1. Company "Automatic systems hedging"
BUSINESS PLAN
March 24, 2012
99012, Ukraine, Sevastopol
Russian:
Tel: +38(066) 339-70-13
ICQ 483-624-139
Skype: automatic-systems-hedging
English:
Tel: +38(095) 355-56-06
ICQ 649-777-376
Skype: maxi19865
E-mail: Automatic_System_Hedging@mail.ru
CONFIDENTIAL
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made only in compliance with Federal and State securities laws.
This document includes confidential and proprietary information of and regarding Automatic systems hedging. This
document is provided for informational purposes only. You may not use this document except for
informational purposes, and you may not reproduce this document in whole or in part, or divulge any of its
contents without the prior written consent of Automatic systems hedging. By accepting this document, you agree to
be bound by these restrictions and limitations.
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2. Table of Contents
1. Pitch ……………………...………………………………………………………………………………...4
2. Executive summary ………………………………………………………………………………..….......5
3. Company ………………………………………………………………………………..…........................7
3.1. Background: aims and objectives
3.2. Characteristics of the company's services
3.3. Innovations Company: Automated portfolio management
4. Еnvironment for business ………………………………………………………………………..….........10
4.1. Sectoral environment: the category of hedge funds
4.2. Business concept: a comparison of hedge funds with mutual, mutual and other funds
4.3. Project Strategy
5. Analysis of markets for the company's services .……………………………………………………….14
5.1. Estimating the size of the market and the possible development trends
5.2. Assessment of market share and volume of services.
5.3. Market segmentation and identification of niche services company
6. Competition and competitive advantage ……….……………………………………………………….15
6.1. Comparative characteristics of competitive services
6.2. Comparative characteristics of competing firms
6.3. SWOT-analysis of the company
7. Risk-management ………………………………………………………………………………..…..........17
7.1. Trade (market) risk.
7.2. Administrative (organizational) risk.
7.3. Political and currency risks (the risks of incidence of the underlying assets).
7.4. Natural, technical and production risks.
7.5. Technical risks.
7.6. Operational risks.
7.7. Legal risks and risks of conflict of interest.
7.8. Liquidity risk.
7.9. Transaction costs.
7.10. Counterparty risk
8. The organization of foreign economic activity of the firm …..….……………………………………..23
8.1. Organizational maintenance of international relations.
8.2. Economic support of international relations.
9. The strategy of the marketing plan ………………………………...……………………………………24
9.1. The overall marketing strategy.
9.2. Pricing.
9.3. Tactics of implementation services to investors.
9.4. Warranty Policy: Methods of insurance.
9.5. Break-even point.
10. Organizational and Management plan…………………………………………………..…………….28
10.1. Business calendar: the creation of a hedge fund. Gantt chart.
10.2. The organizational structure and service contractors.
10.3. Summary of key executives.
10.4. Other investors.
10.5. Duties of directors and staff of the management company.
10.6. Hiring and bonus system.
11. Investment Plan ……….…………………………..…..…………………………..…..…………………33
11.1 Sources of funding.
11.2. The strategy to attract funding.
12. Financial plan ……………………………………………………………………………………..….......35
12.1 The need for funding (selection of the amount of investment and financing schedule):
• Option №1. Investments up to $ 1-2 million.
• Option №2. Investments 2 to $ 5 million.
• Option №3. Investments of $ 5-7 million and above.
12.2. Statement of Cash Flow, the schedule of repayment of loans..…………………………………38
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3. 12.3. The overall project efficiency and sensitivity analysis …..…………………………………...41
- Net present value (NPV);
- Internal rate of return (IRR);
- Profitability Index (PI);
- Payback Period (PP);
- Discounted Payback Period (DPP);
- Net investment efficiency (NRR);
- Duration (D);
- Modified Internal Rate of Return (MIRR);
- Modified the present value (MNPV);
- Discounted profitability index (DPI);
12.4. Financial performance:….……………………………………………………………………….42
- Current ratio (CR), %
- Quick ratio (QR), %
- Total liabilities to total assets (TD / TA),%
- Long-term liabilities to assets (LTD / TA)
- Total commitment to his own. drops. (TD / EQ), %
- Return on Investment (ROI),%
- Return on equity (ROE),%
- Return on sales (ROS),%
- Absolute liquidity ratio (LR)?
- Financial independence ratio (Equity to Total Assets)
12.5. Total costs, cost of service contractor, tax payments……………………………………………42
13. Notes to the business plan:
13.1. Sheets ASH: results on real accounts…………………………………….……………………...46
13.1.1. Screenshots of trading posts in the accounts and balance sheet growth chart
13.1.2. Analysis of changes in equity and the number of instruments involved in the trade
13.1.3. Rates of return.
13.1.4. Table of profitable / unprofitable trades.
13.1.5. The matrix of the currency pairs that are used in the accounts
13.1.6. Monitoring settings the account
13.2. Arbitrage trading with the help of "ASH-Arbitrage"……………...…….………………………67
13.3. List of prime brokers and discount brokers…….……………………………………………….67
13.4. Stages and types of hedge fund registration:……………..……………………………………..69
13.4.1. Incubator hedge fund
13.4.2. Fund for the Platform
13.4.3. Full hedge fund
13.5. Costs of administration…………………………………………………………………………..75
13.6. Hedge Fund Due Diligence…………………………………………………………………….. 77
13.7. Cayman Islands hedge funds ……………………………………………….………………….. 80
13.8. Еrrors of hedge funds…………………………………………………………………………….82
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4. 1. PITCH.
The team developed and tested in the context of global markets trading automated methods of hedging risk.
Developments allow to control trading on thousands of accounts and use for one-time trade in each of the
accounts of over 100 instruments: currency, metals, CFDs and futures, which allows trading to hedge risks and to
get ROI 11-14% per month (regardless the growth / decline of individual instruments). To create acompetitive
business requires an organization capable of a hedge fund, which will formal opportunity to attract investment
from institutional investors, banks and pension funds. Dividends to investors - 70-80% of net profit management
company.
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5. 2. EXECUTIVE SUMMARY.
What is needed for each investor?
• To make his money was invested in a variety of risk-free projects with a minimum amount of
commercial risks: imperfect parts - perfect as a whole!
• To all the investments were under the complete control of the investor and he could within a reasonable
time to extract them out of business!
• To the investor was confident that the new business will have a stable set of independent risk factors:
political, administrative and competition!
But how to find so many projects, which all start up risky?
The solution is
The project is within the community projects, each of which compensates for the temporary costs of the
other - the fund that distributes risks to the set of trading tools and directions, independent of the
incompetence of staff, political squabbles, falling exchange rates, taxes and competition.
World analogs
What structure can collect a lot of high-risk areas in the risk-free combination? At present, the best
solution, tested by time and experience the world economy - it is hedge funds.
Stability
The percentage of defaults of hedge funds over the past 10 years - 0.37% per year.
Investors
Dozens of European banks invest their money in hedge funds - are UBS, Credit Suisse, Crédit Agricole,
HSBC, Societe Generale, Anglo Irish Bank, etc.
According to the research company Global Alternatives large private investors (which is about 7.1
million with a capital of more than $ 1 million and total assets of 26 trillion. $) Invested: in hedge funds -
82% in private equity funds - 8 % and 5% in real estate and commodity futures. A significant proportion
of charitable investments, pension funds and non-profit account for hedge funds (this is especially
characteristic for the U.S.).
Assets and Income
In 1990 the total assets managed by hedge funds accounted for only $ 30 billion.
By 2007 they had increased to $ 1.8 trillion. The number of hedge funds in 2011 reached 12 000.
Over the past 18 years the cost of investments in bonds and stocks increased by 4 times, then as an
investment in a diversified portfolio of hedge funds has increased by 10 times.
Taxes
Funds that are registered in an offshore jurisdiction, pay a minimum tax.
Competition and Liquidity
To profit from trading in global markets - competition does not exist. The cost of trading is minimal
barriers to entry are virtually absent, the number of participants and liquidity tremendously almost
perfect. You do not need to open a shopping site, explore the markets, to spend money on advertising, to
open offices in prestigious centers and other global markets will exist as long as there are separate state.
Tools profit
On the New York Stock Exchange and the London Stock Exchange for more than 70% of trade takes
place with the participation of retail automation systems. Most of them - it's automatic system of hedge
funds, as the company Sac Capital Advisor (assets of 14 billion $), RGM Advisors LLC, Man
Investments LTD (1783, assets of $ 71.7 billion) is a fund of hedge funds (for example, one of its funds
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6. Global Fund sells 28 futures contracts), managed by Simons "Renaissance Technologies" is more than $
25 billion (trade is conducted with the help of computer programs), and many others.
That can offer our team?
Ready for implementation, "Automatic system of hedging risks," which allows you to:
• Informed and well-calculated distribution of the fund investments in a variety of tools (over 100
currency pairs, metals, and contracts for difference);
• compensate for the problem at the expense of profitable elements (hedge of a tool by others);
• gradual introduction of fund investments in trade (according to the strategy of "temporary" risk-
sharing);
• consolidation of profits during the trading period (the set of accounts that are running on
different starting points in time);
• profit from both the major and minor volatile instruments;
• independence of trading results on the direction of tool (long / short strategies).
What is the investor?
The expected profitability of the project - 11-14% per month (rate of return an investor - 70-80% of net
profit). Terms investvlozheny return - 3 years. Project-developed scheme of protection against risks:
falling base rates, administrative, commercial, legal and political. Monitoring the safety of investments
and investment strategy by following a few inspectors partners: the bank, custodian, administrator, prime
broker, auditors and legal counsel.
Starting the project
To start the project requires the cost of office equipment and legal registration of hedge fund - 1-5% of
the total investment (about $ 40-50 thousand). Minimum investment - $ 1 million, the maximum -
Unlimited (the strategy is scalable to any amount investment).
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7. 3. COMPANY.
3.1. Background: aims and objectives.
AIM: To create a Hedge Fund using for the service ASH (automatic system hedging) for global markets in
currency, stocks, bonds, commodities / raw materials (Foreign exchange, CFD).
OBJECTIVES: To create a working business that does not require large expenditures on the base and extension
activities, has a stable independent of the commercial, political and administrative risks, and able to attract large
investments from qualified and institutional investors (banks, providing clients with asset allocation to hedge
funds, large private investors and pension funds).
3.2. Characteristics of the company's services.
Hedge Fund offers to investors (with the volume of investments of $ 300 000) services effective investment and
profit through the service of automatic hedging. An investor entering into an agreement with the hedge fund is
able to hedge their investments and to profit from the volatility of the hundreds of tools (the movement of which
is associated with global changes in the global economy). And at the same time, the service allows companies to
avoid the influence of negative trends in the global economic situation due to long / short strategies. Monitoring
the safety of investments and investment strategy by following a few inspectors partners: administrator, prime
broker, auditors and legal counsel.
3.3. Innovations Company: Automated portfolio management
Parameters "automatically hedging"
• Using a system of independent investment pools and joint stabilization fund:
Individual approach to every investor can establish independent monitoring of accounts, selection of
individual tools (used in commerce), insurance, individual selection of contractors (prime brokers), the repayment
schedule. This system gives the performance an investor of investment independent of other investors and hedge
funds in general. This is - additional insurance against the risks of scalability and availability of all the same all
the benefits of the strategy.
Investment capital is divided into 2 parts: trade and stabilization. Stabilization Fund (amounting to 20-30%
of total capital) is designed to meet the challenges necessary to prevent resetting the account in case of
approaching critical levels Equity to the level of stop-outs. Practice shows that the level of Equity does not fall
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8. below 20-30% relative to the size of the Balance Sheet. However, such insurance bills provide for future periods
of trade risk-free combination of technical and strategic account management tools.
Stabilization Fund is the general strategic reserve investments and connects to the solution of commercial
risks of individual accounts of all investors.
• Use 10 or more base currencies for hedging long-term trends in currency portfolio:
Investment in one currency is translated in equal installments of 10 or more currencies, which makes
hedging falling base rates.
• Using an automated system of internal stabilization funds investment pool:
Automated system of internal transfers of funds between the accounts of the investment pool gives extra
stability ratio Equity / Balance and does not allow to incur losses in the event of a fall in the equity of individual
accounts.
• Distribution of fund investments in a variety of tools (over 100 currency pairs, metals, and
contracts for difference). Problematic elements of the compensation due to lucrative (one
hedge instrument by others):
The distribution of investment fund (within the same account) on a variety of tools (over 100 currencies,
metals and contracts for difference), ie Volatility trading using multiple tools allows interdependent management
tools in one account (one hedge instrument by others).
• Using the matrix input tools in the trade:
Each account is distinct from other accounts (earlier and later switched to the active stage of the trade) a set
of tools. That is, it is different for each of the accounts.
• Gradual introduction of fund investments in trade (according to the strategy of
"temporary" risk-sharing):
Trading on the part of the allocated number of accounts equal to the trading period (1.5-2 months). The
gradual introduction of capital in the trade risks associated with trading and substantiated not repeatable market
fluctuations. In the case of formation of the negative vibrations of tools, their impact will occur on a limited
number of accounts, rather than all at once.
• Securing the profit for the entire trading period:
Due to the fact that you are using the distribution of investments by the number of days of trading period,
the question is not only the gradual introduction of fund investment in trade, but also the phasing out of trade, ie
secure profits. Thus, the graph has a smooth removal of profit rising curve.
Trading period and is associated with preservation of profit, ie at the end of active trading ASH system
switches to a passive trade, and after 20-30 days, will close all orders, providing no subsidence approximation to
the Equity Balance.
After the closure of all orders are removed from the account of the necessary funds, as well as part of the
funds goes to the Stabilization Fund, located on unused accounts to trade.
• Making a profit from both micromotion currency pairs, day volatility instruments, and on
the medium-term periods (1-2 months):
The automatic system provides an opportunity to profit from both the low volatility of currencies and the
volatility of longer periods (weeks to months). This system gives an advantage over other systems is that the
availability of profitable trades is about 90%.
The presence of an automatic exchange system and calculate the change profitable base rates makes it
possible to obtain additional revenue in the amount of 2-3% per month on investment.
• To profit from arbitrage trading on the SPOT-market, using the resources of the
stabilization fund:
Stabilization Fund in addition to the direct purpose of using it as a stabilization in some accounts, the
reallocation of resources between accounts is used to profit from arbitrage situations in the market for immediate
delivery through the exchange of Reuters SPOT / FWDS Matching attached to «ASH-Arbitrage." Since the
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9. instantaneous exchange transactions, then the need for the base currency of the trading accounts can be
implemented immediately, without any loss.
• The independence of the trading results of the direction of movement of tools (long / short
strategies):
Trading strategy, implemented in the automatic schemes ASH, makes a profit regardless of the direction of
the tool, which is implemented by means of multidirectional trade, which would enable the simultaneous closure
of unprofitable trades through profitable.
• Ability to engage in trade an unlimited number of accounts:
The system can carry out transactions and monitor thousands of accounts. Staff shall be the
controlling function and is not directly involved in trading operations, while the system performs a few
thousand trades per month for each of the accounts.
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10. 4. ENVIRONMENT FOR BUSINESS.
4.1. Sectoral environment: the category of hedge funds
1. Hedge funds that combine long and short positions on shares (Long / short equity).The strategy
corresponds to the "classical" model and is buying a "good" of securities and sale of "bad", thus not excluding
completely, but significantly reducing market power.
2. Dedicated short. Funds that use only short positions in securities.
3. Equity market neutral. These funds use a ineffectiveness of market prices for different securities of the
relevant (similar) assets, completely neutralizing the effects of dependence on the market.
4. Foundations of troubled securities (Distressed securities). They operate with debts or assets of
companies with financial or operational problems, which could be followed for the transformation of the
company: bankruptcy, sale of assets, restructuring, etc.
5. Arbitrage Merger (Merger arbitrage). The strategy consists of investments associated with the companies
that are expected to go through the process of mergers or acquisitions with other companies.
6. Arbitration on convertible bonds (Convertible bond arbitrage). Funds try to take advantage of price
discrepancies between convertible bonds and their underlying stocks.
7. Arbitrage bonds (Fixed income arbitrage). This class of strategies aimed at generating income from price
anomalies between related bonds.
8. Emerging market funds (Emerging market). Funds invest in all types of securities related to developing
countries: stocks, bonds, government debt.
9. Global macro. Is aimed at investing in global markets in currency, stocks, bonds, commodities / raw
materials.
10. Managed futures (Managed futures). Trade in the initial offering commodity and financial futures
contracts on behalf of its clients.
Hedge funds, profit-making with multi-strategy
Name Style Location
Abax Global Capital Multi-Strategy Central Hong Kong
Alydar Capital Hedge Boston, MA
Alyeska Investment Group Multi-Strategy Chicago, IL
Amaranth Advisors* Multi-Strategy Greenwich, CT
Angelo, Gordon & Co. Multi-Strategy New York, NY
APG Asset Management US Multi-Strategy New York, NY
Apollo Advisors Multi-Strategy New York, NY
Appaloosa Management Hedge Chatham, NJ
Avalon Global Asset Management Hedge Houston, TX
Azentus Capital Multi-Strategy Hong Kong
Balyasny Asset Management Multi-Strategy Chicago, IL
Barclays Capital Multi-Strategy New York, NY
Blue Marble Capital Partners Limited Hedge Nelson, BC
BlueCrest Capital Management Hedge London
Bridgewater Associates LP Multi-Strategy Westport, CT
Buckingham Capital Management Hedge New York, NY
Canyon Capital Advisors Multi-Strategy Beverly Hills, CA
Carlson Capital Hedge Dallas, TX
Caxton Associates Multi-Strategy New York, NY
Cheyne Capital Hedge London
Citadel Investment Group Hedge Chicago, IL
Clinton Group Multi-Strategy New York, NY
Clovis Capital Management Hedge New York, NY
CQS Management Limited Multi-Strategy London
CR Intrinsic Investors Hedge Stamford, CT
Czech Asset Management Hedge Greenwich, CT
D.E. Shaw & Co Multi-Strategy New York, NY
Deephaven Capital Management* Multi-Strategy Minnetonka, MN
Duquesne Capital Management Multi-Strategy New York, NY
Eclectica Asset Management Multi-Strategy London
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11. Elm Ridge Management LLC Hedge Irvington, NY
Eton Park Capital Management Multi-Strategy New York, NY
Farallon Capital Management Hedge San Francisco, CA
Fortitude Capital Multi-Strategy Sydney
Fortress Investment Group Multi-Strategy New York, NY
FRM Capital Advisors Multi-Strategy London
FrontPoint Partners Multi-Strategy Greenwich, CT
Gartmore Investment Management Multi-Strategy London
George Weiss Associates Multi-Strategy New York, NY
GLG Partners Multi-Strategy New York, NY
Goldman Sachs Principal Strategies* Multi-Strategy New York, NY
Hayground Cove Asset Management Multi-Strategy New York, NY
HBK Investments Multi-Strategy Dallas, TX
Highbridge Capital Management Multi-Strategy New York, NY
Highland Capital Management Multi-Strategy Dallas, TX
Hoplite Capital Management Hedge New York, NY
Hunter Global Investors Hedge New York, NY
Hutchin Hill Capital Multi-Strategy New York, NY
Implied Capital Multi-Strategy Boulder, CO
International Standard Asset Mgmt Multi-Strategy New York, NY
Ionic Capital Management LLC Multi-Strategy New York, NY
Ivaldi Capital Multi-Strategy London
James Caird Asset Management Multi-Strategy London
Jefferies Asset Management LLC Multi-Strategy New York, NY
K Capital Partners Hedge Boston, MA
Kynikos Associates Short Seller New York, NY
LionRock Capital Pte Multi-Strategy Singapore
Lone Peak Partners Management LP Multi-Strategy New York, NY
Magnetar Capital Partners Multi-Strategy Evanston, IL
Man Group plc Multi-Strategy London
Manikay Partners Multi-Strategy New York, NY
Mariner Investment Group Multi-Strategy Boston, MA
Marshall Wace Asset Management Hedge London
Matrix Group Multi-strategy London
Maverick Capital Hedge New York, NY
Millennium Management Hedge New York, NY
Mistral Capital Partners Hedge Boston, MA
MSD Capital Multi-Strategy New York, NY
Myriad Asset Management Multi-Strategy Hong Kong
Northwest Investment Management Multi-Strategy Hong Kong
OM Investment Management Multi-strategy Tampa, FL
Orchard Capital Partners Multi-Strategy Hong Kong
Pacific Alternative Asset Management Co Multi-Strategy Irvine, CA
Paloma Funds Multi-Strategy Greenwich, CT
PAR Capital Management Hedge Boston, MA
Paris Capital Partners Multi-Strategy London
Paulson & Co. Multi-Strategy New York, NY
Pequot Capital Management* Multi-Strategy Westport, CT
Perella Weinberg Partners Multi-Strategy New York, NY
Permit Capital LLC Multi-Strategy West Conshohocken, PA
Perry Capital Hedge New York, NY
Platinum Management Multi-Strategy New York, NY
Polar Capital Multi-Strategy London
Porter Orlin Hedge New York, NY
Ramius Capital Group Multi-Strategy New York, NY
Round Rock Capital Advisors Co. Multi-Strategy Tokyo
RWC Partners Multi-Strategy London
SAC Capital Advisors Multi-Strategy Stamford, CT
Sandelman Partners Multi-Strategy New York, NY
Seminole Management Hedge New York, NY
Sigma Capital Management Multi-Strategy New York, NY
SkyBridge Capital LLC Multi-Strategy New York, NY
Stark Investments Multi-Strategy St. Francis, WI
Steadfast Capital Management Hedge New York, NY
Steenman Asset Management Multi-Strategy 1204 Geneva
Talpion Fund Management LP Multi-Strategy New York, NY
Tiger Management Multi-Strategy New York, NY
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12. TPG-Axon Capital Multi-Strategy New York, NY
Trafalgar Capital Management Multi-Strategy London
UBS O?Connor Multi-Strategy Chicago, IL
Visium Asset Management LLC Multi-Strategy New York, NY
Voras Capital Management Multi-Strategy New York, NY
Wexford Capital LLC Multi-Strategy Greenwich, CT
Xaraf Capital Multi-Strategy Greenwich, CT
Hedge-funds investing in Global Macro
Name Style Location
Argonaut Capital Management Global Macro New York, NY
Auriel Capital Management Global Macro London
Autonomy Capital Research Global Macro London
Avantium Investment Management Global Macro London
Balestra Capital Global Macro New York, NY
Brevan Howard Asset Management Global Macro London
Cavenagh Capital Macro Singapore
Clarium Capital Management Global Macro New York, NY
Collard Capital Management Global Macro Geneva
COMAC Capital LLP Global Macro London
Covepoint Capital Advisors LLC Global Macro New York, NY
Galle Global Macro Partners LLC* Global Macro New York, NY
Grant Capital Partners Global Macro Santa Barbara, CA
Minerva Capital Management* Macro Hong Kong
OGI Capital Partners Global Macro Tokyo
Panda Global Advisors LLC Global Macro New York, NY
Pilgrim Partners Asia Pte Global Macro Singapore
PointState Capital Global Macro New York, NY
Principalis Asset Management Global Macro London
PSQR Management LLC Global Macro New York, NY
Round Table Investment Management Global Macro Charlotte, NC
SemperMacro Capital LLP* Global Macro London
SLJ Macro Partners Macro London
Soros Fund Management Global Macro New York, NY
Suranya Capital Partners Global Macro Stamford, CT
Trigon Investment Advisors LLC Global Macro New York, NY
Universa Investments (Black Swan) Macro Santa Monica, CA
Woodbine Capital Advisors Global Macro New York, NY
4.2. Business concept: characteristics of hedge funds compared to stocks, mutual funds
and other
Hedge-fund - a private, not limited to regulation, or regulation subject to weaker investment fund is not
available a wide range of individuals and managed by professional investment managers. Characterized by
special fee structure for asset management, as well as the presence of equity in the assets of the fund manager.
U.S. hedge funds are entitled by law to serve only professional investors (qualified investors), with an initial
payment of at least $ 5 million to private investors and $ 25 million - for institutional qualified investors.
"Unbounded regulatory" means nelimitirovannost nelimitirovannost strategy and margin leverage (leverage).
Professional funds in offshore jurisdictions offer a more simplified conditions (capital investment of $ 100,000,
and there is no restriction on the equity of the management company).
The activities of hedge funds is subject to less regulation by government agencies, providing freedom of
choice in the control tools of the trade, their share in the portfolio, investment strategies, etc.
Hedge funds use the full range of existing tools of the trade: futures, options, stocks, bonds, currencies,
bank certificates, instruments OTC market .... It allows you to effectively diversify its portfolio and provides
more opportunities to generate income.
Hedge funds use a wide range of asset management strategy: short selling, arbitrage, futures trading, the
search for undervalued assets, markets, pricing anomalies, buying shares of companies with commitments to
further influence, etc. As a rule, they all have zero or negative correlation with the stock market, ie Hedge funds,
unlike conventional funds show returns regardless of whether the stock market is falling or rising.
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13. The basis of successful hedge fund of knowledge and skills management. They are professionals of the
highest class, the elite of the financial market. Only the best fund managers have a chance to perform well for a
long time for the entire spectrum of financial instruments and investment strategies.
Risk control - the most important stage of management of hedge funds. Working with a diverse set of asset
managers constantly monitor and control the risks for each individual instrument, strategy, and the entire
portfolio as a whole.
The remuneration of the management company, as a rule, consists of two parts: 1-2% of total assets under
management (as well as mutual funds), and 20% of the profits earned by the fund (only in hedge funds). Thus,
there is a convergence of interests of investors and the manager as the main income of the latter depends on the
success of the fund.
Hedge funds - a tool for long-term investment horizon of 5-10 years. Accordingly, for the withdrawal of
funds before a certain date (usually 3-5 years) are charged an additional commission of 1-3%. The initial
investment amount is much higher than in conventional funds, and amounts to 10-50 thousand dollars.
Many hedge funds guarantee its investors a return of initial capital. This means that even if the manager is
not able to generate income fund, investors lose their money. Classic Funds are deprived of such opportunities.
4.3. The strategy of the project.
ASH system allows the independent yields for all accounts that use different instruments to trade, as well
as running in various business aspects. The ability to manage tens of thousands of accounts with an independent
income - a key factor for any of scalability, ie, strategy is equally functional to invest any amount investments.
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14. 5. ANALYSIS OF MARKET SERVICE.
5.1. Estimating the size of the market and possible trends of its development.
According to the research company Global Alternatives large private investors (which is about 7.1 million
with a capital of more than $ 1 million and total assets of 26 trillion. $) Invested: in hedge funds - 82% in private
equity funds - 8 % and 5% in real estate and commodity futures. A significant proportion of charitable
investments, pension funds and non-profit account for hedge funds (this is especially characteristic for the U.S.).
Banks lend themselves as hedge funds and private investors to attract investment to the volume of investments
from $ 10,000 to purchase shares of hedge funds.
If we compare this proportion with the banking sphere, it occupies a volume of 25-30 trillion. $ At a lower
yield of bank fin. instruments and with a similar level of defaults.
So hedge funds are able, under the same trends, but it is - an increase in assets from $ 30 billion. (In 1990)
to $ 1.8 trillion in 2011 (100 times in 22 years) - focus on managing the assets in its banking, family offices,
pension funds and charities.
According to forecasts of the consulting firm McKinsey, in the coming years, the influence of hedge funds
will continue to grow: by 2012 their assets will grow to 3.5 trillion dollars, and invested money - up to 9.12
trillion dollars. Thus, hedge funds along with funds and Asian central banks welfare will be among the
institutions that have the greatest impact on the development of the global financial system.
5.2. Assessment of market share and volume of services.
According to the information portal HedgeCo.Net, now there are about nine thousand hedge funds. Last
year, their total assets have exceeded 1.8 trillion dollars. At the same time four hundred and first in terms of
capital structures controlled almost 80% of total assets industry. Among the most influential players - JP Morgan
Asset Management, Goldman Sachs Asset Management, Bridgewater Associates, DE Shaw, Farallon Capital
Management, Och-Ziff Capital Management, Barclays Global Investors, Man Group, Cerberus Capital
Management. Most of them - came from the United States.
The volume of services provided depends on returns of hedge fund and less commonly associated with
advertising activities, as the yield estimate is carried out by institutional investors. Because of the possibility of
attracting investments based on three basic factors:
a) The ratio of return / risk hedge fund;
b) the demonstrated stability of profitability;
c) Availability of own funds in an asset manager of a hedge fund.
5.3. Market segmentation and identification of a niche service business.
According to the categories of hedge funds, pronounced 10 different types:
1. Hedge funds that combine long and short positions on shares (Long / short equity).
2. Dedicated short.
3. Equity market neutral.
4. Distressed securities.
5. Merger arbitrage.
6. Convertible bond arbitrage.
7. Fixed income arbitrage.
8. Emerging market.
9. Global macro.
10. Managed futures.
Strategy "Automatic system of hedging" include the possibility of combining the Long / short equity in
Global macro and Managed futures. Possible coverage of all markets in which it is possible to combine in one
instrument purchase / sale.
14
15. 6. COMPETITION AND COMPETITIVE ADVANTAGE.
6.1. Comparative characteristics of competitive services.
Many hedge funds use a staff (traders) to trade in different markets. It uses a fairly large amount of money,
because the number of professional traders is limited. Thus, increasing the risks of trading the transactions.
Automatic systems are also very common, but they are rarely used in commerce for hundreds of hedging
instruments for trading on one account.
Reference: automated trading, as less prone to the human factor is widely used for hedging, for example,
the company RGM Advisors LLC (in Austen, Texas) uses high-frequency trading. The founder of SAC CAPITAL
ADVISOR Steve Cohen manages assets of about $ 7 billion that was earned with Scalping operations.
Consider the benefits of the ASH over manual trading.
The main advantage - the ratio of labor costs and thus the feasibility of the principle of hedging. Given the
possibility of a person (not using ASH) to control accounts, he was given to the analysis of one currency pair and
trading decision making can spend 5-30 minutes. one trading action. ASH, depending on the speed of the
computer is a complex calculation of a single instrument within a fraction of a second, making a day on one bill
from 500 to 1,000 transactions.
The decision regarding the trading activities, the complex calculations that take into account a
comprehensive account status, opportunities for trade for each instrument separately, under the full control of
ASH. The human factor affects only the installation of the correct input parameters (which can not be determined
automatically), the moment of transition from active to passive trading (at the end of the trading period), the
control over the need to involve the stabilization fund.
Cumulative comparative table of the effectiveness of trade
Accounts of
The human resource-
currency Trading on
Bidder Accounts Total trading factor in an expensiveness
pairs on an an account
account (200 accounts)
account
20 bargain.
20
Тrader 5-10 5 10-20 200 decisions
computers
every day
2-1
bargaining. 4 Comp.
ASH+
solutions for (1 per
multiterminal+ 1000 100 500-1000 200 000
the entire 50-100 of
Тrader
auction. accounts)
Period
Advantage 1:100 1:20 1:50 1:1000 1:300 1:5
The average final advantage on all counts - ASH (under the supervision of the trader) trader works more
efficiently at about 300 times, and taking into account the reduction of trade risk, the rate can increase efficiency
by 5-10 times (depending on the size of the initial capital in the accounts of the trader).
In the implementation stage "Systems network control, global reporting and security ASH"
(MultiTerminal), through which can be centralized to notify the Comptroller of accounts (100 to 10 000), as
well as in-depth analysis of trade and create a common reporting. The system is also designed to protect accounts
from unauthorized or accidental interference with trade.
6.2. Comparative characteristics of competing firms.
Feature of competition in the market for hedge funds is:
15
16. 1) Lack of competition on the fact of trading strategies (especially on the global macro).
2) The competition is based on the yield and accumulated image stability.
Closest to the niche occupied by the business - a company Sac Capital Advisor, and "Renaissance
Technologies". They also form the basis of return on their automation systems. Profitability of these companies
below the stated yield hedge fund, but their advantage is the high image stability.
In addition to these facts, the market of hedge funds in attracting new investment is growing and
competitive services can be able to attract new investment clients without the need to adopt competing
companies.
6.3. SWOT-analysis of the company.
The positive impact The negative impact
Strengths (project properties, or the team, giving
Weaknesses (properties that weaken the
advantages over others in the industry):
project):
1. No need for a large staff to monitor tens of
1. Small group experiences in the creation of
The internal thousands of accounts.
international relations.
Environment 2. The desire to replenish the command of
2.Reassessment of their own knowledge
knowledge in the field of know-how, trade and the
regarding the understanding of the complexity
desire to explore new opportunities to attract
of financial models in global markets.
investment and Fin. lending.
Opportunities (external apparent factors that
provide additional opportunities to achieve the
Threats (external probable factors that can
objective):
complicate the achievement of the goal):
The external 1.Of great interest from private investors to
1. Crisis of global proportions that do not give
Environment profitable hedge funds.
fulfill duties with investors and counterparties.
2. Number investvlozheny in this area continues
2. Bankruptcy prime brokers.
to grow and has not yet reached the point of
stability.
16
17. 7. RISK-MANAGEMENT.
7.1. Trade (market) risk.
Typical errors of market hedge funds, for that matter, and other forms of investments is an attempt to
"predict" the direction of movement of assets (stocks, bonds and other instruments). Examples of this Amaranth
Advisors, Bailey Coates Cromwell Fund, Marin Capital, Aman Capital, Tiger Funds, Long-Term Capital
Management (for more on errors of these funds in the 13.8. Еrrors of hedge funds.). Wishful thinking - is to lose a
large part of the capital, as happened with these hedge funds. The strategy used by ASH, is not focused on a
specific orientation of the movement of assets, and is focused on making a profit from any direction of the tool
(long / short strategies).
In any automated system is a key parameter stability: the system should not be omitted due to the critical
difference between equity and balance. For this is the internal settings of protection:
1. Depending on the appearance of a lot of orders over a certain value includes tracking and, if the balance
of equity = - close all open and pending orders.
2. If the equity <20% balance included a ban on opening new units.
3. If the equity falls below the level of Risk by 10%, all open and pending orders are modified in such a
way that the closure orders on the take occurred at a lower price movement (ie, faster).
4. Profit. Another way to reduce the risks - it is shutting down all orders that are open for a specified
trading period, by the smooth end of trade. That is, after the termination of the period of active trading, the
system switches to the passive trade, when all blocks are installed gradually over two to three weeks, and closed
with a profit is the difference between equity and the balance goes smoothly to zero (no sagging balance sheet.)
5. The most basic way to protect against losses - a multi. The advantage of this moment is also the fact that
all other methods of protection work independently on each of the pairs. Also, the possibility of getting into a
price range in which the price of long-term "frozen" - is reduced by the amount of currency pairs.
6. Time-based strategy further reduces the possibility of entering orders in the long range of movement
rates and makes it possible to make a profit even if nizkovolatilnyh movements of the instrument.
7. The optimum ratio of active and passive trading. The study of this relation to the accounts of dozens
made it possible to optimize the trading periods and create an additional system of protection against trade risks.
During the entire cycle of trafficking used two trading strategies associated with a profit:
a) from the small movements of currencies for a short period (the ratio of transactions and profits with the
minimum - that is, a lot of deals and a small profit on each transaction), the chart - this is the first 7 days;
17
18. b) on the major movements for long periods (the ratio of transactions and the maximum profit - that deals a
little, and profits - large), the chart - from the 15th day of trading.
Thus, for 8 to 14 trading days there is an almost complete absence of transactions and profits associated
with the fact that the 1st strategy exhausted, and on the 2nd - they have not yet occurred.
As you know, the less the period of active trade, the less prone to risks of any account. Thus, without loss
of efficiency during the active trading can be reduced to terms of an effective trade strategy for the 1st or even
less, ie, 1 (one) working day. This method also allows the optimization of trading periods, ie reducing downtime
local yield, which is equivalent yield is not forgetting. Also, this method combined with the integrated software
of the bank (providing transaction between accounts) and Multiterminal ON ASH, will provide an opportunity to
use the unused funds in the accounts (in the transition from active to passive trading) due to the dynamic change
of number of instruments used and the size of the account.
8. Dynamic tracking the ratio equity / balance on all accounts and automatic transaction of funds between
accounts to maintain the same ratio.
9. Using arrays to determine the set rates for each of the accounts makes it possible to reduce the frequency
of tools consistently running accounts.
10. It is advisable to consider ways to prevent a margin call one or more accounts. If the equity falls, say to
80% on the balance, you need to add to the expense of 30-50% of the balance (this figure is set for the
stabilization fund). The necessity of this addition is calculated before the onset of the ASH price level when the
bill may be lost.
The reasons for the possible situations that require the use of the stabilization fund - a very long period of
movement within a wide range (not the price movement in a certain direction, namely a wide range of limitations,
output prices from a wide range brings equity to the balance sheet). Again, to achieve such conditions, all
previous methods of protection reduce the possibility of occurrence of such situations to insignificant interest.
Practice shows that the decrease in equity on the balance does not exceed 20-30% during the trading period.
7.2. Administrative (organizational) risk.
The main causes of administrative risks - it is an authority to manage risk and cash flow control in one
person. Because the proposed organizational model to manage a fund, these functions are separated, the
administration risks can be offset.
Negative example, when these positions were combined in one person, it's Nick Lisson, the collapse of one
of the most stable banks in the history of Britain - "Barings". His strategy is also indicative in the sense of lack of
hedging items - dependent on the movement of one instrument (he has put on the Nikkei 225 index) and the
dependence on the direction of the market (he has put on growth).
Hedge funds are secure and transparent investment business. As strange as it may sound for a weakly
regulated company in the Cayman Islands, but the credibility of qualified investors in such hedge funds are not
less than the usual regulated mutual funds. It is based on a system of independent contractors who work with
hedge fund on a commercial basis. In the hedge fund, that is, investment structures, including the management
company and the fund, there are at least five reputable auditors partners: the bank, custodian, administrator, prime
broker, auditors and legal counsel. Some contractors (eg, prime broker and custodian) interact with each other,
administrators monitor daily performance, liquidity, etc. In any action inconsistent control signal is input to
investors and partners, and with the active development of the institution of the independent risk management
falls under the control and the implementation of the strategy itself.
In other words, to organize a fraudulent scheme in this case is almost impossible. If you have any suspicion
of a counterparty leaves the scheme or simply initially refused to cooperate with the Fund, as the reputation it
more expensive. So if you intend to deceive investors to create the classic structure of a hedge fund simply does
not make sense.
7.3. Political and currency risks (the risks of incidence of the underlying assets).
The main factor of political risks are the risks of incidence of the underlying assets (this is the currency
which is the basic input / output in the accounts of the broker). There is a complete solution of such risks. At a
certain agreement with a broker can also provide additional revenue (amounting to 1-2% per month) due to the
implementation of protection against these risks.
18
19. Addressing these risks is to ensure that all open accounts at the broker had:
1) his base currency (7-10 major currencies separately on each of the accounts);
2) the opportunity at the end of the trading period change the base currency at the current rate for the
currency, which fell for the current period relative to the base currency of the course - see details in paragraph 4
of the Business Plan "strategy trades" (§ § Specification for Prime- broker).
Thus, the dynamic change in rates will provide additional revenue and hedging political risks. In the event
of a significant drop in one of the base currency for the current trading period by 15-20% relative to other
currencies, the availability of the list of underlying assets is 7.10 neutralizes rates drop to 1.5-2%, which did not
significantly affect the profitability of the trading period.
It is also possible the combination of this strategy using options to hedge the risk of incidence of the
underlying assets.
Another example of the indigenous influence political decisions on the exchange rate was demonstrated to
September 6, 2011 the Swiss Central Bank, when he tied the Swiss franc (CHF) to Euros (EUR) - see Fig. A.
Following this decision a couple EURSHF volatility was significantly reduced by the infusion method of the
Central Bank. Such a situation is not a risk for ASH, because:
1) is used to hedge a few dozen currency pairs;
2) The profitability of the system is extracted from both the volatile movements of currency pairs, and from
nizkovolatilnyh;
3) In the case of excess volatility of the spread of a share of the pair, it is automatically disconnected from
the trade and open positions are closed after a certain time.
An example of a situation on the currency markets - the uncertainty of investors about the course
"Eurodollar" in connection with the expected default dollars August 3, 2011 - see Fig. Two. As a result of this
uncertainty, there was steady movement of a wide range.This character of the currency pair exchange rate
movements is also not critical to thetrading strategy ASH:
1) In case of exceeding the threshold of one pair of lots, the remaining pairs compensatethe destabilization
(described in more detail in a trade risks);
2) The presence of time-strategy provides a minimum percentage of open orders fallinginto similar price
ranges.
19
20. 7.4. Natural, technical and production risks.
Natural, technical and operational risks - partial or complete destruction of office equipment, which is
designed to solve the trade problem. These risks are offset by the use of VPS-servers. The software (settings of
trading accounts) during the installation on office computers simultaneously duplicated on separate VPS-server.
In case of violation of the office for more than a few hours and the inability to transfer work to another office,
includes a remote trading terminals in the VPS-servers. This is a temporary solution to provide virtually
uninterrupted trade, regardless of the risks.
7.5. Technical risks.
Technical risks are associated with several factors: a violation of Internet communications, power failure,
equipment failure (PC).
Violation of Internet connection
Solved by the presence of all computers connected to two independent providers. In the event of power
failure - and an additional fixed-connection basis on each computer with a modem (telephone operator).
Violation of the power
In order to prevent short-term (up to 2 to 4 hours) of power outages to trade should be used laptops. For
long trips should be provided for equipment (generator) to maintain power for a few days.
Breakdown of equipment (PC)
Solved with the help of preset settings for all accounts on one server. In the event of failure of one of the
computers efficiently incorporated into the same trading account on the server.
Note: in order to verify the degree of dependence ASH-fault connection, power failure, equipment failure
due to a run for nearly a month on the principle - the power is only a third of the total trading time. The results are
as follows (see picture):
1. Disconnections hardly affected the balance of growth trends. That is, special subsidence is observed
2. The growth of the balance is less than planned for a given set of currencies and CFDs (65).
Conclusions: The system is stable with technical faults, but with lower profitability.
20
21. 7.6. Operational risk.
Examples of professionalism in the actions of traders can lead to significant losses, because the use of
automated trading with ASH and multiterminalnogo software system will provide a significant proportion of
protection against these risks (for details see Section 7 of the Business Plan, "The advantages over manual trading
ASH").
Historical examples of professionalism in the actions of traders:
London's FTSE100 index fell 2%, when a trader is one of the brokers sold the shares for 300 million
pounds instead of 30 million
A more comical story is connected with Salomon Brothers, now part of Citigroup. In 1998, a trader of the
company unwittingly sold the French government bonds worth 850 million pounds. The thing is that he
inadvertently leaned against the keyboard, thus pushing some "unnecessary" buttons.
7.7. Legal risks and risks of conflict of interest.
The primary brokers, which typically interact with hedge funds, have a high reputation. Nevertheless, the
risk of nonpayment by the broker of positive trading results and solve a technical and legal methods.
Techniques (warning and monitoring):
1) Connected, the terminal hangs.
Short breaks connection to the server are reflected in the results of trade with ASH only indirectly, if they
are limited to a few minutes. These cliffs are mainly affected the speed of updating currency pairs (a change of
control for them). Low speed operation can significantly affect profitability.
2) Submission of quotations of poor quality: this includes an increase in spreads is not provided for in the
contract, gaps (gaps between the candles), candle drawing nonexistent size of several hundred items, etc.
The size of gaps, drawing candle does not have any significant effect on the account, can only boost their
profits. Growth spread above a certain value to the minimum can be fixed with the help of ASH and inform the
broker of non-compliance of contract (in which the prescribed limits of these changes). For candles, having a size
above a certain value is the control for all currency pairs with a periodicity of 7-15 seconds, which is the
appearance of a candle can immediately track and in the absence of connection between these bursts with real
quotations (including by comparing quotes from other brokers) may apply to the broker for an explanation.
3) Third party broker closes the open orders.
21
22. In the case of closing the deal were not from the terminal, ASH tracks incident intervention.
Legal techniques
A properly executed contractual relationship with the broker that clearly specified trading terms
(commission, a range of changes in spreads, etc.) as well as the choice of a broker who is not tarnished its "name"
of fraud, minimize legal risks. If you have any problems with the West by the broker can make a complaint to the
Commission Commodity Futures Trading http://www.cftc.gov/ or the National Futures Association
http://www.nfa.futures.org/. If there is evidence of violation of its obligations broker may fines million.
Examples of recent incidents are quite revealing:
Alpari Ltd Company in the spring of 2010 was fined by the Financial Services UK - FSA to 140,000 pounds
for the lack of control by the company for money laundering by their clients.
Brokerage company BroCo Investments was fined by the Securities and Exchange Commission USA (SEC)
in the amount of $ 1.3 million. Russian broker accused of manipulating the quotes, and breaking into customer
accounts.
The use of market access through the prime broker, who often value their prestige, to avoid legal risks, and
control all elements of the trade with ASH - to reduce those risks to zero.
7.8. Liquidity risk.
Risk arising from the sale of an existing asset. This type of risk means the inability to quickly implement an
asset without significantly reducing the cost. The main measure of market liquidity is the difference between the
purchase and sale (the so-called spread).The value of the spread depends on the volume of trading financial asset
in the market.The smaller the value of trading volume, the greater the spread. Therefore, before starting to trade
in a test mode ASH excludes trades less liquid instruments (currency pairs and CFD): all of the tools that have
spread in relation to the average daily volatility of the above 1:10 (1:7 for example) are excluded from the trade
as ineffective. The same thing happens in the trading process - a tool can be excluded from active trading after the
start of the trading account.
7.9. Transaction costs.
Access to different markets (in different countries) by PRIME-broker (and legal guardians and powers
custodian bank), thereby reducing transaction costs and difficulties associated with the need to monitor multiple
accounts, etc.
7.10. Counterparty risk.
After the bankruptcy of Lehman Brothers investors realized that no one, even the largest prime broker, is
not protected from bankruptcy, and began to actively put their money in different primary brokers, reducing the
risk of the counterparty.
There are several reasons for the active use of multiple prime brokers:
• First, the financial crisis and the bankruptcy of Lehman Brothers have set the task of hedge funds to
diversify counterparty risk: it is clear that if you have multiple primary broker, you can quickly share and
transfer their assets between them.
• Second, for those hedge funds that need to securities lending by their primary brokers, the presence of
multiple primary means brokers can access various sources of borrowing, covering the necessary range of
securities with a choice of "best" price.
• Third, an additional primary brokers allow you to use additional sources of funding, thereby reducing the
risk of financing.
• Fourth, the "new" prime brokers may offer some services which did not have the "old" or that broker
provided on less favorable terms.
To date, large hedge funds have a 5 to 10 primary brokers. Therefore, the original term "primary broker»
(prime broker), in the sense of principal, principal, sole (meaning primary broker), no longer reflects its original
essence, since hedge funds are working with multiple prime brokers.
Thus, to solve the counterparty risk, cooperation with several prime brokers.
22
23. 8. THE ORGANIZATION OF FOREIGN ECONOMIC
ACTIVITY OF THE FIRM
8.1. Organizational maintenance of international relations.
The output of transnational markets is through technological cooperation with the Prime Broker.
Technical requirements for Prime-broker:
1. A sufficient number of instruments for hedging (over 50). Trading tools that can be used to hedge:
• currency pairs - all except for those that do not meet the principles of trading strategies, most often
spread with commensurate volatility pairs. In case of failure ASH currency pair, it is a transition into the
category of passive trade until the close of all orders (after the trade is automatically terminated on the
inefficient instrument).
• CFD (Contracts For Difference - CFDs): CFD INDICES (major stock indexes), CFD GRAINS (wheat),
CFD MEATS (meat and poultry), CFD SOFTS (coffee, cocoa), CFD CTOCK (U.S. stocks) CFD ENERGIES
(energy: oil, petrol), CFD BOND (government bonds), CFD RUS (Russian stocks), CFD METALS (metal).
• Futures (futures) - provided that the duration of the futures contract exceeds the trading period.
Note: The technical requirements of efficiency, determined automatically apply to all instruments. The
number used on one account and the instruments depends on the speed of the terminal broker - the smaller
requotes, breaks communication with the server, the more it makes sense to use the tools.
2. Minimum lot size - 0.01 (no more), the maximum lot - 10 (no less), or in a ratio of 1:1000. For the CFD -
minimum lot may be 0.1.
3. The number of open and pending orders - no less than 200. Minimum number associated with the
number of CMV-used tools, such as 50 instruments: 50h8 = 400 (orders).
4. Terminal "MetaTrader-4" of "MetaQuotes Software Corp."
Five. Ability to set countervailing orders (long / short).
6. The size of the shoulder 1:100-1:500. Can trade with any shoulder, but the effectiveness of the strategy
(profitability) depends on the size of the shoulder. The minimum level of leverage for the most efficient trade is
automatically determined for each instrument, and may be issued in the form of a tabular report on the stage of
checking the validity of trading conditions.
7. The presence of an automatic (configurable) of transactions between the accounts of the investment pool.
The system features:
a) automatic transactions between trading and reserve (stabilization) accounts managed by the signals
emanating from Multiterminal ASH;
b) Management of foreign exchange operations on the SPOT-market stabilization fund by using the system
Reuters SPOT / FWDS Matching, connected to the "ASH-Arbitrage."
8.2. Economic support of international relations.
Custodian will charge a fee (per transaction) between 0.05% and 0.10% of total NAV or transactional
basis. It can also be set a minimum threshold of payment.
Prime brokers also establishes a commission depending on the size of the order.
23
24. 9. THE STRATEGY OF THE MARKETING PLAN.
9.1. The overall marketing strategy.
Short term plans:
1-3 months: the creation of legal and financial framework for trade in global markets.
3-15 months: the accumulation of good trading history.
Medium-term plans:
1-3 years: audit the results of trade, bringing the results of additional investment from private investors.
Long-term plans:
3-10 years: the expansion of effective strategies for different markets. Attracting investment from
institutional investors, banks and pension funds.
9.2. Pricing.
In world practice, set fees for the services of a hedge fund. They consist of an entrance fee, management
fee and the fee for the result.
Entry fee - can vary up to 1% for other investors and is required to complete necessary legal documents
and additional office equipment technology.
Management fee (% of capital) - 1-2% of the managed capital (before the trading period) and divided
between the Fund and the Management Company.
All costs for contractors (bank-custodian, prime broker, administrator, auditor and legal counsel) are
usually borne by the fund. S / n, office and other expenses (including an investment adviser) associated with the
management takes care of the Management Company.
Success Fee (20% of profit) - paid monthly by the Management Company on the fact of making a profit.
Remuneration for the result can be withdrawn from your account without interrupting trade, as a percentage of
the removal of 1-2% the size of the account balance does not affect the trade and would not require
reconfiguration of Automatic hedging.
9.3. Tactics of implementation services to investors.
1. With the potential investor held a presentation of services provided by the hedge fund and its
counterparties.
2. The investor signs the investment memorandum (Offering memorandum), and, if necessary, the
insurance risks of trading with counterparties. Investment memorandum is signed for one year and may
be extended.
3. After that transaction in the investment accounts of the hedge fund custodian bank.
4. Through the system of foreign exchange transactions received by Reuters Investment divided
by 10 or more accounts with different base currencies.
5. Further, the Management Company account connects to the trading system, Prime-broker or
multiple brokers according to Prime-entry plan for investment (displayed in the Investment
Memorandum).
6. In any moment of shopping can be displayed from the sale of investments. In this case, the
possible loss an investor incurs. In addition, the investor pays a fee for CC lost profits amounting to 5%
of the investment.
7. If an investor wishes to stop the trade in accordance with the investment strategy, its funds for 4
months will be refunded an amount equal to the embedding.
24
25. 8. In a year when investment memorandum will not be renewed, the investor returns the sum of
investment + income received after deduction of all expenses: entry fee, management fee, the fee for the
result.
9. During the year the investor's costs (management fees and compensation for the results) are
taken from the returns received from investment.
9.4. Warranty Policy: Methods of Insurance
Hedge-fund may use internal and external resources of insurance transactions.
Internal resources:
1. The use of the stabilization fund (from 10 to 30% depending on the decision of the investor).
2. Using a complex dynamic changes in the balance of accounts (depending on changes in equity on
account of the investment pool).
External Resources:
1. Insurance risks of trading companies with contractors. For example, "Miller Insurance Services Limited
2012" http://www.miller-insurance.com/specialist_areas/professional_executive_and_financial_risks.aspx
insures commercial risk.
2. The formation of the legal elements of the guaranteed hedge fund (GHF).
Most of the guaranteed funds are arranged on the same principle: the part of the invested funds used to
purchase guarantees the return of investment capital, and the remaining funds are invested to produce income (see
the figure.). Also, for security in the GHF used options strategies.
9.5. The point of payback.
The hedge fund is not a manufacturing company, for break-even point can not be calculated for him. But
the point of the project payback (when profits exceed the projectcosts are spent) depends on the size of the initial
investment.
Take, for example: 400 thousand, a million and 10 million:
MONTH 0 1 2 3 4 5
BANALCE (at the end of month) 400000 372312 386352 400932 416073 431796
one-time Registration of hedge fund -35000 0 0 0 0 0
costs
Office costs -5800 0 0 0 0 0
variable costs Management costs -4000 -3723 -3864 -4009 -4161 -4318
Transaction and other costs -355 -372 -386 -401 -416 -432
fixed costs Office costs -262 -262 -262 -262 -262 -262
Balance (at the beginning of 354583 367955 381840 396260 411234 426784
month)
25
27. 10000000
2500000
2000000
1500000
1000000 10000000
500000
0
1 2 3 4 5
The point of return for the investment amount in nearly 10 million comes in the 1st month of trading.
At the start of trading depends on the speed of processing of legal issues:
1) Making jur. documents the hedge fund.
2) Formation of external economic relations with the prime brokers.
The possibility of removal of funds from trading accounts occurs within 1.5-2 months fromthe start of
trading. Thus an investment of between 1 million and above give coherencetime of return and trading strategies
of the system.
The point of return to investors, investing in an already-formed hedge fund, is 4 monthssince the launch of
investment in trade (according to the investment memorandum.)
27
28. 10. ORGANIZATION AND MANAGEMENT PLAN.
10.1. Business calendar: the creation of a hedge fund. Gantt chart.
Months 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Weeks 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
Manufacturing matters:
1. Rent an office.
2.Connecting to the office of the alarm system.
3.Installation of office equipment, furniture and
stationary power systems.
4.Connecting to a 3rd independent providers of
Internet-Network.
5.Connecting to the Reuters system.
Questions for personnel:
1.A set of qualified personnel.
2.Training of staff to the principles of monitoring and
compliance reporting ASH.
3.Training work on Reuters.
Information Questions:
1. Setting up "the system network control, global
reporting and security ASH".
2.Setting up interaction with the software ASH prime
broker and Reuters.
Legal Questions:
1.Legal registration of hedge fund and management
company (see section 13.4).
2.Registration foreign economic relations and
contracts with prime brokers, auditors and
administrators.
3.Audit.
Trading:
1. Realization trade operations.
2.Reporting.
28
29. 10.2. The organizational structure of hedge fund counterparties and services.
INVESTMENT
(money, valuable securities, other assets)
INVESTMENT MANAGER CUSTODIAN BANK BOARD OF DIRECTORS
(operations) (deposit of assets)
AUDITOR HEDGE FUND INVESTMENT ADVISER
ADMINISTRATOR
(accounting) PRIME BROKER LEGAL ADVISOR
(access to markets, trading
platforms, loan to the fund)
SUB-BROKER 1 SUB-BROKER 2
THE MARKET
(stocks, bonds, futures, currencies and other instruments)
It is quite possible to do a simple structure, in some cases, for example, there are funds for a limited of
number of investors who may not be so cumbersome. Also features custodian bank often does Prime Broker.
The sponsor / owner of the fund
Sponsor, often a major participant in the hedge fund is its creator. As a parent he becomes the primary or
sole holder of voting shares through which control is exercised over the activities of the board of directors.
Voting shares, as a rule, do not give the holder the right to a share of the profits derived from investment of the
fund. In addition, the sponsor may be one of the investors and as such holds equity stakes in the form of non-
voting shares that are entitled to profit participation fund.
Board of directors
On the board of directors of hedge fund charged with the function of control of all aspects of its activities.
The Board of Directors oversees the activities of the investment manager and other professional firms providing
services to the fund. Its mission also includes conflict resolution, when the shareholders' interests are in conflict
with the interests of the investment manager. The Board of Directors approves the remuneration of the manager,
appoints independent auditors, as well as selects the key agents that will serve the hedge fund. Although these
duties are often represented a mere formality, and ideally the board of directors of hedge fund shall consist of the
most respected professionals in the financial or legal field, whose task is to prevent fraud or illegal acts on the
part of managers. Board members are personally liable up to the criminal, for the observance of the principles and
rules of the fund, stated in the investment memorandum.
The board of directors and may include the owner fund.
Investment Manager
Investment Manager is a management company, which uses the funds accumulated in hedge-fund
investment, according to investment strategy, taking concrete investment decisions for its implementation, as well
as taking the lead in the operating performance of the fund.
Typically, hedge fund manager is the owner or part owner, and manages its own funds.In the hedge fund
industry adopted a fee structure 2/20, that is, the management company receives a percentage of fund assets for
the management (Management Fee, typically 2%) and the percentage of the result (Success Fee, usually 20%).
Opening and maintenance fund is quite expensive, so the Management Fee is usually completely spent on
registration fees of all contractors, office personnel, marketing, etc.
Investment adviser
Attracts investments in hedge fund and interacts with customers. Hedge funds voluntarily provide
information about their activities to specialized news agencies, as they are forbidden to advertise themselves
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30. among ordinary investors. Qualified investors use to search for and selection of hedge funds such sources as the
"Bloomberg", specialized databases and platforms such as Hedgefund.net largest investment banks.
Legal Consultant
Sometimes they can be an administrator. Responsibilities consist of a consultant to comply with the
requirements of regulators, contracts with the investors and the decision of other legal issues.
Bank-Custodian
In the role of hedge fund custodian should serve a large bank with a good reputation in the function of
which is, above all, keeping the assets of the investor, ie, securities and cash. In some cases the custodian does
not have them in reality, it just takes them to the balance of a central depository system of the country in which
located. Custodian may also engage in conduct and execution of transactions, but this function is actually more
often goes to the primary broker. Custodian also prepares reports on the transactions that pass through the fund,
and sometimes it can check compliance with investment policy manager stated in the charter of the fund
objectives.
Administrator
The main function of an administrator is to determine the fund's net asset value (net asset value - NAV).
Calculation of NAV, as a rule, the date of subscription for shares of the Fund or the repayment, which usually
falls on the first working day of each month or the next day at regular intervals, usually within a month. For some
funds with greater liquidity (eg, CTA) NAV calculation is carried out weekly and even daily. Essentially, the
activities of the administrator is to determine the value of the Fund regardless of the investment manager. Most
administrators also perform several other functions, including preparation of financial statements, paying bills,
sending reports to shareholders, the coordination of investor relations, etc. Often, the administrator assumes the
tasks of the paying agent, which holds the subscription for shares of stock and repay them, and distributes profits
to shareholders. Administrators are usually licensed by local regulators, and are responsible for their work.
Auditor
The auditor shall audit the financial statements of fund accounting rules and financial regulations.
Typically, the fund conducts an audit of its accounts on an annual basis. The presence of an auditor - a necessary
condition of the hedge fund as an auditor without other agents, and service companies are unlikely to agree to
serve. Availability of audit as a prerequisite for attracting investment.
In the event of an audit - it may be such famous companies such as KPMG, Deloitte, etc.
For example, a global company "Ernst & Young" (http://www.ey.com) carries out an audit of financial
statements in accordance with International Financial Reporting Standards (IFRS) and national standards (US
GAAP, the Russian Accounting Principles).
The prime broker
If conventional brokers simply spend one-off transactions of hedge funds, prime broker takes a much
broader set of functions. In the role of prime broker acts as a rule, an investment bank with a worldwide
reputation (Morgan Stanley, Goldman Sachs, Merrill Lynch, Bear Stearns). Since the structure of such a bank and
brokerage company located, and trading unit, and operating office and management company, it is able to provide
hedge funds at the same time a range of services. Thus, the brokerage division conducts transactions of hedge
fund or redirects them through a broker, which selects hedge fund, and then closes the deal and will report to the
custodian of it. In addition, the primary agent and he often acts as a custodian. The management company may
provide prime broker hedge-fund shares in debt. In addition, the primary broker provides hedge fund leverage.
10.3. Summary of key executives.
KSENDZOV ОLEKSANDR
30
31. 28/09/1977, married, two daughters.
Experience in building software:
2000-2006. Creating a system
morfosinteza the Russian language.
Development and registration of
copyright in the program "A collection
of texts and illustrations."
Licensingauthoring program (SBU
License and License Min.ekonomiki
Ukraine).
2006-2011. Development of a
mathematical model of the global market laws. Creating"automatically hedging" strategy and
management, providing risk-free trading in global markets.
Tasks in the project: investment manager.
TSURKAN MAKSYM
08/07/1986 unmarried.
Education: Southern Branch «Crimean
Agrotechnological University" National
Agrarian University, Faculty of accounting
profession - accounting and auditing. Courses
on management of tourist business. Courses on
Internet trading.
Experience:
2007-2008. Internship in England.
2008. SC "Crimean Wine House» Ltd.
«L'EMPIRE DU VIN».
Manager to manage material flows of materials main production warehouse.
2009. LLC "Kaczynski." Organization of accounting. Development of standards for wages.
2010-2011. Commodity-accountant jewelry network, "Silver Star" (UKRZOLOTO)
31
32. Duties: Work in 1S 8.2 "Management Accounting": recording and analysis of the TMC, the primary
accounting, record keeping, discount programs, interaction with various parts of the central office
and the entire chain of stores "Silver Star".
2011-2012. The official representative of the broker "InstaForex".
General skills: driving license categories A, B, C, English (fluent), Ukrainian (fluent), 1C:
Accounting 8.2.
Tasks in the project: Investment Advisor.
10.4. Other investors.
Investors put their money into the fund in order to make a profit. Usually they do not have the right
to vote (voting shares), and vote with their money, or bringing them to the fund or taking back.
10.5. Duties of directors and staff of the management company.
Investment Manager:
1. Alignment with the investor some points of the memorandum of the investment: a plan of capital input
into the scheme hedged trade, inventory hedging instruments (currency pairs, etc.), the optimal size of
the stabilization fund.
2. Setting up a stabilization fund management.
3. Organization of round the clock monitoring of trading activities in the accounts of investors, and
analysis of the changes in the accounts of the investment pool.
4. Sending a test report on the accounts of the investor of the investment pool.
5. Trading decisions and setting ASH under trading conditions the broker.
6. Personnel matters.
Investment Advisor:
1. Attracting investment / loan to the fund.
2. Dealing with financial issues of interaction with the counterparties: prime brokers, custodian bank, the
administrator and the auditors.
3. Bookkeeping Management Company.
Legal Counsel:
1. Monitoring compliance with the requirements of regulators.
2. The conclusion of contracts with investors.
3. The decision of legal issues of cooperation with banks, prime brokers, and others.
Programmer:
1. Configuration and control of serviceability of the equipment and software.
2. Setting up "The system network control, global reporting and security ASH".
3. Setting up interaction with the software ASH prime broker and Reuters.
4. Providing information security management company, designing and creating complex information
security systems (KSZI) for the OID (object information activities), writing a threat model (description of the
channel information leaks, and their elimination).
Supervisors (4 people): the control and maintenance of Multiterminal ASH.
1. Undergo preliminary training on demo accounts.
2. Lead round the clock monitoring of accounts.
3. Trading decisions are not taken. Report a need for intervention in trade investment manager.
4. Control of constant power and Internet connections.
5. Monitoring the effectiveness of interaction with the software ASH prime broker.
10.6. Hiring and bonus system.
Hiring of staff will be through the media (newspapers), as well as with the "Employment Center".
The system of bonuses and changes in employees' salaries will be commensurate increase in the
net profitability of the company.
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33. 11. INVESTMENT PLAN: STRATEGY AND SOURCES OF
FUNDING.
11.1 Sources of funding.
Potential investors of hedge funds:
• high net worth individuals;
• financial advisors;
• wealth-management offices and RIAs;
• single- and multi-family offices;
• fund of hedge funds;
• corporations;
• foundations and endowments;
• pensions;
• sub-advisory relationships;
• banks.
Consider for example the ability to attract capital in a hedge fund formed by the leading European
banks:
Swiss bank UBS
Under the direction of Wealth Management Bank offers wealthy clients with services to build an
investment portfolio, which may include investments in hedge funds. The website of the bank the possibility of
such investments are as follows:
"Hedge funds can generate an attractive return over the long term. They have a relatively modest level of
volatility in the capital and most of them have the means to produce positive results even in falling markets. In
addition, hedge funds portfolio confer resistance and improve its performance in the ratio yield / risk. "
The Management Company UBS Global Asset Management A & Q is recognized as one of the largest
investors in the shares of hedge funds.
Swiss investment bank Credit Suisse
The Bank offers its customers a wide range of services to build an investment portfolio, built on the basis
of the strategies of hedge funds. Credit Suisse has established links with many hedge funds and can offer its
customers as investments in single hedge funds, and multiple strategies of hedge funds.
Credit Suisse calculates and publishes its own index of hedge funds, Credit Suisse / Tremont. The bank
allows customers to build an investment portfolio based on its index.(Https://www.credit-
suisse.com/us/hedge_strategies/en/index.jsp )
Credit Suisse is the largest investor in hedge funds and attempts to expand its business through the
acquisition of investment companies, managers of hedge funds (http://old.k2kapital.com/news/fin/696365.html ).
French investment banking group Crédit Agricole
In August 2009, the investment arm of the group, Crédit Agricole Asset Management (Caam), has a
running fund of hedge funds of $ 14 billion, said it was going to jump on the platform of managed accounts.
(Http://www.hfmweek.com/news/255892/crdit-agricole-turns-to-managed-accounts.html )
HSBC London
HSBC also provides services to wealthy clients to build portfolios based on alternative investment
instruments, including hedge funds. The bank and hedge funds are among the major players in this market. The
Management Company HSBC Private Bank is recognized as one of the largest investors in the shares of hedge
funds. HSBC also offers prime brokerage for hedge funds.
(Http://www.hsbcprivatebank.com/services/alternative-investments.html)
French Societe Generale
In the area of private banking offers customers a portfolio of services based on the formation of hedge
funds. (Http://www.privatebanking.societegenerale.com/our-expertise/hedge-funds.html )
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34. Irish Anglo Irish Bank
The direction of the bank's private banking offers to invest in alternative investments, including, and hedge
funds.
(Http://www.angloirishbank.ie/Wealth_Management/Investment_Services/ ).
11.2. The strategy of attracting funding.
In order to attract additional investment in a hedge fund, you must earn a "historical performance". An
audit of the company (Die Dillegence) at the end of the first reporting period (1 year), as well as advertising
makes it possible to attract the attention of investors on the basis of historical data.
Hedge-Fund may advertise themselves in specialized media outlets, as advertising among ordinary
investors is prohibited. Qualified investors use to search for and selection of hedge funds such sources as the
"Bloomberg", specialized databases and platforms such as Hedgefund.net largest investment banks.
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