What is a hedge fund?

A hedge fund can be defined as an investment vehicle that pursues the goal of absolute return in any market condition. It is capable of profiting in rising and falling markets, as well as employ sophisticated strategies or taking directional bets. Hedge funds are capable of employing an assortment of strategies and can use all available instruments including traditional equities, fixed income instruments, use conservative leverage, and derivatives such as swaps, options and commodity and financial futures. They have a distinct advantage over traditional mutual funds in that broader and more sophisticated approaches to investment can be employed.

Are hedge funds risky?

The most common misconception about the hedge fund industry is that they are extremely volatile and unpredictable in nature. This common misconception is due to the fact that the media have negatively fueled this by crystallizing these events when they occur. During the infancy of the hedge fund industry, the main strategy used was "Global Macro", which at the time, was highly speculative in nature. However over the years, hedge funds have used numerous new strategies to generate alpha and less than 5% of the overall hedge fund industry are now Global Macro funds. Today, the reality is that hedge funds in general are conservative in nature and focus on risk management and capital preservation, rather than the "wild cowboy" style of investing of the early days.

What is the difference between a hedge fund and a mutual fund?

There are numerous ways these two funds differ from each other. The following are the major differences:

What kind of hedge fund strategies can be used?

Almost all forms of investment strategies can be used as long as they can create wealth for clients. The main strategies are outlined below:

• Convertible arbitrage
• Fixed Income Arbitrage
• Equity Hedge
• Long/Short Equity
• Multi-Strategy
• Managed Futures and CTA Funds
• Distressed Securities
• Event Driven
• Fund of Hedge Funds
• Merger Arbitrage
• Relative Value

*for a more detailed explanation, please see "Hedge Fund Strategies"

How are portfolio managers compensated?

Compensation structures in the hedge fund industry differ from those in the mutual fund industry. Typical hedge funds charge a management fee and a performance fee. Management fees are a fixed fee that is based on a small percentage of total assets received. Performance fees are fees charged based on the performance of the portfolio using a high water mark. Charging a performance fee can be advantageous to both manager and client as it gives management team a true incentive to create profit for clients, whereas in traditional mutual funds, management is rewarded based on assets under management, regardless of the performance of the portfolio.

What is a high water mark?

A high water mark is an indicator of the highest peak in value that an investment fund has reached. The high water mark is usually used in the context of a performance fee of a hedge fund. Hedge funds usually implement a high water mark when charging performance fees. For example, if a client invests $1,000,000 in a fund and it increases to $1,150,000 but dips back down to $1,100,000, the fund cannot charge another performance fee until the investment reaches at least the previous high of $1,150,000.

What kind of risk management controls does N1 Fund have in place?

N1 Fund products are monitored in-house on a daily basis. The firm takes pride in taking care of the needs of clients and understands that risk management and capital preservation plays an equal role as do alpha generation. N1 Fund ensures that the portfolio is balanced in terms of strategies used and that leverage does not ever exceed 300% in any given scenario. The fund managers are also in constant contact with underlying portfolio managers and receive regular information on a daily to weekly basis. The firm's chief analyst is constantly on the lookout for new information in the financial markets that may affect the performance of the portfolio and will notify the investment committee of any changes or re-adjustments that may be needed in the asset allocation of the portfolio.