Research Assessments

Career/Industry Forecast

Job Title: Hedge Fund Management

Job Description: The duties of hedge fund managers include making investment decisions for private investors, liquidity needs, and fees. You must be skilled at managing finance with knowledge of the financial market as well as math.

Training, Education, and Certification: In order to increase your chances of becoming a hedge fund manager, you should obtain a Bachelors of Science in Finance and a Masters in Business Administration as well as a Chartered Financial Analyst certification.

College or Post High School Programs and Recommended High School Courses: High level math classes and computer science programs as well as engineering. Some colleges offer a financial engineering program.

National and Local Professional Organizations: Ackerman Capital Management LLC & Alphaengine Global Investment Solution LLC

Related Areas: Financial analyst, private equity associate, financial analyst, compliance analyst

Salary: Hedge fund management is not an entry level position but one can work their way up. An entry level salary can range from $50,000-$70,000. With 10 years of experience, one can make as much as $285,000 with the top hedge fund managers making millions or even billions in compensation.

Career Outlook: 6%-9%. This job will grow nationwide.

Terminology: Liquidity, investment portfolio, 2 & 20, assets under management, gate

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

21 September, 2022

Research Assessment 1

A hedge fund managers day starts early and will usually end later than everyone else. As a hedge fund manager, your day revolves around the opening and closing of the stock market. Not only does a hedge fund manager’s life involve mathematical and critical decision making skills, but a huge part of being a hedge fund manager is developing and maintaining good social relations with investors and brokers. Hedge fund managers must also be very organized in their portfolios, schedules, and models. Although hedge fund managers are similar to mutual fund and exchange-traded fund managers in the sense that they all handle investment portfolios, hedge funds are typically more high-risk and high-profile. Hedge fund managers make critical decisions to raise investment capital and rebalance investments to maintain a risk/reward ratio. Hedge fund managers are aided by analysts and traders.

As I was reading this article, I learned that just like corporate lawyers, hedge fund managers also have long work days. However, I realized that hedge fund managers are more involved socially than I expected which is an upside for me because I love interacting with other people. I am also very interested in how the stock market works and investing as a whole so I will further expand upon my research in the stock market and how to create an investment portfolio. I also learned that the risk of working as a hedge fund manager was not as bad as I thought because hedge fund managers have a team of analysts and traders who will aid in making these investment decisions.

This article mainly taught me how the life of a hedge fund manager goes so that I can learn the basics of what a hedge fund manager is. In my next research assessments and interviews, I will dive deeper into the stock market and investment portfolios because now I have an idea for my end of year product. I am especially looking forward to learning about the stock market because it is something that I have always been interested in, but I have never gotten to learn much about it.

Maverick, J. B. (2022, February 8). A day in the life of a hedge fund manager. Investopedia. Retrieved September 27, 2022, from https://www.investopedia.com/articles/professionals/112515/day-life-hedge-fund-manager.asp

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

3 October 2022

Research Assessment 2

An investment portfolio contains one’s assets, investments in stocks, bonds, and cash which can be used to accumulate wealth or to purchase a new home or retirement. The investments one chooses factor in risk to varying degrees in the form of fluctuations/asset price volatility and one’s time horizon–the length that one is willing to hold a stock for. There are three types of investment portfolios: conservative, aggressive, and moderate. A conservative investment portfolio is characterized by a short time horizon, low-risk investments, and/or need for liquidity which in turn creates a low-return but low-risk investment portfolio in order to maintain money and assets instead of growing money. On the other hand, an aggressive investment portfolio is characterized by a long time horizon, high-risk investments, and/or little to no need for liquidity. As a result of the high-risk investments, aggressive investors choose to allocate real estate, bonds, and floating-rate bank loans in order to supplement their income. A moderate investment portfolio is considered a balance between an aggressive and a conservative investment portfolio characterized by a 60/40 split between stocks and bonds.

In order to start an investment portfolio, one must maintain stable finances meaning good budgets, no debt, and an emergency fund. You should also plan ahead for important life events, such as vacations or buying a house. Next, you must decide your tolerance for risk meaning you must know how big of a risk you are willing to take for certain investments. A big part of this is your time horizon which is how long you’re willing to wait to sell a stock. The longer your time horizon the bigger the tolerance for risk. Then, you must choose your account type: employer-sponsored retirement account (401k), individual retirement account (IRA), or a taxable brokerage account. It’s suggested that you have two retirement accounts. A Roth IRA is exempt from taxes. Finally, you must choose your investment type: bonds, stocks, floating-rate loan banks, real estate, annuities, commodities, and cash. The picture below depicts the risk level of each type of investment with commodities being the highest risk (refer to figure 1.1).

You must then establish your strategic asset allocation (SAA), and it is very important to diversify your portfolio. The charts below depict the different types of SAAs (refer to figure 1.2).

This article introduced me to a plethora of new vocabulary that I need to become knowledgeable of in order to gain a true understanding of the topic. I was mainly introduced to the different types of investment approaches: aggressive, moderate, and conservative. In my next research assessment and interview assessment, I will further my knowledge of all the vocabulary words that are necessary to know. I also learned the basic fundamentals of creating an investment portfolio. In this research assessment, I also began to form a new part of my product in which I will create and display three different types of investment portfolios with three different approaches.

Investment portfolio: What it is and how to build a profitable one. Annuity.org. (n.d.). Retrieved October 4, 2022, from https://www.annuity.org/personal-finance/investing/how-to-build-an-investment-portfolio/

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

21 October 2022

Research Assessment 3

The structure of a hedge fund is composed of relationships between investors and the Investment Manager (IM) and//or the General Partner (GP). IMs are typically U.S. partnerships and LLCs. IMs receive around 2% of the hedge fund’s asset value as personnel compensation, fixed assets, etc. GPs are partnerships owned by the same members of the IM and receive 20% of the profits based on the performance of the master fund after fees and losses instead of charging management fees. Hedge funds tend to be more liquid than private equity funds, mutual funds, ETFs, bond funds, regulated investment companies, or real estate investment trusts. Liquidity refers to the ability of a company to raise money to pay off financial obligations like debt without having to take out loans or money from external sources. The two factors that determine liquidity is the ability to turn assets into cash to pay off liabilities which dictates short-term liquidity and debt capacity. The allocation of profits from the Master Fund can be sent to a domestic feeder (DF) or a foreign feeder (FF). A domestic feeder functions as a “pass-through entity” that is typically a limited partnership (LP) or a limited liability company (LLC) which are comprised of C Corporations that contains individual investors allowing all of the income to be taxable at the partnership level. An FF is a foreign corporation being treated as a corporation in which the place where the corporation is formed usually has low or no tax jurisdiction. Tax-exempt investors and foreign investors use the FF to make investments into the Master Fund allowing for foreign investors to be classified as dividends.

This document from the IRS details what hedge fund partnerships consist of between the IM and GP while also explaining the difference between private equity funds, mutual funds, ETFs, etc. The document also explains how hedge funds can be taxed through different means, such as a hedge fund choosing to be classified as a domestic feeder or a foreign feeder. Fortunately, my research in corporate law last year has aided me in better understanding the concepts of classification and taxation.

The document has allowed me to familiarize myself with how hedge funds are classified and taxed under business law. The knowledge that I have gained from this document will guide me in creating an investment portfolio for my product while also explaining the classification and taxation of a hedge fund. I can also make connections between my research in corporate law and hedge fund management to better explain my research and product.

LB&I International Practice Service Concept unit - IRS tax forms. (n.d.). Retrieved October 27, 2022, from https://www.irs.gov/pub/int_practice_units/jti_c_05_01_04_01.pdf

Dylan Pham

Ms. Dutton

Hedge Fund Management

10 November 2022

Research Assessment 4

The 2/20 rule concerns the fees of a hedge fund; 2% is taken from the Net Asset Value (NAV) and given to the manager(s) as the management fee while 20% of the increase of the NAV within a 12-month period is given to the manager(s) as the performance fee. Hurdle rates are essentially benchmarks for rates of return that managers must meet in order to charge performance fees; these are usually fixed in an agreement. Claw-back provisions prevent limited partners from being overcharged fees when accounting for losses. High-water marks are points in which investment funds have made the most money. Performance fees are given after the high-water mark is passed to ensure that managers make “new money.”

In relation to liquidity, hedge funds have restrictions and rules to prevent liquidity issues that could collapse a fund. Some hedge funds keep side pockets where they separate the liquid and illiquid investments and securities. Lock-up periods allow managers to withdraw from illiquid investments to ensure the protection of the portfolio as a whole. Soft lock-ups allow investors to withdraw in exchange for a redemption fee given to the manager. Rolling lock-ups allow investors to collect capital on a designated date, and if they do not withdraw their money on this date, they lose the right to claim and enter another lock-up period. Gate provisions prevent and limit the redeeming of capital during times of stress on the fund to prevent a forced liquidation. On the fund level, this may be set at 20% of the NAV and 25% of the capital on the investor level. Funds also set subscription frequencies to cap the number of investments one can make within a given time frame. Maximum leverage employed stops over-leveraging by preventing managers from borrowing more money than investors had initially committed in capital.

Through this research assessment, I was able to learn more about the structure of hedge fund management fees and liquidation. I wasn’t very familiar with liquidation, but this article helped me learn the terms and practices involved in liquidation within hedge funds. With my knowledge of liquidation and fees, I hope to be able to include some information about these concepts within my presentation and possibly my product. However, I may need to do a little more research on these terms in practice; possibly through my interviews.

“Hedge Fund Fees, Types, and Structures.” Preqin, https://www.preqin.com/academy/lesson-3-hedge-funds/hedge-fund-fees-types-and-structures.

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

11 November 2022

Research Assessment 5

The term leverage in hedge fund management concerns the method by which hedge funds use debt to increase returns on investments typically with higher risk profiles through underlying securities instead of putting in actual capital. Leverage tends to be used to increase returns with a higher risk, to improve low-risk investments, reduce risk, and to improve liquidity and lower transaction costs. Hedge funds decide how to use leverage based on their investment strategy. For example, a manager might want to increase return on investments at a higher risk if their confidence in their investment thesis is strong. A manager may want to decrease volatility in a long/short equity fund by taking short positions to offset long exposure. By taking positions in derivatives may benefit investors more than in the commodity market itself when it comes to liquidity. Shorting is the most common form of leverage which is when fund managers take securities that will sell short giving them money for their selection on the basis that they buy it back later. If the stock goes up, fund managers will lose money as short-selling a stock rides on the belief that a stock will drop for fund managers to buy back at a lower price. Managers can also use prime brokers to receive credit to buy assets in return for a fixed percentage of the fund’s cash, securities, and a fee. Fund managers can use derivatives like futures, forwards, options, and swaps; this is called implicit leverage.

There are three structures for hedge funds: master-feeder, side-by-side, and standalone. Master-feeder structures are used to pool capital from taxable, tax-exempt, and non US investors in one master fund which are incorporated in offshore tax-neutral areas like Bermuda. Tax-exempt and foreign investors utilize foreign feeder funds while taxable investors use domestic feeders to invest into the master fund. In a side-by-side structure, offshore structure follows the same strategy of the domestic fund. Investors typically invest in a limited partnership in a side-by-side structure. This structure tends to have drawbacks as fund managers must allocate trades to both the offshore and domestic fund. In a standalone structure, investors do not invest through a middle man. This is geared towards foreign investors and tax-exempt investors.

Through my research, I was able to learn what the term leverage is in hedge fund management which was previously a difficult subject to grasp. This article was especially helpful in learning what shorting is. I learned that hedge fund management is not just straight up making investments and allocating assets. It involves creative ways to make money through leverage. I may need to learn more about what securities and derivatives are which I will bring up in my next interview. I would like to include leverage into my product by using an example of shorting and taking positions in derivatives.

“Hedge Fund Fees, Types, and Structures.” Preqin, https://www.preqin.com/academy/lesson-3-hedge-funds/hedge-fund-fees-types-and-structures.

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

11 November 2022

Research Assessment 6

There are different types of hedge funds that cater to different types of investments and investment strategies. Commingled funds are shared funds under one account with money from multiple investors. Managed accounts are sub-advised by fund managers who can only make investment decisions for a single investor instead of pooling money from multiple sources. Managed accounts tend to be more specialized for investors which allows them to reduce risk from an unbalanced portfolio. Investors are also fully transparent to fund managers and can change their portfolios based on needs and beliefs. Because managed accounts are for one investor only, fund managers must dedicate time and resources to this single investor meaning that only the biggest investors can have managed accounts. A fund of one is similar to a managed account in the sense that it is a partnership between one investor and a fund manager. However, they are dissimilar in that the fund manager assumes full liability for the assets leaving investors with little to no governance over their investments made. Listed funds are listed and traded on the stock exchange. By putting a hedge fund on smaller stock exchanges, hedge funds must disclose asset values in annual reports which leads to more public opinion. Undertakings for Collective Investment in Transferable Securities (UCITS) are defined by their European based structure in which they increase investor protection by giving more transparency and by marketing to other investors in the EU. UCITS funds have to offer bi-weekly liquidity and monthly transparency reports that detail the investments made and the strategies used. In UCITS, underlying investments and leverage is regulated creating smaller returns but with smaller fees. Alternative mutual funds are also called “40 Act funds” that are classified as mutual funds. They are similar to UCITS in that they have hedge fund strategies despite being registered as a mutual fund. Alternative mutual funds must offer daily liquidity and periodic transparency documents. Also similar to UCITS there are restrictions on underlying investments and leverage caps.

Through my research, I was able to learn the many structures of hedge funds which has helped me understand terminology in previous research assessments and interviews. Moving forward, I would like to familiarize myself more with the different types of structures so that I may include them in my presentation and possibly my product as I hope to represent multiple types of hedge fund structures, types, and strategies to give a well rounded presentation of my research.

“Hedge Fund Fees, Types, and Structures.” Preqin, https://www.preqin.com/academy/lesson-3-hedge-funds/hedge-fund-fees-types-and-structures.

Dylan Pham

Ms. Dutton

ISM II: Hedge Fund Management

11 December 2022

The GameStop Phenomenon: Problem or Revolution?

At the height of the pandemic, investing became a “new” pastime for the general public as the market dipped allowing for more retail investors to arise along with zero-commission investing platforms like Robinhood. And in January 2021, a particular event in the stock market took place that had and will have ramifications for our markets and the policies that govern them. The GameStop phenomenon was painted by the media as a battle between retail investors versus institutional investors. The consequences of the GameStop phenomenon exposed the ethical and legal discrepancies in the field of investing as the regulations and practices were called into question by the public and the government, but the way that these regulations and practices will change is still a developing issue. This paper will analyze the causes of the GameStop incident and how this event will play a role in changing the landscape of investing or if it should change at all.

Amidst the COVID-19 and the pandemic, the use of low-cost/zero-comission investment platforms, such as Robinhood, led to the rise of retail investors. Retail investors are

non-institutional investors who exchange securities through savings, brokerages, or even retirement accounts. These types of investors typically have less spending money compared to institutional investors. Prior to January 2021, GameStop stocks, listed as GME on the New York Stock Exchange, were valued at just $17.25, but by January 28, it reached a record of $483. This was due to the collective action to invest into GME through the Reddit forum entitled “WallStreetBets.” However, GME was also on the receiving end of hedge fund managers taking short positions into the stock. Shorting is a form of leverage used by hedge funds in which they buy securities in a stock hoping for the stock to drop in order for them to buy the stock again later to sell back to the lenders letting hedge funds earn the difference. As GME shot up, institutional investors began to lose millions of dollars at a time. This led to the media’s portrayal of the situation as a “David and Goliath narrative, pitting a band of individual traders against Wall Street hedge funds that were betting against GameStop’s success” (Schulp). As a result of this financial phenomenon, the federal government, Securities Exchange Committee (SEC), and Financial Industry Regulatory Authority (FINRA) began to investigate to uncover unethical practices in order to redesign regulatory policies concerning retail and institutional investing.

The collective action taken by retail investors to invest into a stock that hedge funds took short-positions in was destined to create chaos and bitter tensions. As retail investors continued to pump money into GME to create a short-squeeze, hedge funds that were shorting were losing millions and millions of dollar by the minute. To make matters worse for institutional investors, many hedge funds would buy the stock again to bail out of their short positions which only drove the price up even more. But what enabled retail investors to have this much power over big time investors was a zero-commission investment platform ironically named Robinhood. GME continued to skyrocket until January 28-29 when Robinhood restricted its users from purchasing GME but allowed them to sell. This resulted in heated backlash from retail investors as they believe Robinhood, hedge funds, and the government conspired against them to save money for the elites (Malz). Soon after, The SEC and FINRA launched investigations looking for insider trading and market manipulation within WallStreetBets, Robinhood, Citadel Securities, and a payment-for-order-flow maker for Robinhood (Malz). However, many people tend to lean towards supporting the retail investors. According to Jennifer J. Schulp in her article entitled “GameStop and the Rise of Retail Trading,” the growing number of retail investors and their increasing percentage of investments in the stock market is a sign of a growing economy that will foster further innovation and growth for the nation. The GME phenomenon indicates the changing dynamic of investing in the U.S. as common people can stimulate the market while also growing their own wealth, and for this reason, the regulations for retail investing should not be changed (Schulp).

Another question was presented before the regulators, as Robinhood was accused of creating an addictive user interface that corrupted the impulsive decisions of retail investors. Gamification, in this context, is when investing is given game like aspects that allow the platform to become more addictive and promote more investing. Although gamification has increased involvement in the stock market, it has also increased “trading that is maladaptive or excessive” (Tierney). As a result, the SEC has asked the public for information about “regulatory interventions” in order to combat a deeper level of market manipulation as a result of gamification (Tierney). In a sense, Robinhood’s design is, either intentionally or not, taking advantage of eager retail investors who hope to increase their wealth. This calls into question whether gamification should be regulated and perceived as market manipulation as well as the regulation of retail investors.

Robinhood had been on the SEC’s and FINRA’s watchlist for some time as Robinhood had reported outages in service before during times of “high stock market volatility” (Malz). And being on center stage for the world to see, Robinhood restricted the purchase of GME which resulted in public and political scrutiny from retail investors and the regulators. However, the Reddit forum WallStreetBets was also receiving backlash from regulators and the government for possibly colluding in insider trading. Hearings were and are being held by the Financial Stability Oversight Council (FSOC), the House Financial Services, and the Senate Banking Committees with the SEC deciding on new regulatory guidelines for PFOF and retail investing apps (Malz). When it comes to hedge funds and short selling, the SEC is also considering more restrictions on their ability to take these positions. However, in order for market manipulation to be proven, “some sort of fraud or deception” must be found, and the SEC has found very little (Schulp). In addition, the SEC is investigating market manipulation as a result of conflict of interest between Robinhood’s decision to restrict the trade of GME and brokerages and hedge funds.

The GameStop phenomenon saw the power of collective action by retail investors while also exposing shady and unethical practices by institutional investors and platforms. As the involvement of retail investors continues to grow, regulators will consider restricting the power of retail investing apps and even the retail investors themselves even though retail investors help stimulate economic growth in our markets and innovation. As for institutional investors in hedge funds and brokerages may see a decrease in their power and freedom to use short selling and market manipulation to their advantage. The rise of zero-commission apps like Robinhood may also see further regulation in their use of gamification and market manipulation as a result of Robinhood’s restriction of GME. No matter what regulators choose to do, retail investors are a growing group who continue to increase their hold of the stock market and will continue to influence the market despite the efforts of institutional investors. The GameStop phenomenon was a problem in the sense that it exposed unethical and even illegal practices in the financial world which will have regulatory implications. However, it was revolutionary in that the power of retail investors is apparent and established.

Works Cited

“Hedge Fund Fees, Types, and Structures.” Preqin, https://www.preqin.com/academy/lesson-3-hedge-funds/hedge-fund-fees-types-and-structures.

Investment portfolio: What it is and how to build a profitable one. Annuity.org. (n.d.). Retrieved October 4, 2022, from https://www.annuity.org/personal-finance/investing/how-to-build-an-investment-portfolio/

Malz, Allan M. “The Gamestop Episode: What Happened and What Does It Mean?” Journal of A pplied Corporate Finance, vol. 33, no. 4, 2021, pp. 87–97.

Schulp, Jennifer J. “GameStop and the Rise of Retail Trading.” Cato Journal, Vol. 41, no. No. 3, 2021.

Tierney, James Fallows. “Investment Games.” Duke Law Journal, Vol. 72:353, 15 Feb. 2022.