The hedge fund industry has grown at a ferocious pace in the last decade, from as few as 300 funds in 1990 to more than 10,000 funds today. These funds have become highly visible in markets and the press, and are estimated to manage over $1.4 trillion in assets, both through onshore and offshore funds.
The very first hedge fund was started by Alfred W. Jones in 1949. By using leverage and short selling, he effectively "hedged" risk in the marketplace. Though his hedge fund greatly outperformed mutual funds of that time, hedge funds really didn't feign much interest until the 60's. Big names like Warren Buffet and George Soros took an interest in Jone's strategy, and over the next th years, 130 hedge funds were born.
Hedge funds, like other alternative investments such as real estate and private equity, are thought to provide returns that are uncorrelated with traditional investments. This attracted an increasing number of individual and institutional investors. However, while Alfred Jones' strategy employed short selling and leverage, there are a multitude of different strategies used by hedge fund managers today, and the term "hedge" doesn't always apply, since many of these funds are not hedged at all. In fact, many hedge funds attempt to capture absolute returns and take positions that are often highly speculative.
In 2008, the hedge fund industry faced one of its worse years in history as markets across the globe crumbled. Many of the best and brightest managers and investors faced losses of 30 percent or more, and assets under management decreased as investors opted into treasury bills and cash investments. Still, many of the strategies utilized by hedge fund managers capture greater returns in a volatile market, and some of the hedge funds found ways to make investors money despite the financial crisis.
In the first half of 2009, the industry as a whole has bounced back in dramatic fashion and seen its popularity rise among many investors. What does the future hold for this often misunderstood investment class? Only time will tell.
Employing vastly different investment strategies and approaches to risk-management, hedge funds are defined by their structural characteristics, rather than their "hedged" nature.
Hedge funds are primarily organized as private partnerships to provide maximum flexibility in constructing a portfolio. Hedge funds can take both long and short positions, make concentrated investments, use leverage or derivatives, and invest in many markets. This is in sharp contrast to mutual funds, which are highly regulated and cannot easily take advantage the same breadth of investment instruments. While mutual funds are mainly limited to stocks and bonds, hedge funds enjoy a wide variety of investments which may include futures, PIPEs, real estate, art, even website domain names.
Hedge funds typically use a different fee structure for investors than mutual funds as well. While both mutual funds and hedge funds charge a management fee or a fee based on a percentage of total assets under management, hedge funds typically charge a fee based on a percentage of profits, known as a performance fee. The performance fee helps to align the managers' and investors' interests. In addition, most hedge fund managers commit a portion of their wealth to the funds further aligning their interest with that of other investors. Thus, the objectives of managers and investors are the same, and the nature of the relationship is one of true partnership.
Another feature of hedge funds is you must be an accredited investor or a qualified client in order to invest your money. This is one of the very few regulations that hedge funds must abide by and is designed to protect the average middle-class investor from getting into investments they don't fully understand.
VIJAY POPAT
The very first hedge fund was started by Alfred W. Jones in 1949. By using leverage and short selling, he effectively "hedged" risk in the marketplace. Though his hedge fund greatly outperformed mutual funds of that time, hedge funds really didn't feign much interest until the 60's. Big names like Warren Buffet and George Soros took an interest in Jone's strategy, and over the next th years, 130 hedge funds were born.
Hedge funds, like other alternative investments such as real estate and private equity, are thought to provide returns that are uncorrelated with traditional investments. This attracted an increasing number of individual and institutional investors. However, while Alfred Jones' strategy employed short selling and leverage, there are a multitude of different strategies used by hedge fund managers today, and the term "hedge" doesn't always apply, since many of these funds are not hedged at all. In fact, many hedge funds attempt to capture absolute returns and take positions that are often highly speculative.
In 2008, the hedge fund industry faced one of its worse years in history as markets across the globe crumbled. Many of the best and brightest managers and investors faced losses of 30 percent or more, and assets under management decreased as investors opted into treasury bills and cash investments. Still, many of the strategies utilized by hedge fund managers capture greater returns in a volatile market, and some of the hedge funds found ways to make investors money despite the financial crisis.
In the first half of 2009, the industry as a whole has bounced back in dramatic fashion and seen its popularity rise among many investors. What does the future hold for this often misunderstood investment class? Only time will tell.
Employing vastly different investment strategies and approaches to risk-management, hedge funds are defined by their structural characteristics, rather than their "hedged" nature.
Hedge funds are primarily organized as private partnerships to provide maximum flexibility in constructing a portfolio. Hedge funds can take both long and short positions, make concentrated investments, use leverage or derivatives, and invest in many markets. This is in sharp contrast to mutual funds, which are highly regulated and cannot easily take advantage the same breadth of investment instruments. While mutual funds are mainly limited to stocks and bonds, hedge funds enjoy a wide variety of investments which may include futures, PIPEs, real estate, art, even website domain names.
Hedge funds typically use a different fee structure for investors than mutual funds as well. While both mutual funds and hedge funds charge a management fee or a fee based on a percentage of total assets under management, hedge funds typically charge a fee based on a percentage of profits, known as a performance fee. The performance fee helps to align the managers' and investors' interests. In addition, most hedge fund managers commit a portion of their wealth to the funds further aligning their interest with that of other investors. Thus, the objectives of managers and investors are the same, and the nature of the relationship is one of true partnership.
Another feature of hedge funds is you must be an accredited investor or a qualified client in order to invest your money. This is one of the very few regulations that hedge funds must abide by and is designed to protect the average middle-class investor from getting into investments they don't fully understand.
VIJAY POPAT
