The first vehicle commonly described as a hedge fund was started by Alfred W. Jones in 1949. By combining long positions with short selling and leverage, Jones aimed to reduce some market exposure — the origin of the word “hedge.” Interest in that structure grew in later decades. Investors such as Warren Buffett and George Soros were among those who studied Jones’s approach. The word “hedge” does not describe every fund that uses the label. Managers today use many strategies. Some reduce market exposure. Others take directional or concentrated positions and can be highly speculative.
Hedge funds are one part of a wider alternatives market that also includes private equity and real estate. Some strategies are designed to have a lower correlation to public equities than a long-only stock portfolio. Correlation, risk, and return vary by fund and by period. This page does not publish a current industry fund count or AUM figure.
The 2008 market crisis was severe for many managers and investors. Losses were widespread, and some investors reduced alternatives exposure. Outcomes in that period, and in the years that followed, were not uniform. Past results are not a guarantee of future results. What the industry does next is not something this page forecasts.
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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 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.
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