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Hedge fund

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Financial market participants
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Terms

A hedge fund is an investment fund charging a performance fee and typically open to only a limited range of investors. In the United States, hedge funds are open to accredited investors only. Because of this restriction they are usually exempt from any direct regulation by the SEC, NASD and other regulatory bodies.

Though the funds do not necessarily hedge their investments against adverse market moves, the term is used to distinguish them from regulated retail investment funds such as mutual funds and pension funds, and from insurance companies.

Hedge funds' activities are limited only by the terms of the contracts governing the particular fund. They can follow complex investment strategies, being long or short assets and entering into futures, swaps and other derivative contracts.

The funds, often organized as limited partnerships in the United States, typically invest on behalf of institutions and high-net-worth individuals. A common objective is to generate returns that are not closely correlated to those of the broader financial markets.

Origins and development

The term hedge fund dates back to a fund founded by Alfred Winslow Jones in 1949. A.W. Jones strategy was to sell short some stocks while buying others, thus some of the market risk was hedged. Many "investment pools", "investment syndicates", "investment partnerships" or "opportunity funds" that share characteristics of modern hedge were in operation long before. Such managers included Jesse Livermore, Bernard M. Baruch and Benjamin Graham. However, Jones was the first to combine short selling, the use of leverage, a limited partnership structure to avoid regulation, and a 20% incentive fee as compensation for the managing partner. And so Jones is widely regarded as the father of the modern hedge fund industry. [1]

While most of today's hedge funds still trade stocks both long and short, some do not trade stocks at all, instead focusing on other financial instruments including commodity futures, options, foreign currency and emerging market debt.

Assets under management of the hedge fund industry totaled $1.225 trillion at the end of the second quarter of 2006 according to the recently released data by Chicago-based Hedge Fund Research Inc. (HFR). This was up 19% on the previous year and nearly twice the total three years earlier. In a separate study published by Institutional Investor News and New York City-based HedgeFund.net, total estimated assets for the industry grew by 24% in 2006 to a total of $1.9 trillion. Performance is said to have accounted for 33% of the total increase.

Because hedge funds typically use leverage/gearing or debt to invest, the positions they can take in the financial markets are larger than their assets under management. The number of hedge funds increased 10% during the past year to reach around 9,000 according to HFR. Celent analysis of data from Hedge Fund Research and EurekaHedge reveals that, as of August 2006, the global hedge fund market was approximately US$1.3 trillion in assets and is expected to reach US$2.38 trillion by 2009, an annualized growth rate of 17%. European hedge fund assets will significantly increase their share of the global hedge fund market, rising from 27% in 2006 to 35%; assets will rise from US$397 billion to US$835 billion. Asia’s market share will increase from just under 5% (US$74 billion) to 9% (US$215 billion). [2]

Hedge funds have increasingly become involved in "shareholder activism" in the United States, by taking large stakes in companies and mounting a takeover or insisting upon management improvements. In May 2007, Business Week magazine reported that a hedge fund, Millbrook Capital Management, had become the second-largest shareholder in Acxiom, an Arkansas company, and was opposing a takeover by ValueAct Capital hedge fund and Silver Lake Partners, a private equity fund. [3]

Fees

Usually the hedge fund manager will receive both a management fee and a performance fee. As with other investment funds, the management fee is computed as a percentage of assets under management. Management fees might typically be 1.5% or 2.0%.

Performance fees

Performance fees, which give a share of positive returns to the manager, are one of the defining characteristics of hedge funds. The performance fee is computed as a percentage of the fund's profits, counting both paper profits and actual realized trading profits. Performance fees exist because investors are usually willing to pay managers more generously when the investors have themselves made money. For managers who perform well the performance fee is extremely lucrative.

Typically, hedge funds charge 20% of gross returns as a performance fee, but again the range is wide, with highly regarded managers demanding higher fees. In particular, Steven Cohen's SAC Capital Partners charges a 50% incentive fee (but no management fee) and Jim Simons' Renaissance Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund before returning all investors' capital and running solely on its employees' money.[citation needed]

Managers argue that performance fees help to align the interests of manager and investor better than flat fees that are payable even when performance is poor. However, performance fees have been criticized by many people including notable investor Warren Buffett for giving managers an incentive to take risk, possibly excessive risk, as opposed to high long-term returns. In an attempt to control these problems, fees are usually limited by high water marks and sometimes by hurdle rates.

High water marks

A "High water mark" is often used.[citation needed] This means that the manager does not receive incentive fees unless the value of the fund exceeds the highest net asset value it has previously achieved. For example, if a fund was launched at a net asset value (NAV) of 100 and rose to 130 in its first year, a performance fee would be payable on the 30% return. If the next year it dropped to 120, no fee is payable. If in the third year the NAV rises to 143, a performance fee will be payable only on the 13% return from 130 to 143 rather than on the full return from 120 to 143.

This measure is intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. If a high water mark is not used, a fund that ends alternate years at 100 and 110 would generate performance fee every other year, enriching the manager but not the investors. However, this mechanism does not provide complete protection to investors: a manager that has lost money may simply decide to close the fund and start again with a clean slate -- provided that he can persuade investors to trust him with their money. A high water mark is sometimes also referred to as a "Loss Carryforward Provision".

Hurdle rates

Some funds also specify a 'hurdle', which signifies that the fund will not charge a performance fee until its annualized performance exceeds a benchmark rate, such as T-bills or a fixed percentage, over some period. This links performance fees to the ability of the manager to do better than the investor would have done if he had put the money in a bank account.

Though logically appealing, this practice has diminished as demand for hedge funds has outstripped supply and hurdles are now rare. [citation needed]

Strategies

Hedge funds do not constitute a homogeneous asset class. The bulk of hedge funds describe themselves as long / short equity, perhaps because this is the least specific of the available descriptions, but many different approaches are used taking different exposures, exploiting different market opportunities, using different techniques and different instruments:

Hedge Fund Indices

There are a number of indices that track the hedge fund industry. These indices come in two types, Investable and Non-investable, both with substantial problems. There are also new types of tracking product launched by Goldman Sachs and Merrill Lynch, "clone indices" that aim to replicate the returns of hedge fund indices without actually holding hedgefunds at all.

Investable indices are created from funds that can be bought and sold, as with a traditional equity index such as the S&P500 or FTSE100. Only Hedge Funds that agree to accept investments on terms acceptable to the constructor of the index are included. Investability is an attractive property for an index because it makes the index more relevant to the choices available to investors in practice. In some ways these indices are similar to Fund of hedge funds. However, such indices do not represent the total universe of hedge funds and may under-represent the more successful managers, who may not find the index terms attractive. Fund indexes include Hedge Fund Research, CSFB Tremont and FTSE Hedge.[2][3]

The index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index with a small tracking error. Indices provided by FTSE, HFR, CSFB or MSCI are among the best known examples. These indices allow access to alternative investment strategies at low cost, providing liquidity but sacrificing some representativity as a result.

Non-investable indices are indicative in nature, and aim to represent the performance of the universe of hedgefunds using some measure such as mean, median or weighted mean from some hedgefund database. There are diverse selection criteria and methods of construction, and no single database captures all funds. This leads to significant differences in reported performance between different databases.

Non-investable indices inherit the databases' shortcomings in terms of scope and quality of data. Funds’ participation in a database is voluntary, leading to “self reporting bias” because those fund that choose to report may not be typical of funds as a whole. For example, some do not report because of poor results or because they have already reached their target size and do not wish to raise further money.

The short lifetimes of many hedgefunds means that there are many new entrants and many departures each year, which raises the problem of “survivorship bias”. If we examine only funds that have survived to the present, we will overestimate past returns because many of the worst-performing funds have not survived, and the observed association between fund youth and fund performance suggests that this bias may be substantial. As the HFR and CISDM databases began in 1994, it is likely that they will be more accurate over the period 1994/2000 than the CSFB database, which only began in 2000. [citation needed]

Database providers have differing selection criteria, so their data does not represent the same universe of hedgefunds. This is referred to as "selection bias". For instance, HFR excludes managed futures while TASS and CISDM include them.

When a fund is added to a database for the first time, all or part of its historical data is recorded ex-post in the database. It is likely that funds only publish their results when they are favourable, so that the average performances displayed by the funds during their incubation period are inflated. This is known as "instant history bias” or “backfill bias”.

In traditional equity investment, indices play a central and unambiguous role. They are widely accepted as representative, and products such as futures and ETFs provide liquid access to them in most developed markets. However, among hedgefunds no index combines these characteristics. Investable indices achieve liquidity, at the expense of representativeness. Non-investable indices may be more representative, but their quoted returns may not be available in practice. Neither is wholly satisfactory.

Legal structure is usually determined by the tax environment of the fund investors. Many hedge funds are domiciled -- have their legal residence -- offshore in countries unrelated to either the manager, investor or investment operations of the fund, with the objective of making taxes payable only by the investor and not additionally by the fund.

Funds ordinarily are run by hedge fund management companies, which may operate one or many funds domiciled in multiple jurisdictions.

For U.S-based investors who pay tax, hedge funds are often structured as limited partnerships because these receive relatively favourable tax treatment in the US. The hedge fund manager (usually structured as a corporate entity) is the general partner or manager and the investors are the limited partners or members respectively. The funds are pooled together in the partnership or company and the general partner or manager makes all the investment decisions. [4]

Non-US investors and U.S. entities that do not pay tax (such as pension funds) do not receive the same benefits from limited partnerships, and funds for these investors are often structured as offshore or unit trusts or investment companies. Hybrid or "Master-feeder " structures that contain both a US limited partnership and an offshore company allow hedge funds to attract capital from several different tax regimes.

At the end of 2004, 55% of the number of hedge funds, managing nearly two-thirds of total hedge fund assets, were registered offshore. The most popular offshore location was the Cayman Islands followed by British Virgin Islands and Bermuda. The U.S. was the most popular onshore location accounting for 34% of the number of funds and 24% of assets. EU countries were the next most popular location with 9% of the number of funds and 11% of assets. Asia accounted for the majority of the remaining assets. [citation needed]

Onshore locations are far more important in terms of the location of hedge fund managers. New York City and the Gold Coast area of Connecticut (particularly Stamford, Connecticut and Greenwich, Connecticut) together are the world's leading location for hedge fund managers with about twice as many hedge fund managers as the next largest centre, London. This is not surprising considering that the US is the source of the bulk of hedge fund investments. London is Europe’s leading centre for the management of hedge funds. At end-2006, three-quarters of European hedge fund investments, totalling $400bn, were managed within the UK, the vast majority from London. Assets managed out of London grew more than fourfold between 2002 and 2005 from $61bn to $225bn. Australia was the most important centre for the management of Asia-Pacific hedge funds. Managers located there accounted for around a quarter of the $140bn in Asia-Pacific hedge funds’ assets in 2006.[5]

Hedge funds that have filed for IPOs have done so outside the United States. Although widely reported as a "hedge-fund IPO" [6], the Fortress Investment Group LLC IPO filed November 8, 2006 is for the sale of the manager, not of the hedge funds it manages.[7]

Regulatory Issues

Part of what gives hedge funds their competitive edge, and their cachet in the public imagination, is that they straddle multiple definitions and categories; some aspects of their dealings are well-regulated, others are unregulated or at best quasi-regulated.

US regulation

The typical investment company in the United States is required to be registered with the U.S. Securities and Exchange Commission (SEC). Mutual funds are the most common type of registered investment companies. Aside from registration and reporting requirements, investment companies are subject to strict limitations on short-selling and the use of leverage. There are other limitations and restrictions placed on investment company managers, including the prohibition on charging incentive or performance fees.

Funds that trade in commodities, which include many of the largest funds engaged in "macro" strategies, are registered with the Commodity Futures Trading Commission as commodity pools and as commodity trading advisors, or CTAs. In an address to the Securities Industry Association in 2004, Sharon Brown-Hruska, acting director of the CFTC, said that 65 of the top 100 funds in 2003 were commodity pools, and 50 out of the 100 largest hedge funds were CTAs in addition to being commodity pools.[4]

Although hedge funds fall within the statutory definition of an investment company, hedge funds elect to operate pursuant to exemptions from the registration requirements. The two major exemptions are set forth in Sections 3(c)1 and 3(c)7 of the Investment Company Act of 1940. Those exemptions are for funds with fewer than 100 investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3(c) 7 Fund"). [5] A qualified purchaser is an individual with over US$5,000,000 in investment assets. (Some institutional investors also qualify as accredited investors or qualified purchasers.) [6] A 3(c)1 Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number of investors. Both types of funds can charge performance or incentive fees.

In order to comply with 3(c)(1) or 3(c)(7), hedge funds are sold via private placement under the Securities Act of 1933. Thus interests in a hedge fund cannot be offered or advertised to the general public, and are normally offered under Regulation D. Although it is possible to have non-accredited investors in a hedge fund, the exemptions under the Investment Company Act, combined with the restrictions contained in Regulation D, effectively require hedge funds to be offered solely to accredited investors. [7]. An accredited investor is an individual with a minimum net worth of US$1,000,000 or, alternatively, a minimum income of US$200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year.

The regulatory landscape for Investment Advisors is changing, and there have been attempts to register hedge fund investment managers. There are numerous issues surrounding these proposed requirements. One issue of importance to hedge fund managers is the requirement that a client who is charged an incentive fee must be a "qualified client" under Advisers Act Rule 205-3. To be a qualified client, an individual must have US$750,000 in assets invested with the adviser or a net worth in excess of US$1.5 million, or be one of certain high-level employees of the investment adviser. [8]

For the funds, the tradeoff of operating under these exemptions 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. [citation needed]

In December 2004, the SEC issued a rule change that required most hedge fund advisers to register with the SEC by February 1, 2006, as investment advisers under the Investment Advisers Act.[9] The requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over 15 investors. The SEC stated that it was adopting a "risk-based approach" to monitoring hedge funds as part of its evolving regulatory regimen for the burgeoning industry.[10] The rule change was challenged in court by a hedge fund manager, and in June 2006, the U.S. Court of Appeals for the District of Columbia overturned it and sent it back to the agency to be reviewed. See Goldstein v. SEC.

Although the SEC is currently examining how it can address the Goldstein decision, commentators have stated that the SEC currently has neither the staff nor expertise to comprehensively monitor the estimated 8,000 U.S. and international hedge funds. See New Hedge Fund Advisor Rule. One of the Commissioners, Roel Campos, has said that the SEC is forming internal teams that will identify and evaluate irregular trading patterns or other phenomena that may threaten individual investors, the stability of the industry, or the financial world. "It's pretty clear that we will not be knocking on [hedge fund] doors very often," Campos told several hundred hedge fund managers, industry lawyers and others. And even if it did, "the SEC will never have the degree of knowledge or background that you do."[citation needed]

In February 2007, the President's Working Group on Financial Markets rejected further regulation of hedge funds and said that the industry should instead follow voluntary guidelines.[11][12][13]

Comparison to private equity funds

Hedge funds are similar to private equity funds in many respects. Both are lightly regulated, private pools of capital that invest in securities and compensate their managers with a share of the fund's profits. Most hedge funds 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 so investors are "locked in" for the entire term of the fund. Hedge funds often invest in private equity companies' acquisition funds.[citation needed]

Between 2004 and February 2006, some U.S. hedge funds adopted 25 month lock-up rules expressly to exempt themselves from the SEC's new registration requirements. They now fall under the registration exemption drafted to exempt private equity funds.[citation needed]

Comparison to U.S. mutual funds

Like hedge funds, mutual funds are pools of investment capital (i.e., money people want to invest). However, there are many differences between the two, including:

  • Mutual funds are regulated by the SEC, while hedge funds are not
  • A hedge fund investor must be an accredited investor with certain exceptions (employees, etc.)
  • Mutual funds must price and be liquid on a daily basis

Additionally, mutual funds must have a prospectus available to anyone that requests them (either electronically or via US postal mail), and must disclose their asset allocation quarterly, while hedge funds do not have to abide by these terms. Hedge funds also frequently do not have daily liquidity, but rather "lock up" periods of time where the total returns are generated (net of fees) for their investors and then returned when the term ends, through a passthrough requiring CPAs and US Tax W-forms. Lots of people tolerate the nature of hedge funds over mutual funds because they usually generate higher total returns for their investors versus mutual funds.

Recently, however, the mutual fund industry has created products with features that have traditionally only been found in hedge funds.

Mutual funds have appeared which utilize some of the trading strategies noted above. Grizzly Short Fund (GRZZX), for example, is always net short, while Arbitrage Fund (ARBFX) specializes in merger arbitrage. Such funds are SEC regulated, but they offer hedge fund strategies and protection for mutual fund investors.

Also, a few mutual funds have introduced performance-based fees, where the compensation to the manager is based on the performance of the fund. However, under Section 205(b) of the Investment Advisers Act of 1940, such compensation is limited to so-called "fulcrum fees".[14] Under these arrangements, fees can be performance-based so long as they increase and decrease symmetrically.

For example, the TFS Capital Small Cap Fund (TFSSX) has a management fee that behaves, within limits and symmetrically, similarly to a hedge fund "0 and 50" fee: A 0% management fee coupled with a 50% performance fee if the fund outperforms its benchmark index. However, the 125 bp base fee is reduced (but not below zero) by 50% of underperformance and increased (but not to more than 250 bp) by 50% of outperformance. [15]

Offshore regulation

Many offshore centers are keen to encourage hedge funds. To do this they offer some combination of professional services, a favorable tax environment, and business-friendly regulation. This should not be taken to imply that the quality of regulation in offshore centers is lax -- indeed, financial supervision in some is as good or better than onshore centers such as London or New York. [[16]] Major centers include Dublin, Luxembourg, Cayman Islands and Bermuda.

Typical rules concern restrictions on the availability of funds to retail investors (Dublin), protection of client confidentiality (Luxembourg) and the requirement for the fund to be independent of the fund manager.

Privacy issues

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, such as Bermuda, Cayman Islands, British Virgin Islands, where regulation of investment funds permits wider powers of investment (the Cayman Islands have been estimated to be home to about 75% of world’s hedge funds, with nearly half the industry's estimated $1.225 trillion AUM[8]). Hedge funds have to file accounts and conduct their business in compliance with the less stringent 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 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 of $7.818 trillion (according to the Investment Company Institute). [citation needed]

Debates and polemics

Market capacity

Analysis of the rather disappointing hedge fund performance in 2004 and 2005 called into question the alternative investment industry's value proposition. Alpha may have been becoming rarer for two related reasons. First, the increase in traded volume may have been reducing the market anomalies that are a source of hedge fund performance. Second, the remuneration model is attracting more and more managers, which may dilute the talent available in the industry.

However, the market capacity effect has been questioned by the EDHEC Risk and Asset Management Research Centre (see Géhin and Vaissié, 2006, The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy, The Journal of Alternative Investments, Vol. 9, No. 1, pp. 9-18), through a decomposition of hedge fund returns between pure alpha, dynamic betas, and static betas.

While pure alpha is generated by exploiting market opportunities, the dynamic betas depend on the manager’s skill in adapting the exposures to different factors, and these authors claim that these two sources of return do not exhibit any erosion. This suggests that the market environment (static betas) explains a large part of the poor performance of hedge funds in 2004 and 2005.

Systemic risk

Hedge funds came under heightened scrutiny as a result of the failure of Long-Term Capital Management (LTCM) in 1998, which necessitated a bailout coordinated by the U.S. Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster.

The ECB (European Central Bank) has issued a warning on hedge fund risk for financial stability and systemic risk: "... the increasingly similar positioning of individual hedge funds within broad hedge fund investment strategies is another major risk for financial stability which warrants close monitoring despite the essential lack of any possible remedies. This risk is further magnified by evidence that broad hedge fund investment strategies have also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades."[9]

The Times wrote about this review: "In one of the starkest warnings yet from an official institution over the role of the burgeoning but secretive industry, the ECB sounded a note of alarm over the possible repercussions from any collapse of a hedge fund, or group of funds."[10]

However, the ECB statement itself has been criticized by a part of the financial research community. These arguments are developed by the EDHEC Risk and Asset Management Research Centre:[17]. The main conclusions of this study are that “the ECB article’s conclusion of a risk of “disorderly exits from crowded trades” is based on mere speculation. While the question of systemic risk is of importance, we do not dispose of enough data to reliably address this question at this stage”, “ it would be worthwhile for financial regulators to work towards obtaining data on hedge fund leverage and counterparty credit risk. Such data would allow a reliable assessment of the question of systemic risk”, and “besides evaluating potential systemic risk, it should be recognised that hedge funds play an important role as “providers of liquidity and diversification”.

Performance measurement

The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. Traditional indicators (Sharpe, Treynor, Jensen) work when returns follow a symmetrical distribution. In that case, risk is represented by the standard deviation. Unfortunately, hedge fund returns are not normally distributed, and hedge fund return series are autocorrelated. Consequently, traditional performance measures suffer from theoretical problems when they are applied to hedge funds, leading to erroneous fund rankings.

Innovative performance measures have been introduced: the Modified Sharpe ratio by Gregoriou and Gueyie (2003), the Omega by Keating and Shadwick (2002), the Alternative Investments Risk Adjusted Performance (AIRAP) by Sharma (2004), and the Kappa by Kaplan and Knowles (2004). An overview of these performance measures is available in Géhin, W., 2006, The Challenge of Hedge Fund Performance Measurement: a Toolbox rather than a Pandora’s Box, EDHEC Risk and Asset Management Research Center, Position Paper, December. However, there is no consensus on the most appropriate absolute performance measure, and traditional performance measures are still used in the industry.

Relationships with analysts

In June 2006. the U.S. Senate Judiciary Committee began an investigation into the links between hedge funds and independent analysts, and other issues related to the funds. Connecticut Attorney General Richard Blumenthal testified that an appeals court ruling striking down oversight of the funds by federal regulators left investors "in a regulatory void, without any disclosure or accountability."[18] The hearings heard testimony from, among others, Gary Aguirre, a staff attorney who was recently fired by the SEC. [19] [20]

Transparency

Some hedge funds, mainly American, do not use a third party to custody their assets. This can lead to conflict of interest and in extreme cases can assist fraud. In a recent example, Kirk Wright of International Management Associates has been accused of mail fraud and other securities violations [21] which allegedly defrauded clients of close to $180 million.[22]

Hedge fund data

Top earners

Institutional Investor magazine annually ranks top-earning hedge fund managers. Earnings from a hedge fund are simply 100% of the capital gains on the manager's own equity stake in the fund plus 20% to 50% (depending on policy) of the gains on the other investors' capital.

The 2004 top earner was Edward Lampert of ESL Investments Inc. who earned $1.02 billion during the year (PR Newswire link).

The 2005 top earner was James Harris Simons with an earning of $1.6 billion according to Alpha magazine.[11] However, Trader Monthly reported that Simons only earned about $1 billion and that the top earner was instead T. Boone Pickens with an estimated earning of over $1.5 billion during the year.[12]

The full top 10 list of hedge fund earners according to Trader Monthly includes:

Notable hedge fund management companies

Sometimes also known as alternative investment management companies.

Top 25 funds of hedge funds by assets

Funds of hedge funds invest in a portfolio of underlying hedge funds rather than investing in securities directly. They hire the hedge fund managers on behalf of their clients following due diligence on the managers in addition to building diversified portfolios of these managers. They are ranked by Dec 2005 Assets Under Management (though this cannot be taken as the final word on the matter given the intense privacy that surrounds much of the industry). See Institutional Investor Magazine Link for the 100 largest hedge funds: http://www.deshaw.com/articles/Alpha.pdf

Terminology

Further reading

Research Articles

  • Agarwal, V., and N.Y. Naik, 2000,Multi-Period Performance Persistence Analysis of Hedge Funds, Journal of Financial and Quantitative Analysis, Vol. 35, No. 3.
  • Amenc, N., L. Martellini, and M. Vaissié, 2003, Benefits and Risks of Alternative Investment Strategies, Journal of Asset Management, Vol. 4, No. 2, pp. 96–118.
  • Asness, C., R. Krail, and J. Liew, 2000, Do Hedge Funds Hedge?, Journal of Portfolio Management, Vol. 28, No. 1, pp. 6–19.
  • Caslin, J. J., 2004, Hedge Funds, British Actuarial Journal, Vol. 10, No. 3, pp. 441-521.
  • De Souza, C., and S. Gokcan, 2004, Hedge Fund Investing: A Quantitative Approach to Hedge Fund Manager Selection and De-Selection, Journal of Wealth Management.
  • Fransolet, L. and J. Loeys, 2004, Have Hedge Funds Eroded Market Opportunities?, Journal of Alternative Investments, Vol. 7, No. 3, pp. 10–33.
  • Géhin, W., and M. Vaissié, 2005, Lighthouses Or Tricks Of Light? An In-Depth Look at Creating a Quality Hedge Fund Benchmark, The Journal of Indexes, May/June.
  • Géhin, W., and M. Vaissié, 2006, The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy, The Journal of Alternative Investments, Vol. 9, No. 1, pp. 9-18.

Research Papers

  • Amenc, N., L. Martellini, and M. Vaissié, 2003, Indexing Hedge Fund Indexes, EDHEC Risk and Asset Management Research Center, Position Paper, December.
  • Amenc, N., and L. Martellini, 2003, Optimal Mixing of Hedge Funds with Traditional Investments, EDHEC Risk and Asset Management Research Center, Position Paper, February.
  • Amenc, N., and M. Vaissié, 2006, Determinants of Funds of Hedge Funds’ Performance, EDHEC Risk and Asset Management Research Center, Position Paper, February.
  • Géhin, W., 2006, The Challenge of Hedge Fund Performance Measurement: a Toolbox Rather Than a Pandora’s Box, EDHEC Risk and Asset Management Research Center, Position Paper, December.
  • Géhin, W., and M. Vaissié, 2004, Hedge Fund Indices: Investable, Non-Investable and Strategy Benchmarks, EDHEC Risk and Asset Management Research Center, Position Paper.
  • Giraud, J.R., 2005, Mitigating Hedge Funds’ Operational Risks: Benefits and limitations of managed account platforms, EDHEC Risk and Asset Management Research Center, Position Paper, December.
  • Goltz, F., L. Martellini, and M. Vaissié, 2004, Hedge Fund Indices from an Academic Perspective: Reconciling Investability and Representativity, EDHEC Risk and Asset Management Research Center, Position Paper, November.
  • Martellini, L. and V. Ziemann, 2005, The Benefits of Hedge Funds in Asset Liability Management, EDHEC Risk and Asset Management Research Center, Position Paper, October.

Books

  • Black, Keith (2004). Managing a Hedge Fund: A Complete Guide to Trading, Business Strategies, Risk Management and Regulations. McGraw-Hill. ISBN 007143481X.
  • Lhabitant, François-Serge (2002). Hedge Funds: Myths and Limits. John Wiley & Sons. ISBN 0-470-84477-9.
  • Lhabitant, François-Serge (2004). Hedge Funds: Quantitative Insights. John Wiley & Sons. ISBN 0-470-85667-X.
  • Lhabitant, François-Serge (2004). Handbook of hedge Funds. John Wiley & Sons. ISBN 0-470-02663-4.
  • Gregoriou, Greg (2006). Funds of Hedge Funds. Butterworth-Heineman, an imprint of Elsevier. ISBN 0-7506-7984-0.
  • Nelken, Izzy (2005). Hedge Fund Investment Management. Butterworth-Heineman, an imprint of Elsevier. ISBN 0-7506-6007-4.
  • Kessler, Andy (2004). Running Money : Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score. Collins. ISBN 0-06-074064-7.
  • Drobny, Steven (2006). Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets. Wiley. ISBN 0-471-79447-3.
  • Ineichen, Alexander M., Absolute Returns - Risk and Opportunities of Hedge Fund Investing, New York: John Wiley & Sons, 2003. ISBN 0-471-25120-8
  • Ineichen, Alexander M., Asymmetric Returns - The Future of Active Asset Management, New York: John Wiley & Sons, 2006, forthcoming. ISBN 0-470-04266-4
  • Spangler, Timothy (2005). A Practitioner's Guide to Alternative Investment Funds. ISBN 1-898830-98-3.
  • Weiss, Gary, Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments, New York: Portfolio, 2006. Argues that hedge funds tend to underperform market indexes and are excessively hyped by the media. ISBN 1-59184-094-5

See also

Academic research

Industry news

Indices

Trade associations

References

  1. ^ Steve Johnson, A short history of bankruptcy, death, suicides and fortunes, Financial Times, April 27 2007
  2. ^ Celent Report: According to figures published by Celent 2 August 2006. See also Trends in Hedge Fund Administration.
  3. ^ Now It's Hedge Fund vs. Hedge Fund, Business Week, May 18, 2007
  4. ^ [1] A Practitioner's Guide to Alternative Investment Funds
  5. ^ Hedge Funds, pg 2 International Financial Services London
  6. ^ Fortress files for first US hedge fund IPO, Marketwatch
  7. ^ FORTRESS INVESTMENT GROUP LLC, SEC Registration Statement
  8. ^ Institutional Investor, 15 May 2006, Article Link, although statistics in the Hedge Fund industry are notoriously speculative
  9. ^ ECB Financial Stability Review June 2006, p. 142
  10. ^ Gary Duncan (2006-06-02). "ECB warns on hedge fund risk". The Times. Retrieved 2007-05-01. {{cite news}}: Check date values in: |date= (help)
  11. ^ "$363M is average pay for top hedge fund managers". Institutional Investor, Alpha magazine (USA TODAY article, 26 May, 2006). Retrieved May 27. {{cite web}}: Check date values in: |accessdate= (help); Unknown parameter |accessyear= ignored (|access-date= suggested) (help)
  12. ^ Traders Monthly. Top Hedge Fund Earners of 2005.
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