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Hedge Fund Data

Hedge fund industry performance deep dive – full year 2023, download full report, in summary….

• A resurgence in risk assets provided a significant tailwind to more long-biased and/or historically higher beta strategies, which were among the worst performing strategies in 2022.
• There are a handful of sub-strategies that delivered strong performance both in 2022 and 2023 – quant – stat arb was up 10.9% in 2023 and 12.7% in 2022. While macro – FIRV was up 10.9% and 8.4%.

Five-year performance (CAR) for hedge funds now stands at 6.5%, comfortably outperforming bonds (-0.4%) but underperforming equities (+9.4%) from a total return perspective, however, outperforming equities from a risk-adjusted perspective (Sharpe of 0.7 vs 0.5).

• Dispersion has continued to fall and now sits at levels more in line with those observed pre-COVID.

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Hedge fund industry performance review

Seven of the eight hedge fund master strategies saw net growth in AUM, led by equity long/short, followed by multi-strategy.

Hedge fund assets – as measured by those funds reporting to Aurum’s Hedge Fund Data Engine – have grown by $93.2bn since the end of 2022 to stand at $2.9tn. This was driven by net positive performance (+$187.5bn) and partially offset by outflows (-$94.3bn). Seven of the eight hedge fund master strategies saw net growth in AUM, led by equity long/short, followed by multi-strategy. Equity long/short growth in AUM was exclusively driven by significant net positive P&L, which was offset by significant net investor outflows. Multi-strategy growth was predominantly driven by positive P&L, although was the only strategy to have had net positive investor inflows. The only other strategy to see total assets increase during the period by over $10bn is Macro, driven by positive P&L and partially offset by net investor outflows. Quant was the only category to see a fall in assets, with investor outflows only partially offset by net positive P&L.

Equity long/short was also the strongest performing strategy returning 11.5% on an asset weighted basis and outperforming, with the headline figure dragged down by underperformance from quant (+2.0%), while multi-strategy funds were broadly in line with HF Composite figure.

NET RETURN (1 YR)

The hedge fund industry was up 7.9% for the year on an asset weighted basis. This compares to the mean figure of 8.5%, suggesting that, on average, larger hedge funds have underperformed. The median performing hedge fund returned 7.2% for the year. The median performing hedge fund sub-strategies were credit – direct lending (ranked 18th th out of 36 sub-strategies returning 8.0%) and arb-CB (19 th : 8.0%). The largest constituent of the hedge fund universe was equity long/short (over 20% of assets), followed by multi-strategy and long biased both constituting ~14%. Equity long/short was also the strongest performing strategy returning 11.5% on an asset weighted basis and outperforming, with the headline figure dragged down by underperformance from quant (+2.0%), while multi-strategy funds were broadly in line with HF Composite figure.

Those strategies that performed strongly in 2022 in the higher volatility regime and risk-asset selloff were among the worst performing in 2023. Arb – Tail is down over 10%, Quant – CTA having returned over 15% in 2022, was down 3.8% in 2023.

A resurgence in risk assets provided a significant tailwind to more long-biased and/or historically higher beta strategies such as event – activist (+20.9%), long – equity (+14.4%), global equity (+14.3%), and long – other (14.2%). It should be noted that all of these strong performing areas were among the worst performing in 2022.

On the other end of the scale some of those strategies that performed strongly in 2022 in the higher volatility regime and risk-asset selloff are among the worst performing in 2023. Arb – Tail is down over 10%, quant – CTA having returned over 15% in 2022, was down 3.8% in 2023. Interestingly commodity strategies have also struggled during the year.

H1 performance was heavily skewed to the start of the year and at the end of Q2. Performance was then solid in June/July, flat to marginally negative for three months (during which time both bonds and equities sold off significantly), before rallying into year end alongside the rally in risk assets – standout months during the year were March (-0.3%), predominantly driven by a tough month for macro strategies (both macro – global macro and quant – CTA sub-strategies in particular) and – to a lesser extent – credit. October was also a down month (-0.4%) driven by negative performance across equity long/short, long biased, and event. This is covered in more detail below.

There are a handful of sub-strategies that delivered strong performance both in 2022 and 2023, so it is worth highlighting quant – stat arb, macro – FIRV, quant in particular. Quant – stat arb was up 10.9% in 2023 and 12.7% in 2022. Macro – FIRV was up 10.9% and 8.4% in 2022 and 2023 respectively.

As can be seen in the following chart, dispersion between top and bottom decile performing hedge funds has fallen dramatically since the end of 2022, as has general risk-asset volatility. Dispersion sits at levels more in line with those observed pre-COVID.

10th – 90th PERCENTILE 12M ROLLING PERF. SPREAD [1]

STANDARD DEVIATION (1 YR)

Multi-strategy funds, which have been the long-term consistent performers (5y CAR of 10.6% with a Sharpe of 2.2), performed more in line with the median hedge fund in 2023

As indicated above, top performing strategies have been those that have sub-strategy components that typically exhibit a higher beta to risk assets. Equity long/short is the top performing headline strategy (+11.5%) with a number of sub-strategies among the top performers. Event (+9.6%) has been driven by the top performing sub-strategy event – activist (+20.9%) ranking 1 st out of all 36 sub-strategies. Credit funds have also outperformed the broader hedge fund universe (+8.7%), driven by credit – multi (+10.0%), credit – strucLO (+9.2%) and credit – distress (+9.1%).

Multi-strategy funds, which have been the long-term consistent performers (5y CAR of 10.6% with a Sharpe of 2.2), performed more in line with the median hedge fund in 2023 (7.6% vs the median of 7.2%).

The worst performing strategy was arbitrage (+2.0%), driven by material underperformance from the arb – tail sub-strategy (-10.0%) and mediocre performance from arb – vol (1.3%). It is no surprise that tail hedging strategies would underperform in 2023 given the falling realised and implied volatility and negative beta associated with the strategy. Arb – vol strategies had performed well in the more elevated volatility regime in 2022, with 2023 a much more muted environment.

Quant (+2.0%) struggled due to underperformance from CTAs (quant – CTA: -3.8%) and quant macro (quant – macro: -1.4%). CTAs struggled in March (-6.1%) in particular with the massive move in interest rates. The negative attribution from CTAs and quant macro strategies was more than offset by stronger performance in statistical arbitrage, quant equity market neutral and risk premia strategies respectively (quant – stat arb: +10.9%, quant – RP: 10.6%, quant – EMN: 8.1%).

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Presented on an equally weighted basis. Source: Aurum Hedge Fund Data Engine.

*HF Composite = Aurum Hedge Fund Data Engine Asset Weighted Composite Index. **Bonds = S&P Global Developed Aggregate Ex Collateralized Bond (USD). ***Equities = S&P Global BMI.

The Hedge Fund Data Engine is a proprietary database maintained by Aurum Research Limited (“ARL”).  For information on index methodology, weighting and composition please refer to  https://www.aurum.com/aurum-strategy-engine/ . For definitions on how the Strategies and Sub-Strategies are defined please refer to  https://www.aurum.com/hedge-fund-strategy-definitions/

Bond and equity indices The S&P Global BMI and S&P Global Developed Aggregate Ex Collateralized Bond (USD) Total Return Index (the “S&P Indices”) are products of S&P Dow Jones Indices LLC, its affiliates and/or their licensors and has been licensed for use by Aurum Research Limited. Copyright © 2021 S&P Dow Jones Indices LLC, its affiliates and/or their licensors. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. By accepting delivery of this Paper, the reader: (a) agrees it will not extract any index values from the Paper nor will it store, reproduce or further distribute the index values to any third party for any purpose in any format or by any means except that reader may store the Paper for its personal, non-commercial use; (b) acknowledges and agrees that S&P own the S&P Indices, the associated index values and all intellectual property therein and (c) S&P disclaims any and all warranties and representations with respect to the S&P Indices.

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Hedge Funds: Overview, Strategies, and Trends

• Living reference work entry
• First Online: 31 October 2021
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• John M. Longo 3  

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Hedge funds are quite likely the most important investment vehicles in the financial markets today since they control roughly $3.8 trillion in assets and account for the bulk of trading volume across many asset classes. They also tend to attract “the best and brightest” investors due to high levels of remuneration and fewer investment restrictions relative to public investment funds. This article provides its readers with a firm understanding of the hedge fund industry, their most common investment strategies, and the trends shaping the field. It also provides detailed examples of three specific hedge fund strategies: dual share class arbitrage, pairs trading, and activist investing.

Hedge funds in their various forms may play a useful role in most individual and institutional portfolios due to the prospect of higher risk adjusted returns, as well as the lack of correlation with traditional stock and bond portfolios. In short, they may improve the Markowitz Efficient Frontier of most portfolios. The industry is still evolving on a global basis and its continued growth will likely result in the further compression of fees, payment for alpha instead of beta, increased liquidity, improved transparency, wider accessibility, and increased regulation.

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The source of the number for assets under management is Preqin, while Statista is the source for mutual fund and pension fund assets. Norrestad ( 2021 ) is the source of the pension fund data.

Value Walk is the source of Jones’ investment performance.

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Preqin is the source of the number of hedge funds and total assets under management for the industry.

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Longo, J.M. (2021). Hedge Funds: Overview, Strategies, and Trends. In: Lee, CF., Lee, A.C. (eds) Encyclopedia of Finance. Springer, Cham. https://doi.org/10.1007/978-3-030-73443-5_54-1

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DOI : https://doi.org/10.1007/978-3-030-73443-5_54-1

Received : 07 June 2021

Accepted : 07 June 2021

Published : 31 October 2021

Publisher Name : Springer, Cham

Print ISBN : 978-3-030-73443-5

Online ISBN : 978-3-030-73443-5

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Hedge Fund Analysis: 4 Performance Metrics to Consider

• 21 Sep 2021

According to data by research firm Preqin, hedge funds surpassed $4 trillion in assets under management at the end of March 2021. This high-risk, high-reward asset class is a notoriously esoteric investment option limited to high-net-worth individuals and institutional investors. Hedge funds use a wide variety of sophisticated strategies, but they don’t have to be confusing.

Whether you’re an aspiring hedge fund manager, an accredited investor looking to get started in the space, or a curious professional hoping to understand hedge fund analysis, gaining a foundation in the basics of hedge funds and the metrics most commonly used to measure their performance is a great place to start.

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What Are Hedge Funds?

Hedge funds are a type of alternative investment that use pooled funds and various investment strategies to earn returns for limited partners. Hedge funds’ investment strategies can include virtually any investment type, ranging from traditional assets, such as stocks and bonds, to other types of alternatives, like private companies or real estate . The primary goal of hedge funds is to realize a return on investment no matter the market’s state.

Two key hedge fund strategies to know are:

• Diversification , which requires building portfolios that contain a variety of asset types and risk profiles as a way to spread out risk and maximize potential returns.
• Hedging , which aims to limit risk by offsetting one security’s risk with another. For example, to offset the risk caused by an asset’s seasonal fluctuation, you could invest in an asset with the opposite seasonality. In this simplified example, the risk of these two assets together is effectively zero.

Hedge funds require investors to be accredited, which is defined by the United States Securities and Exchange Commission (SEC) as having a net worth of at least $1 million or having had an annual income of $200,000 or more ($300,000 or more with a spouse) for the past two years with a reasonable expectation that it will extend to the current year.

If you’re an accredited investor, you need a network of connections in the field to get individually involved in hedge fund investing.

Related: 3 Essential Skills for Success in the Alternative Investments Industry

Foundations for Hedge Fund Analysis

Before learning about metrics for measuring hedge fund performance, there’s necessary groundwork to lay. It can be tempting to assume that if Portfolio A has a higher return on investment than Portfolio B, Portfolio A was a more successful investment. Yet, this doesn’t consider each portfolio’s risk profile.

A decent return on a high-risk investment can be considered more successful than a high return on a low-risk investment. This is especially relevant when analyzing hedge funds because this investment field is all about offsetting risk and outperforming the market based on well-managed securities combinations.

Basic statistical knowledge can be a helpful precursor to hedge fund analysis, as performance is often measured using averages, standard deviations, or ratios that are calculated using statistical formulas.

Additionally, hedge fund analysis relies heavily on benchmarking . Because the goal is to outperform the market, your analysis needs a point of reference, or benchmark. The metrics for measuring hedge fund performance are based on various factors—including risk and return—that are benchmarked against the S&P 500 or other investment indices.

Related: The Future of the Alternative Investments Industry

4 Performance Metrics for Hedge Fund Analysis

To get involved in hedge funds, you need to understand the ways you can measure their performance. Here’s a primer on four of the most common performance measures for hedge fund analysis.

Beta (β) is the measure of an asset or portfolio’s risk compared to the market’s risk. If an asset has a beta of one, its risk profile is the same as the market’s. There’s no “good” or “bad” beta—it’s all about you or your client’s risk preference. If you prefer safer investments, a portfolio with a beta of 0.3—30 percent of the market’s risk—could be a good choice. If you feel comfortable with a higher level of risk, a portfolio with a beta of 1.3—130 percent of the market’s risk—might be more attractive.

One way to obtain your desired beta level is to invest in the market as a whole, giving equal weight to riskier and safer investment options, then invest a percentage of your capital to match your desired beta.

For instance, it’s explained in the online course Alternative Investments that if you want a beta of 0.8, you could simply invest 80 percent of your investment capital in the market and keep the other 20 percent as cash, or invest it in a risk-free asset, such as treasury bills. This ensures that 80 percent of your investment will have the same beta as the market, and the other 20 percent will have a beta of zero.

The example also illustrates how you might obtain a beta of 1.3: Invest all of your capital in the market (100 percent) and then borrow the equivalent of 30 percent of your initial investment and invest that in the market, too. Your risk would then be equal to 130 percent of the market’s risk.

Although it may seem backward, beta sets the stage for alpha. Alpha ( α) is the difference between an asset or portfolio’s return and a benchmark’s return, relative to the amount of risk taken (beta). Essentially, alpha is the extra return your asset or portfolio gains above and beyond the market’s return.

Alpha is an important metric because it provides context. It answers the question, “If the beta were equal to one, how much better or worse did this asset perform than the market?” Alpha accounts for risk, allowing you to directly compare your asset’s returns with the market’s returns.

To calculate alpha, use this formula, where “A” refers to your asset or portfolio:

α A = (Actual Excess Return) A – β A × (Actual Return on Market)

Calculating alpha requires knowing the average market risk premium and the returns on a riskless asset (beta of zero). These figures allow you to calculate how much above or below the expected amount the asset or portfolio returned. Those numbers can then be used to calculate alpha.

3. Sharpe Ratio

The Sharpe ratio —coined by William Sharpe, winner of the Nobel Prize in Economics—is the return percentage per unit of risk. The Sharpe ratio is useful for directly comparing the performance of two assets or portfolios with different levels of risk.

Like alpha, the Sharpe ratio measures performance in relation to risk, but instead of comparing the asset to the market, it compares multiple assets to each other.

To calculate the Sharpe of a pair of assets, use this formula:

Sharpe Ratio = (Return of Asset – Risk-Free Return) / Standard Deviation of Asset’s Rate of Return

To use this formula, you need to know the return of your asset, the rate of return on a risk-free asset, and the standard deviation of your asset’s rate of return. Standard deviation , one way to measure risk, is the dispersion of a dataset based on its average. This basic statistical concept can explain the range of possibilities in both directions of the average. The larger the standard deviation, the more risk involved.

An example of the Sharpe ratio in action can be found in Alternative Investments, where two risky assets are described: Investment A returns eight percent with a 20 percent standard deviation, and Investment B returns nine percent with the same standard deviation. In this scenario, it’s clear which asset you’d prefer: Investment B, because it returns more than Investment A with the same level of risk.

Things get trickier when assets’ risk levels are different. Imagine now that Investment A returns eight percent with a 10 percent standard deviation instead of 20 percent. Is Investment B still the better performing asset? For this example, assume the risk-free rate of return is two percent.

Calculation for Investment A:

Sharpe ratio = (0.08 - 0.02) / 0.1

Sharpe ratio = 0.06 / 0.1

Sharpe ratio = 0.6

Calculation for Investment B:

Sharpe ratio = (0.09 – 0.02) / 0.2

Sharpe ratio = 0.07 / 0.2

Sharpe ratio = 0.35

After calculating the Sharpe ratio of the two assets, it’s clear that Investment A is the better performing investment.

4. Information Ratio

The information ratio is the excess return of an asset or portfolio divided by its “tracking error,” which is the standard deviation of the fund’s excess returns (or alpha). Similar to the Sharpe ratio, the information ratio measures return per unit of risk but focuses on excess returns instead of total returns.

To calculate the information ratio, use this formula:

Information Ratio = (Asset Rate of Return – Benchmark Rate of Return) / Alpha

The information ratio can be used to tell if the risk of trying to outperform the market is worth it. If your information ratio is high, your strategies are more likely to pay off.

Building on Foundational Analysis Skills

These foundational concepts and metrics are just the tip of the hedge fund iceberg. If you’re interested in investing in hedge funds or becoming a portfolio manager, starting with the basics can provide a strong foundation on which to build your knowledge. It’s important to remember that each metric considers how an asset or portfolio relates to its benchmark and weighs the risk involved, but each provides a unique perspective on performance.

To learn more about hedge fund performance metrics, how they influence each other, and how to build a diversified portfolio, consider taking an online course, such as Alternative Investments .

Are you interested in expanding your knowledge of hedge funds and other alternative investments? Explore our five-week online course Alternative Investments and other finance and accounting courses .

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What Is a Hedge Fund?

• How It Works
• Common Strategies

Hedge Fund Compensation

Hedge fund vs. mutual fund, what to consider before investing, the bottom line.

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Hedge Fund: Definition, Examples, Types, and Strategies

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

A hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers. These managers use a wide range of strategies, including leverage (borrowed money) and the trading of non-traditional assets, to earn above-average investment returns.

A hedge fund investment is often considered a risky, alternative investment choice and usually requires a high minimum investment or net worth. Hedge funds typically target wealthy investors.

Key Takeaways

• Hedge funds are actively managed funds focused on alternative investments that commonly use risky investment strategies.
• A hedge fund investment typically requires accredited investors and a high minimum investment or net worth .
• Hedge funds charge higher fees than conventional investment funds.
• The strategies used by hedge funds depend on the fund manager and relate to equity, fixed-income, and event-driven investment goals.
• A hedge fund investor's investment usually is locked up for a year before they may sell shares and withdraw funds.

Investopedia / Julie Bang

Understanding Hedge Funds

Hedging their bets.

The term "hedge fund" refers to an investment instrument with pooled funds that is managed to outperform average market returns. The fund manager often hedges the fund's positions to protect them from market risk.

They do so by investing a portion of the fund's assets in securities whose prices move in the opposite direction of the fund's core holdings. Theoretically, should the prices of the core holdings move down, the prices of the securities acting as a hedge should move up. As a result, the hedge can offset any losses in the core holdings.

For example, a hedge fund that focuses on a cyclical sector , such as travel, may invest a portion of its assets in a non-cyclical sector such as energy, aiming to use the positive returns of the non-cyclical stocks to offset any losses in cyclical stocks.

Hedge funds use risky strategies, leverage , and derivative securities such as options and futures. Therefore, an investor in a hedge fund is commonly regarded as an accredited investor . This means that they meet a required minimum level of income or assets. Typical investors are institutional investors, such as pension funds and insurance companies, and wealthy individuals.

Investments in hedge funds are considered  illiquid  as funds often require investors to keep their money in the fund for at least one year, a time known as the lock-up period. Withdrawals may also only happen at certain intervals such as quarterly or bi-annually.

Types of Hedge Funds

Four common types of hedge funds are:

• Global macro hedge funds : These are actively managed funds that attempt to profit from broad market swings caused by political or economic events.
• Equity hedge funds: These may be global or specific to one country, investing in lucrative stocks while hedging against downturns in equity markets by shorting overvalued stocks or stock indices.
• Relative value hedge funds : These funds seek to exploit temporary differences in the prices of related securities, taking advantage of price or spread inefficiencies.
• Activist hedge funds: These aim to invest in businesses and take actions that boost the stock price such as demanding that companies cut costs, restructure assets, or change the board of directors .

The appeal of many hedge funds lies in the reputations of their managers, which stand out in the closed world of hedge fund investing.

Common Hedge Fund Strategies

Hedge fund strategies cover a broad range of risk tolerance and investment philosophies. They involve a large selection of investments, including debt and equity securities, commodities, currencies, derivatives, and real estate .

Common hedge fund strategies are classified according to the  investment style of the fund's manager and include equity, fixed-income, and event-driven investment goals.

• A long/short hedge fund strategy is an extension of pairs trading , by which investors go long and short on two competing companies in the same industry based on their relative valuations.
• A fixed-income hedge fund strategy gives investors solid returns, with minimal monthly volatility and aims for capital preservation; it takes both long and short positions in fixed-income securities .
• An event-driven hedge fund strategy takes advantage of temporary stock mispricing, spawned by corporate events like restructurings, mergers and acquisitions , bankruptcy, or takeovers.

Examples of Hedge Funds

The most notable hedge funds, based on assets under management (AUM) , include:

• Bridgewater Associates: Founded in New York in 1975 and headquartered in Westport, Conn., global leader, with more than $124 billion in AUM.
• Renaissance Technologies: Founded in 1982 and headquartered in East Satauket, N.Y., with mathematical- and statistical-based investment strategies, and over $106 billion in AUM.
• AQR Capital Management: Founded in 1998 and headquartered in Greenwich, Conn., with applied quantitative research investment strategies, and over $94.5 billion in AUM.

Australian investor Alfred Winslow Jones is credited with launching the first hedge fund in 1949 through his company, A.W. Jones & Co. Raising $100,000, he designed a fund that aimed to minimize the risk in long-term stock investing by  short-selling , now referred to as the long/short equities model.

In 1952, Jones converted his fund to a  limited partnership , added a 20% incentive fee as compensation for the managing partner, and became the first money manager to combine short selling, the use of leverage , and a compensation system based on performance.

Today, hedge funds employ a standard "2 and 20" fee system, which refers to a 2% management fee and a 20% performance fee.

The management fee is based on the net asset value of each investor's shares, so an investment of $1 million garners a $20,000 management fee that year to cover the operations of the hedge and compensate the fund manager .

The performance fee is commonly 20% of profits. If an investment of $1 million increases to $1.2 million in one year, $40,000 is the fee owed to the fund.

Hedge funds are not as strictly regulated by the Securities and Exchange Commission (SEC) as mutual funds are.

Mutual funds are a practical, cost-efficient way to build a diversified portfolio of stocks, bonds, or short-term investments. They are available to the general public and average investor.

Hedge funds normally will only accept money from accredited investors who include individuals with an annual income that exceeds $200,000 or a net worth exceeding $1 million, excluding their primary residence. These investors are considered suitable to handle the potential risks that hedge funds are permitted to take.  

A hedge fund can invest in land, real estate, stocks, derivatives, and currencies while mutual funds use stocks or bonds as their instruments for long-term investment strategies.

Unlike mutual funds where an investor can elect to sell shares at any time, hedge funds typically limit opportunities to redeem shares and often impose a locked period of one year before shares can be cashed in.

Hedge funds employ the 2% management fee and 20% performance fee structure. In 2022, the average expense ratio across all mutual funds and exchange-traded funds was 0.37%.

Read about Investopedia's 10 Rules of Investing by picking up a copy of our special issue print edition.

As investors conduct research to identify hedge funds that meet their investment goals, they often consider the fund or firm's size, the track record and longevity of the fund, the minimum investment required to participate, and the redemption terms of the fund. Hedge funds operate in many countries, including the U.S., United Kingdom , Hong Kong, Canada, and France.

According to the SEC, investors should also do the following when deciding whether or not to invest in a hedge fund:

• Read the hedge fund’s documents and agreements which contain information about investing in the fund, the strategies of the fund, the location of the fund, and the risks anticipated by the investment.
• Understand the level of risk involved in the fund’s investment strategies and whether they equate with your personal investing goals, time horizons, and risk tolerance. 
• Determine if the fund is using leverage or speculative investment techniques which will typically invest both the investors’ capital and the borrowed money to make investments.
• Evaluate potential conflicts of interest disclosed by hedge fund managers and research the background and reputation of the hedge fund managers.
• Understand how a fund’s assets are valued as hedge funds may invest in highly illiquid securities and valuations of fund assets will affect the fees that the manager charges.
• Understand how a fund's performance is determined and whether it reflects cash or assets received by the fund as opposed to the manager’s estimate of the change in the value.
• Understand any limitations to time restrictions imposed to redeem shares.

What Tools Do Investors Use to Compare the Performance of Hedge Funds?

Investors look at the annualized rate of return to compare funds and to reveal funds with high expected returns. To establish guidelines for a specific strategy, an investor can use an analytical software package such as Morningstar to identify a universe of funds using similar strategies. 

How Do Hedge Funds Compare to Other Investments?

Hedge funds, mutual funds, and exchange-traded funds (ETFs) all pool money contributed by many investors and attempt to earn a profit for themselves and their clients.

Hedge funds are actively managed by professional managers who buy and sell certain investments with the stated goal of exceeding the returns of the markets, or some sector or index of the markets. They take the greatest risks while trying to achieve these returns. In addition, hedge funds are more loosely regulated than competing investments, and they can invest in options and derivatives as well as esoteric investments that mutual funds cannot invest in.

Why Do People Invest in Hedge Funds?

A wealthy individual who can afford to diversify into a hedge fund might be attracted to the high-performance reputation of its manager, the specific assets in which the fund is invested, or the unique strategy that it employs.

Hedge fund investing is considered a risky alternative investment choice and requires that investors can make a large minimum investment or have a high net worth. Hedge fund strategies involve investing in debt and equity securities, commodities, currencies, derivatives, and real estate.

Hedge funds are loosely regulated by the SEC and earn money from the 2% management fee and 20% performance fee structure.

U.S. Securities and Exchange Commission. " Hedge Funds ."

Nasdaq. " Top 10 U.S. Hedge Funds of April 2024 ."

CFO. " A Short History of Hedge Funds ."

U.S. Securities and Exchange Commission. " Investor Bulletin - Hedge Funds ."

U.S. Securities and Exchange Commission. " Updated Investor Bulletin: Accredited Investors ."

Morningstar. " Investors Piled Into the Cheapest Funds in 2022 ."

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Hedge Funds

Hedge funds, originally created with the aim of hedging risk in a portfolio of long and short positions, invest in assets from an investment pool typically funded by a limited number of reputable sources. This resource guide provides sources with hedge fund-related material, including general industry information, salary data, and methodologies. The Financial Services & Investment Banking resource guide may also be of use.

An overview of alternative investments for institutional asset allocators and other overseers of portfolios containing both traditional and alternative assets, including hedge funds. 

Alternative Investments: A Primer for Investment Professionals

Many of the terms included in this glossary by the Commodity Futures Trading Commission are used in the hedge fund sector.

Guide to the Language of the Futures Industry

Industry research reports for select US states, UK, Australia, Canada, and China.

Go To Database

Report titled Private Equity, Hedge Funds & Investment Vehicles in the US

A primer from the SEC on hedge funds for the investor considering this type of investment.

U.S. Securities and Exchange Commission Fast Answers: Hedge Funds

Analysis, funds and indexes.

Financial data on equities, indices, currencies, commodities and futures.

For hedge fund information, type "HFND," then press the green GO key.

Financial data analysis platform to analyze data from global equity and fixed income markets.

Includes some data on hedge funds.

The Hedge Fund Marketing Alliance provides a list of indexes following different hedging strategies and methodologies in tracking the market. Many sites require free registration to view and/or download data. Links to other resources also are provided.

Hedge Fund Index

Multi-currency research platform that provides performance and holdings analyses of investments.

Morningstar Direct

Screen for hedge funds by strategy, performance, size, and other criteria. From the menu, choose "New," then "Advanced Search," then "Hedge Fund." To screen by strategy, search by "Morningstar Category."

Provides access to information on private equity and venture capital companies, funds, and deals.

Preqin's hedge fund products and services provide a complete 360 degree view of the industry, including institutional investors' plans for hedge fund investments, fund performance, fund strategies, fund managers and fund terms.

Careers, Associations and Events

Online content and journal track global industry performance, regulatory developments, best practices, and trends.

Alternative Investment Management Association

S earch for jobs in the financial sector by title and geographic location. Type "JOBS" and hit GO.

Investment professional positions from analyst to general partner in private equity, leveraged buyout, venture capital, hedge fund and asset management firms. Jobs in all parts of the U.S., Canada, and in major cities in Europe and Asia. (Registration required)

International nonprofit association of hedge fund managers, service providers, and investors. Web site includes articles and information on the hedge fund industry.

Hedge Fund Association

Resource for hedge fund investors, managers, and marketers. They also provide a list of industry event and conference calendars . 

Hedge Fund Marketing Association

Association for investment managers in hedge funds, futures, and other alternative investments. Provides information about hedge funds, regulations and the industry response to them, and events. Some information is restricted to members.

Managed Funds Association

In-depth industry guides including internship information, career advice and user-generated content on companies and career issues.

Hedge Funds: search Hedge Funds and find the most recent Vault Guide. 

News and Journals

Full-text issues (current and archival) of quarterly publications covering research on global investment and finance.

PMR Journals (Portfolio Management Research)

Includes Journal of Alternative Investments , the official publication of the Chartered Alternative Investment Analyst Association (CAIA), and a leading source of new research and analysis in the field of alternative investments. Follow the "Journals" link.

Official publication of the Chartered Alternative Investment Analyst Association; expert analysis on managing alternative investments. 

Journal of Alternative Investment

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Hedge Funds: Strategies and How to Invest

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Hedge funds are actively managed investments that are only open to accredited investors.

Hedge funds are typically less regulated and riskier than more traditional investments such as mutual funds.

Hedge funds often charge significantly higher fees than other investments.

What is a hedge fund?

A hedge fund is an investment in which a fund manager invests money for accredited investors , with the goal of maximizing returns and minimizing risk. Hedge fund managers attempt to make money in both good and bad stock market conditions, sometimes by using aggressive trading strategies.

This type of active management comes with a considerable level of risk, so investors should consider whether they're comfortable with this approach before investing. Hedge funds also tend to have higher minimums and costlier management fees than other types of investments.

Understanding hedge funds

One of the easiest ways to understand hedge funds is to compare them with a more common investment: Mutual funds. Mutual funds also invest pools of investor money. But mutual funds are quite different from hedge funds.

Like mutual funds, many hedge funds hold stocks and bonds. But they’re also allowed to invest in more speculative fare, such as private equity , bankrupt companies, art, currency and derivatives. Whereas the goal of a regular mutual fund is to beat the returns of the overall stock market or some portion of it, hedge funds aim to deliver absolute positive returns — meaning gains that aren’t tied to any particular benchmark — over time.

Stricter shareholder requirements

Mutual funds are open to all investors who can meet the minimum investment requirement, most often in the $100 to $2,500 range.

Hedge funds accept only a limited cadre of “accredited” investors, defined by federal law as someone who earned at least $200,000 (or $300,000 combined with a spouse) in each of the last two years and expects to continue to do so, or who has a net worth of $1 million or more, excluding the value of a primary residence.

That requirement and high investment minimums (typically $1 million and up) are to allow access only to more sophisticated investors who can handle a large financial loss.

Less regulation and transparency

Mutual funds are required to register with the Securities and Exchange Commission, making them subject to regulations. Most hedge funds are not, since they don’t advertise publicly, and they therefore aren’t subject to the same protections and disclosure requirements that apply to mutual funds.

This lack of transparency makes it more difficult for investors to verify a hedge fund’s claims and see exactly how their money is being invested. However, hedge fund investors are protected in case of fraud (such as Ponzi schemes). The SEC has sued hedge funds that have misrepresented investment returns, account statements and fund managers' track records.

Riskier trading strategies

Hedge fund managers have latitude to use more aggressive trading strategies than their mutual fund counterparts. They can make highly concentrated bets by investing the fund’s capital in just a few assets, and they often use leverage, which involves borrowing money to make trades. Leverage can amplify returns and losses.

High performance-based fees

Both mutual funds and hedge funds charge an annual asset-based management fee — also known as an expense ratio or advisory fee. For mutual funds, that fee is usually between 0.25% and 1.5% of your investment in the fund per year.

Hedge fund investors also pay an additional performance-based incentive fee. A well-known setup is called “2 and 20,” in which shareholders pay an annual fee of 2% of their investment in the fund and 20% of any year’s profit above a preset percentage. In recent years, fees have come down and are now closer to 1.5% and 18%.

Less liquidity

Mutual fund investors are allowed to cash out of their investment at any time.

Because hedge funds sometimes invest in illiquid assets, they often have lockup periods of several months to several years when redemptions are not permitted. Some hedge funds have loosened their lockup provisions, but they can still restrict access to your money by requiring investors to provide notice well in advance of any withdrawal.

Complex tax prep and reporting

Mutual funds can generate taxes on dividends, interest, and capital gains, which may require investors to deal with forms such as the 1099-DIV and 1099-INT. Hedge funds, on the other hand, generally issue investors a Schedule K-1, which can be far more complex to navigate and may require the assistance of a tax professional.

» Managing your wealth: Learn about estate planning

Hedge fund strategies

To hedge, an investor or fund manager makes two investments that react in opposite ways — if one investment goes down, the other goes up, which reduces overall risk.

One example of this that often makes headlines is the “short.” Hedge funds may short a stock if they think the price is going to fall in the near future, and continue to hold stocks they think will keep performing well. This is known as an equity long/short strategy.

To profit from a drop in the stock price, the hedge fund may borrow shares from a financial institution, then immediately sell them. If the stock price falls, the fund uses the proceeds from the sale to buy the stock back at the lower price, return the borrowed shares and keep the difference in price as profit. (Learn more about how shorting a stock works.)

Hedge funds may also use a “global macro” strategy, through which they base their investments on an analysis of macroeconomic events on a huge scale. For example, fund managers may analyze interest rates and monetary policy of a particular country, and use that information to make bets through currency and currency derivative products.

Other strategies include:

Buying distressed securities. This may mean buying stock in bankrupt or financially struggling companies.

Merger arbitrage. This approach takes advantage of price differences before and after a merger.

Fixed-income arbitrage. This strategy capitalizes on price changes in fixed-income securities, such as bonds.

» Building wealth: How to invest $100,000

How to invest in hedge funds

Once you understand and accept that hedge funds come with higher minimums, fees and risk than traditional mutual funds, and offer less liquidity and transparency, you may be in a place to start researching hedge fund managers.

If you have a fund manager in mind, first check their disciplinary record with the SEC. This can be found on the firm’s Form ADV, which investment advisors are required to submit. This form features information about the advisor’s business, its clients, business practices and any past disciplinary events. This form is also required to clearly explain fee structures, any potential conflicts of interest, services the advisor offers and any additional costs for those services.

In short, this is the place to go to weed out any hedge fund managers whom you don’t feel comfortable working with. You can find an advisor’s Form ADV on the SEC’s Investment Advisor Public Disclosure search function .

Choosing a hedge fund manager to handle huge sums of your money can be daunting. If you don’t have a manager in mind, or need a place to start, consider the following list of the largest hedge funds by assets under management. [0] Pensions & Investments . The Largest Hedge Fund Managers . View all sources

Bridgewater Associates.

Renaissance Technologies.

Millennium Management.

The level of assets a fund holds may not translate to the best fund for you. What’s more, hedge funds are not a uniform asset class; varying strategies result in a wide range of risk/return profiles. Even fund managers deploying the same strategies over the same period have seen widely varying returns, demonstrating the elevated risk of hedge funds. Choosing a winning hedge fund can be extremely difficult.

Hedge fund analysis tools and databases do exist, but if you’re serious about finding the best hedge fund for you, it may be best to work with a wealth advisor. With a holistic look at your particular financial situation, these experienced professionals can help you decide whose fees, minimums and strategies match your investor profile, and find funds that are currently accepting new investors.

» Ready to get started? Learn how to choose a financial advisor

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Are hedge funds right for all accredited investors?

Because accredited investors have substantial financial resources, the thinking goes, they can participate in riskier investments, such as hedge funds, and escape potential losses mostly unscathed.

However, hedge funds may not be the answer even if you’re accredited, according to Alex Crouch, a certified financial planner and associate at Abound Wealth in Franklin, Tennessee.

“It is important to understand that just because you have access to invest in hedge funds, doesn't mean that you should,” Crouch said in an email interview. “People often assume that once they hit a certain level of wealth they should be using more sophisticated strategies. But the truth is that most hedge fund investors over the past 20 years would have been better off investing in an index fund, especially after factoring in the higher fees that hedge funds demand.”

If you’re looking for a higher risk/reward profile than tracking broad indexes but aren’t ready (or aren’t qualified) to dive into hedge funds, investing in index funds that track specific sectors, geographic regions or company sizes may suit you.

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Hedge funds research: quant strategies on the rise as post pandemic optimism grows.

New research with 100 leading hedge fund managers reveals widespread enthusiasm for quant strategies.

• 80% of hedge fund managers expect institutional investors to increase their allocation to quant strategies in the next twelve months

• 73% of managers believe the current economic and fiscal environment is attractive for quant strategies

• 86% expect the number of quant hedge funds to increase over the next five years

Hedge fund managers are very optimistic about their future prospects and see quantitative strategies as a clear area for growth, according to recently commissioned independent research with 100 global hedge fund managers.

Collectively, the hedge fund managers surveyed manage over $231 billion in AUM across European, Asian and North American markets, and provide telling insights into the market trends and dynamics of the hedge fund industry.

Growing Allocation To Quant Hedge Fund Strategies

The findings reveal that 80% of hedge fund managers expect institutional investors to increase their allocation to quant strategies in 2021, with 29% expecting this increase to be significant.

When asked which quant strategies and asset classes are likely to see the biggest increase in inflows over the next 12 months, the hedge fund managers interviewed predicted FX and equities will see the largest rise, followed by rates, volatility and commodities strategies.

Macro Environment Drives Opportunities For Quant Strategies

A key reason for optimism in the sector is that 78% of managers surveyed believe that quantitative strategies should perform better in 2021 than they did in 2020 and 73% believe the current economic and fiscal environment is attractive for quant strategies. Some 68% say they expect quant strategies to outperform this year, and nearly six out of ten (59%) believe many are becoming more attractive because they offer diversification benefits for portfolios. Growing levels of sophistication and innovation in the sector are fueling this trend.

Increased Transparency

As the hedge fund industry continues to grow, levels of transparency in the quant market are expected to increase. 75% of hedge fund managers think increased transparency will lead to institutional investors increasing their allocation over the long term.

When questioned about what mattered most to them in trading infrastructure, 65% of hedge funds surveyed said backtesting (providing consistent results between live trading and backtests by factoring in real-life trading costs and market structures) was ‘very important’. 52% said  clean data  was also very important to them. The ability to move seamlessly from research into production and execution (49%) and getting trading strategies to market faster (47%) were also cited as significant features.

Social Media And Crypto Assets

New and innovative datasets were also found to have supported the growth in systematic strategies: 24% of hedge fund managers questioned have dramatically increased their analysis of social media and chatroom data over the past 12 months. A further 48% said it has increased, and only 12% said they have focused on this set of market data less.

Furthermore, over the next two years, 30% say they will dramatically increase their use of chat room and social media data to support signal construction and wider investment decisions. A further one in three (35%) believe their usage of this data will rise slightly.

Over the next two years, over 80% of respondents expect an increase in the use of cryptocurrencies in quant strategies and portfolio management, including 36% who foresee a dramatic increase. 45% predict a slight rise.

Capitalising On Data And Technology

2021 is proving to be a strong year for hedge funds in terms of performance and the sector is on track for sustained growth [2]. Exposure to new or previously under-utilised datasets and methods in social media, crypto, and even more recently, nowcasting, are further fueling innovation in the industry.

When launching new systematic investment processes, infrastructure build-out and data management can be slow and expensive, while strategy development and back-testing can be cumbersome and repetitive. Fund managers are increasingly looking for new ways to reduce inefficiencies and create operational leverage via SaaS solutions and ‘plug and play’ technologies to ensure that their funds can improve their pace, scale and innovation when launching new strategies.

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Hedge funds hit by lack of private equity exits

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Private equity’s struggle to return money to clients is hitting hedge funds, which rely on the same pension plans, foundations and endowments for fundraising.

Hedge funds seeking to raise money from institutional investors are being rebuffed on the grounds that the institutions lack the cash to give them. 

The difficulty is at least in part due to a slowdown in distributions that investors have received from private equity funds.  

“The lower rate of distributions from private equity, [private] debt and venture funds is having a knock-on effect, leading some allocators to pause on new investments into illiquid funds and reduce new investments in more liquid hedge funds,” said Michael Monforth, global head of capital advisory at JPMorgan Chase.

Buyout-backed exits fell to $345bn last year — their lowest level in a decade, according to Bain & Co’s annual private equity report. This has left the private equity industry sitting on a record backlog of 28,000 companies worth more than $3tn, the Bain & Co report found, as a slowdown in dealmaking made it harder to return money to their backers. 

“Private equity distributions have gone down, the IPO market has been very thin and M&A has been held back,” said Nick Moakes, chief investment officer of the £36.8bn Wellcome Trust. “If you’re not going to get bought and can’t get listed, PE is scratching its head on how to do distributions.”

Hedge funds and private equity managers are often competing to raise money from the so-called “alternatives” allocation of institutional investors, which can also include private credit, infrastructure and real estate assets. As investors receive distributions from existing holdings, the money is recycled into new commitments.

“For the vast majority of institutions, private equity and hedge funds come out of the alternatives bucket,” Sunaina Sinha Haldea, head of private capital advisory at wealth manager Raymond James, said.

“The lack of distributions out of private markets portfolios is going to impact the ability to make new commitments in other parts of the alternatives portfolio . . . that includes hedge funds.”

Last year assets in the global private capital industry ballooned to $14.5tn, according to the Bain & Co report, more than treble the $4tn it managed a decade earlier.

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In contrast, inflows to hedge funds have been muted for the past decade, with investors pulling cash on a net basis in five years out of the last 10, according to Hedge Fund Research. 

The capital constrained environment is also having an impact on the market for new hedge fund launches.

Former Millennium co-chief investment officer Bobby Jain has been forced to scale down day-one fundraising ambitions for his new hedge fund, Jain Global, ahead of its July launch.

One hedge fund manager currently trying to raise capital said investors often cited the lack of distributions they had received from their private equity investments as a reason why they would not invest. Investors were waiting to receive more money back before reinvesting, they added.

“What you are seeing is a failure to exit on the private equities, and it’s kind of having this follow on effect where its leading to a lower velocity of capital flowing throughout all alternatives,” Sam Diedrich, a managing director at Partners Capital, said. “It’s becoming a real issue.”  

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HEDGE FUND CAPITAL SURGES TO NEW RECORD AS MANAGERS, ALLOCATORS POSITION FOR UNPRECEDENTED RISKS

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CHICAGO, (April 22, 2024) – Hedge fund capital extended the year-end surge, rising to a historic $4.3 trillion milestone in 1Q24 on strong performance and investor inflows, with managers navigating a complex environment on improving economic outlook and acceleration of M&A concurrent with unprecedented geopolitical risks, including ongoing and potential military conflicts as well as inflation, interest rate and macroeconomic uncertainty.

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Hedge funds could offer several attractive benefits for an investor’s portfolio, from attractive risk-adjusted returns to diversification benefits, access to alternative investment strategies and the potential to generate positive returns across market conditions. Hedge funds can offer investors the opportunity to access unique, unconstrained investment strategies that pursue risk and reward holistically. They typically have a broader mandate than traditional investment managers, allowing them to pursue returns in a dynamic and opportunistic way.

Hedge funds encompass a diverse range of investment strategies that offer exposure to non-traditional risks. These strategies include long/short equity, relative value, global macro, and event-driven amongst others. Each strategy has its own unique investment approach, providing investors with opportunities to access different types of risk in the market. Asset managers utilize various tactics, such as short selling, utilizing leverage, and trading derivatives, to hedge certain risks and isolate others.  Managers have different areas of focus, levels of exposure, and holding periods. 

As a highly skill- and execution-dependent asset class, manager selection is critical in hedge funds. Implemented correctly, it can offer an attractive risk-reward with meaningful downside protection. We believe an optimum alternatives allocation should include a long-term strategic allocation to unconstrained hedge funds that is matched to your organization’s needs and objectives. Mercer offers hedge funds as ‘diversifying alternatives’, a term we believe encapsulates what these kinds of funds are designed to add − an important element of diversification to your portfolio through a variety of different strategies. Essentially, hedge funds may give you a risk-controlled exposure to non-traditional sources of return. 

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Grab holdings – uber’s asian peer is hedge funds’ favorite ai penny stock.

We recently compiled a list of the 11 Best AI Penny Stocks to Invest in Now   and in this article we will talk about one of our top picks.

Penny stocks can be very rewarding for investors who can tolerate a higher level of risk, but they do require meticulous research to identify the intrinsic value of the company and the hidden potential for growth opportunities. At Insider Monkey, we analyze thousands of companies through the prism of the hedge fund sentiment toward them, including stocks that are trading at very cheap prices. One stock that captured our attention among the best AI penny stocks to invest in now is Grab Holdings Ltd (NASDAQ: GRAB ).

Grab Holdings Ltd (NASDAQ:GRAB) saw 37 hedge funds from our database holding its shares as of the end of March. This number was unchanged over the quarter, but the total value of shares held by these funds increased to $613 million from $561 million between January and March. The growth in the aggregate value of hedge funds' positions can be attributed to a number of investors increasing their exposure to the company.

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As of the end of March, the top shareholder of Grab Holdings Ltd (NASDAQ:GRAB) among the hedge funds in our database is Chase Coleman's Tiger Global Management, which raised its position by 31% to 66.80 million shares. Other bullish investors include Ken Griffin's Citadel Investment Group and Cliff Asness' AQR Capital Management, which boosted their stakes by 232% and 308%, respectively, to 21.77 million shares and 13.06 million shares.

What To Know About Grab Holdings

Singapore-based Grab Holdings Ltd (NASDAQ:GRAB) provides delivery, mobility and digital financial services in Southeast Asia. The company has operations in eight countries, including Singapore, Thailand, Vietnam, Cambodia, Indonesia, the Philippines, Malaysia, and Myanmar. In 2018, Grab acquired the Southeast Asian operations of Uber Technologies Inc (NYSE: UBER ).

For the latest quarter, Grab Holdings Ltd (NASDAQ:GRAB) reported revenue of $653 million, a 29% year-on-year increase on a constant currency basis. At the same time, the company's first-quarter net loss narrowed down to $0.03 from $0.06 recorded a year-earlier. Even though the revenue managed to beat the estimates by $14.5 million, the net loss missed the expectations by $0.02.

On a segment basis, Grab Holdings recorded robust revenue growth across all three segments. Mobility saw an increase of 30% on the year to $247 million, while deliveries and financial services revenue grew by 24% to $350 million and by 56% to $55 million.

Following the results, several analysts reiterated their bullish stance on the stock. Barclays reiterated its 'Overweight' rating and raised the price target to $4.70 from $4.30, while analysts at Benchmark reiterated their 'Buy' rating and $6.00 price target.

Trading at 5.74 times its sales implies that Grab Holdings Ltd (NASDAQ:GRAB) is not cheap (by comparison for Uber Technologies Inc (NYSE:UBER) this ratio stands at 3.51). However, the company operates in emerging markets where the demand for its services (and its market share) will continue to improve. Moreover, it managed to narrow down its operating loss by $129 million to $75 million during the first quarter. It also posted a record EBITDA of $62 million and upped its 2024 EBITDA guidance to $250 million - $270 million range from $180 million - $200 million forecasted earlier.

Grab Holdings As an Under-the-Radar AI Play

Grab Holdings Ltd (NASDAQ:GRAB) commitment to applying artificial intelligence technology into its Core Business is what makes it one of the best AI penny stocks to invest in now. Between 2018 and 2019, the company invested $250 million on AI technology and is already reaping rewards. During the fourth-quarter earnings call , CEO Anthony Tan mentioned that Grab had built its own marketing tool powered by large language models (LLM) which allowed it to reduce content generation to just 90 minutes from 99 hours, while also improving the quality of content.

Moreover, Grab Holdings Ltd (NASDAQ:GRAB) is leveraging AI to help its customers get better food recommendations and its delivery drivers rely on Grab Maps, which uses AI to help them to easier identify the destination.

To further advance its AI presence, Grab Holdings Ltd (NASDAQ:GRAB) has recently announced a partnership with Microsoft Corporation (NASDAQ: MSFT )-backed OpenAI. Both companies will develop advanced AI solutions aimed at enriching the experience for Grab's users, partners, and employees. Initially, Grab and OpenAI plan to focus on Accessibility, customer support, and mapping.

All in all, Grab Holdings Ltd (NASDAQ:GRAB) is definitely a stock that deserves a closer look for more risk-tolerant investors. If you want to explore other AI stocks under $5 that smart money is bullish on, check out our free report on the 11 Best AI Penny Stocks to Invest in Now .

If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the  cheapest AI stock .

Disclosure: None. This article is originally published at Insider Monkey .

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Hedge Fund's "Mag 7" Exposure Hits a Record: ETFs to Tap

The "Magnificent 7" — Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG, GOOGL), Amazon (AMZN), Nvidia (NVDA), Tesla (TSLA) and Meta Platforms (META) — have been driving the market rally this year on artificial intelligence (AI) craze. Buoyed by the AI boom and NVIDIA’s blockbuster earnings, hedge funds raised their exposure to U.S. technology behemoths to a record high. According to the latest report from Goldman Sach’s prime brokerage, Magnificent 7 companies account for about 20.7% of hedge funds’ total U.S. single stock net exposure. This represents the highest level on the record and exceeds the previous peak level of 20% seen last summer. NVIDIA alone has added about $470 billion in market capitalization since it released results on May 22 (read: Can NVIDIA's AI Chip Dominance Continue? ). Further, the Magnificent 7 hit 31% weighting in the S&P 500.

ETFs to Tap

Investors seeking to tap the hedge fund’s activity could consider ETFs having the largest exposure to Magnificent 7. Roundhill Magnificent Seven ETF ( MAGS Quick Quote MAGS - Free Report ) Roundhill Magnificent Seven ETF is the first-ever ETF offering investors equal-weight exposure to the “Magnificent Seven” stocks. It has amassed $330.1 million in its asset base and charges 29 bps in fees per year. MAGS trades in average daily volume of 199,000 shares (read: ETFs to Tap as Investors Turn Most Bullish Since November 2021 ). MicroSectors FANG+ ETN ( FNGS Quick Quote FNGS - Free Report ) This ETN is linked to the performance of the NYSE FANG+ Index, which is equal-dollar weighted and designed to provide exposure to a group of highly traded growth stocks of next-generation technology and tech-enabled companies. The note accounts for a 10% share in each of these seven stocks. MicroSectors FANG+ ETN has accumulated $276.1 million in its asset base and charges 58 bps in annual fees. It trades in a moderate volume of 142,000 shares a day on average and has a Zacks ETF Rank #3 (Hold). Vanguard Mega Cap Growth ETF ( MGK Quick Quote MGK - Free Report ) Vanguard Mega Cap Growth ETF tracks the CRSP US Mega Cap Growth Index. It holds 79 securities in its basket, with the Magnificent Seven collectively accounting for 57.7% of the total assets. Vanguard Mega Cap Growth ETF charges 7 bps in annual fees and trades in a good volume of around 282,000 shares a day on average. The fund has AUM of $19.8 billion and a Zacks ETF Rank #2 (Buy). Invesco S&P 500 Top 50 ETF ( XLG Quick Quote XLG - Free Report ) Invesco S&P 500 Top 50 ETF follows the S&P 500 Top 50 ETF Index, which measures the cap-weighted performance of the largest companies on the S&P 500 Index, reflecting the performance of the U.S. mega-cap stocks. It holds 54 stocks in its basket and Magnificent Seven accounts for a combined 53.2% share. Invesco S&P 500 Top 50 ETF has been able to manage assets worth $4.4 billion but trades in a good volume of about 1.2 million shares a day on average. XLG charges 20 bps in annual fees and has a Zacks ETF Rank #3 (read: ETFs to Bet on Analysts' Bullish Forecast for S&P 500 ). iShares S&P 100 ETF ( OEF Quick Quote OEF - Free Report ) iShares S&P 100 ETF offers exposure to the 101 largest U.S. companies. Magnificent Seven accounts for a combined 45.2% share. iShares S&P 100 ETF has amassed $12.3 billion in its asset base and charges 20 bps in annual fees. It trades in an average daily volume of 194,000 shares and has a Zacks ETF Rank #3.

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