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The Hedge Fund Industry

The Hedge Fund Industry

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Published by Tafadzwa Nyamajiwa

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Published by: Tafadzwa Nyamajiwa on Jun 29, 2012
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08/30/2013

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PART
one
The Hedge Fund Industry
CCC-Ineichen 1 (1-58) 9/4/02 3:53 PM Page 1
 
CCC-Ineichen 1 (1-58) 9/4/02 3:53 PM Page 2
 
CHAPTER
1
Introducing Absolute Returns
During the French Revolution such speculators were known asagitateurs, and they were beheaded.
—Michel Sapin*
HISTORY OF THE ABSOLUTE RETURN APPROACH
Prologue to the Twentieth Century
Most market observers put down 1949 as the starting date for so-called ab-solute return managers, that is, the hedge fund industry. However, if we loosenthe definition of hedge funds and define hedge funds as individuals or partnerspursuing absolute return strategies by utilizing traditional as well as nontradi-tional instruments and methods, leverage, and optionality, then the startingdate for absolute return strategies dates further back than 1949.One early reference to a trade involving nontraditional instruments andoptionality appears in the Bible. Apparently, Joseph wished to marry Rachel,the youngest daughter of Leban. According to Frauenfelder (1987), Leban, thefather, sold a (European style call) option with a maturity of seven years on hisdaughter (considered the underlying asset). Joseph paid the price of the optionthrough his own labor. Unfortunately, at expiration Leban gave Joseph theolder daughter, Leah, as wife, after which Joseph bought another option onRachel (same maturity). Calling Joseph the first absolute manager would be astretch. (Today absolute return managers care about settlement risk.) How-ever, the trade involved nontraditional instruments and optionality, and riskand reward were evaluated in absolute return space.Gastineau (1988) quotes Aristotle’s writings as the starting point for
3
*Michel Sapin, former French Finance Minister, on speculative attacks on the franc.From Bekier (1996).
CCC-Ineichen 1 (1-58) 9/4/02 3:53 PM Page 3

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