Shallow Swim In Strategy Maps

I was going through chapters from a book by Robert S Kaplan & David P Norton titled Strategy maps and found some interesting points related to measuring the effectiveness of strategy which I would like to share with larger community.

Successful execution of strategy requires three components:

{Breakthrough results} = {Describe the strategy} + {Manage the strategy}

The authors say that the philosophy behind these three components is simple:

• You cannot manage (third component) what you cannot measure (second component)
• You cannot measure what you cannot describe(first component)

Let me now introduce you two key terms which help us provide lot of information around a strategy implementation and how can we as an organization seek measurement of it.

Balanced Scorecards are performance management tools that translate an organization’s vision and strategy into a sensible distribution of performance measures. The Balanced Scorecard model prioritizes these measures around three non-financial perspectives (Internal Process, Learning & Growth, Customer) in additional to the traditional financial perspective.

Now taking this further, it is necessary to graphically describe a strategy by explicit cause-and-effect relationships among objectives in the four BSC perspectives. This helps to bring out much desired relationship between strategy and its implementation & this particular void is filled by strategy map of a company. This concept and framework of strategy maps has been coined by Robert S Kaplan & David P Norton.

The exercise of creating strategy map clarifies the logic by which the company’s strategic goal will be achieved and visually communicate different components or elements of strategy. The framework of strategy maps links short term and long term financial aspirations of a company to the differentiated value that the company needs to provide to the customers to ensure their loyalty both in current and future time frame. While every organization’s strategy map is different, the authors have come-up with a generic strategy map to serve as a starting point for any organization in any industry. If we revisit the equation as stated above, the BSC helps us address the second component by showing how to measure strategic objectives in multiple perspectives. With introduction of strategy maps equations gets translated into:

Breakthrough results = {Strategy Maps} + {Balanced Scorecard} + {Strategy-Focused Organization}

Strategy maps apart from clarifying the strategy of the company through cause and effect relationship also help in identification of:

• Targeted customers and the attributes of the products and services that they value.
• Key processes of the company that deliver the company’s strategy.
• Identification of intangible assets that would support the processes that deliver a company’s strategy.

Through this framework introduced By Robert & Norton one can get to know the following:

• How value gets created in the internal and learning and growth perspectives.
• Themes, based on value-creating processes that articulate the dynamics of strategy.

Identification of intangible assets is one of the most important aspects of strategy maps, as most organizations fail to establish a link between their intangible assets and fulfillment of their strategic goals. Often it is seen that HR has little or no alignment with the strategic goals of the company. Strategy maps help in converting intangible assets into tangible outcomes for following classified intangible assets:

• Human capital (employee skill and knowledge)
• Information capital (databases, information systems, networks and technology infrastructure)
• Organizational capital (culture, leadership, employee alignment, teamwork and knowledge management)

The value of intangible assets can not be directly or independently measured but their value derives from their ability to help the organization in implementing its strategy, which can be ensured through strong linkages created by strategy maps & also it provides the managers with the required granularity to describe and manage strategy at an operational level.

You can refer to following website to view a sample of the strategy map which helps clarify further how the linkages are useful in bringing out meaningful information for measuring strategic outcomes in an organization: Sample Strategy Map

An evening at McDonalds..

It was a nice Sunday evening when I went to Mc Donalds. Now of course there is nothing great about going to McD but the story is yet to come. Please keep reading…However this is just a request to the reader to keep reading and in no way I guarantee any intellectual stuff coming up. The reader is the sole guarantor of wasting his time. Coming back to the story so I was in McD and I ordered a Coke which I demanded to be chilled. Further I asked for some French fries. (This was an evening snack guys.. so I contended myself with just this much…) However I had to rush back soon for some urgent assignment. So I asked the guy how much time it would take for the French fries. As against my expectation, he said 3 minutes, which was just what I wanted. So I sat there waiting for my French fries to be delivered….three, four, five …ten minutes passed but I didn’t receive much awaited French Fries…Now I got restless. In normal scenario (i.e before coming to SPJAIN-PGPM…at time I was an MBA illiterate) I would have blasted the guy,got the Fries, ate it and would have been on my way to college…But what happened later was something serious…I sat there thinking about the entire conversation. I am sure as PGPMites  read they will understand the cause of my thought process….and Yes this is where is the punch of the story lies….so I would suggest the reader to continue reading…I assure it’s going to be interesting…

My thought process:

Events (thoughts)

I saw beautiful French fries poster displayed at the counter (This was an Invitation to offer)

I said: “I would like to have French fries” (Yeah this would be.. offer)

McD boy: Sure Mam (Promise with consideration/Agreement)

I said: But first tell me how long would it take for French fries (Implication of my law studies:-Conditions)

Mc D: Not more than three minutes Mam. (Here he got trapped……Finally the Qualified Acceptance)

I said: Ok. Get me one. (Contract)

This wasn’t the end guys…When I was not delivered the French fries in three minutes…I did thought of various sections and legal cases that could be acted upon the poor guy…I wasn’t sure if  he would ever understand my mental state…so I controlled all my emotions,got my pack of fries with me almost after 11.5 minutes and went on my way.

This is what a Business law class in an MBA curriculum does to you.….thanks to Prof. D.M. Damle for all his impressive lectures…We all just adore you sir!!

SAMVAAD

Strategy – Art of Selling – II

As a part of our guest Lecture series “Samvaad” we once again had the opportunity to listen to Mr. Sanjay Ray who is Director, Solutions Engineering and Pre-sales at SAP India.

This time he spoke about “Strategy – Art of Selling”, role of Business Development and Sales team in an IT company. He started with the example of Cisco whose latest product offering Human network, suggest the way in which a company can relate to the needs of its customer. Sanjay’s Lecture started with “The customer Engagement Lifecycle”,which can be represented as below:

VIP MAP–>Qualification MAP–>Value Proposition–>Differentiator Matrix–>Presented Contracts

VIP MAP is a jargon used to express three key parameters:

Vision: This means understanding the vision of your customer. What they want to achieve.

Indicator: To know how are the customers progressing?  How are they doing in strategy?

Pain: Indicates reduction in pains of your customer. The IT product map you give should be aligned to the customer’s vision map.

What is Lead generation : The Business Development Team and Sales team sit together at the start of the year and decide on number of leads in year.

• Don’t focus at “Pains” of customer but focus at their “Vision”.
• The Lead should be validated through value assumption
• Until you have clarity that your product is feasible and aligned to customer’s vision, don’t take it up.
• Even if you have a proposition but the chances of conversion are lower in customer then it is better to DROP.

You drop a customer if there is

Distraction

Risks are bigger

Opportunity &

Potential then

DROP the PROSPECT

The Qualification MAP asks to check on following:

Customers

• Customer Profile: Example “Selling of ERP to Real Estate or Jewellery Industry”.  Few years back Real Estate felt no need to implement any T solution to maintain their projects and work. However the long term vision and increase in sector was perceived well and today most of the real estate business going global know how important it is to implement ERP system.
• Financial Situation of customer: In most cases the customer won’t buy your Product if his financial situation is grave. However in few cases if customer’s need is critical and your product feasibility aligns with customer’s vision and his survival then it is sure the customer would accept the offer. Example: Eureka Forbes struck a deal with IBM
• Project Framework: Make sure the customer has a team or Project that can evaluate your product
• Drivers and Requirements
• Date of Rating

Project

• Customer Relationship: One of the most important criteria. It is actually the relationship that makes the deal work. In most of the cases the Technologies are more or less similar eg. Outsourcing capabilities of WIPRO and Infosys are similar but who would get the deal is decided by customer relationship.
• Political Situation: This is another very important criterion.For eg, “You have good customer relationship with CIO . But your competitor gets the deal.Why? He knew the CFO. And unfortunately CFO is the decision making.” Bottom line : Understand the Politics of Customer’s Organization.
• Expectation Matching
• Decision Making

Risk

• Prospect Resources: If customer doesn’t has the right kind of people who can use your product and services then better drop the customer.
• Competitive Differentiation
• Relative Value Add
• Our resources

Solution Selling Phase

• This is the showcasing of Products and services.
• Make sure you don’t showcase all features here.
• Identify specific areas and specific indicators here.
• Customer seeks in you the capability they want.

In fact if customer sees the number of computers, the number of people, and the number of systems you have deployed then he may actually assume his costs for implementing your product may be higher and the customer may divert.

Value Proposition:

Few Questions to ask and remember in Value Proposition are:

• Understand the value for customer
• Convey to the architects: The architects are actually the technical people. You are required to give them briefing note
• Why us and not others (competitors)
• Which factors are decisive for success of project
• What is our solution
• What is the prospect aiming to achieve
• Why does Prospect need to act

Identify–>Evaluation Phase–>Solution Selling–>Decision Making–>Implement

The SAMVAAD for 13^th June 09 ends here. Waiting to hear soon from Mr. Sanjay Ray soon on further phases of “The art of selling”.

PGPM Admission advertisement in Economic Times – 8 June

Click Ad to enlarge

PGPM is now MBA accredited by AMBA

About AMBA

The Association of MBAs is the international impartial authority on postgraduate business education. Their accreditation service is the global standard for all MBA, DBA and MBM programmes. They accredit over 157 programmes in 71 countries.

They are the only professional membership association for over 9,000 MBA students and graduates, accredited business schools, and MBA employers.

About PGPM

Post Graduate Programme in Management (PGPM), is a One Year, full-time, residential programme at S.P. Jain Institute of Management & Research. The mission of PGPM programme is to create and nurture value-based future leaders taking on higher management roles in transforming organizations. This programme is specially designed for experienced professionals, with minimum work experience of 5 years.

In quest for sustainable HRM strategy

I was having a small discussion with my HRM professor on different facets of formulating a sustainable HRM strategy which is not a mere lip-service but beyond that. I thought I would share some of those thoughts which were provoked as part of the questions posed and how we can build on the ideas to reach our goal. Some of the questions which came to my mind were very basic but I guess atomic level details are always basic in nature and it is from there you start to build upon the foundation that leads to more concrete ideology.

We talk a lot about the fact that can we work in consulting, or can we go to FMCG sector after doing MBA? Would it be possible to take a lateral shift totally un-related to our previous work-profile…?. I think so it is possible to an extent but it is not something which can be achieved just by your efforts because a business runs on two facets – External positioning and internal strength .The former means to be substantially and differentially present to meet customer’s expectation and build customers’ engagement. The latter means its attitude of its people to improve processes and remain cost competitive. Many a time’s company’s focus on the external positioning rather than on the internal processes and especially in a business upturn situation and in a downturn they turn their attention to internal processes and on people. A Great company would do both simultaneously at all times to improve its internal and also evaluate it external positioning to improve its performance. If an organization is building its attitudes focusing on improvement of processes all the time, the competencies of people also gets enhanced and there is a multiplier effect across the organization Therefore skill and competencies must be there but ultimately the attitude drives commitment and even at times if there is a skill deficiency , or organization can still have a competitive advantage for a sustainable performance as experience of some great organizations have proved irrespective of the industry type.

When we talk about “sustained success”, then what is the measure for it? , we have seen that there are umpteen dimensions which are qualitative and measurement of those may be a big challenge…One of the ways to deal with this is to profess the concept of “triple bottom-line” within the organization. The concept of TBL demands that a company’s responsibility be to stakeholders rather than shareholders. In this case, ’stakeholders’ refers to anyone who is influenced, either directly or indirectly, by the actions of the firm. According to the stakeholder theory, the business entity should be used as a vehicle for coordinating stakeholder interests, instead of maximizing shareholder (owner) profit. You can see such examples in corporate like ITC, TATA Sons. Also the idea to develop “strategy maps” for the HRM process which can lead to formation “balanced score cards” would be beneficial in assessing intangible measurements as tangible outcomes.

“Motivation” – we have talked a lot about this in parlances of our organizations and dwelt upon it in classrooms but in a highly competitive market , the equation for motivation always has one variable with a positive relationship and that is “money” but as managers we know that we may not always control the pie to the extent we may wish to…so…what is the least that can done to address this challenge…though money is important dimension in the life of an employee there are examples which are counter supported by research worldwide that people are motivated when

• They are clear about their objective and what is expected of them.
• When they have a supportive superior
• When their workplace interface are friendly

As managers our locus of control is to create this and that’s our job all the time every time – albeit a tough job but that is what makes life and management wonderful.

I will keep sharing my small brain-storm sessions with larger audience because I find this as the strongest medium to gain more knowledge.

Businessworld covers PGPM Course

Businessworld has covered SPJIMR’s PGPM programme in two separate articles.

The first article talks about “Practical Training” and captures “Class of 2009″ in action.

You can read this at BW’s website by following this links :

http://www.businessworld.in/index.php/B-School/Room-With-A-View.html

http://www.businessworld.in/index.php/B-School/Room-With-A-View/Page-2.html

The second article talks about 100% placement for the PGPM Class of 2008. The link is given below:

http://www.businessworld.in/index.php/B-School/Executive-Crash-Course/Page-2.html

BW has also rated B-Schools in India. SPJIMR has moved up from 9th to 8th position !! Kudos

http://www.businessworld.in/index.php/B-School/Breaking-Through-The-Clutter.html

A Brush with Strategic Sales

Mr.Sanjay Delivering lecture On Strategic Pre-Sales

As part of our Samvaad Series, we had an opportunity to listen to Mr. Sanjay Ray who is Director, Solutions and Pre-sales Engineering at SAP India.

His lecture provided us great insights into strategic pre-sales cycle and how there are different level of pre-sales consultants operating in the market. The most important point which came to forefront was that you should know your customer for sales and business development. It is not about selling product and services but about selling “value” to the customer. This is one aspect which is evidently visible when you take a pass on different type of sales guys present in the industry, namely technical (level-1), capable (level-2), strategic (level-3). As one tries to distinguish between these three types of sales consultant one would see that there intent to sell moves from product & features to the customer and that is where the difference lies.

Some key parameters on which you can classify these consultants are as follows:

Level	Outlook	Timing	Alignment
Level-III	Outcomes	Proactive	Executive
Level-II	Process	Response	Management
Level-I	Event	Reactive	Operations

 A strategic sale is like a game of chess and playing it the grand-master style is what makes you cut the deal. You need to make the customer play to your game-plan to crack a deal. Alignment with the customer is what can lead you to success. The opportunity to align with the customer either lies in the initial phases of the deal or at the end of the deal. In middle phases when technical evaluation is being done, it is not possible to establish relationship with the customer to the extent you would desire. Level-I sales guys operate during the operational phase of the deal which actually tends to make them not think beyond the operational silo where as a level-II or III sales guy would think make interface with the customer at the stages mentioned earlier during the deal roadmap.

 There is another matrix which distinctly explains the different facets of the various levels of sales guys which exist in the industry:

Level	Perception	Resources	Performance
Level-III	Business Meeting	High On Customer ROI	Reliable/Exceeds
Level-II	Reasonable sales call	Timely / judicious	Consistently Achieves
Level-I	Technical alternatives	Premature / Excess	Marginal / inconsistent

Don’t consider technical alternatives for the customer but treat it as a meeting where you can highlight the value proposition to the customer which can come in many ways & most importantly pricing is not a barrier, you would get the right price if customer perceived value is high. Even if the customer does not have the kind of money to buy the solution, you can make him go for it if you are able to identify the impact points for the customer and how it can help turnaround tables in customers favor if he were to buy the solution. It is necessary to understand the buying process and what are the sync points of it with the Customer Engagement Cycle (CEL). For being a successful strategic sales guy you don’t need to “sell” but help the customer “buy”.

The sync points through which helps develop the value proposition consist of:

Value Assumption ↔  Assessment and understanding customer needs

Value Proposition ↔ Identifying solutions to suit the value proposition of the customer

Value Proof ↔ Justification

Value Delivery ↔ Implementation

Customer management would be a continuous process all through the buying process. There was lot to offer from my Mr.Sanjay’s side but we were constrained by time and that was the most unfortunate part. I would leave his trail with this parting point; understand the concept of VIP while dealing with the customer view point.

V ↔ Vision ↔ where do I want to be ↔ customer vision

I ↔ Indicator ↔ How do I know that I have arrived?

P ↔ Pain ↔ what keeps me from getting there?

Elections 2009

King-Cong(ress)

The curtains were drawn on the 15^th Lok Sabha elections yesterday after the results were announced. Expectedly, UPA will retain power at the centre. What surprised however was the way Manmohan Singh & Co. mustered numbers for Congress with consummate ease. 205 seats is something which even die hard Congress fans were not expecting. With only 19 seats short of majority, the alliance of Grand Old party of India is all set to retain power with support of some smaller parties and a few independents.

If you ask me, I personally wanted BJP to win. But a choice between Manmohan and LK Advani rolled the dice in favor of the former. The results are significant in current scenario when India along with the rest of the world is going through tough times. A Third Front (or an nth Front government) at the centre, a la Deve Gowda regime in 1998 or a Charan Singh government post emergency in 1979, would have resulted in unstable government and power games in the Parliament, with actual issues relegated to the backseat. A stable government at the Centre ensures pro-reformist measures, tackling of real issues, possibly a revival of D street in Mumbai and importantly for us, no political upheaval at the end of 2009 when PGPM goes for placements.

Significant results

• Congress gets past 200, after 19 years
• Expect the fifth generation of Late Mr. Motilal Nehru to take over centre stage anytime soon in the form of Rahul Gandhi
• End of Advani era in BJP. But who next…Narendra Modi? My guess is as good as yours
• Lalu, Paswan routed in their stronghold Bihar
• Nano moves out of Bengal but drives Mamata in
• Prakash Karat and his dogmatic leftist policies leaves CPM high and dry
• Naveen Patnaik(Orissa), Karunanidhi(TN) and YS Rajashekhara Reddy(AP) do well riding on a  pro-incumbency wave

Key states

Uttar Pradesh: Rahul proves his mettle
UP is considered the most sought after state in India with maximum number of seats. There is an old saying: ‘The one who rules UP, rules Delhi’. Rahul Gandhi decided to go alone in UP without any alliance. His perennial visits to poor households and hunger strike paid. Drama or not…I don’t know. But after 25 years, Congress got back its Dalit and Muslim vote bank which resulted in 21 seats. Significant numbers huh!! Mayawati caved in under anti incumbency factor. And Mulayam was fighting with no real issues at hand.

Maharashtra: Raj Thackeray – Baazigar
‘Haar ke jeetne waale ko baazigar kehte hain’: Shahrukh tells Kajol during their first meeting in the famous 1993 Bollywood blockbuster. I never quite understood the meaning of the insipid dialog then. Now, I guess, I do. Raj Thackeray’s MNS did not win even a single seat, but ensured BJP-Shiv Sena combine pay for not his ouster from Shiv Sena. Raj quotes a dialog from Amar Akbar Anthony after election results with an obvious reference to his cousin Uddhav – ‘tum apun ko itna maara. Apun tumko sirf do maara…par kya solid maara maloom’. BJP-Shiv Sena vote bank got divided with Raj’s MNS. Congress-NCP combine won 25 of 48 seats and significantly, won all six constituencies in Mumbai.

Delhi: We love you Shiela
Delhi BJP state unit needs to do some serious introspection. HT says: “Delhiites seem to have fallen in love with Sheila Dixit”. Not without a reason though. BJP draws a blank. And a clean sweep for Conngress – 7-0.

Bihar: Perform or Perish
While we were watching election results on NDTV before running for our International Business quiz, Varun Jha told me – ‘Ladke ne kaam kiya hai Bihar mein’  with an obvious reference to the CM. Good governance pays. What Manmohan did at the centre, Nitish did in Bihar. Ensuring a landslide victory for BJP-JD(U) combine, he clearly showed that if you perform, you will be rewarded. Lalu -Paswan got what the rest of the country was hoping for. Three seats for RJD (down from 24 last time) and a big ZERO for Paswan’s Lok Janshakti party. The humiliating part is both lost from the constituencies they were contesting from. Lalu managed to win one at Saran beating loud-mouthed Rajiv Pratap Rudy of BJP.

Andhra Pradesh: Glamour downloaded
AP along with Rajasthan tilted the balance in Congress’s favor. YSR defied the anti incumbency wave getting 33 seats for Congress. Glamour downloaded with Chiranjeevi’s Prana Rajyam Party not managing even a single seat. Sad to see Chandrababu Naidu failing again.

West Bengal: Bengalis gift to the rest of the country
Prakash Karat tried his level best that India does not take a step forward in the last five years. The hopeless handling of Rizwanur murder case and unnecessary violence in Nandigram and Singur ensured CPI(M) not finishing at the top of the table in WB after 30 years, winning only 15 of 42 seats. A change of guard was inevitable. Mamta Banerjee’s politics on Nano paid off. Mr. Ratan Tata surely won’t be a happy man.

Rajasthan: Maharani’s after effects
Another state which turned the tide in favor of UPA. BJP continues to pay for sins committed by Vasundharaje Scindia during her tenure as Chief Minister. After their debacle in assembly elections last years, they lost badly in Lok Sabha elections as well winning only 4 of 25 seats.

 

Finally…

The election results will ensure a stable government at the Centre. But I sincerely hope that Congress adopts a complete pro-reforms policy. And liberalization moves in a fast forward mode now. Hope not to see any further reservations in educational institutes or any talk of reservations in private sector. Late Pramod Mahajan had aptly said once, “We take pride in being the world’s largest democracy. We need to be the world’s most efficient democracy”

I would like to end this post with my dream cabinet:

Prime Minister: Manmohan Singh
Home Minister: P Chidambaram
Defence Minister: Pranab Mukherjee
Finance Minister: Montek Singh Ahluwalia
HRD Minister: Rahul Gandhi

Basic of Hedge Funds

Introduction

Hedge Funds are a popular investment vehicle for High Networth Indviduals(HNI) or other Institutional Investors who have bigger risk apetite than retail or smaller investors. The Hedge funds invest in all possible investment vehicles like shares, debt, commodities, real estate, private equity companies etc. Well as the name suggests the basic methodology of hedge funds is to invest in risky financial securities and hedge these investments using different hedging (alleviating risk) techniques like arbitrage, short selling etc. A typical investment in a Hedge Fund for example requires around Rs 1,25,00,000 to Rs 3,00,00,000. Remeber this figure can go to about Rs 50,00,00,000 for bigger funds. 

 

Risk Associated 

 

So why all this hoopla around Hedge Fund investment. Well the debacle of Long Term Capital Management(LCTM) Fund which leveraged itself more than 30 times on the investor’s money was one of the biggest hedge fund bubble leading to lot of scare among not only developing countries but developed nations of world too. It was the big daddy of Lehman Brothers. Some of the geniuses of our times(mathematicians, nobel laureates) were involved in developing mathematical and statisitical models for churning out an average return of more than 40% in LCTM. But the fund was ultimately bailed out with the help of Federal Reserve and Investment Banks in 2000.

 

Some of the risks which make investment in Hedge Fund scary are :

1. Hedge Funds usually invest in very risky securities to generate an above average return than stock market and other instruments. This leads to an inherent risk

2. Because of the competitive nature, hedge funds do not publicly disclose their investments which concerns investors.

3. Historically there haven’t been regulatory framework to keep a tab on Hedge funds and protect investors.

4. Lock In period is high in Hedge Funds, even exiting out of an hedge fund can take a minimum of one month.

5. Volatility of strategy. To make a decent return, the hedge funds have to manoeuvre funds around different markets which leads to volatility and skepticism among investors

 

Types of Hedge Funds

 

There are various classification of Hedge Funds, some of the most popular ones are :

 

1. Fixed Income arbitrage – These funds work on exploitation of inefficiencies in the pricing of bonds(fixed income). For example you might hold a long position in interest rate swap and opposite position i.e. short position on bond. This is called as swap spread arbitrage. There are other methods such as yeild curve arbitrage, volatility arbitrage, capital structure arbitrage etc. The instruments used are interest rate swaps, asset backed securities etc.

 

2. Convertible arbitrage – These funds work on pricing inefficiency of a convertible security and the common stock. For example you might go long on Tata Motor’s convertible bond(say FCCB’s) and short on Tata Motor’s stock. The premise is that convertible security might be priced inefficiently relative to the underlying stock. In above case this arbitrage will be succesfull if the Tata Motors FCCB is selling at a perceived discount to Tata Motors stock.

 

3. Merger Arbitrage – These funds exploit price inefficiency in stock price of merging companies. In a cash merger, an acquirer proposes to purchase the shares of the target for a certain price in cash. Until the acquisition is completed, the stock of the target typically trades below the purchase price. An arbitrageur buys the stock of the target and makes a gain if the acquirer ultimately buys the stock. Whereas in a stock for stock merger, the acquirer proposes to buy the target by exchanging its own stock for the stock of the target. An arbitrageur may then short sell the acquirer and buy the stock of the target. After the merger is completed, the target’s stock will be converted into stock of the acquirer based on the exchange ratio determined by the merger agreement. The arbitrageur delivers the converted stock into his short position to complete the arbitrage.

 

3. Sector Funds – These funds invest in specific sectors like pharama, technology etc. based on their expertise

 

4. Diversified Funds – These funds invest in different sectors to mitigate risk.

 

Many investment banks provide the index of performance of different hedge Funds grouped by category like this.

 

What is the hurdle rate ?

 

An investor in a hedge funds has to pay several fees to the hedge fund manager like management fees for the assets held within the fund and performance fees for the positive returns provided by the hedge funds. Management fees is charged on percentage of assets owned by fund and performance fees as a percentage of total profits. But hedge funds cannot charge performance fees as long as they don’t provide returns above a minimum percentage set at inception of hedge fund. This minimum return percentage is called the hurdle rate for a hedge fund and is an incentive for hedge fund manager to push average returns higher.

 

How does a small investor gets to invest in a Hedge Fund ?

 

Answer is Fund of Funds. You can compare them to a Mutual Fund which invests in different securities/scrips of companies. Similar to Mutual Fund an Fund of Funds invests in a selected list of Hedge Funds based on it’s investment strategy. Thus a Fund of Fund(FOF) can be Sectoral FOF, Fixed Income arbitrage FOF, Diversified FOF etc

 

As expected a Fund of Funds reduces the diversification/unsystematic risk. Funds of funds generally charge a fee for their services, always in addition to the hedge fund’s management and performance fees, which can be 1.5% and 15-30%, respectively. Fees can reduce an investor’s profits and potentially reduce the total return below what could be achieved through a less expensive mutual fund or ETF.

 

What is the difference between an Hedge Fund and Private Equity(PE) ?

 

Although both these funds invest for higher growth oppurtunities and are lightly regulated, they have opposing view of investments. Hedge Funds invest in different securities including debt of PE funds and are always looking to find capital appreciation in short term, Private Equity Funds invest primarily in very illiquid assets such as early-stage companies and have a broad long term view of investments. Hedge fund investors generally are able to withdraw their investments more frequently than private equity fund investors who are locked in for longer periods. Hedge funds value their investment on Mark to Market basis whereas PE value using long term valuation methodoligies like NPV,IRR etc. For more details you can look here.