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A
hedge fund
is an investment fund open to a limited range of investors that is permitted by regulators to
undertake a wider range of investment and trading activities than other investment funds, and that, in general,pays aperformance fee to itsinvestment manager.Every hedge fund has its own investment strategy that
determines the type of investments and the methods of investment it undertakes. Hedge funds, as a class, investin a broad range of investments including shares, debt andcommodities.
As the name implies, hedge funds often seek to hedgesome of the risks inherent in their investments using a
variety of methods, most notablyshort sellingand derivatives. However, the term "hedge fund" has also come to
be applied to certain funds that do not hedge their investments, and in particular to funds using short selling andother "hedging" methods to increase rather than reduce risk, with the expectation of increasing the return on theirinvestment.Hedge funds are typically open only to a limited range of professional or wealthy investors. This provides them withan exemption in many jurisdictions from regulations governing short selling, derivatives,leverage,fee structures
and the liquidity of interests in the fund. This, along with the performance fee and the fund's open-ended structure,
differentiates a hedge fund from an ordinary investment fund.
The net asset valueof a hedge fund can run into many billions of dollars, and the grossassets of the fund will
usually be higher still due toleverage. Hedge funds dominate certain specialty markets such as trading withinderivatives with high-yield ratings and distressed debt.
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History
Sociologist, author, and financial journalistAlfred W. Jonesis credited with the creation of the first hedge fund in1949.
Jones believed that price movements of an individual asset could be seen as having a component due tothe overall market and a component due to the performance of the asset itself. To neutralize the effect of overallmarket movement, he balanced his portfolio by buying assets whose price he expected to be stronger than themarket andselling short assets he expected to be weaker than the market. He saw that price movements due to
the overall market would be cancelled out, because, if the overall market rose, the loss on shorted assets would becancelled by the additional gain on assets bought and vice-versa. Because the effect is to 'hedge' that part of therisk due to overall market movements, this became known as a hedge fund.
Industry size
Estimates of industry size vary widely due to the lack of central statistics, the lack of a single definition of hedgefunds, and the rapid growth of the industry. As a general indicator of scale, the industry may have managedaround $2.5 trillion at its peak in the summer of 2008.
Thecredit crunchhas causedassets under management
(AUM) to fall sharply through a combination of trading losses and the withdrawal of assets from funds by investors.
DatabaseNumber of Active FundsWebsite
Morningstar Altvest8200
]
www.altvest.comBarclay Hedge5648
]
]
www.hedgeworld.comHedgefund.net7450
]
www.hedgefunds.netHedge Fund Research7500
]
Eureka hedge8232
]
www.eurekahedge.comCASAM CISDM4166
]
Fees
A hedge fund manager will typically receive both amanagement feeand aperformance fee (also known as an
incentive fee) from the fund. A typical manager may charge fees of "2 and 20", which refers to a management feeof 2% of the fund's net asset valueeach year and a performance fee of 20% of the fund's profit.
Management fees
As with other investment funds, the management fee is calculated as a percentage of the fund's net asset value.
Management fees typically range from 1% to 4% per annum, with 2% being the standard figure.
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Hedge Fund
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