Mondial Global Investors

FAQs - Frequently Asked Questions

What is a hedge fund?
A hedge fund is a fund that has the ability to go short, as well as long. This ability to go short enables the fund to hedge its investment exposure. Therefore, the fund is able to make money in a falling market, unlike a conventional long-only investment vehicle, such as a unit trust or mutual fund.

What role can alternative investments play in a portfolio?
As you know, traditional investment vehicles focus on relative performance based upon a standard market benchmark. As opposed to traditional investment vehicles, which aim to outperform a standard market benchmark, alternative investments can offer institutional investors diversification, a lower correlation (or non-correlated return relative to overall market), and risk-adjusted absolute returns.

How fast is the alternative investment industry growing?
In 1990, there were about 600 hedge funds worldwide with assets of approximately $38 billion. According to industry publications, at the end of 1998, despite even the much publicized collapse of Long Term Capital Management, there were some 3,300 hedge funds with assets of approximately $375 billion. KPMG Peat Marwick and RR Capital Management Corp., in a March 1998 report, projected an approximate 26% annual growth rate of hedge fund assets, likely resulting in a $500 billion market in 2001, and growing to $1.7 trillion market within the next ten years.

Why invest in hedge funds?
Hedge funds are investment vehicles that usually aim for a risk-adjusted absolute return, as opposed to traditional investment vehicles, which aim to outperform a standard market benchmark (such as the S&P 500 or Russell Index). Hedge funds have a higher degree of flexibility in the instruments that the fund can invest in. For example, a hedge fund can invest in nearly any and every investment instrument that exists. Many but not all hedge funds invest in derivatives-instruments that derive from an underlying security. Some of these instruments include options, futures, convertibles and warrants. There are four main reasons hedge funds use derivatives: to reduce risk, to capture a manager's opinion in a cost effective way, to exploit inefficiencies in the pricing of derivatives arising from intrinsic pricing complexities, and to increase exposure without excessively expanding the fund's balance sheet. Hedge funds have a high degree of flexibility in the investment strategies they employ. A hedge fund manager can use leverage, short selling, arbitrage, or a focus in a specific industry or kind of security. Managers can be active on the long and short side of the market. The diversity of strategies and instruments utilized by hedge funds results in the low correlation to typical equity market benchmarks. This relates to the belief that performance has more to do with superior stock selection than market direction.

 Does MGI use gearing?
The funds will only be geared when we consider it appropriate. It was not geared in 1997, and geared only a small amount for short periods in 1998 and 1999.

 Do you run a market neutral fund?
No. It is the exposure that matters. We normally have a mixture of longs and shorts. The number and type of positions depends on a combination of available opportunities and prospects for the markets.

How do you protect the portfolio when markets are falling?
By cutting long positions when stop loss limits are hit, increasing cash and opening up more shorts in stock index futures. Our defensive stance means that often we profit in falling markets.

Do you use derivatives?
Yes, but we tend to avoid options as they are expensive. We will trade warrants and index futures to gain or reduce exposure. We do not use OTC derivatives such as swaps.

Are you bottom up or top down?
Both. We are stock pickers, but like to operate in favourable conditions. Our global outlook allows us to choose favourable markets. We do not "fight the market". If the economic outlook for a country/sector is poor we avoid trading that market. We do not have to be in the market. We do not aim to relatively outperform a benchmark, we aim for a positive absolute return. In this we have been successful since 1997 with only two quarters where we have produced negative returns in four years.

 Do you hedge your currency exposure?
The portfolio is Dollar denominated so we hedge non-dollar exposure back into the dollar when we deem it advisable.

 What is a normal size position?
We try to focus on a small number of positions (less than 20), and the normal size would be 5-10% of the net assets. Typically we scale into positions over time. We operate very flexible parameters

 Why did you set the up Fund up in the Bahamas?
No witholding taxes, and a well regulated centre for offshore funds.

 Where can I see the price?
A monthly NAV will be available on Bloomberg and direct from us.

How does your high-water mark work?
Unlike some other hedge funds, the high-water mark is not cancelled at each year end. If the NAV falls below its high, no performance fee is payable until the previous high is again exceeded.

 Why the move into private equity/venture capital?
Profit. A recent investment in a Hong Kong electronics company has shown a 1750% return. Successful growth companies often have their most dramatic returns prior to public listing Due to the illiquid nature of this kind of investment we plan to allocate less than 10% of funds to this type of risk.

What is the minimum investment?
$1 million.