Infographic: What is a Hedge Fund?
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What is a Hedge Fund?

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What is a Hedge Fund?

What is a Hedge Fund?

For many entry-level investors, hedge funds are shrouded in mystery and exclusivity.

It’s common, for example, for media coverage to focus on the ultra-wealthy founders and CEOs of hedge funds, such as Ray Dalio or Bill Ackman, as well as their secretive investing strategies or exclusive clientele. Like investment banks, they are seen as an elite fixture on Wall Street, and they also get scapegoated for a variety of market problems ranging from manipulation to a lack of transparency.

However, despite an image of complexity and secrecy, the basics around hedge funds are actually quite easy to understand. Today’s infographic from StocksToTrade.com highlights some of those key points.

Hedge Fund Basics

Hedge funds are generally structured in a similar manner to venture capital funds:

General partner: This partner is in charge of the fund, and invests capital based on the fund’s objectives.

Limited partner: This partner is an investor that supplies some of the capital. It’s worth noting that generally only accredited investors are allowed by the SEC to invest in hedge funds, as they are considered high-risk investments.

With the money from general and limited partners, the fund executes on its investing strategy. Hedge fund strategies can range from trading currencies with extreme leverage to using event-driven tactics such as taking activist positions in companies.

Other hedge funds, such as Renaissance Technologies, are known for their focus on trading using big data, AI, and machine learning – and for taking an outside approach to investing by hiring mathematicians, physicists, or other people with non-financial backgrounds.

It’s most common for hedge funds to use a “two and twenty” fee structure. Limited partners pay a 2% asset management fee, and a 20% cut from any profits generated.

Pros and Cons

Arguably, the biggest benefit of investing in hedge funds stems from the ability to partner with some of the world’s top investment managers, and to generate returns that do not correlate with the market. Hedge funds can help to diversify a portfolio – and when the general market is struggling, hedge funds using the right strategy can still provide a handsome return.

In terms of cons, hedge funds require investors to lock up money for extended periods of time, and also tend to charge significant fees. Lastly, the use of leverage can magnify small losses, and a lack of diversification within a given fund can lead to more concentrated losses, as well.

For more on hedge funds, see 48 key hedge fund terms every investors should know.

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Thematic Investing: 3 Key Trends in Cybersecurity

Cyberattacks are becoming more frequent and sophisticated. Here’s what investors need to know about the future of cybersecurity.

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The following content is sponsored by Global X ETFs
Global X BUG ETF Global X BUG ETF Holdings

Thematic Investing: 3 Key Trends in Cybersecurity

In 2020, the global cost of cybercrime was estimated to be around $945 billion, according to McAfee.

It’s likely even higher today, as multiple sources have recorded an increase in the frequency and sophistication of cyberattacks during the pandemic.

In this infographic from Global X ETFs, we highlight three major trends that are shaping the future of the cybersecurity industry that investors need to know.

Trend 1: Increasing Costs

Research from IBM determined that the average data breach cost businesses $4.2 million in 2021, up from $3.6 million in 2017. The following table breaks this figure into four components:

Cost ComponentValue ($)
Cost of lost business$1.6M
Detection and escalation$1.2M
Post breach response$1.1M
Notification$0.3M
Total$4.2M

The greatest cost of a data breach is lost business, which results from system downtimes, reputational losses, and lost customers. Second is detection and escalation, including investigative activities, audit services, and communications to stakeholders.

Post breach response includes costs such as legal expenditures, issuing new accounts or credit cards (in the case of financial institutions), and other monitoring services. Lastly, notification refers to the cost of notifying regulators, stakeholders, and other third parties.

To stay ahead of these rising costs, businesses are placing more emphasis on cybersecurity. For example, Microsoft announced in September 2021 that it would quadruple its cybersecurity investments to $20 billion over the next five years.

Trend 2: Remote Work Opens New Vulnerabilities

According to IBM, companies that rely more on remote work experience greater losses from data breaches. For companies where 81 to 100% of employees were remote, the average cost of a data breach was $5.5 million (2021). This dropped to $3.7 million for companies that had under 10% of employees working from home.

A major reason for this gap is that work-from-home setups are typically less secure. Phishing attacks surged in 2021, taking advantage of the fact that many employees access corporate systems through their personal devices.

Type of AttackNumber of attacks in 2020Number of attacks in 2021Growth (%)
Spam phishing1.5M10.1M+573%
Credential phishing5.5M6.2M+13%

As detected by Trend Micro’s Cloud App Security.

Spam phishing refers to “fake” emails that trick users by impersonating company management. They can include malicious links that download ransomware onto the users device. Credential phishing is similar in concept, though the goal is to steal a person’s account credentials.

A tactic you may have seen before is the Amazon scam, where senders impersonate Amazon and convince users to update their payment methods. This strategy could also be used to gain access to a company’s internal systems.

Trend 3: AI Can Reduce the Cost of a Data Breach

AI-based cybersecurity can detect and respond to cyberattacks without any human intervention. When fully deployed, IBM measured a 20% reduction in the time it takes to identify and contain a breach. It also resulted in cost savings upwards of 60%.

A prominent user of AI-based cybersecurity is Google, which uses machine learning to detect phishing attacks within Gmail.

Machine learning helps Gmail block spam and phishing messages from showing up in your inbox with over 99.9% accuracy. This is huge, given that 50-70% of messages that Gmail receives are spam.
– Andy Wen, Google

As cybercrime escalates, Acumen Research and Consulting believes the market for AI-based security solutions will reach $134 billion by 2030, up from $15 billion in 2021.

Introducing the Global X Cybersecurity ETF

The Global X Cybersecurity ETF (Ticker: BUG) seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Cybersecurity Index. See below for industry and country-level breakdowns, as of June 2022.

Sector (By security type)Weight
Cloud28.0%
Network25.1%
Identity17.7%
Internet15.0%
Endpoint12.8%
CountryWeight
🇺🇸 U.S.71.6%
🇮🇱 Israel13.2%
🇬🇧 UK8.2%
🇯🇵 Japan5.5%
🇰🇷 South Korea0.9%
🇨🇦 Canada0.6%

Totals may not equal 100% due to rounding.

Investors can use this passively managed solution to gain exposure to the rising adoption of cybersecurity technologies.

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Investor Education

Countries with the Highest Default Risk in 2022

In this infographic, we examine new data that ranks the top 25 countries by their default risk.

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Countries with the Highest Default Risk in 2022

In May 2022, the South Asian nation of Sri Lanka defaulted on its debt for the first time. The country’s government was given a 30-day grace period to cover $78 million in unpaid interest, but ultimately failed to pay.

Not only does this impact Sri Lanka’s economic future, but it also raises an important question: which other countries are at risk of default?

To find out, we’ve used data from Bloomberg to rank the countries with the highest default risk.

The Sovereign Debt Vulnerability Ranking

Bloomberg’s Sovereign Debt Vulnerability Ranking is a composite measure of a country’s default risk. It’s based on four underlying metrics:

  • Government bond yields (the weighted-average yield of the country’s dollar bonds)
  • 5-year credit default swap (CDS) spread
  • Interest expense as a percentage of GDP
  • Government debt as a percentage of GDP

To better understand this ranking, let’s focus on Ukraine and El Salvador as examples.

CountryRankGovernment Bond
Yield (%)
5Y CDS SpreadInterest Expense
(% of GDP)
Government Debt
(% of GDP)
🇸🇻 El Salvador131.8%3,376 bps
(33.76%)
4.9%82.6%
🇺🇦 Ukraine860.4%10,856 bps
(100.85%)
2.9%49%

1 basis point (bps) = 0.01%

Why are Ukraine’s Bond Yields so High?

Ukraine has high default risk due to its ongoing conflict with Russia. To understand why, consider a scenario where Russia was to assume control of the country. If this happened, it’s possible that Ukraine’s existing debt obligations will never be repaid.

That scenario has prompted a sell-off of Ukrainian government bonds, pushing their value down to nearly 30 cents on the dollar. This means that a bond with face value of $100 could be purchased for $30.

Because yields move in the opposite direction of price, the average yield on these bonds has climbed to a very high 60.4%. As a point of comparison, the yield on a U.S. 10-year government bond is currently 2.9%.

What is a CDS Spread?

Credit default swaps (CDS) are a type of derivative (financial contract) that provides a lender with insurance in the event of a default. The seller of the CDS represents a third party between the lender (investors) and borrower (in this case, governments).

In exchange for receiving coverage, the buyer of a CDS pays a fee known as the spread, which is expressed in basis points (bps). If a CDS has a spread of 300 bps (3%), this means that to insure $100 in debt, the investor must pay $3 per year.

Applying this to Ukraine’s 5-year CDS spread of 10,856 bps (108.56%), an investor would need to pay $108.56 each year to insure $100 in debt. This suggests that the market has very little faith in Ukraine’s ability to avoid default.

Why is El Salvador Ranked Higher?

Despite having lower values in the two metrics discussed above, El Salvador ranks higher than Ukraine because of its larger interest expense and total government debt.

According to the data above, El Salvador has annual interest payments equal to 4.9% of its GDP, which is relatively high. Comparing to the U.S. once more, America’s federal interest costs amounted to 1.6% of GDP in 2020.

When totaled, El Salvador’s outstanding debts are equal to 82.6% of GDP. This is considered high by historical standards, but today it’s actually quite normal.

The next date to watch will be January 2023, as this is when the country’s $800 million sovereign bond reaches maturity. Recent research suggests that if El Salvador were to default, it would experience significant, yet temporary, negative effects.

Another Hot Topic for El Salvador: Bitcoin

In September 2021, El Salvador became the first country in the world to adopt bitcoin as legal tender. This means that Bitcoin is recognized by law as a means to settle debts and other obligations.

The International Monetary Fund (IMF) criticized this decision in early 2022, urging the country to revoke legal tender status. In hindsight, these warnings were wise, as Bitcoin’s value has fallen by 56% year-to-date.

While this isn’t directly related to El Salvador’s default risk, it does open potential avenues for relief. For instance, large players in the crypto space may be willing to assist the government to keep the concept of “nation-state bitcoin adoption” alive.

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