One reason why a hedge fund...
8.10 One reason why a hedge fund may prefer to avoid registration is to avoid making some of the disclosures required of a public company. For this reason, investors often receive less information about hedge fund investments than they would receive about mutual fund positions or other registered investment portfolios.
Investors may demand more disclosures than the minimum required of an unregistered hedge fund. The investor may receive as much information as would be disclosed if the investment was registered. Hedge funds do not need to make uniform disclosures to all investors, so some investors may be able to demand transparency and daily net asset values and other investors may receive only highly aggregated disclosures and no interim valuations.
Accounting
9.1 Although the question provides no information about the size of the
particular positions, it does provide enough information to calculate
the leverage. Suppose the hedge fund had $3 in debt and $1 in equity.
The fund would have $4 in assets. To calculate leverage, divide the assets
by the hedge fund capital. This hedge fund is levered 4:1. The
general case is:
A = Total assets held by the hedge fund
D = Total liabilities of the hedge fund
E = Equity or partners' capital
A = D + E
This is true for any capital structure!
9.2 The position is carried as an asset worth $25 million regardless of how the position is financed. The financing position creates a $12.5 million liability, not an asset. Because the fund financed half of the position, the cash balance is $12.5 million higher than the cash position would have been if no money was borrowed. Therefore, it might be argued that the position and financing would impact $37.5 million on the hedge fund assets.
9.3 The short position would be carried as a liability, not an asset. The cash collateral of $12 million would appear as a short-term asset.
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