Hedge Funds: An Irish Perspective1
Hutchinson, Mark, Irish Journal of Management
The International Financial Services Centre (IFSC) in Ireland is gradually becoming a major centre for hedge-fund operations. Industry reports suggest that there are up to 66 hedge funds domiciled in Ireland. Funds are attracted primarily by the low corporation tax rate, but also by the progressive attitude of the Irish regulatory authorities. In addition, a sample of hedge funds examined in this paper suggests that the Irish Stock Exchange is the most popular exchange listing for hedge funds and fund of funds. Despite Ireland's emergence as a hedge-fund centre, as yet there has been no research dealing with Ireland in the literature. The purpose of this article is to introduce hedge funds, review the development of the industry in Ireland and discuss the alternative strategies followed by funds and their relative performance, and how this performance compares to traditional asset classes such as equities and bonds.
Subsequent to this introductory section, the paper is set out as follows: the next section gives a definition of hedge funds and a brief history, followed by a review of the hedge-fund industry in Ireland. The trading styles used by hedge funds are then described and the returns to the different strategies analysed. The final section of the paper provides a summary and conclusion.
DEFINITION AND HISTORY OF HEDGE FUNDS
Hedge funds are private investment vehicles where the manager has a significant personal stake in the fund and enjoys a high level of flexibility to employ a broad spectrum of dynamic trading strategies involving use of derivatives, short selling2 and leverage in order to enhance returns and better manage risk. It is this dynamic use of derivatives and short selling that differentiates hedge funds from traditional investment vehicles such as mutual funds and index trackers.
Fund of funds can be defined as investment vehicles offering investors exposure to a group of portfolio-manager-selected hedge funds employing a range of trading strategies. To avoid exposure to specific manager- or investment-strategy risk, a typical fund of funds would invest in 8 to 10 different hedge-fund strategies and 30 to 50 managers.
Despite the perceived innovation, hedge funds are not an investment product of the 19905. The person widely accepted as having started the first hedge fund is Alfred Winslow Jones (see Fung and Hsieh, 1999; Argawal and Naik, 2000; Ineichen, 2000 etc.). Jones started his private partnership fund on 1 January 1949 and employed a long short strategy in order to increase returns and hedge a degree of market exposure. In 1966, an article appeared in Fortune magazine describing Jones' investment style and strong returns. This article attracted significant attention, capital and new funds to the hedge-fund industry. However, during and after the downturn of 1969, many funds experienced difficulty due to their net long bias and there was a net outflow of money out of hedge funds. In the mid- to late 19805, with the emergence of managers such as George Soros and julian Robertson, generating returns of at least 40 per cent per annum, the industry began to return to prominence. More recently, hedge funds have generally remained out of the spotlight, with the exception of the high-profile failure of Long Term Capital Management (LTCM)3 in 1998.
THE HEDGE-FUND INDUSTRY IN IRELAND
The Irish hedge-fund industry has grown quickly over the last couple of years. During this period, the Irish Stock Exchange has become the exchange listing of choice for hedge funds and fund of funds. Table 6.1 is reproduced from data supplied by EurekaHedge Pte Ltd. Out of a sample of 346 hedge funds, 71 have a stock exchange listing. Of these 71, 65 are listed on the Irish Stock Exchange. From a sample of 555 funds of funds, 26 per cent have a listing and 66 per cent of those listed have an Irish Stock Exchange listing. It would appear that, in total, about one-quarter of hedge funds and fund of funds have a stock exchange listing and three-quarters of those listed are listed on the Irish Stock Exchange. …