Hedge Funds: Investment Pools, Advisers, Trading Practices, Monitoring, Regulation (2006)

A hedge fund is a pooled investment vehicle administered by a professional management firm, and often structured as a limited partnership, limited liability company, or similar vehicle. They are usually distinguished from private equity funds, which use the more illiquid investment strategies associated with private equity. Hedge funds invest in a diverse range of markets and use a wide variety of investment styles and financial instruments. The name "hedge fund" refers to the hedging techniques traditionally used by hedge funds, but hedge funds today do not necessarily hedge. Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public. As such, they generally avoid direct regulatory oversight, bypass licensing requirements applicable to investment companies, and operate with greater flexibility than mutual funds and other investment funds.


Hedge funds are most often open-ended and allow additions or withdrawals by their investors. A hedge fund's value is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.
Many hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling ("absolute return"). Hedge fund managers often invest money of their own in the fund they manage, which serves to align their own interests with those of the investors in the fund.[5][6] A hedge fund typically pays its investment manager an annual management fee, which is a percentage of the assets of the fund, and a performance fee if the fund's net asset value increases during the year. Some hedge funds have several billion dollars of assets under management (AUM). As of 2009, hedge funds represented 1.1% of the total funds and assets held by financial institutions.[7] As of June 2013, the estimated size of the global hedge fund industry was US$2.4 trillion.
Because hedge funds are not sold to the general public or retail investors, the funds and their managers have historically been exempt from some of the regulation that governs other funds and investment managers with regard to how the fund may be structured and how strategies and techniques are employed. Regulations passed in the United States and Europe after the 2008 credit crisis were intended to increase government oversight of hedge funds and eliminate certain regulatory gaps.



During the US bull market of the 1920s, there were numerous private investment vehicles available to wealthy investors. Of that period, the best known today, is the Graham-Newman Partnership founded by Benjamin Graham and Jerry Newman which was cited by Warren Buffett, in a 2006 letter to the Museum of American Finance, as an early hedge fund.[9]
The sociologist Alfred W. Jones is credited with coining the phrase "hedged fund" [10][11] and is credited with creating the first hedge fund structure in 1949, although this has been disputed.[12] Jones referred to his fund as being "hedged", a term then commonly used on Wall Street, to describe the management of investment risk due to changes in the financial markets.[13] In 1968 there were almost 200 hedge funds, and the first fund of funds that utilized hedge funds were created in 1969 in Geneva.[citation needed]
In the 1970s, hedge funds specialized in a single strategy, and most fund managers followed the long/short equity model.[clarification needed] Many hedge funds closed during the recession of 1969--70 and the 1973--1974 stock market crash due to heavy losses. They received renewed attention in the late 1980s.[11] During the 1990s, the number of hedge funds increased significantly, funded with wealth created during the 1990s stock market rise.[10] The increased interest was due to the aligned-interest compensation structure (i.e. common financial interests) and the promise of above high returns.[14] Over the next decade hedge fund strategies expanded to include: credit arbitrage, distressed debt, fixed income, quantitative, and multi-strategy.[11] US institutional investors such as pension and endowment funds began allocating greater portions of their portfolios to hedge funds.

http://en.wikipedia.org/wiki/Hedge_fund