Vancouver, British Columbia, V1V 1V1
September 28, 2011
Mr. James Dimon, CEO
J.P. Morgan Chase & Co.
270 Park Avenue,
New York, NY 10017
Subject: New market for hedge funds
Dear Mr. Dimon:
It is a pleasure for ABS Consultants to be working with J.P. Morgan Chase & Co. As follow-up to our initial conversations, we have considered various trends occurring within the financial arena, and have identified one trend specifically within the space of alternate investments that would most benefit your firm. The concept underlying this trend is the lack of accessibility to hedge funds for non-accredited retail investors, and through the implementation of the forthcoming proposed structure, we are confident J.P Morgan Chase with be able to provide added value to both its clients and its investors.
Hedge Fund Market: The Trend
From the inception of the first hedge fund in 1949 by A.W. Jones, skepticism has surrounded this investment vehicle. Over recent years however, the benefits of diversification have caused a wider breadth of investors to look past their mystique and gain reasonable insight into the investment alternative that has been attracting some of the most affluent of investors for well over 50 years. Now, as mutual funds prove to be by comparison quite inefficient, and a reversion to general stock picking proves difficult with current market turbulence, more and more of the investing public are looking to alternate vehicles. This trend is quickly becoming resolute. Credibility for this is drawn from the massive purchases of mortgage-backed securities in 2007-2008, valued at $8.91 trillion in 2009 even after recessionary levels of write-offs had occurred. Furthermore, with market activity steadily globalizing2, opportunities created by capturing such a trend are incalculable.
Hedge Funds: The Structure
Hedge funds are unique as an investment vehicle primarily for one reason: their structure. Hedge funds are set up as partnerships, with investors gaining access to management techniques by signing on as limited partners. In this format, investors have no
responsibility for running the company, or in this case as the company consists primarily of the fund, managing that pool of capital. The investors are instead legally guaranteed a proportional percentage of the profits, less management expenses.
Advantages and Disadvantages of the Structure
This structure has both its pros and cons. The benefits come from all investors being partners. Based on the assumption that a “partner” chooses to take such a position based on a full understanding of his or her company and its operations. In this case, the company refers to the fund manager(s), with operations being replaced by trading techniques and strategies. As investors are accordingly assumed to have done prudent research before taking their position, the fund is able to assume any strategy it chooses, invest in any asset class, take both long and short in investments, and utilize leverage as is determined advantageous. The only restriction to this is that the fund’s board of directors must approve any major strategic changes, however as this board generally consists of the fund manager and some or the larger investors in the fund, we can assume this to be a minor formality in most cases. The second advantage is derived from the same underlying principle: hedge funds adhering to the accredited investor policy and having less than 499 “partners” do not have to register with the Securities and Exchange Commission (SEC), which allows the funds to evade public posting of financial results, and more importantly does not require they release their investment strategy publically. This allows funds to retain their competitive advantage on a specific investment strategy for long periods of time without other funds replicating the...