Hedge Funds in Nigeria
What are hedge funds?
Hedge funds are finance companies that pool together funds from investors for the purpose of investing them in a wide range of assets and financial instruments that are risky. They gear towards making high returns on investment no matter the state of the market. It is a collection of assets meant to hedge risks to investors’ money from the fluctuations in the market. Hedge funds are managed by fund managers whose job is to make smart investment decisions for the benefit of the investors. The investment plans can be in
- Buying and developing privately owned businesses
- Real estate
- Government bonds
The hedge fund manager pools resources from only accredited investors. He invests in the above-mentioned investment plans plus any other plan (commodities, currencies etc) that will yield dividends no matter how risky it is.
Top five fund managers in Nigeria are:
- Stanbic IBTC Asset Management Limited.
- FBN Capital Asset Management Limited.
- UBA Asset Management Company.
- Asset and Resources Management Limited.
- Chapel Hill Denham Management Limited.
- Too Big to Fail.
The fund managers get their payment in basically two ways:
- Percentage of the capital invested in the fund plus percentage on profits made from the investment and
- Percentage of profits made on the investment only
Hedge fund investors are professional and elegant organizations and high net worth individuals who have the financial capacity to take high risks. These investors can be sourced for, through the following channels: Social Media, Alumni Events, Online Forums, Angel Groups.
The demerit of investing in Hedge Funds in Nigeria is:
- Any regulatory body does not control them. This makes it risky to invest in them
- They cannot be forecasted explicitly, therefore, they are likely to lead to a loss
- The investment cannot be converted to cash(it is illiquid), therefore, it cannot be pulled out of investment
- Its tendency to huge losses is quite high. This is because it involves a concentrated investment
- Investing with borrowed money increases the effect of a failed investment
- Money invested in the fund remains inaccessible for a number of years.
How do hedge funds make profit?
This involves buying fixed-income securities from a lower-price market and selling it at a higher price in order to make profit. Examples of securities that can go through this process are: treasuries, bonds etc.
- Stock picking
In stock picking, expertise is required to identify and buy stocks that have the potential for high returns on investment while selling the stocks that do not have sign of high performance. Stock picking is meant for experienced fund managers.
In this case, hedge fund managers identify companies that are about to, or have already gone moribund, and buy over their debt, thereby taking
Event-driven strategy is a strategy in which hedge funds buy the debt of companies that are in financial distress or have already filed for bankruptcy.
- Quantitative Analysis
With this strategy, hedge funds study the investment trend using mathematical research method using technology.
Requirements to start a hedge fund in Nigeria:
- Duly signed Forms
- Form SEC 3 (For the Company)
- Form SEC 2 and 2D: Sponsored Individuals and Compliance Officer should complete this form in duplicates
- Form SEC 2 and 2D: meant for completion by the Directors of the Company in duplicates
A compliance officer’s duty is to ensure that the fund abides by the rules and regulations of the security and exchange commission, under the law of the federal republic of Nigeria and ISA 2007.
- Evidence of Payment of Filing/Application Fee
- Evidence of Payment of Processing Fee
- Evidence of Payment of Registration Fee
- Evidence of Payment of Sponsored Individual Fee
- Sponsored Individuals and Directors with their data and documents
- No less than three sponsored Individuals, including one compliance officer;
- Managing Director of the Company
- Contact/postal addresses of last employer and those of nominated referees of sponsored individuals;
- An up-to-date résumé is presented by the sponsored individuals as well as the directors.
- Photocopies of other credentials of sponsored individuals: SSCE, a certificate from a Higher institution, plus NYSC discharge certificates.
- A proof that the Sponsored Individuals have the requisite minimum of four years post-graduation experience to adequately carry out the Fund/Portfolio Manager Function as directed by the SEC’s guidelines;
- Each sponsored individual will have to present a police clearance report and two recent passport photographs at the SEC’s Abuja or Lagos zonal office for verification.
- Photocopies of means Identification of the Directors and the Sponsored Individuals of the Company eg International Passport,
- Minimum Paid-Up Capital and Fidelity Insurance Bond
- Proof of having paid the required minimum Capital of N150,000,000 (One Hundred and Fifty Million Naira) in the form of Bank balances, fixed asset or investment in quoted Securities);
- Current Fidelity Insurance Bond covering at least 20% of the minimum paid-up capital as stipulated by the Commission’s Rules and Regulations
- Applicant Company
- Detailed profile of the company, which include data such as a brief history of the company, structure of the organization and shareholding, record of company’s activities, principal officers etc
- The names and contact details of the other smaller companies under the parent company, what they do as well as percentage holding;
- Proof of Payment of portion of shares given to the shareholders;
- Company’s organizational chart
- Business plan;
- Company’s statement of accounts from the bank shows transactions for the last six months;
- Business Documents
A copy of each of the following, duly certified by the CAC;
- Certificate of Incorporation
- Memorandum of Association
- Articles of Association
- CAC Form(s) showing Statement of Share Capital, Return of Allotment, and Particulars of Directors
In conclusion, hedge funds are investment portfolios that give a high return on investment, though with high risk. That is why it is best suited for big organizations and high net worth individuals who have the financial shock absorber to cushion the devastating effect of any losses.
The unregulated nature of hedge funds in Nigeria makes it risky. It is advisable to engage the services of a financial savvy fund manager that will make prudent investment decisions.
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