Frequently Asked Questions
What is a Hedge Fund?
A hedge fund usually refers to a type of equities investment fund that holds investments which are both “long” and “short” positions. A long position is a holding that the investment firm believes will rise in value and a short position is a holding that the firm thinks will fall in value. Long positions are established by simply purchasing the shares on the market. Short positions are created by “borrowing” the shares from other holders (utilising a market mechanism established for this purpose) then selling the borrowed shares with the objective of buying the shares back in and returning them to the lender when the share price has fallen. The difference between the sale price and cheaper repurchase price is retained by the firm as the profit on the position.
The expression ‘hedge fund’ has expanded these days outside the area of listed equities to sometimes include investments in other asset classes or to involve share investing in a particularly incisive and concentrated manner utilising a high conviction approach – such as allocating 50% of its available investment capital to its 5 best ideas. To summarise, you could say that “a hedge fund is a pool of money contributed by investors and run by a fund manager whose goal is to maximise returns and minimise risk”.
Why the ASX?
CVI Partners’ focus on the ASX is simply because there’s a lot more opportunities to find bargain-priced shares on the ASX than the New Zealand stock exchange. Partly it’s a factor of the much larger dynamic Australian economy but also because Australia is simply a more entrepreneurial place where businesses develop huge ambitions and pursue them, perhaps there’s more acceptance in Australia of the idea that wealth creation is a highly positive thing. There’s about 2000 companies listed on the ASX versus the NZX’s 165. There’s simply more profit-producing options to choose from and a lot more “shorting” activity, which is helpful in pulling the price of troubled companies down quickly and creating bargain situations we might be interested in. There’s a heck of a lot more liquidity. For a firm like ours, there’s both fun and profit to be had on the ASX that doesn’t exist in New Zealand.