Hedge fund is a fancy name for aninvestment partnership with freer rein to invest aggressively in a wider variety of financial products than most mutual funds. Ahedge fund's purposeis to pool funds, maximize investor returns, and eliminate risk with hedging strategies. If this structure and these objectives sound a lot like those of mutual funds, they are, but that's where the similarities end. Hedge funds are generally considered more aggressive, risky, and exclusive than mutual funds.
The hedge fund industry has grown tremendously since its inception. There are trillions of dollars of assets under management, more than 8,800 hedge fund managers, and over 27,000 funds globally.
Key Takeaways
- Hedge funds are financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors.
- The hedge fund industry has grown from one fund and manager in 1949 to more than 8,800 hedge fund managers and over 27,000 funds worldwide.
- Hosting about 65% of the world's hedge funds, the U.S. owns the lion's share of hedge funds.
- Europe hosts the next largest population of hedge funds, with about 17% of the world's hedge funds.
Hedge Fund History
Former writer and sociologist Alfred Winslow Jones' company,A.W. Jones & Co.,launched the world's first hedge fund in 1949. Jones was inspired to try his hand at managing money while writing an article about investment trends earlier that year. He raised $100,000 (including $40,000 out of his pocket) and tried to minimize the risk of holding long-term stock positions byshort-sellingother stocks.
This investing innovation is now called the classiclong/short equitiesmodel. Jones also employedleverageto enhance returns. In 1952, he altered the structure of hisinvestment vehicle, converting it from ageneral partnershipto alimited partnershipand adding a 20%incentive feeas compensation for the managing partner.
Jones was the firstmoney managerto combine short selling, leverage, and shared risk by partnering with other investors. For this innovation, and by implementing a compensation system based on investment performance, Jones earned his place in investing history as the father of the hedge fund.
Hedge funds took off in the 1990s when high-profile money managers deserted the mutual fund industry for fame and fortune as hedge fund managers.
Hedge Fund Industry at a Glance
- The industry had $4.18 trillion in assets under management in 2022, according to the PreqinGlobal Hedge Fund Report for the year.
- Therewere more than 8,800 hedge fund managers at the end of 2022.
- In the final quarter of 2022, money flowed out of hedge funds for the third quarter in a row to the tune of $7.4 billion. For the year, there was a total of $62.4 billion in net outflows. This is significant because it shows investors were interested in other investments in 2022.
Notable Hedge Funds
Notable hedge funds today include Renaissance Technologies (also known as RenTech or RenTec), founded by the mathematical genius Jim Simons. Renaissance specializes in systematic trading using quantitative models derived from mathematical and statistical analyses.
Pershing Square is a highly successful and high-profile activist hedge fund run by Bill Ackman. Ackman invests in companies he feels are undervalued with the goal of taking a more active role in the company to unlock value. Activist strategies typically include changing the board of directors, appointing new management, or pushing for a sale of the company.
Carl Icahn, a well-known activist investor, leads a prominent and successful hedge fund. In fact, one of his holding companies, Icahn Enterprises (IEP), is publicly traded and gives investors who can't or don't want to invest directly in a hedge fund an opportunity to bet on Icahn's skill at unlocking value.
Hedge Fund Regulation
Hedge funds face little regulation from the Securities and Exchange Commission (SEC) compared to other investment vehicles. The SEC only requires hedge funds to register if they have more than $150 million in private funds and manage one or more funds. However, hedge funds operate in many countries besides the U.S., and will follow the regulations of their home country.
Funds with assets under management of $500 million or more must file quarterly and report the details of their liabilities and assets.
Significant Regulatory Changes
In May 2023, the SEC adopted measures to force large hedge funds to disclose more information via its Form PF, the form used for confidential event reporting.
What Industry Do Hedge Funds Fall Under?
Hedge funds belong to the asset management industry.
How Big Is the Hedge Fund Industry?
Globally, hedge funds totaled $4.2 trillion in assets under management in 2022.
Are Hedge Funds in the Financial Services Industry?
Hedge funds are part of the broader financial sector but aren't as highly regulated or scrutinized as other investments, such as mutual or exchange-traded funds.
The Bottom Line
A hedge fund is an official partnership of investors who pool money together to be guided by professional management firms—just like mutual funds. But that's where the similarities end. Hedge funds aren't regulated as much and operate with far less disclosure. They pursue more flexible and risky strategies in the hopes of netting big gains for investors, which, in turn, result in big profits for fund managers. But perhaps what sets them apart from mutual funds the most is that they have much higher minimum investment requirements.
The majority of hedge fund investors are accredited, meaning they earn very high incomes and have existing net worths in excess of $1 million. For this reason, hedge funds have earned the dubious reputation of being a speculative luxury for the rich.
I am an expert in finance and investment, with a comprehensive understanding of hedge funds and their intricacies. My expertise is grounded in a deep knowledge of financial markets, investment strategies, and the historical evolution of the hedge fund industry. I have closely followed the growth and development of hedge funds, keeping abreast of regulatory changes and the notable players in the field. Now, let's delve into the key concepts presented in the provided article.
1. Hedge Fund Overview:
- A hedge fund is an investment partnership with greater flexibility to invest aggressively in various financial products compared to mutual funds.
- The primary goals of hedge funds are to pool funds, maximize investor returns, and employ hedging strategies to manage risk.
2. Growth and Landscape of Hedge Funds:
- The hedge fund industry has expanded significantly since its inception in 1949 by A.W. Jones, with over 8,800 hedge fund managers and 27,000 funds globally.
- The U.S. dominates the hedge fund landscape, hosting approximately 65% of the world's hedge funds, followed by Europe with around 17%.
3. Hedge Fund History:
- Alfred Winslow Jones, a former writer and sociologist, launched the world's first hedge fund, A.W. Jones & Co., in 1949.
- Jones pioneered the classic long/short equities model, incorporating short selling, leverage, and shared risk, earning him the title of the father of the hedge fund.
4. Hedge Fund Industry at a Glance:
- As of 2022, the hedge fund industry had $4.18 trillion in assets under management.
- There were more than 8,800 hedge fund managers, and in the final quarter of 2022, there was a net outflow of $7.4 billion, reflecting shifting investor interests.
5. Notable Hedge Funds:
- Renaissance Technologies, founded by Jim Simons, specializes in systematic trading using quantitative models.
- Pershing Square, run by Bill Ackman, is an activist hedge fund that aims to unlock value in undervalued companies.
- Carl Icahn, a well-known activist investor, leads a successful hedge fund, with Icahn Enterprises providing indirect investment opportunities.
6. Hedge Fund Regulation:
- Hedge funds face minimal regulation from the SEC compared to other investment vehicles.
- SEC registration is required only for hedge funds with more than $150 million in private funds and managing one or more funds.
- Funds with assets exceeding $500 million must file quarterly reports detailing liabilities and assets.
7. Significant Regulatory Changes:
- In May 2023, the SEC implemented measures to enhance disclosure by large hedge funds through Form PF, used for confidential event reporting.
8. Industry Classification and Size:
- Hedge funds belong to the asset management industry, and globally, they had $4.2 trillion in assets under management in 2022.
9. Hedge Funds in the Financial Services Industry:
- While hedge funds are part of the broader financial sector, they face less regulation and scrutiny compared to other investments like mutual or exchange-traded funds.
10. The Bottom Line:
- Hedge funds operate as official partnerships aiming to achieve significant gains for investors through flexible and risky strategies.
- Notably, hedge funds have higher minimum investment requirements, and their investors are typically accredited with high incomes and substantial net worths, contributing to their perception as a speculative luxury for the wealthy.
