Pooled Investment Vehicles – Non-Traditional Hedge Fund Strategies

The term “hedge fund” is really a misnomer as most hedge funds are not hedged.  A better term would be pooled investment vehicle.  Traditional types of pooled investment vehicle structures include hedge funds, private equity funds, venture capital funds, real estate funds, and “hybrid” funds (funds which combine components of the above).

This article is going to discuss other types of non-traditional hedge funds, that is hedge funds which do not fall within the typical types of hedge fund securities trading strategies (long/short equity, multi-strategy, global macro, fixed income, equity market neutral, managed futures, etc). As more people become familiar with hedge funds and become interested in investing in them, managers will begin to create funds to fit specific demographics.  The following are interesting projects which can be accomplished through the hedge fund (or pooled investment vehicle) structure:

Green Hedge Funds – in a vein similar to the Vice Fund*, hedge funds can concentrate their investments in any specific hot area. Green companies is currently a hot area and many people are already calling a bubble in “green” companies, at least in the private equity space.  According to this article by Richard Wilson, mandates at institutional level to invest in “green” hedge funds are expected to significantly increase in the coming years.

Horse Racing Hedge Funds – there are two ways that a fund like this would work.  First, the hedge fund can actually pool investor money and then the manager would place bets on various horses through various betting establishments.  With a fund like this the sponsor would need to make sure to disclose the exact nature of the program so that any legal or gambling issues could be vetted before the hedge fund launch.  Second, the hedge fund could buy racing horses and then race them for profit.  There are already these types of pooled vehicles out there and they are usually have a private equity structure with capital calls.

Gambling or Online Gambling Hedge Funds – with the rise in popularity of Texas Hold-em on television and the proliferation of online gambling there has been discussion of hedge funds devoted to making money from this phenomenon.  Basically this would be done through pooling money and then allocating to traders (live or online) who would then play with money.  With a fund like this there are many issues, not the least of which is the illegality of gambling in much of the US and online.  It is likely that a gambling attorney would need to be brought in to opine on the issue of the legality of such a fund.

Sports Betting Hedge Fund – like the gambling hedge fund, sports betting presents a very attractive opportunity for potential hedge fund managers.  A couple of years back Mark Cuban discussed the idea of a sports betting hedge fund on his blog (blog post).  While his fund never got off the ground, I have heard of other potential hedge fund sponsors trying to get a fund like this launched.  I have not yet heard of a successful fund like this, but I think it is just a matter of time.

Lottery Hedge Fund – about a year and a half ago I had the idea of starting a lottery hedge fund which would pool money to buy a large amount (or all possible number combinations) of number combinations at one of the very large lottery drawings.  While it is feasible to create a fund to do this, there are many technical issues which would need to be resolved if a fund like this was to launch.

Charitable Hedge Funds – while not necessarily having a different strategy from traditional hedge funds, these charitable hedge funds would take a portion of their profits and devote them to charitable causes.  Presumably the sponsor of a charitable hedge fund would create such a fund for his network of friends and family, all of whom would have similar views on the nature of the charitable donation.

Shariah Compliant Hedge Funds – such funds have become more over the past couple of years and are expected to continue such growth in the future.

Other Issues – in general, establishing a non-traditional hedge fund or pooled investment vehicle will involve the same basic steps as forming a hedge fund (see Start Up Hedge Fund Timeline).  The key issue is what type of assets the fund will buy and sell.  The nature of the assets will necessarily drive the structure.  These are they types of issues you would discuss with your attorney, include whether the manager will need to be registered as an investment advisor. Other articles of interest may include:

* The Vice Fund is a mutal fund which invests in domestic and foreign companies engaged in the aerospace and defense industries, owners and operators, gaming facilities as well as manufacturers of gaming equipment, manufactures of tobacco products and producers of alcoholic beverages.  The website can be found here.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.