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 $3 billion 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 three 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 has attracted an increasing number of individual and institutional investors who have realized that investing in hedge funds can further diversify their portfolios and produce higher returns at lower risk.
While Alfred Jones' strategy employed short selling and leverage, there are a multitude of different strategies used by hedge fund managers today. The term "hedge" doesn't always apply, since many of these funds are not hedged at all.
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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 do not have the same breadth of investment instruments at their disposal. 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. Another feature of hedge funds is that 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. In addition, most hedge fund managers commit a portion of their wealth to the funds in order to align 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.
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