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How to Invest in Hedge Funds as a Retail Investor
The Top 5 Hedge Funds You Need to Know About
Hedge funds are a unique investment vehicle designed to generate market-beating returns. They do this by utilizing a specific strategy or taking additional risks—often involving complex tools such as derivatives, leveraged mergers and acquisitions, quantitative models, and short-selling securities. In this article, we’ve defined the top 5 hedge funds you need to know about as an investor
According to the Financial Times, most hedge funds fail, with the average lifespan sitting at about five years. Hedge funds charge far above average fees (often as much as 2% of their assets under management plus a performance fee), and yet, for the last decade, many have failed to outperform the US market indices.
That being said, some of the best hedge funds have outperformed the market multiple years, including the inevitable bear markets. And while it’s important to remember that past performance does not guarantee future results, hedge funds with strong historic performance over long periods of time can be a good litmus test when choosing to invest.
Today, we’re profiling the top 5 hedge funds with large AUMs and notably strong historic returns over a long period of time.
Renaissance Technologies
Renaissance is a series of hedge funds started by mathematician (and billionaire) Jim Simons. Since 1988, their global funds have used complex mathematical models to execute mostly automated trades. Therefore, it is predominantly a quantitative fund designed to use computing power to predict future price changes in financial markets.
So far, it’s been incredibly successful, with the leading fund ‘Medallion’ generating over one hundred billion dollars (and a 39% average net return after fees 1988-2018),[1] making Simons one of the wealthiest people in the world. Interestingly, however, the Medallion fund is closed to external investors, and there is little transparency in its operations.
Renaissance runs three public funds, including the well-regarded Renaissance Institutional Equities Fund (RIEF). The public funds are not without controversy, as they have trailed the secretive private fund during critical periods. Nonetheless, Renaissance has been a top-class hedge fund that has a history of nearly unmatched success.
Millennium Management
Millennium’s co-founder and CEO, Israel Englander, was in the headlines recently as the highest-earning hedge fund manager of 2020. In most circumstances, you don’t collect massive paychecks unless the hedge fund has performed. Millennium Management offers many strategies under their hedge fund stable and has over $48 billion in assets under management (AUM).
The fund offers a unique structure, employing 265 portfolio management teams (almost 3,000 individuals) under a ‘platform model’ of investing. Each portfolio manager is allocated money to deploy using their specific trading strategy. Their funds are highly data-driven and the average company in the portfolio displays an impressive average Uniform return on assets (ROA) at 13% per the companies 2020 Q4 13-F, according to Valens Research. With this history of performance and stability, it’s no wonder Millennium is one of the top hedge funds.
Two Sigma Investments
Compared to Renaissance and Millennium, Two Sigma is a relatively young hedge fund— founded in 2001 by John Overdeck, David Siegel, and Mark Pickard. Primarily, Two Sigma deploys a quantitative strategy, using machine learning and artificial intelligence to drive its trading strategies.
A look at the fund’s website immediately highlights their differentiation from the average hedge fund – 60% of their employees come from non-financial backgrounds, and they refer to themselves as scientists (with over 200 PhDs), applying their expertise to a number of financial services sectors. With a rapidly growing AUM over $58 billion as of the writing of this piece, the quantitative strategies of Two Sigma have certainly been a popular investment.
AQR Capital
AQR stands for ‘Applied Quantitative Research’ (we can definitely see a theme emerging across the world’s top hedge funds). As an asset manager, AQR is one of the largest, with over $140 billion AUM as of 2020 (according to Investopedia). It’s best known for its alternative investment funds, which are designed to provide investors exposure to a portfolio with low correlations with the broader equity market, focusing on diversification.
AQR is heavily linked to prestigious academic institutions, with over half of AQR employees holding advanced degrees, including 52 with PhDs. They have a partnership with the London Business School as well as sponsoring the Top Finance Graduate Award at Copenhagen Business School.
Bridgewater Associates
Bridgewater has been an extremely influential hedge fund in the world of financial markets over the last four decades. Founded in 1975 by famed hedge fund manager Ray Dalio, the fund mainly deals in macro-themed investments, making plays on economic trends such as currency, GDP, and inflation.
Interestingly, Dalio cites their unique corporate culture as one of the main reasons for their fund and corporate success. Employees are encouraged to be critical and completely transparent with each other, having almost all meetings recorded and freely available for view within the firm.
Bridgewater was the first to offer important strategies, such as absolute return products, currency overlays, and alpha and beta separation. They now have over 1,500 employees and $138 billion AUM across all their funds in May 2021, according to Investopedia.
How to access top hedge funds as a retail investor
Accessing an investment in a hedge fund is best done with the help of knowledgeable advisors that know the industry inside and out. Investing in quality hedge funds as a retail investor is more accessible than ever before.
HUDSONPOINT Capital provides qualified retail investors with the platform they need to access a wide range of alternative investment opportunities, including some the best hedge funds. By pooling investor’s funds, HUDSONPOINT can help you access unique hedge funds as part of your broader financial strategy.’
If you’re interested in adding Hedge Funds to your portfolio, please schedule a call to learn more about what we have available right now.
There can be no assurance that any hedge fund will achieve its investment objectives. There exists a possibility that an investor could suffer a substantial or total loss as a result of an investment. Prospective investors should be aware of the substantial risks of investing in any hedge fund and must, either individually or together with his advisors, have the financial sophistication and expertise to evaluate the merits and risks of investing.
This is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation of any products or services. Opinions are subject to change with market conditions. The views and strategies may not be suitable for all investors and are not intended to be relied on for legal or tax advice.
Securities offered through National Securities Corporation Member FINRA/SIPC
— ‘The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution’ by Gregory Zuckerman 2019
