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Hedge fund 1

Hedge fund
A hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of investment
and trading activities than traditional long-only investment funds, and that, in general, pays a performance fee to its
investment 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, invest in a broad range of investments including
shares, debt and commodities. Some people consider the fund created in 1949 by Alfred Winslow Jones to be the
first hedge fund.[1]
As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety
of methods, most notably short selling and derivatives. However, the term "hedge fund" has also come to be applied
to certain funds that, as well as (or instead of) hedging certain risks, use short selling and other "hedging" methods as
a trading strategy to generate a return on their capital.
In most jurisdictions hedge funds are open only to a limited range of professional or wealthy investors who meet
certain criteria set by regulators, and are accordingly exempted from many regulations that govern ordinary
investment funds. The exempted regulations typically cover short selling, the use of derivatives and leverage, fee
structures, and the rules by which investors can remove their capital from the fund. Light regulation and the presence
of performance fees are the distinguishing characteristics of hedge funds.
The net asset value of a hedge fund can run into many billions of dollars, and the gross assets of the fund will usually
be higher still due to leverage. Hedge funds dominate certain specialty markets such as trading within derivatives
with high-yield ratings and distressed debt.[2]

History
Sociologist, author, and financial journalist Alfred W. Jones is credited with the creation of the first hedge fund in
1949.[1] Jones believed that price movements of an individual asset could be seen as having a component due to the
overall market and a component due to the performance of the asset itself. To neutralize the effect of overall market
movement, he balanced his portfolio by buying assets whose price he expected to be stronger than the market and
selling 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 be cancelled by the
additional gain on assets bought and vice-versa. Because the effect is to 'hedge' that part of the risk 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 hedge
funds and the rapid growth of the industry. As a general indicator of scale, the industry may have managed around
$2.5 trillion at its peak in the summer of 2008.[1] The credit crunch has caused assets under management (AUM) to
fall sharply through a combination of trading losses and the withdrawal of assets from funds by investors.[3] Recent
estimates find that hedge funds have more than $2 trillion in AUM.[4] A recent survey of hedge fund administrators
indicates single manager hedge funds have over $2.5 trillion in assets under administration ($AuA)[5]

In the business models of most managers.6 billion). By incentivising the manager to generate returns." . 2009. the management fees for large funds may form a significant part of the manager's profits.[12] while Jim Simons' Medallion Fund charged a 45% performance fee.. with the decline being more pronounced in funds of hedge funds (FOFs).[8] Management fees associated with hedge funds have been under much scrutiny. not as a unique asset class but as a unique ‘fee structure’. Buffett charged incentive fees until his firm was very large. fees are usually limited by a high water mark. A typical manager may charge fees of "2 and 20". with several large public pension funds. usually counting both realized and unrealized profits. including notable investor Warren Buffett. by allowing managers to take a share of profit but providing no mechanism for them to share losses. the range is wide with highly regarded managers charging higher fees. Management fees typically range from 1% to 4% per annum. The average incentive fee for funds launched in 2009 was 17.[7] Management fees are usually expressed as an annual percentage. but calculated and paid monthly or quarterly. For example Steven Cohen's SAC Capital Partners charges a 35-50% performance fee. performance fees give managers an incentive to take excessive risk rather than targeting high long-term returns. As the hedge fund remuneration structure is highly attractive it has been remarked that hedge funds are best viewed ". the management fee is calculated as a percentage of the fund's net asset value. performance fees are intended to align the interests of manager and investor more closely than flat fees do. In an attempt to control this problem. Performance fees Performance fees (or "incentive fees") are one of the defining characteristics of hedge funds. However. ($32 billion). with 2% being the standard figure.[11] However.6 percent.[6] Fees A hedge fund manager will typically receive both a management fee and a performance fee (also known as an incentive fee) from the fund.9 percent (versus 8. Several publications publish annual estimates of the earnings of top hedge fund managers. Brevan Howard ($27 billion).2 percent (versus 19. The manager's performance fee is calculated as a percentage of the fund's profits. Incentive fees for single manager funds fell to 19.05 percent in Q1 08).. 1. calling on managers to reduce fees. Mr. who believe that. The business models of most hedge fund managers provide for the management fee to cover the operating costs of the manager.[9] [10] Typically. Average incentive fees have declined since the start of the financial crisis.7 billion in assets under management as of December 31. Ironically. notably CalPERS. leaving the performance fee for employee bonuses. which refers to a management fee of 2% of the fund's net asset value each year and a performance fee of 20% of the fund's profit. and Soros Fund Management ($27 billion).34 percent in Q1 08) while FOFs fell to 6. hedge funds charge 20% of returns as a performance fee.[1] Management fees As with other investment funds. Paulson & Co. the performance fee is largely available for staff bonuses and so can be extremely lucrative for managers who perform well.[13] Performance fees have been criticized by many people.Hedge fund 2 Largest hedge fund managers The 25 largest hedge fund managers had $519.5 billion) followed by Bridgewater Associates ($43.6 percent below the broader industry average. The largest manager is JP Morgan Chase ($53.

Hurdle rates Some managers specify a hurdle rate. With a "hard" hurdle. The mechanism does not provide complete protection to investors: A manager who has lost a significant percentage of the fund's value may close the fund and start again with a clean slate. This means that the manager receives performance fees only on increases in the net asset value (NAV) of the fund in excess of the highest net asset value it has previously achieved. demand for hedge funds tended to outstrip supply. if a fund were launched at a NAV per share of $100. managed futures (CTA) • Market: equity. signifying that they will not charge a performance fee until the fund's annualized performance exceeds a benchmark rate. thereby giving investors some indication of the nature of the particular fund. Unlike management and performance fees. futures. no fee would be payable. which then rose to $120 in its first year. a performance fee would be payable on the $20 return for each share. particular investment types and leverage limits via statements in its offering documentation. LIBOR or a fixed percentage.[1] This links performance fees to the ability of the manager to provide a higher return than an alternative.[14] This tactic is dependent on the manager's ability to persuade investors to trust him or her with their money in the new fund. a fund that ends alternate years at $100 and $110 would generate a performance fee every other year. High water marks are intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. enriching the manager but not the investors.Hedge fund 3 High water marks A high water mark (or "loss carryforward provision") is often applied to a performance fee calculation. For example. rather than on the full return during that year from $110 to $130.. illiquid or long-term strategies. making hurdle rates relatively rare. A hedge fund will typically commit itself to a particular strategy. swaps • Exposure: directional. commodity. rather than continue working for no performance fee until the loss has been made up for. fixed income. Prior to the credit crisis of 2008. currency • Instrument: long/short. redemption fees are usually retained by the fund and therefore benefit the remaining investors rather than the manager. Withdrawal/redemption fees Some funds charge investors a redemption fee (or "withdrawal fee" or "surrender charge") if they withdraw money from the fund. Each strategy can be said to be built from a number of different elements: • Style: global macro. If the next year it dropped to $110. Strategies Hedge funds employ many different trading strategies. market neutral . directional. options. The fee may also dissuade investors from withdrawing funds after periods of poor performance. with no standard system used. which are classified in many different ways. thereby reducing turnover and allowing the use of more complex. A redemption fee is often charged only during a specified period of time (typically a year) following the date of investment. event-driven. investment. If in the third year the NAV per share rose to $130. a performance fee would be payable only on the $10 profit from $120 (the high water mark) to $130. The purpose of the fee is to discourage short-term investment in the fund. a performance fee is charged on the entire annualized return if the hurdle rate is cleared. such as T-bill yield. With a "soft" hurdle. If a high water mark is not used. or only to withdrawals representing a specified portion of an investment. relative value (arbitrage). a performance fee is only charged on returns above the hurdle rate. usually lower risk.

healthcare etc.long equity positions hedged with short sales of stocks or stock market index options. • Short bias .where the investments are selected according to numerical methods using a computerized system) • Diversification: multi-manager.Hedge fund 4 • Sector: emerging market. • Multi-strategy . • Long/short equity (Equity hedge) . • Discretionary macro .the fund trades in currency markets.the fund trades in diversified markets. . • Fundamental growth . biotechnology.take advantage of declining equity markets using short positions.expertise in niche areas such as technology. • Fundamental value . executed by software without any human intervention other than the initial programming of the software. Trading) Global Macro funds attempt to anticipate global macroeconomic events. India etc.invest in undervalued companies.equity trading using quantitative techniques.diversification through different styles to reduce risk. • Multi-strategy . such as China. • Trend following . • Commodity Trading Advisors (CTA. energy.trading is carried out by investment managers selecting investments. Trading) . instead of being generated by software. • Systematic diversified .the fund attempts to profit from following long-term or short-term trends.specialized in emerging markets. Global macro (Macro. • Emerging markets . pharmaceuticals. multi-strategy. • Systematic currency . systematic/quantitative (or "quant" . technology. • Sector funds .the fund attempts to profit from anticipating reversals in such trends. multi-fund.the fund trades in futures (or options) in commodity markets. basic materials.the fund uses a combination of strategies. generally using all markets and instruments to generate a return. • Quantitative Directional . healthcare. multi-market The four main strategy groups are based on the investment style and have their own risk and return characteristics. • Non-trend following (Counter trend) .invest in companies with more earnings growth than the broad equity market. Managed futures. meaning that the fund takes both long and short positions in shares traded on public stock exchanges. • Systematic macro . The most common label for a hedge fund is "long/short equity".trading is carried out using mathematical models. • Method: discretionary/qualitative (where the individual investments are selected by managers). Directional (Equity hedge) Hedged investments with exposure to the equity market.

• Credit long / short .as long / short equity but in credit markets instead of equity markets.being market neutral by maintaining a close balance between long and short positions.exploit the change in implied volatility instead of the change in price.non-fixed income arbitrage strategies based on the yield instead of the price. Miscellaneous • Fund of hedge funds (Multi-manager) .specialized in restructuring companies or companies engaged in a corporate transaction. • Distressed securities (Distressed debt) .diversification through different styles to reduce risk.specialized in corporate fixed income securities.exploit pricing inefficiencies between merging companies. • Fixed income corporate . • Regulatory arbitrage .a hedge fund exploiting a combination of different hedge fund strategies to reduce market risk.specialized in private equities. • Multi-strategy . Market neutral) Exploit pricing inefficiencies between related assets that are mispriced.equity market neutral strategy using statistical models. • Merger arbitrage (Risk arbitrage) . • Multi-strategy . F cube) .specialized in companies trading at discounts to their value because of (potential) bankruptcy.fixed income arbitrage strategy using asset-backed securities. • Regulation D .partly hedged fund excluding short selling but allow derivatives. • Volatility arbitrage .a fund invested in other funds of hedge funds.unhedged equity fund with 130% long and 30% short positions.exploit pricing inefficiencies between convertible securities and the corresponding stocks.exploit pricing inefficiencies between related fixed income securities.the practice of taking advantage of regulatory differences between two or more markets. • Asset-backed securities (Fixed-Income asset-backed) . • Long-only absolute return funds .Hedge fund 5 Event-driven (Special situations) Exploit pricing inefficiencies caused by anticipated specific corporate events. • Multi-strategy .diversification through different styles to reduce risk. • Equity market neutral (Equity arbitrage) .a hedge fund wherein the investment is spread along separate sub-managers investing in their own strategy. . • Yield alternatives . • Fixed income arbitrage .a hedge fund with a diversified portfolio of numerous underlying hedge funds. • Convertible arbitrage . • 130-30 funds . • Credit arbitrage . • Statistical arbitrage .fixed income arbitrage strategy using corporate fixed income instruments.take large positions in companies and use the ownership to be active in the management Relative value (Arbitrage. • Activist . • Special situations . • Fund of fund of hedge funds (F3. the market exposure is 100%. • Multi-manager .

with certain funds borrowing sums many times greater than the initial investment.[15] Short selling . a leverage of over 30 times. Hedge fund structure A hedge fund is a vehicle for holding and investing the money of its investors. The portfolio is managed by the investment manager.due to the nature of short selling. which is the actual business and has employees. Long-Term Capital Management had $125 billion of assets on a base of $4 billion of investors' money. Lack of regulation . and other factors relevant to an investment decision. lending securities for the purpose of short selling.certain hedge fund strategies involve writing out of the money call or put options. investing in certain types of hedge fund can be a riskier proposition than investing in a regulated fund. particularly in the U. short selling opens up new investment opportunities. trade execution. It can therefore be difficult for an investor to assess trading strategies. a loss of only 10% of the value of the investments of the hedge fund will wipe out 100% of the value of the investor's stake in the fund. and therefore some may carry undisclosed structural risks. As well as the investment manager. Short volatility . Administrator – the administrator typically deals with the issue and redemption of interests and shares. Appetite for risk . It also had off-balance sheet positions with a notional value of approximately $1 trillion. shortly before its collapse. not subject to as much oversight from financial regulators as regulated funds. Prime brokers are typically parts of large investment banks.. in some jurisdictions. and collateralized debt obligations based on sub-prime mortgages. a practice that gives rise to a potential conflict of interest inherent in having the investment manager both determine the NAV . required to be sophisticated investors who are assumed to be aware of these risks. distressed securities. One approach to diagnosing hedge fund risk is operational due diligence. diversification of the portfolio. and willing to take these risks because of the corresponding rewards: Leverage amplifies profits as well as losses.in addition to money invested into the fund by investors. Many hedge funds have some of these characteristics: Leverage . some of these functions are performed by the investment manager. In September 1998. clearing and settlement.hedge funds are more likely than other types of funds to take on underlying investments that carry high degrees of risk. The fund itself has no employees and no assets other than its investment portfolio and cash. The most common service providers are: Prime broker – prime brokerage services include lending money. and performs related back office functions. once the creditors have called in their loans. a hedge fund will typically borrow money or trade on margin. secrecy helps to prevent imitation by competitors. If these expire in the money the fund may make large losses. In some funds. unless the short position directly hedges a corresponding long position.S. acting as counterparty to derivative contracts. and being unregulated reduces costs and allows the investment manager more freedom to make decisions on a purely commercial basis. Many prime brokers also provide custody services. despite a "hedge" being a means of reducing the risk of a bet or investment. the losses that can be incurred on a losing bet are in theory limitless. such as high yield bonds. Lack of transparency . Paul Steinborn.Hedge fund 6 Hedge fund risk According to hedge fund legend and authority. Investors in hedge funds are. calculates the net asset value of the fund. riskier investments typically provide higher returns.hedge fund managers are. in most countries. the functions of a hedge fund are delegated to a number of other service providers. Ordinary funds very rarely use short selling in this way.hedge funds are private entities with few public disclosure requirements. If a hedge fund has borrowed $9 for every $1 received from investors.

Many hedge funds are structured as master-feeder funds. which will have organized the establishment of the hedge fund. will pay tax on the fees that it receives for managing the fund.g.[16] Investment manager locations In contrast to the funds themselves. Founder shares typically have no economic rights. Unit trusts are typically marketed to Japanese investors. an offshore corporate fund.[18] The legal entity Limited partnerships are principally used for hedge funds aimed at US-based investors who pay tax. It was followed by Delaware (US) 27%. Regulatory considerations will also play a role.. Offshore corporate funds are used for non-U. East coast – principally New York City and the Gold Coast area of Connecticut – this has become the leading location for hedge fund managers. Many hedge funds are established in offshore financial centres so that the fund can avoid paying tax on the increase in the value of its portfolio. with three-quarters of European hedge fund investments. is taking on a more important role as a source of funds for the global hedge fund industry. The UK and the U. British Virgin Islands 7% and Bermuda 5%. An investor will still pay tax on any profit it makes when it realizes its investment. Frequently. Distributor . entities that do not pay tax (such as pension funds). the type of entity used does not have a significant bearing on the nature of the fund. either as the general partner of a limited partnership or as the holder of “founder shares” in a corporate fund. Domicile The legal structure of a specific hedge fund – in particular its domicile and the type of legal entity used – is usually determined by the tax environment of the fund’s expected investors.S. It was estimated there were 7. The Cayman Islands was the most popular registration location and accounted for 39% of the number of global hedge funds.the distributor is responsible for marketing the fund to potential investors.S. invest all of its assets into the master fund. in turn.[17] London is Europe’s leading centre for hedge fund managers. at the end of 2009.000 investment managers in the United States in 2004. Other than taxation. Asia. limited partnership and a unit trust) to invest into the same master fund. usually based in a major financial centre. the investors will invest into a feeder fund. this role is taken by the investment manager. a U. In such a structure. allowing an investment manager the benefit of managing the assets of a single entity while giving all investors the best possible tax treatment. are leading locations for management of Asian hedge funds' assets with around a quarter of the total each. Around 60% of the number of hedge funds in 2009 were registered in offshore locations. primarily in Ireland and Luxembourg. investment managers are primarily located onshore in order to draw on the major pools of financial talent and to be close to investors. Around 5% of global hedge funds are registered in the EU. may retain an interest in the hedge fund. This allows several feeder funds (e. and more particularly China.S. Outside of the U. as the investors will receive relatively favorable tax treatment in the US. and voting rights over only a limited range of issues. The general partner of the limited partnership is typically the investment manager (though is sometimes an offshore corporation) and the investors are the limited partners. investors and U. about $400 billion.Hedge fund 7 and benefit from its increase through performance fees. With the bulk of hedge fund investment coming from the U.S.S. and the investment manager. The assets of the master fund will then be managed by the investment manager in the usual way.S. regulations often require this role to be taken by a third party. such as selection of the investment manager. The investment manager. which will. as such investors do not receive the same tax benefits from investing in a limited partnership. The fund’s strategic decisions are taken by the board of directors .

such as the Irish Stock Exchange. his redemption proceeds could only be obtained by selling the liquid assets of the fund.[20] . If an investor redeems when certain assets cannot be valued or sold. Once the damage has been assessed. and which distributes its profits. To realize the investment. the investor will redeem the interests or shares at the NAV per interest/share prevailing at that time. the fund will generally redeem the side pocket interests/shares and pay investors the proceeds. Open-ended nature Hedge funds are typically open-ended. the fund may employ a "side pocket".Hedge fund 8 of the fund. as this provides a low level of regulatory oversight that is required by some investors. A fund listing is distinct from the listing or initial public offering (“IPO”) of shares in an investment manager. the price of each being the net asset value (“NAV”) per interest/share. the security can again be valued with some accuracy. A fund investing in insurance products. Investors do not typically trade shares or interests among themselves and hedge funds do not typically distribute profits to investors before redemption. Although widely reported as a "hedge-fund IPO". A side pocket is a mechanism whereby the fund segregates the illiquid assets from the main portfolio of the fund and issues investors with a new class of interests or shares which participate only in the assets in the side pocket. Specific types of fund may also use side pockets in the ordinary course of their business. Moreover.[19] the IPO of Fortress Investment Group LLC was for the sale of the investment manager. Side pockets are designed to address issues relating to the need to value an investor's holding in the fund if they choose to redeem. the fund cannot be confident that the calculation of his redemption proceeds would be accurate. applies to subscriptions during the same period. Once the fund is able to sell the side pocket assets. They were used extensively following the collapse of Lehman Brothers in September 2008. Therefore. in that the fund will periodically issue additional partnership interests or shares directly to new investors. which is independent but generally loyal to the investment manager. for example. This contrasts with a closed-ended fund. Side pockets Where a hedge fund holds assets that are hard to value reliably or are relatively illiquid (in comparison to the redemption terms of the fund itself). if the value of the underlying investments has increased (and the NAV per interest/share has therefore also increased) then the investor will receive a larger sum on redemption than it paid on investment. Those interests/shares cannot be redeemed by the investor. If the illiquid assets subsequently turned out to be worth less than expected. A similar problem. the remaining investors would bear the full loss while the redeemed investor would have borne none. Shares in the listed hedge fund are not generally traded on the exchange. Side pockets therefore allow a fund to ensure that all investors in the fund at the time the relevant assets became illiquid will bear any loss on them equally and allow the fund to continue subscriptions and redemptions in the meantime in respect of the main portfolio. not of the hedge funds that it managed. inverted. Side pockets are most commonly used by funds as an emergency measure. when the market for certain types of assets held by hedge funds collapsed. which has a limited number of shares which are traded among investors. may routinely side pocket securities linked to natural disasters following the occurrence of such a disaster. preventing the funds from selling or obtaining a market value for the assets. Listed funds Corporate hedge funds sometimes list their shares on smaller stock exchanges.

For banks and corporate entities.000 or. or be one of certain high-level employees of the investment adviser. applied to firms managing in excess of US$25. In response to the court decision.[25] There have been attempts to register hedge fund investment managers.S. A client who is charged an incentive fee must be a "qualified client" under Advisers Act Rule 205-3. Court of Appeals for the District of Columbia overturned it and sent it back to the agency to be reviewed.5 million. and normally the shares sold do not have to be registered under Regulation D.[24] In order to comply with 3(c)(1) or 3(c)(7). Although hedge funds are investment companies.000 with over 14 investors.[29] The rule change was challenged in court by a hedge fund manager. the U. as investment advisers under the Investment Advisers Act. See Goldstein v. reporting or disclosure obligations" but does potentially increase "the risk of enforcement action" for negligent or fraudulent activity. 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.[26] In December 2004. Mutual funds are the most common type of registered investment companies. and their cachet in the public imagination. alternatively.000 in investment assets. is that they straddle multiple definitions and categories.[21] A qualified purchaser is an individual with over US$5. with two commissioners dissenting. "does not impose additional filing.[31] In February 2007. 2006. combined with the restrictions contained in Regulation D. they have avoided the typical regulations for investment companies because of exceptions in the laws. U.000. some aspects of their dealings are well-regulated. while a 3(c)7 Fund can have an unlimited number of investors. the exemptions under the Investment Company Act. Although it is possible to have non-accredited investors in a hedge fund. regulation The typical public investment company in the United States is required to be registered with the U. The two major exemptions are set forth in Sections 3(c)1 and 3(c)7 of the Investment Company Act of 1940. SEC [30]. Aside from registration and reporting requirements.S. leaving larger investment managers up to the Securities . Securities and Exchange Commission (SEC).000 in assets invested with the adviser or a net worth in excess of US$1. Those exemptions are for funds with 100 or fewer investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3(c) 7 Fund").S. with minor exceptions. the SEC issued a rule change that required most hedge fund advisers to register with the SEC by February 1. a minimum income of US$200. To be a qualified client. There are other limitations and restrictions placed on public investment company managers. The Securities Act of 1933 disclosure requirements apply only if the company seeks funds from the general public.[27] The requirement.[23] A 3(c)7 fund with more than 499 investors must register its securities with the SEC.[28] The new rule was controversial. an individual must have US$750. (Some institutional investors also qualify as accredited investors or qualified purchasers.Hedge fund 9 Regulatory issues Part of what gives hedge funds their competitive edge. hedge funds raise capital via private placement under the Securities Act of 1933.)[22] A 3(c)1 Fund cannot have more than 100 investors. in 2007 the SEC adopted Rule 206(4)-8.[25] An accredited investor is an individual person with a minimum net worth of $1. and the quarterly reporting requirements of the Securities Exchange Act of 1934 are only required if the fund has more than 499 investors. in June 2006. investment companies are subject to strict limitations on short-selling and the use of leverage.000. the President's Working Group on Financial Markets rejected further regulation of hedge funds and said that the industry should instead follow voluntary guidelines. including the prohibition on charging incentive or performance fees. the minimum net worth is $5.000 in invested assets. while others are unregulated or at best quasi-regulated.[32] [33] [34] In November 2009 the House Financial Services Committee passed a bill that would allow states to oversee hedge funds and other investment advisors with $100m or less in assets under management. Rule 206(4)-8.000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year. effectively require hedge funds to be offered solely to accredited investors.000. and. There are numerous issues surrounding these proposed requirements.000. unlike the earlier challenged rule.

back over to state oversight[35] Comparison to U. Mutual funds that utilize some of the trading strategies noted above have appeared. mutual funds are pools of investment capital (i.S. and must disclose their asset allocation quarterly. 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. However. Recently. Hedge funds also ordinarily do not have daily liquidity. For example. while Arbitrage Fund (ARBFX) specializes in merger arbitrage. 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. Hedge fund investors tolerate these policies because hedge funds are expected to generate higher total returns for their investors versus mutual funds. Grizzly Short Fund (GRZZX). Tax W-forms.e. the bill would shift 43% of these companies. Both are lightly regulated. Between 2004 and February 2006. while hedge funds are not • A hedge fund investor must be an accredited investor with certain exceptions (employees. However. where the compensation to the manager is based on the performance of the fund. perhaps requiring some months notice. or roughly 710. is always net short.[36] Under these arrangements.Hedge fund 10 and Exchange Commission.. through a passthrough requiring CPAs and U. a few mutual funds have introduced performance-based fees. but for most there is no method of ascertaining pricing on a regular basis. under Section 205(b) of the Investment Advisers Act of 1940. such compensation is limited to so-called "fulcrum fees". the mutual fund industry has created products with features that have traditionally been found only in hedge funds. Comparison to U. fees can be performance-based so long as they increase and decrease symmetrically. 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. However. postal mail). etc. within limits and symmetrically. however. 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. mutual funds Like hedge funds. mutual funds must have a prospectus available to anyone that requests one (either electronically or via U.) • Mutual funds must price and be liquid on a daily basis Some hedge funds that are based offshore report their prices to the Financial Times. some hedge funds adopted 25-month lock-up rules expressly to exempt themselves from the SEC's new registration requirements and cause them to fall under the registration exemption that had been intended to exempt private equity funds.S. but they offer hedge fund strategies and protection for mutual fund investors. Also. Such funds are SEC regulated. there are many differences between the two. including: • Mutual funds are regulated by the SEC. Because the SEC currently regulates advisers with $25m or more under management. for example.S. In addition. Most hedge funds invest in relatively liquid assets. private equity funds Hedge funds are similar to private equity funds in many respects. the TFS Capital Small Cap Fund (TFSSX) has a management fee that behaves. and permit investors to enter or leave the fund. money people want to invest). whereas hedge funds do not have to abide by these terms.S. Hedge funds often invest in private equity companies' acquisition funds.[37] . private pools of capital that invest in securities and compensate their managers with a share of the fund's profits.

protection of client confidentiality (Luxembourg) and the requirement for the fund to be independent of the fund manager. The Cayman Islands have been estimated to be home to about 75% of world’s hedge funds. a bill to amend the Internal Revenue Code of 1986 to provide that the exception from the treatment of publicly traded partnerships as corporations for partnerships with passive-type income shall not apply to partnerships directly or indirectly deriving income from providing investment adviser and related asset management services. UK regulation Hedge funds managed by UK hedge fund managers are always incorporated outside the UK. Offshore regulation Many offshore centers are keen to encourage the establishment of hedge funds. a favorable tax environment. and accordingly the UK hedge fund industry is regulated. prevent. Investable and Clone. heterogeneous and ephemeral. due to various biases. Non-investable indices are representative. the UK hedge fund industry will also be affected by the EU's Directive on Alternative Investment Fund Managers. and Bermuda. but. However. In their historical order of development they are Non-investable. • S.225 trillion AUM. 681. • H. Luxembourg. Typical rules concern restrictions on the availability of funds to retail investors (Dublin). 3268. relating to such funds.S. 1624. The bill would give the federal regulator of futures markets the resources to detect. As the UK is part of the European Union. Clone indices seek to replicate some statistical properties of hedge funds but are not directly based on them. Among them are: • S. a bill to amend the Investment Advisors Act of 1940. which makes it hard to construct a satisfactory index.[38] Hedge funds have to file accounts and conduct their business in compliance with the requirements of these offshore centres. and these fall into three main categories. a hedge fund manager based in the UK is required to be authorised and regulated by the UK's Financial Services Authority. 3417. 1402. However hedge funds are illiquid. Hedge fund indices There are many indices that track the hedge fund industry. Dublin. regulation Hedge funds are exempt from regulation in the United States.R. with respect to the exemption to registration requirements for hedge funds. a bill to amend the Commodity Exchange Act to prevent excessive price speculation with respect to energy commodities. Several bills have been introduced in the 110th Congress (2007–08). In traditional equity investment. and punish price manipulation and excessive speculation. with nearly half the industry's estimated $1. British Virgin Islands. and are not directly regulated by the UK authorities. a bill to restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation. usually in an offshore location such as the Cayman Islands. their quoted returns may not be available in practice. Investable indices achieve liquidity at the expense of limited representativeness.Hedge fund 11 Proposed U. To do this they offer some combination of professional services. indices play a central and unambiguous role. None of the bills has received serious consideration yet. None of these approaches is . They are widely accepted as representative. • S. which would establish a Commission on the Tax Treatment of Hedge Funds and Private Equity to investigate imposing regulations. and business-friendly regulation. and • S. and products such as futures and ETFs provide investable access to them in most developed markets. however. Major centers include Cayman Islands.

and most seriously they may under-represent more successful managers. hedge funds must agree to accept investments on the terms given by the constructor. This model is then used to construct an investable portfolio of those assets. these terms must include provisions for redemptions that some managers may consider too onerous to be acceptable. all or part of its historical data is recorded ex-post in the database. Although they aim to be representative. although initially indications are that much of hedge fund returns can be replicated in this manner without the problems of illiquidity. It is likely that funds only publish their results when they are favorable. and aim to represent the performance of some database of hedge funds using some measure such as mean. the index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index. 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. As replication indices have a relatively short history it is not yet possible to know how reliable this process will be in practice. . When a fund is added to a database for the first time. If we examine only funds that have survived to the present. For example. To make the index investable. The databases have diverse selection criteria and methods of construction. This means that investable indices do not represent the total universe of hedge funds. However. leading to self-selection bias because those funds that choose to report may not be typical of funds as a whole. Investable indices Investable indices are an attempt to reduce these problems by ensuring that the return of the index is available to shareholders. This leads to significant differences in reported performance between different indices. Non-investable indices Non-investable indices are indicative in nature. Hedge fund replication The most recent addition to the field approach the problem in a different manner. Funds’ participation in a database is voluntary. we will overestimate past returns because many of the worst-performing funds have not survived. so that the average performances displayed by the funds during their incubation period are inflated. and the observed association between fund youth and fund performance suggests that this bias may be substantial. To create an investable index. When investors buy these products the index provider makes the investments in the underlying funds. they rely on a statistical modelling process. This makes the index investable.Hedge fund 12 wholly satisfactory. which raises the problem of survivorship bias. non-investable indices suffer from a lengthy and largely unavoidable list of biases. Instead of reflecting the performance of actual hedge funds they take a statistical approach to the analysis of historic hedge fund returns. This is known as "instant history bias” or “backfill bias”. and use this to construct a model of how hedge fund returns respond to the movements of various investable financial assets. transparency and fraud that exist in direct hedge fund investments. and in principle they can be as representative as the hedge fund database from which they were constructed. making an investable index similar in some ways to a fund of hedge funds portfolio. To make the index liquid. median or weighted mean from a hedge fund database. The short lifetimes of many hedge funds means that there are many new entrants and many departures each year. and no single database captures all funds.

[42] The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in June 2007. The study noted that 465 common funds had significant differences in reported information (e."[40] [41] However the ECB statement has been disputed by parts of the financial industry. which warrants close monitoring despite the essential lack of any possible remedies.[46] With these limitations. returns. lightly regulated entities. hedge funds are not obliged to disclose their activities to third parties.000.[43] The funds invested in mortgage-backed securities. this high level of disclosure is not available to non-investors.g. The U. In a recent example. inception date. which will typically have to meet regulatory requirements for disclosure. Much of the data available in consolidated databases is self-reported and unverified. Some believe that broad hedge fund investment strategies have also become increasingly correlated. while some hedge funds have very limited transparency even to investors. The excessive leverage (through derivatives) that can be used by hedge funds to achieve their return[39] is outlined as one of the main factors of the hedge funds' contribution to systemic risk. which may cost on the scale of $50. thereby further increasing the potential adverse effects of disorderly exits from crowded trades. This may include detailed discussions of risks assumed and significant positions.[49] In December 2008. Bernard Madoff was arrested for running a $50 billion Ponzi scheme. The funds' financial problems necessitated an infusion of cash into one of the funds from Bear Stearns but no outside assistance. do not use third parties either as the custodian of their assets or as their administrator (who will calculate the NAV of the fund).. However.[50] While Madoff did not run a hedge fund. management fee. Federal Reserve. of which the largest was Fairfield Sentry. investors have to do their own research.) and that 5% of return numbers and 5% of NAV numbers were dramatically different. and may enjoy more personalized reporting than investors in retail investment funds. This is in contrast to a regulated mutual fund (or unit trust). investment styles. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster.Hedge fund 13 Debates and controversies Systemic risk Hedge funds came under heightened scrutiny as a result of the failure of Long-Term Capital Management (LTCM) in 1998. net assets value.[47] Some hedge funds. and in extreme cases can assist fraud. This can lead to conflicts of interest. mainly American. The ECB (European Central Bank) issued a warning in June 2006 on hedge fund risk for financial stability and systemic risk: ". This case clearly does illustrate the value of independent verification of assets.[44] Transparency As private. were overseen by Madoff and practically all their funds were funnelled to Madoff. several hedge funds (so called feeder funds). Funds may choose to report some information in the interest of recruiting additional investors.[45] A study was done on two major databases containing hedge fund data. contributing to hedge funds' reputation for secrecy. An investor in a hedge fund usually has direct access to the investment advisor of the fund. which necessitated a bailout coordinated (but not financed) by the U.. Kirk Wright of International Management Associates has been accused of mail fraud and other securities violations[48] which allegedly defrauded clients of close to $180 million. etc.S. It was the largest fund bailout since Long Term Capital Management's collapse in 1998. Securities and Exchange commission is investigating. the increasingly similar positioning of individual hedge funds within broad hedge fund investment strategies is another major risk for financial stability. incentive fee.S. .

Hedge fund 14 Market capacity Alpha appears to have been becoming rarer for two related reasons. However. To demonstrate this. Consequently. making them even less reliable than is suggested by the shortness of the available return series.S. Hedge funds’ low correlation with other assets tends to dissipate during stressful market events.[53] [54] Performance measurement Performance statistics are hard to obtain because of restrictions on advertising and the lack of centralised collection.[1] However. risk is represented by the standard deviation. and the lowest level of risk per unit of return). .[55] [56] The question of how performance should be adjusted for the amount of risk that is being taken has led to literature that is both abundant and controversial. but this is disputed for example by Mark Kritzman[57] [58] who performed a mean-variance optimization calculation on an opportunity set that consisted of a stock index fund.[1] Value in mean/variance efficient portfolios According to Modern Portfolio Theory. However summaries are occasionally available in various journals. which may dilute the talent available in the industry. and ten hypothetical hedge funds. Hedge funds are highly individual and it is hard to estimate the likely returns or risks.[51] U. Treynor. Jensen) work best when returns follow a symmetrical distribution. there are three reasons why one might not wish to allocate a high proportion of assets into hedge funds. The result from this second optimization was an allocation of 74% to hedge funds. Omega by Keating and Shadwick (2002). investigations In June 2006. reducing overall portfolio risk. a bond index fund.[52] The U. the Senate Judiciary Committee began an investigation into the links between hedge funds and independent analysts. First. and hedge fund return series are autocorrelated. In that case. portfolios offer the highest level of return per unit of risk. Second.[1] Several innovative performance measures have been introduced in an attempt to deal with this problem: Modified Sharpe ratio by Gregoriou and Gueyie (2003). One of the attractive features of hedge funds (in particular market neutral and similar funds) is that they sometimes have a modest correlation with traditional assets such as equities. Several studies have suggested that hedge funds are sufficiently diversifying to merit inclusion in investor portfolios. though these causes are disputed. traditional performance measures suffer from theoretical problems when they are applied to hedge funds. there is no consensus on the most appropriate absolute performance measure. hedge fund returns are not normally distributed. Hedge fund returns are reduced considerably by the high fee structures that are typically charged. largely because of the impact of performance fees. and 3. This means that hedge funds have a potentially quite valuable role in investment portfolios as diversifiers. The optimizer found that a mean-variance efficient portfolio did not contain any allocation to hedge funds. Securities and Exchange Commission (SEC) is also focusing resources on investigating insider trading by hedge funds.S. the increase in traded volume may have been reducing the market anomalies that are a source of hedge fund performance. rational investors will seek to hold portfolios that are mean/variance efficient (that is. and Kappa by Kaplan and Knowles (2004). Alternative Investments Risk Adjusted Performance (AIRAP) by Sharma (2004). 2. Unfortunately. the remuneration model is attracting more managers. These reasons are: 1. Traditional indicators (Sharpe. Kritzman repeated the optimization using an assumption that the hedge funds incurred no performance fees. making them much less useful for diversification than they may appear. and traditional performance measures are still widely used in the industry.

James Mackintosh.3%. In other words. "Hedge Funds Do About 60% Of Bond Trading. domestic equity mutual fund decreased 37. for example around the collapse of Lehman Brothers in September 2008. "Hedge fund investors have a great chance to cut fees". html). Fires 30 After Losses" (http:/ / www. The S&P 500 total return was -37. nytimes. 2010-09-07. Retrieved 2010-08-14. html?ref=yourmoney) [8] "Financial Rimes. [4] "Hedge Fund Assets Hit $2 Trillion" (http:/ / www. just when an investor needs part of their portfolio to add value. Retrieved 2007-12-19. even "dedicated short bias" funds had a return of -6. the Credit Suisse/Tremont Hedge Fund Index[59] was down 9. com/ node/ 9918). . "Satellite Halts Hedge Fund Withdrawals. According to the same index series. Saijel (2008-11-27). cfm/ docid/ 6133E854-63FF-46FC-95347B445AE4ECFC). ft. 2007). Pionline.. Mutual funds also performed much worse than hedge funds in 2008. 6 February 2009" (http:/ / www. wsj. [5] "Q2 2010 HFN Administrator Survey" (http:/ / www. org/ download. the average U.Hedge fund 15 The other factor reducing the attractiveness of hedge funds in a diversified portfolio is that they tend to under-perform during equity bear markets. bloomberg. and that was one of the best performing equity indices in the world.com.7% and the average Latin America mutual fund plummeted 57. com/ 2007/ 03/ 04/ business/ yourmoney/ 04stra. The Wall Street Journal. com/ cms/ s/ 0/ cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac. Retrieved 2010-08-14. 2009-02-06. March 4. com/ article/ SB118843899101713108. Retrieved 2010-09-14. net/ reports/ Admin_Survey/ q210_survey. finalternatives.E. both residential and commercial. .Pensions & Investments" (http:/ / www.[1] For example. also suffered significant drops in 2008. com/ apps/ news?pid=20601087& sid=atrq052in_gE& refer=home). posting losses significantly worse than the average hedge fund. aima. . htm). Real estate.7%. "2 + 20. pionline. hedgefund. Several equity markets lost more than half their value. Retrieved 2010-08-14. Ft. even though low average correlations may appear to make hedge funds attractive this may not work in turbulent period. [7] New York Times.87%. Channel Capital Group Inc. Craig (August 30.08% during September 2008. And Other Hedge Math". but the average hedge fund return of -18. Most foreign and domestic corporate debt indices also suffered in 2008. hedge funds outperformed many similarly-risky investment options in 2008. The average China mutual fund declined 52. (http:/ / www. . . in January-September 2008. Retrieved 2010-08-14. html). In summary. Hedge funds posted disappointing returns in 2008. The average international equity mutual fund declined 45.com. Notable hedge fund firms • Amaranth Advisors • Bridgewater Associates • Citadel Investment Group • D. 2009-12-09. Bloomberg. Retrieved 2010-08-14. . Shaw • Fortress Investment Group • GLG Partners • Long-Term Capital Management • Man Group • Marshall Wace • Renaissance Technologies • SAC Capital Advisors • Soros Fund Management • Mea Bona LLC • The Children's Investment Fund Management (TCI) Notes [1] "AIMA Roadmap to Hedge Funds" (http:/ / www. Mark Hulbert. According to Lipper.S. com/ article/ 20100308/ CHART2/ 100309910). The average sector mutual fund dropped 39. Study Says" (http:/ / online. FINalternatives.6% in 2008. .00% in 2008.Durbin Hunter [3] Kishan. [6] "Updated The biggest hedge funds . 2007.65% (the HFRI Fund Weighted Composite Index return) was far better than the returns generated by most assets other than cash.8%. . [2] Karmin.

uc.gov.8599. "ECB warns on hedge fund risk" (http:/ / business. 2007-02-22. seclaw. Article Link (http:/ / www. php/ comments/ trader_monthlys_top_100_for_2007_unveiled/ ). Retrieved 2010-08-14. University of Cincinnati College of Law. states to oversee smaller hedge funds" (http:/ / www. "House Financial Services Committee passed bill allowing U. law. Retrieved 2010-08-14.edu.uc. com/ bwdaily/ dnflash/ aug2005/ nf2005088_1711_db042. Legal Affairs. Law. uk/ tol/ business/ economics/ article670960.ch. "The Investment Advisers Act of 1940" (http:/ / www. Retrieved May 25. "Blowing up the Lab on Wall Street" (http:/ / www.com. Richard (2007-08-16).com. uc. nytimes. com/ lists/ 2006/ 54/ biz_06rich400_Steven-A-Cohen_PZMO. html). Retrieved 2010-08-14. 2005-08-08. sec. 2004" (http:/ / sec.com. seclaw.uc. University of Cincinnati College of Law. pg 2 and 3 (http:/ / www. html). [30] http:/ / www. com/ time/ business/ article/ 0. com/ article. Businessweek. edu/ CCL/ 33ActRls/ rule501. dailyii. org/ issues/ November-December-2005/ feature_skeel_novdec05. Law. 1440 Wall Street. hedge fund IPO (http:/ / www.S. Forbes. com/ edito/ RISKArticleEdito. Time. Retrieved 2010-08-14. April 7. Cohen" (http:/ / www. pg 2 (http:/ / www. Retrieved 2010-08-14. United States: SEC Affirms Its Enforcement Authority With New Anti-Fraud Rule Under the Advisers Act (http:/ / www. [23] Skeel D. pdf) [35] Opalesque (9 November 2009). Retrieved 2010-08-14. Release No. edu/ CCL/ InvAdvAct/ sec205. 2008. edu/ CCL/ InvAdvRls/ rule205-3. edu/ CCL/ InvCoAct/ sec3. edu/ CCL/ InvCoAct/ sec2. Riskinstitute. . . law. [15] "Lessons from the Collapse of Hedge Fund. May 15. tfscapital. aspx?articleID=1914753). gov/ Archives/ edgar/ data/ 1380393/ 000095013606009310/ file1. Epoch Investment Partners Inc. thecityuk. "Rules and Regulations promulgated under the Investment Advisers Act of 1940" (http:/ / www. IA-2333. htm). com/ forming_a_hedge_fund. law.edu. com/ 2007/ 02/ 23/ business/ 23hedge. "Incentive fees fall since start of the financial crisis" (http:/ / www. [12] "Forbes 400 Richest Americans: Stephen A. msp). 2006-07-27. legalaffairs. . 1440wallstreet. asp?ArticleID=1039798& LS=EMS73445). time. . int/ pub/ pdf/ other/ financialstabilityreview200606en. . eipny. University of Cincinnati College of Law. htm [25] Marx Law Library. Retrieved 2010-08-14. 2006-09-19. asp?articleid=51202). "General Rules and Regulations promulgated under the Securities Act of 1933" (http:/ / www. . "The Investment Company Act of 1940" (http:/ / www. [36] Marx Law Library. html). [11] "Hedge Fund Math: Why Fees Matter (Newsletter). . com/ IndustryUpdates/ 691/ HFR_Hedge_fund_liquidations_fall_to_levels217. law. University of Cincinnati College of Law. [18] Hedge Funds. thecityuk. Retrieved 2010-08-14. opalesque. edhec-risk. Retrieved 2010-08-14. com/ article. com/ article.uc. iimagazine. html). Marketwatch [20] FORTRESS INVESTMENT GROUP LLC (http:/ / www. htm). pdf) (PDF). pdf [40] "Financial Stability Review June 2006" (http:/ / www. although statistics in the Hedge Fund industry are notoriously speculative [39] http:/ / www.edu. [41] Gary Duncan (2006-06-02). Treasury. htm).uc. [10] "Best-Paid Hedge Fund Managers" (http:/ / www. ecb. htm). htm). Retrieved 2010-08-14. gov/ rules/ final/ ia-2333.uc. (2005). pdf) International Financial Services London [17] "Final Rule: Registration Under the Advisers Act of Certain Hedge Fund Advisers. html). htm#IA). Long-Term Capital Management" (http:/ / riskinstitute. Sec. ece). html). Retrieved 2010-08-14. ch/ 146490. . com/ docs/ NewHedgeFundAdvisorRule. [14] "Hedge Funds: Fees Down? Close Shop" (http:/ / www. Retrieved 2007-05-01. pdf) International Financial Services London [19] Fortress files for first U. New Hedge Fund Advisor Rule (http:/ / www. com/ 55729/ regulation/ Regulatory_Update_House_Financial_Services_Committee_passed236. University of Cincinnati College of Law. . SEC Registration Statement [21] Marx Law Library. [16] Hedge Funds. ustreas. htm [28] http:/ / sec. Release No. Alpha magazine. pdf [38] Institutional Investor. uc. "The Investment Company Act of 1940" (http:/ / www. aspx?siteid=mktw& guid={8CF79DC0-8C69-49D3-907B-153CF689B082}). com/ index. [26] Marx Law Library. opalesque. treasury. [22] Marx Law Library.edu. . . treasury. [27] http:/ / sec. marketwatch. Mondaq. gov/ press/ releases/ reports/ hedgfund. File No. pdf [31] Adelfio NE.com" (http:/ / www.gov. Retrieved May 25. htm#P78_37183 [29] Astarita MJ. forbes. mondaq. html). com/ media/ 2358/ Hedge_Funds_2010." (http:/ / www. timesonline. Law. pdf) (PDF).edu. html).Hedge fund 16 [9] "Trader Monthly's Top 100 for 2007 Unveiled" (http:/ / www. html). Behind the Hedge (http:/ / www. co. gov/ press/ releases/ reports/ principles. gov/ press/ releases/ hp272.00. Retrieved 2010-08-14. . [43] Bookstaber. businessweek. . Griffin N. uc. 2008. [32] Officials Reject More Oversight of Hedge Funds (http:/ / www. . Retrieved 2010-08-14. investor protection" (http:/ / www. May 25. . gov/ rules/ final/ ia-2333. [34] (http:/ / www. com/ media/ 2358/ Hedge_Funds_2010. gov/ rules/ final/ ia-2333. html) [33] "President’s Working Group Releases Common Approach to Private Pools of Capital Guidance on hedge fund issues focuses on systemic risk. (2007). Law. com/ products/ mutual/ files/ Prospectus. [37] http:/ / www. com/ docs/ ref/ GoldsteinSEC04-1434. Institutional Investor. . 2006. [42] "edhec-risk. uc. December 2. com/ pdf/ HedgeFundMathWhyFeesMatter110907. hedgefundworld.1653556. . 2008. . pdf) (PDF). . London: The Times. S7-30-04.S. 4050/ attachments/ EDHEC response to ECB statement on HFs. 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[47] Stulz. and Future.Hedge fund 17 [44] Times Online.com. B. Bernstein Inc. The Journal of Alternative Investments. ‘Hedge Funds and Governance Targets’ (2007) 95 Georgetown Law Journal 1375 External links • CAIA Association (http://caia. [51] Géhin and Vaissié. nytimes.som. 2006. pp.gov. pdf) [46] Liang. Securities and Exchange Commission. & Gerakos. Retrieved May 4. (2000). Research Paper No. International Management Associates Sunset Fund. 2006. Kirk S. International Management Associates Growth & Income Fund. Hedge Funds. New York Times. 2006. [57] ’’Portfolio Efficiency with Performance Fees’’. htm#2)]"]. International Management Associates Advisory Group. [53] "Testimony Concerning Insider Trading by [[Linda Chatman Thomsen (http:/ / www.shtml) of the International Center for Finance at the Yale School of Management • What is a Hedge Fund? (http://www. html?mod=b_hps_9_0001_b_this_weeks_magazine_home_top).edu/research/hedgefund. Journal of Economic Perspectives. [56] The Wall Street Journal. Retrieved 2010-08-14. (http:/ / www. com/ wp-dyn/ content/ article/ 2006/ 06/ 28/ AR2006062801909. html?) [59] "Credit Suisse/Tremont Hedge Index web page" (http:/ / www. 06-21 (http://ssrn. 9-18 [52] Post Store (2006-06-29). .com.21. (2007). J.smu. 1.com. [54] "Hedge Funds to Face More Scrutiny From U. Thomas. "Hedge fund manager faces fraud charges" (http:/ / money. ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155 University of Pennsylvania Law Review 1021 • William W. [58] Hulbert. Hedge Funds: The Living and the Dead. 'Gap Filling. washingtonpost. uk/ tol/ news/ world/ us_and_americas/ article5331997.S. . "Scrutiny Urged for Hedge Funds" (http:/ / www.. LLC.umass. com/ article/ SB119101983536943198. Present. 9. "High Performance . International Management Associates. sec. The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy. LP. September 26. Retrieved 2010-08-14.yale. Mark ‘’2 + 20. March 4.com/abstract-931254) • Marcel Kahan & Edward B. Civil Action" (http:/ / www. pdf. Wright. Market Regulators" (http:/ / www.1257/jep. LLC. Bratton. gov/ news/ testimony/ 2006/ ts092606lct. com/ 2007/ 03/ 04/ business/ yourmoney/ 04stra. and Financial Innovation' (2006) Vanderbilt Law & Econ. (2009). International Management Associates Taurus Fund. and Other Hedge Fund Math’’. 309-326. timesonline.com staff writer (2006-03-30). com/ apps/ news?pid=20601087& sid=aFvR74yK0J20& refer=home). Partnoy & Randall S. . Money. References • Frank S. co. html). cnn. uk/ tol/ business/ industry_sectors/ banking_and_finance/ article1995259. 2010. [55] Willoughby.com/research/educational-articles/ hedge-fund-strategy-definition/what-is-a-hedge-fund. Washingtonpost. barrons. No. LLC. • Center for International Securities and Derivatives Markets (http://cisdm.barclayhedge. and Emerald II Fund. 175-194.com.edu/web/alternative-asset-management) a specialized research and teaching center at the Cox School of Business . hbs. The Times (London). ece). Peter L. Retrieved 2010-08-14. Hedgeindex. Hedge Funds Past.edu) at the University of Massachusetts Amherst is a research center specializing in hedge fund research • Hedge Fund Research Initiative (http://icf. Retrieved 2007-12-19.2. Retrieved 2010-08-14. ece) [45] Cassar.Barron's Online" (http:/ / online.175 [48] "SEC v. 2008. Retrieved from Business Source Complete.cnn. the only professional designation in the area of hedge funds and other alternative investments. International Management Associates Platinum Group. Bloomberg News. G. [49] By Amanda Cantrell. Retrieved 2007-12-19. wsj. aspx?cy=USD). Sec. 2007. gov/ litigation/ litreleases/ lr19581. 21(2). December 5. LP. doi: 10. http:/ / online. Vol. Jack (2007-10-01). htm). LLC. com/ hedgeindex/ en/ default. com/ 2006/ 03/ 30/ markets/ wright_charged/ index. . February 2007. htm). [50] "Wall Street legend Bernard Madoff arrested over 50 billion Ponzi scheme" (http:/ / www. Journal of Financial & Quantitative Analysis. . edu/ units/ am/ pdf/ Gerakos. December 12.cox.html) Educational Resource about Hedge Fund Industry • Alternative Asset Management Center (http://www. bloomberg. . . CNNMoney. co.barrons. LLC. Retrieved 2010-08-14. 35(3)." June 27. Economics and Political Strategy (newsletter). Platinum II Fund. R.som. LLC. timesonline. LLC. Online. com/ public/ resources/ documents/ BA_HedgeFund50_071001. Rock. Determinants of Hedge Fund Internal Controls and Fees. "SEC Probing Bear Stearns hedge funds. . Retrieved from (http:/ / www. sec.org) founded in 2002 is the sponsoring body of the Chartered Alternative Investment Analyst(CAIA) designation. 2007 (http:/ / business. International Management Associates Emerald Fund. hedgeindex.

Hedge fund 18 • Proposal for a Directive on Alternative Investment Fund Managers (http://www.htm) From the Reading Room of the International Association of Hedge Funds Professionals (IAHFP) • HEDGEweb Hedge Fund Research (http://www.hedge-funds-association.hedgeweb.com/ Hedge_Funds_News_April_2010. .net/) Publishes hedge fund indices and analysis of the growth and performance of the hedge fund industry.

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