DEFINE HEDGE FUND PROFESSIONAL

The President's Working Group on Financial Markets 19 provides a range of 2,500–3,500 hedge funds existing in July 1998, and managing capital of $250bn. All returns provided to the vendor are net of all management and performance fees.Įstimates of the number of hedge funds differ: Goldman Sachs and FRM 17 estimates that there are more than 3,500 hedge funds in 1999, while Van Hedge 18 finds approximately 5,800 in existence with nearly $300bn under management. Data in the hedge fund industry is collected on a monthly basis by database vendors such as ZCM/CISDM, HFR and TASS. Chadha and Jansen 4 observe that over 50 per cent of hedge funds refrain from submitting monthly performance figures to database vendors. 15 and by Liang, 16 while some hedge funds have no communication with any database vendors. Hedge funds typically display a higher attrition rate than mutual funds, as reported by Malkiel and Saha 14, Brown et al. Hedge funds are unregulated, and no official government sources of data exist, thereby forcing investors to rely on private database vendors. How large is the hedge fund industry? The number of hedge funds and the total amount of capital under management is considered problematic. 12 Brunel 13, however, prefers to describe them as ‘absolute return’ or ‘semi-directional’ strategies. 10, 11 If the hedge fund's strategy is to uncover assets possessing low correlation to stock markets, the fund is labelled ‘non-directional’ (ie market-neutral and event-driven), while a strategy having high correlation to stock markets is ‘directional’ (ie global macro, long only and short sellers).

Rather than comparing themselves to a benchmark, hedge funds typically focus on absolute returns in all market conditions. Many hedge funds, however, form offshore funds as a mirror image of their onshore funds to attract additional investors. According to the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934, private investment pools such as hedge funds are restricted to a maximum of 499 investors and are not able to issue public securities. Hedge funds are perhaps viewed as illiquid, absolute private investment vehicles that take advantage of price inefficiencies and market trends in financial markets. Hedge fund managers are paid an incentive fee based on performance, whereas mutual fund managers are compensated for the amount of assets they gather from investors. Onshore funds are limited to accredited or sophisticated investors with a net worth exceeding $1m, but a fund of hedge funds (a basket of hedge funds) is not as restrictive. The US Court of Appeals has also recently invalidated the Securities and Exchange Commission's (SEC) attempt to regulate hedge funds under the Investment Advisers Act of 1940. Unlike other traditional investments such as mutual funds, hedge funds are not currently regulated by the Securities Act of 1933 and are not required to disclose their positions. Participation in hedge funds is restricted to high net-worth individuals and to institutional investors such as foundations, life insurance companies, endowments and investment banks. 7, 8 Traditional asset classes such as stocks and bonds offer lower diversification advantages and tend to be highly correlated with US equity markets. By offsetting market movements, hedge funds can improve a portfolio's risk-return relationship and decrease kurtosis, 5, 6 especially during periods of negative equity returns. The general approach traditionally used by hedge fund managers is to find and invest in funds that have low or negative correlation with traditional stock, bond and currency markets.

DEFINE HEDGE FUND PROFESSIONAL

3, 4 With the speculative attack by George Soros on the British pound in 1992 and the collapse of long-term capital management (LTCM) in 1998, hedge funds have received a great deal of coverage in professional and in academic journals.Ĭonsidered as absolute return and alternative investment vehicles, hedge funds have certain characteristics that mutual funds do not have at their disposal. 1, 2 Jones created a market-neutral fund by gearing his position, he was able to outperform the average US equity mutual fund. The term ‘hedge fund’ was first used in 1949 by Alfred Winslow Jones to describe a private investment partnership whereby he ‘hedged’ the risk of his fund by purchasing undervalued stocks and shorting overvalued stocks.

Define hedge fund