What is a Hedge Fund?

A hedge fund is typically a fund for collective investment that employs various trading strategies and uses a range of investment tools such as leverage, short selling, trading in options and derivatives, financial hedging instruments (hence the name), diversification across investment channels, and other tools. This is done in most cases in order to achieve a higher than market return in all market conditions, including in volatile environments.

Hedge funds may employ the following, among other strategies:

• Long-Short – Generating value from exploiting disparities in return of same, similar, or different assets.
• Global-Macro – Generating value from macroeconomic events.
• Systematic Trading – Identifying inconsistencies or trends using algorithmic tools.
• Multi-Strategy – Combining various investment strategies.

Hedge funds are generally organized as limited partnerships, consisting of the general partner (responsible for managing investments and operating the fund) and limited partners, who are the investors in the fund.

The Hedge funds that operate in Israel are open to investments from accredited investors (high financial-worth individuals), institutional entities, and, in most cases, a limited number of “offerees” (investors who are not accredited investors). Due to the restriction of the number of offerees, hedge funds are not required to issue a public prospectus and are not generally supervised by the Israel Securities Authority.

Taxes

The tax on hedge funds, at a rate of 25-30% on real profits for individual investors, is deducted at the end of the calendar year or upon redemption, whichever is earlier. This is a clear disadvantage compared to alternative funds, where tax payment is deferred until redemption, which may benefit from tax deferral and the effect of compound interest.

Hedge Funds in Trust

To expand investment alternatives, a move that may benefit the broader investing public, the Israel Securities Authority  has established (through a temporary directive in effect until October 1, 2025) regulations for issuing hedge funds in trust. These funds allow the general public to access investment opportunities similar to those of hedge funds, which were previously far less accessible, within regulated mutual funds.

Under these regulations, and to enable optimal management of the fund’s hedging and investment strategies, ISA relaxed and removed certain investment restrictions applicable to mutual funds that are not hedge funds in trust pertaining to the assets the fund may acquire as well as to diversification, leverage, and other factors. These strategies, it must be said, inherently involve risks¹.

A hedge fund in trust is designed to combine the unique characteristics and flexibility of an unregulated hedge fund with the advantages of a regulated mutual fund. Below are the main differences between a hedge fund in trust and a hedge fund¹:

Hedge Funds in Trust with Meitav

Meitav Mutual Funds sees great importance in ISA’s initiative to make hedge fund investments, and the expansion of investment alternatives, accessible to the general public.

We have therefore launched three hedge funds in trust (as of March 26, 2023) after a thorough process of evaluating various alternatives, culminating in the selection of investment strategies and external advisors.

Meitav’s hedge funds in trust are as follows:

On behalf of the fund manager, Mr. Shai Assis has been appointed to manage the investment portfolios of the funds. Shai Assis, with extensive investment management experience, is the Chief Investment Manager at Meitav Mutual Funds, and previously (2017–2018) served as a managing partner of a hedge fund.

Features of Meitav’s Hedge Funds in Trust:

• Fixed-Date Fund – Meitav’s funds have a once-a-month effective dates, meaning units can be created or redeemed once a month on the last price calculation day of each calendar month (which is one of the days from Monday to Thursday).
• Publication of Fund Prices – Unit prices are published only for the last price calculation day of each calendar month.

Purchase Request Based on monetary value

Unit creations in the fund are based on monetary value, so the number of units (at par value) actually purchased on the relevant effective date is adjusted to the monetary value specified by the investor in the order, according to the unit price published for that effective date.

Purchase requests can be submitted throughout the month until the designated time on the last price calculation day of the fund each calendar month. Note: if necessary, unit holders may be allotted fractional units (fractional par value), which can also be redeemed.

Sale Request Based on the number of units (par value)

 Redemptions in the fund are based on the number of units (at par value), such that the monetary value of the redeemed units on the relevant effective date is adjusted to the number of units specified by the investor in the redemption request, according to the redemption price published for that effective date.

Note: According to the advance notice mechanism for unit redemption, redemption requests and/or cancellation requests for redemption notices can be submitted until the designated time, which is 10 TASE trading days before the relevant effective date.

The fixed management fees for Meitav’s Hedge Funds in Trust are 1.35%.

Performance fees²

Hedge funds in trust may charge performance fees, which derive from the fund’s positive returns, in addition to the fixed management fees, which derive from the investment amount.

Performance fees for Meitav’s funds are derived from the funds’ positive returns, calculated at the individual investor level, and are charged only when the fund’s return exceeds the hurdle rate set for each fund, which is the return of the Tel-Gov Makam Index.

Performance fees are set at 20% of the fund’s return with a catch-up mechanism³, subject to meeting the high water mark at each performance fee calculation date².

The terms used for calculating the performance fees are as follows:

• Hurdle Rate – The rate above which the fund manager is entitled to charge performance fees.
• Catch-up – A mechanism stipulating that if the fund’s return exceeds the hurdle rate, performance fees can be charged on the full return, provided the net return to the investor after performance fees is not lower than the hurdle rate.
• High Water Mark – A protective mechanism for investors, designed to ensure that in a fund charging periodic performance fees, such fees can only be charged when the fund’s price is higher than the last price at which performance fees were charged or the unit purchase price, whichever is higher.
• Performance Fee Calculation Dates – The date of unit redemption by the unit holder or the last price calculation day of the fund in each calendar year (which is the reset date for performance fee calculations), whichever is earlier (except for 2023, when no performance fees were charged). Performance fee collection is subject to the trustee’s approval.