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
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