Single-Strategy Funds of Funds

Fund of hedge funds (FoFs) are the instruments to allow individual investors to access the hedge funds industry. Fund of hedge funds can be constructed focusing on a specific type of hedge funds strategy.

Single-strategy funds contrast with multi-strategy FoFs, which usually rebalance the assets allocated to a certain strategy according to changes in market conditions and investment views.

Single-strategy fund of funds have less flexibility as they are concentrated on one strategy only. When a certain strategy is not performing well, single-strategy funds have little ability to move out, being at a disadvantage.

Given that hedge funds’ objective is to generate alpha, the ability to avoid certain strategies is a valuable alternative to FoFs, an alternative that single strategy FoFs do not possess. Both single-strategy and multistrategy FoF suffer from high management fees and incremental costs.

Single-strategy funds aim to find the best hedge fund managers and to minimize single-manager risk. Diversification is limited by the fact that hedge funds require minimum investment amounts that may be significant when compared to the size of the FoFs net asset value.

Typical hedge fund strategies are: convertible arbitrage, distressed securities, emerging markets, equity long biased and equity long only, equity long/short, equity short, market timing, event-driven, macro, sector funds, equity market neutral, merger arbitrage, statistical arbitrage, and fixed income strategies.

Davies et al argue that the apparent underdiversification of single strategy FoFs does not take into account improvements in the higher moments of the portfolio distribution and that skewness and kurtosis are most important in portfolio diversification.

Single-Strategy Funds of Funds

Skewness

Skewness is the third centralized moment of a probability density function. It is meant to capture the asymmetry of a distribution. A symmetric distribution (such as the normal distribution) has skewness of zero.

A distribution with a thick right tail and a thin let tail has positive skewness (or will be right skewed), while the opposite is true for a distribution with negative skewness (or one that is let skewed).

Skewness has important ramifications for asset return distributions. Negative skewness is undesirable, since it implies that large, unexpected movements in the asset price are more likely to lead to large losses rather than large gains.

Positive skewness, on the other hand, is more attractive because it implies that large movements in the asset price are likely to lead to large gains. A symmetric distribution implies that large movements are equally likely to lead to large losses or large gains. Many hedge funds, unfortunately, have return distributions that are negatively skewed.

Black–Scholes implied volatilities often exhibit a "skew" when plotted over time. One possible explanation for the volatility skew is that asset prices exhibit skewness, which the normal distribution does not allow.

Skewness

Sliding Fee Scale

Sliding fee scale is a fee as a percentage of assets that increases or decreases over the life of a partnership. Investment firms commonly receive fees that decline as a percentage of assets as the managed asset size increases or a certain time period has past. In addition, investment firms can receive performance or success fees that increase as a percentage of assets as set targets are reached.

Examples of declining fees are investment banks that charge a finder or capital raise fee as a percentage of assets that decreases as the size of the assets purchased or sold increases. An another example would be private equity firms that charge management fees as a percentage of total committed capital, and later scale down this fee after the investment period has ended to reflect the reduced due diligence and transactions done by the general partner. A third example would be a fund of funds that charge investment management fees that decreases as a percentage of assets as the size of the assets invested increases.

Examples of increased fees are hedge fund managers who receive an incentive or performance fee that increases as a percentage of assets as certain return thresholds are met. Another example would be an investment bank that receives a success fee as a percentage of assets that increases if top dollar for assets sales are attained.

Sliding Fee Scale

Social Entrepreneurship

Social entrepreneurship is the application of entrepreneurial approaches to social problems. In commercial entrepreneurship, private wealth creation and profit maximization are often the primary goals.

In contrast, social entrepreneurship directly aims at solving social problems and creating social value. An example of a social entrepreneur ot en mentioned is the Nobel Peace Prize winner Muhammad Yunus who revolutionized micro credits and founded the Grameen Bank in Bangladesh.

Social entrepreneurship is part of the citizen sector, which has increased strongly over the last decades (Bornstein, 2004). Social entrepreneurship has caught the public attention in the United States during the mid 1980s and it is significantly increasing since the mid 1990s. Social entrepreneurs play the role of change agents in the social sector, by:

• Adopting a mission to create and sustain social value (not just private value)
• Recognizing and relentlessly pursuing new opportunities to serve that mission
• Engaging in a process of continuous innovation, adaptation, and learning
• Acting boldly without being limited by resources currently at hand
• Exhibiting heightened accountability to the constituencies served and for the outcomes created.

But this is not the only definition; no universal definition has emerged yet. One important issue of debate is the question whether earned income strategies are a prerequisite for being a social entrepreneur. Common across all definitions is the focus on social value creation with an innovative approach.

As long as the entrepreneur is primarily trying to solve a social problem, he might even use a for-profit-organization. Whether a non-profit or for-profit-organization is chosen is solely determined by whichever organizational form is best suited to achieve the social entrepreneur’s goals.

For commercial entrepreneurs, wealth creation is a proxy for value creation because efficient businesses make profits and inefficient businesses are driven out of the market. This mechanism does not work in the social entrepreneurship sector because markets do not do a good job of valuing social improvements, public goods and harms, and benei ts for people who cannot af ord to pay.

As a result, it is much harder to determine whether a social entrepreneur is creating sufficient social value to justify the resources used in creating that value. To overcome this problem the social impact has to be measured, but at least so far this is a difficult, time consuming, and sometimes even impossible task.

The term social entrepreneur was coined by William Drayton, the founder of the organization Ashoka, which identifies and supports social entrepreneurs. Other organizations that support social entrepreneurs have followed, for example, foundations, venture philanthropy funds, and social venture capital funds.

They are intermediaries of ering private investors the possibility to invest money into social entrepreneurship. The financial rates of return these funds try to achieve range from minus 100% (only grants) to almost market rate returns.

Social Entrepreneurship

Social Venture Capital

Social venture capital, also known as venture philanthropy, is a term for an active, hands-on form of philanthropy that adopts methods used by traditional venture capitalists. There is no single approach to social venture capitalism as venture philanthropists adopt techniques on a selective basis from traditional venture capital methods; three of these are usually included in any discussion of social venture capital.

First, social venture capitalists, like their traditional counterparts, do extensive due diligence. They think of their actions as investments rather than grants and they are highly selective. They closely evaluate various elements before they invest in a social or charitable organization, including the strength of their management team, the risks they face, and their opportunity to make an impact.

Second, social venture capitalists closely monitor their investment and provide ongoing mentoring and support to the group. Finally, social venture capitalists carefully evaluate an organization’s scalability, or their capacity to grow rapidly to address a particularly widespread social problem.

For example, a venture philanthropist looking at a particular issue—famine in Africa—may provide seed funding to three or four agencies and then judge the success each of these has in dealing with the problem and evaluate which approach shows the greatest potential and progress. Once this evaluation phase is completed, the philanthropist looks to provide much larger amounts of money to the selected agency.

The social venture capital movement is not without criticism. Detractors argue that unlike traditional venture capital where a single measure—money—predominates, the not-for-profit world often has multiple objectives, many of which are dii cult to measure.

They also question whether scalability is realistic in the social context, given that any large organizational ef ort usually involves local governments and therefore cannot grow signii cantly without bureaucratic involvement.

Finally, since the ultimate goal of a venture capital investment is a successful exit, it is not clear whether any parallel exists in the social sector. Social venture capital can also be used as a term for a venture capital firm that includes specific social objectives as goals in addition to seeking a return on capital for its investors.

Social Venture Capital

Soft Commodities

Commodities are generally classified into two sectors: hard and soft. Hard commodities include energy, industrial metals, and precious metals. Sot commodities are weather-dependent, perishable commodities for consumption, such as agricultural and livestock products. "Softs" in the narrower sense are luxury foods, such as cof ee, cocoa, sugar, and orange juice, which originate predominantly in tropical and/or subtropical regions.

We can also categorize the following as soft commodities: food and consumer products (e.g., wheat, corn, soybeans, coffee, cocoa, and sugar), industrial agro-raw materials (e.g., cotton and timber), and animal agro-raw materials (e.g., feeder cattle, live cattle, and lean hogs).

Renewable commodities like grains can be produced virtually without limitation, except for the issue of farmland availability. The supply of some commodities exhibits a strong seasonal component. For example, metals can be mined almost throughout the year, but agricultural commodities may depend on a harvesting cycle.

Soft commodities, furthermore, have storability limitations. Livestock, for example, is storable to only a limited degree. It must be continuously fed and housed at current costs, but it is only profitable in a specific phase of its life cycle.

Soft commodity price fluctuations are driven mainly by supply and demand imbalances originating from the business cycle or from unexpected weather patterns. Natural disasters caused by climate change or extreme cold, wetness, or drought can put agricultural commodity crops at risk, which inevitably leads to a price increase.

In addition, the gradual switch from the use of fossil fuels to a larger dependence on biofuels has intensified demand for soft commodities and triggered a change in their use, for example, corn and sugar can increasingly substitute for gasoline.

World population growth and ongoing industrialization and urbanization in emerging markets have also triggered higher demand for soft commodities due to lower global storage. As a result of high price fluctuations, producers, exporters, and traders now commonly hedge their positions with commodity futures. Soft commodities futures contracts are traded mainly on the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Board of Trade.

Soft Commodities

Soybean Market

The Soybean Market is major grain commodity, in the United States, typically planted in the month of May and harvested in September or October of the same year. Soybeans grow mainly in the upper Midwest part of the United States, but are also found in the south and southeast.

Upon harvest, most soybeans are crushed to produce either soybean oil or soybean meal, however, some whole soybeans are roasted and eaten as snacks or used in foods such as tofu. Soybean meal is the largest source of protein for livestock and soybean oil is used in oils, salads, and margarine. Soybean oil is the largest source of vegetable oil in the United States.

Futures contract in soybeans are traded on the Chicago Board of Trade, in quantities of 5000 bushels and are used by both end users for price protection and speculators who wish to profit. Cash prices for Soybeans currently average about $9.00 per bushel, with 3.2 billion bushels supplied and total usage (demand) of about 3 billion, for a market surplus of 200 million bushels. The United States is the world’s largest producer and exporter of soybeans.

Soybean Market