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Hedge fund
From Wikipedia, the free encyclopedia.
(Redirected from Hedge funds)

The term "hedge fund" dates back to the first such fund founded by Alfred Winslow Jones in 1949. Jones' innovation
was to sell short some stocks while buying others, thus some of the market risk was hedged. While most of today's hedge
funds still trade stocks both long and short, many do not trade stocks at all and the term hedge fund has come to mean a
relatively unregulated investment fund, often a partnership rather than a corporation in form, and characterized by
unconventional strategies (i.e., strategies other than investing long only in bonds, equities or money markets).

In addition to selling short, Jones used leverage (borrowed money to trade in addition to the capital provided by his
investors), charged an incentive fee (a fee based on a portion of the clients profits as opposed to a fixed percentage of
assets) and had a substantial portion of his net worth in his investment funds -- all characteristics common in today's
hedge funds, although virtually all hedge fund managers charge an investment management fee of between 1% and 2%
per year as well as an incentive fee.

At the beginning of the 21st century it was regarded by some as a "fashionable" type of investing, since hedge funds saw
large inflows of money during that time.

Contents
1 Flows and levels
2 Fund strategies
2.1 Risk arbitrage
2.2 Strategies
2.3 Regulation
3 Fund of funds
4 Comparison to Private Equity funds
5 Comparison to Mutual funds
6 Hedge fund privacy
7 Recent regulatory developments
8 See also
8.1 Hedge funds
8.2 Hedge fund managers
9 External links
9.1 Magazines
9.2 Trade associations
9.3 Indices

Flows and levels

The amount of money managed by funds that can be termed hedge funds passed the $1 trillion mark during 2004,
according to the Alternative Fund Services Review.

Administration of Hedge Fund Assets

In mid-2004 39 firms provided either on-shore or offshore "Administration Services" to hedge funds that were managing
$1.1 trillion, up from 30 firms managing $745bn a year before. "Taking into account fund of funds ‘double-counting,’"
the review said that "average assets under administration for a hedge fund administrator is US$29bn". "The total number

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of funds has broken the 10,000 barrier, though the grand total of 11,362 does include both master-feeders and separate
feeder and sub-funds." The 39 Administrators tracked for the mid-2004 number were:

Citco Fund Services

Fortis
Bank of Bermuda GFS
IFS (a State Street company)
BISYS Hedge Fund Services
GlobeOp Financial Services
UBS Fund Services
Investors Bank & Trust
SEI Investments (NASDAQ: SEIC
(http://quotes.nasdaq.com/asp/SummaryQuote.asp?symbol=SEIC&selected=SEIC) )
Olympia Capital
Bank of New York
RK Consulting
PFPC
Euro-VL
Bank of Butterfield Fund Services
SS&C Fund Services (http://www.ssctech.com/fundservices/)
Crédit Agricole Investor Services
DPM
Dundee Leeds
Admiral Administration
DAIWA Securities Trust & Banking
RBC
Trident Trust
Citigroup Global Transaction Services
Cayman National Trust
Custom House Group
Baring Fund Administration Services (IFM)
Caledonian Fund Services
Kredietbank SA
Dexia BIL Fund Services
Nottingham Company
Tranaut Fund Administration (Ireland)
Spectrum Global Fund Administration
Bank of Ireland Securities Services
Banque Privée Edmond de Rothschild
ATC Fund Services
Meridian
Close Fund Services
AIB Worthytrust Fund Administration

Fund strategies
Arbitrage
Convertible arbitrage
Fixed income arbitrage
Risk arbitrage
Statistical arbitrage ('StatArb')
Equity (finance)
Equity market neutral
Long / short equity
Event driven (finance)

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Distressed securities
Regulation D
Event driven multi-strategy
Other
Emerging markets

Risk arbitrage

Main article: risk arbitrage

One common hedge strategy is to buy shares of a company that is in the process of a merger and acquisition. The
company's stock has an announced price that it will be worth on the date of the merger, so if the stock is under that value
prior to the merger, it is a safe investment to purchase the stock and wait. This strategy can be risky, as there is a
possibility that the merger will not go through and the stock will be left at its current value. Frequently, the trader will also
sell the stock of the acquiring company in addition to buying the stock of the target.

Most of the early hedge funds did just this. They became very popular as a way of seeing gains better than the investment
grade bond market, while still having low risk.

However the side effect of this popularity was to dramatically increase the interest in all of the non-standard investment
strategies, and soon other funds were being set up with new strategies aimed primarily at high growth. Although there is
no hedging in these cases, the term is still used for these funds as well.

Strategies

Hedge funds use alternative strategies such as selling short, arbitrage, trading options or derivatives, using leverage,
investing in seemingly undervalued securities, trading commodity and FX contracts, and attempting to take advantage of
the spread between current market price and the ultimate purchase price in situations such as mergers. They can be
extremely risky investments as illustrated by the example of Long-Term Capital Management.

Regulation

In the United States, investment companies registered with the Securities and Exchange Commission are subject to strict
limitations on the short-selling and use of leverage that are essential to many hedge fund strategies. For this and other
reasons, hedge funds elect to operate as unregistered investment companies. As a result, interests in a hedge fund cannot
be offered or advertised to the general public, and are limited to individuals who are both "accredited investors" (who
have total incomes of over US$200,000 per year or a net worth of over US$1,000,000) and "qualified purchasers" (who
own at least US$5,000,000 in qualified investments). For the funds, the trade off is that they have fewer investors to sell
to, but they have few government imposed restrictions on their investment strategies. The presumption is that hedge funds
are pursuing more risky strategies, which may or may not be true depending on the fund, and that the ability to invest in
these funds should be restricted to wealthier investors who are presumed to be more sophisticated and who have the
financial reserves to absorb a possible loss.

Fund of funds
A special type of investment vehicle called a fund of funds, a fund which invests in other hedge funds rather than trading
assets itself. Because some U.S. funds of funds may be specially registered with the Securities and Exchange
Commission, they can accept investments from individuals who are not accredited investors or qualified purchasers, and
often have lower investment minimums (sometimes as low as $25,000).

Comparison to Private Equity funds

Hedge funds are similar to private equity funds, such as venture capital funds, in many respects. Both are relatively

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unregulated pools of capital that invest in securities and compensate their managers with a share of funds profits. Hedge
funds typically invest in very liquid assets, and permit investors to enter or leave the fund easily. Private equity funds
invest primarily in very illiquid assets, such as early-stage companies and consequentially, investors are "locked in" for
the entire term of the fund.

Hedge funds are regular investors in private equity companies' acquisition funds.

Comparison to Mutual funds

Like Hedge funds, mutual funds are pools of investment capital. However, mutual funds are highly regulated by the
Securities and Exchange Commission. One consequence of this regulation is that mutual funds cannot compensate
managers based on the performance of the fund, which many believe dilutes the incentive of the fund managers to
perform.

Hedge fund privacy

As private, lightly regulated partnerships, hedge funds do not have to disclose their activities to third parties. This is in
contrast to a fully regulated mutual fund (or unit trust) which will typically have to meet regulatory requirements for
disclosure. The hedge funds are typically domiciled in an offshore jurisdiction, e.g. Bermuda, Cayman Islands, Virgin
Islands, where regulation of investment funds permits wider powers of investment. Hedge funds have to file accounts and
conduct their business in compliance with the less onerous requirements of these offshore centres. Investors in hedge
funds enjoy a higher level of disclosure than investors in mutual funds including detailed discussions of risks assumed,
significant positions, and investors usually have direct access to the investment advisors of the funds. This high level of
disclosure is not available to non-investors, hence the notion of privacy attached to hedge funds.

A byproduct of this privacy and the lack of regulation is that there are no official hedge fund statistics. An industry
consulting group, HFR (hfr.com), reported with suspicious precision that at the end of the second quarter 2003 there are
5660 hedge funds world wide managing $665 billion. To put that in perspective, at the same time the US mutual fund
sector held assets $6,818 billion (according to the Investment Company Institute).

The combination of privacy and rich investors means that hedge funds are a target for criticism whenever markets move
against some group's interests. For example, hedge funds were widely blamed for the speculative run-up in the bond
market that preceded the global bond crisis of 1994, although the major players in the bond spree were actually large
commercial and investment banks.

Recent regulatory developments

In October 2004, the U.S. Securities and Exchange Commission approved a rule change that, if implemented as planned,
will require most hedge fund advisers to register with the SEC.

The rule is expected to encounter legal challenges, specifically on the question of whether the SEC has exceeded its
statutory authority.

See also
Derivatives market
Venture capital

Hedge funds

Large hedge funds

Pequot Capital Management (website (https://www.pequotcap.com/) )

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Clinton Group (website (http://www.Clinton.com/) )

Hedge fund managers

Alfred Winslow Jones

Eric Mindich
George Soros
Julian Robertson
Stanley Druckenmiller
Seth Tobias
David Gerstenhaber
Bill Fleckenstein
Joel Greenblatt
Doug Kass
Michael Steinhardt
Jim Cramer
Edward O. Thorp
Steven A. Cohen
Edward Lampert
David Tepper

External links
HedgeCo.net (http://www.hedgeco.net/)
Skousen Hedge Fund Trader (http://www.skousenhedgefundtrader.com/visitor.php?offer=hfs49a.html)
Harvard Business School's Baker Library Guide to Hedge Funds (http://www.library.hbs.edu/guides/hedgefunds/)
Risk Management for Hedge Funds - a Prime Broker's perspective
(http://www.eubfn.com/arts/760_bearstearns.htm)
Difference Between Hedge Funds and Mutual Funds
(http://mutualfunds.about.com/cs/hedgefunds/l/blhedgefunds.htm)
Stock Picks of Best Hedge Fund managers at GuruFocus.com: George Soros and Edward Lampert.
(http://www.gurufocus.com/)

Magazines

Alternative Universe (http://www.alternative-universe.net/)

Hedge Funds Review - World's oldest hedge fund magazine (http://www.hedgefundsreview.com/)
HFM – Hedge Fund Manager (http://www.afsrmagazine.com/)
Lipper/HedgeWorld (http://www.hedgeworld.com/)

Trade associations

Managed Funds Association (MFA) (http://www.mfainfo.org/)

Alternative Investment Management Association (AIMA) (http://www.aima.org/)

Indices

DOW Jones Hedge Fund Indexes (http://www.djhedgefundindexes.com/)

HedgeIndex - Home Page (http://www.hedgeindex.com/)
HedgeFund.net RealTime (http://www.hedgefund.net/bench_main.cfm/)
Talenthedge Indices - Home Page (http://www.talenthedge.com/)
S&P Hedge Fund Indices
(http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/IndicesIndexPg&r=1&l=EN&b=4&s=132&

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General areas of Edit

finance (http://en.wikipedia.org/w/wiki.phtml?title=MediaWiki:Finance-footer&action=edit )

Financial markets |
Fund management |
Financial institutions |
Personal finance |
Public finance |
Financial mathematics |
Financial economics
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Categories: Derivatives

This page was last modified 03:36, 4 September 2005.

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