a PTPTN loan is only once (or max twice) in your life time. Not the same case with credit card which you can apply every now and then. The processing procedure is very easy, which will be solved in the university during the orientation week ( depending on university procedures ).

2)Why you should not use your parents' money to settle off the loan

Your parents' money are meant for retirement, thus one should be responsible for his/her loan. Settling off the loan in lump sum doesn't provide you the liquidity option. Imagine if you need the money for emergency case (eg medical expenses), you can't withdraw that amount of money back from PTPTN.

Imagine if you can borrow at 4% and invest at a guaranteed return of 5% (eg Merdeka Bond), you would have been able to make a riskless investment return of RM200. Lets do some mathematics, the net return is 1% (5%-4%) while investing RM20,000 (PTPTN loan amount) at the net return of 1% gives you RM200 return per annum.

As long as the expected return is higher than the borrowing cost, you will definately make profit along the years servicing your education loan. If the expected return is 8% (eg ASW 2020), you would have been able to make a riskless investment return of RM800. Lets do some mathematic again; investing RM20,000 (PTPTN loan amount) at the net return of 4% (8%-4%) gives you RM800 return per annum.