Hedge Fund: From Wikipedia, The Free Encyclopedia

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Hedge fund
From Wikipedia, the free encyclopedia
A hedge fund is an investment fund open to a limited range of investors Financial market
that undertakes a wider range of investment and trading activities than participants
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.[citation needed]
As the name implies, hedge funds often seek to hedge some of the risks Collective investment
inherent in their investments using a variety of methods, most notably schemes
short selling and derivatives. However, the term "hedge fund" has also Credit unions
come to be applied to certain funds that, as well as (or instead of) hedging Insurance companies
certain risks, use short selling and other "hedging" methods as a trading Investment banks
strategy to generate a return on their capital. Pension funds
Prime Brokers
In most jurisdictions hedge funds are open only to a limited range of
professional or wealthy investors who meet certain criteria set by Trusts
regulators, and are accordingly exempted from many regulations that
govern ordinary investment funds. The exempted regulations typically Finance series
cover short selling, the use of derivatives and leverage, fee structures, and Financial market
the rules by which investors can remove their capital from the fund. Light Participants
regulation and the presence of performance fees are the distinguishing Corporate finance
characteristics of hedge funds. Personal finance
Public finance
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. Banks and banking
Hedge funds dominate certain specialty markets such as trading within Financial regulation
derivatives with high-yield ratings and distressed debt.[1]
Contents
■ 1 History
■ 2 Industry size
■ 2.1 Largest hedge fund managers
■ 3 Fees
■ 3.1 Management fees
■ 3.2 Performance fees
■ 3.2.1 High water marks
■ 3.2.2 Hurdle rates
■ 3.3 Withdrawal/redemption fees
http://en.wikipedia.org/wiki/Hedge_fund 7/30/2010
■ 4 Strategies
■ 4.1 Global macro
■ 4.2 Directional
■ 4.3 Event-driven
■ 4.4 Relative value
■ 4.5 Miscellaneous
■ 5 Hedge fund risk
■ 6 Hedge fund structure
■ 6.1 Domicile
■ 6.2 Investment manager locations
■ 6.3 The legal entity
■ 6.4 Open-ended nature
■ 6.5 Side pockets
■ 6.6 Listed funds
■ 7 Regulatory issues
■ 7.1 U.S. regulation
■ 7.1.1 Comparison to U.S. private equity funds
■ 7.1.2 Comparison to U.S. mutual funds
■ 7.1.3 Proposed U.S. regulation
■ 7.2 UK regulation
■ 7.3 Offshore regulation
■ 8 Hedge fund indices
■ 8.1 Non-investable indices
■ 8.2 Investable indices
■ 8.3 Hedge Fund Replication
■ 9 Debates and controversies
■ 9.1 Systemic risk
■ 9.2 Transparency
■ 9.3 Market capacity
■ 9.4 U.S. investigations
■ 9.5 Performance measurement
■ 9.6 Value in mean/variance efficient portfolios
■ 9.7 Notable hedge fund firms
■ 10 Notes
■ 11 References
■ 12 External links
History
Sociologist, author, and financial journalist Alfred W. Jones is credited with the creation of the first
hedge fund in 1949.[2] 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.[2] 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]
Largest hedge fund managers

The 25 largest hedge fund managers had $519.7 billion in assets under management as of December 31,
2009. The largest manager is JP Morgan Chase ($53.5 billion) followed by Bridgewater Associates
($43.6 billion), Paulson & Co. ($32 billion), Brevan Howard ($27 billion), and Soros Fund Management
($27 billion).[5]
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. A typical manager may charge fees of "2 and 20", 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.[2]
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.[6]
Management fees are usually expressed as an annual percentage, but calculated and paid monthly or
quarterly.
The business models of most hedge fund managers provide for the management fee to cover the
operating costs of the manager, leaving the performance fee for employee bonuses. However, the
management fees for large funds may form a significant part of the manager's profits.[7] Management
fees associated with hedge funds have been under much scrutiny, with several large public pension
funds, notably CalPERS, calling on managers to reduce fees.
Performance fees
Performance fees (or "incentive fees") are one of the defining characteristics of hedge funds. The
manager's performance fee is calculated as a percentage of the fund's profits, usually counting both
realized and unrealized profits. By incentivising the manager to generate returns, performance fees are
intended to align the interests of manager and investor more closely than flat fees do. In the business
models of most managers, the performance fee is largely available for staff bonuses and so can be
extremely lucrative for managers who perform well. Several publications publish annual estimates of the
earnings of top hedge fund managers.[8][9] Typically, hedge funds charge 20% of returns as a
performance fee.[10] However, the range is wide with highly regarded managers charging higher fees.
For example Steven Cohen's SAC Capital Partners charges a 35-50% performance fee,[11] while Jim
Simons' Medallion Fund charged a 45% performance fee.
Average incentive fees have declined since the start of the financial crisis, with the decline being more
pronounced in funds of hedge funds (FOFs). Incentive fees for single manager funds fell to 19.2 percent
(versus 19.34 percent in Q1 08) while FOFs fell to 6.9 percent (versus 8.05 percent in Q1 08). The
average incentive fee for funds launched in 2009 was 17.6 percent, 1.6 percent below the broader
industry average.[12]
Performance fees have been criticized by many people, including notable investor Warren Buffett, who
believe that, by allowing managers to take a share of profit but providing no mechanism for them to
share losses, performance fees give managers an incentive to take excessive risk rather than targeting
high long-term returns. In an attempt to control this problem, fees are usually limited by a high water
mark. Ironically, Mr. Buffett charged incentive fees until his firm was very large.[citation needed]
As the hedge fund remuneration structure is highly attractive it has been remarked that hedge funds are
best viewed "... not as a unique asset class but as a unique ‘fee structure’."By whom? Citation?
High water marks
A high water mark (or "loss carryforward provision") is often applied to a performance fee calculation.
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. For example, if a fund
were launched at a NAV per share of $100, which then rose to $120 in its first year, a performance fee
would be payable on the $20 return for each share. If the next year it dropped to $110, no fee would be
payable. 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, rather than on the full return during that year
from $110 to $130.
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. If a high water mark is not used, a fund that
ends alternate years at $100 and $110 would generate a performance fee every other year, enriching the
manager but not the investors.
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, rather than continue
working for no performance fee until the loss has been made up for.[13] This tactic is dependent on the
manager's ability to persuade investors to trust him or her with their money in the new fund.
Hurdle rates
Some managers specify a hurdle rate, signifying that they will not charge a performance fee until the
fund's annualized performance exceeds a benchmark rate, such as T-bill yield, LIBOR or a fixed
percentage.[2] This links performance fees to the ability of the manager to provide a higher return than an
alternative, usually lower risk, investment.
With a "soft" hurdle, a performance fee is charged on the entire annualized return if the hurdle rate is
cleared. With a "hard" hurdle, a performance fee is only charged on returns above the hurdle rate. Prior
to the credit crisis of 2008, demand for hedge funds tended to outstrip supply, making hurdle rates
relatively rare.[citation needed]
Withdrawal/redemption fees
Some funds charge investors a redemption fee (or "withdrawal fee" or "surrender charge") if they
withdraw money from the fund. A redemption fee is often charged only during a specified period of time
(typically a year) following the date of investment, or only to withdrawals representing a specified
portion of an investment.
The purpose of the fee is to discourage short-term investment in the fund, thereby reducing turnover and
allowing the use of more complex, illiquid or long-term strategies. The fee may also dissuade investors
from withdrawing funds after periods of poor performance.
Unlike management and performance fees, redemption fees are usually retained by the fund and
therefore benefit the remaining investors rather than the manager.
Strategies
Hedge funds employ many different trading strategies, which are classified in many different ways, with
no standard system used. A hedge fund will typically commit itself to a particular strategy, particular
investment types and leverage limits via statements in its offering documentation, thereby giving
investors some indication of the nature of the particular fund.
Each strategy can be said to be built from a number of different elements:
■ Style: global macro, directional, event-driven, relative value (arbitrage), managed futures (CTA)
■ Market: equity, fixed income, commodity, currency
■ Instrument: long/short, futures, options, swaps
■ Exposure: directional, market neutral
■ Sector: emerging market, technology, healthcare etc.
■ Method: discretionary/qualitative (where the individual investments are selected by managers),
systematic/quantitative (or "quant" - where the investments are selected according to numerical
methods using a computerized system)
■ Diversification: multi-manager, multi-strategy, multi-fund, multi-market
The four main strategy groups are based on the investment style and have their own risk and return
characteristics. The most common label for a hedge fund is "long/short equity", meaning that the fund
takes both long and short positions in shares traded on public stock exchanges.
Global macro
(Macro, Trading) Global Macro funds attempt to anticipate global macroeconomic events, generally
using all markets and instruments to generate a return.
■ Discretionary macro - trading is carried out by investment managers selecting investments,

instead of being generated by software.
■ Systematic macro - trading is carried out using mathematical models, executed by software
without any human intervention other than the initial programming of the software.
■ Commodity Trading Advisors (CTA, Managed futures, Trading) - the fund trades in
futures (or options) in commodity markets.
■ Systematic diversified - the fund trades in diversified markets.
■ Systematic currency - the fund trades in currency markets.
■ Trend following - the fund attempts to profit from following long-term or short-term
trends.
■ Non-trend following (Counter trend) - the fund attempts to profit from anticipating
reversals in such trends.
■ Multi-strategy - the fund uses a combination of strategies.
Directional
(Equity hedge) Hedged investments with exposure to the equity market.
■ Long/short equity (Equity hedge) - long equity positions hedged with short sales of stocks or
stock market index options.
■ Emerging markets - specialized in emerging markets, such as China, India etc.
■ Sector funds - expertise in niche areas such as technology, healthcare, biotechnology,
pharmaceuticals, energy, basic materials.
■ Fundamental growth - invest in companies with more earnings growth than the broad equity
market.
■ Fundamental value - invest in undervalued companies.
■ Quantitative Directional - equity trading using quantitative techniques.
■ Short bias - take advantage of declining equity markets using short positions.
■ Multi-strategy - diversification through different styles to reduce risk.
Event-driven
(Special situations) Exploit pricing inefficiencies caused by anticipated specific corporate events.
■ Distressed securities (Distressed debt) - specialized in companies trading at discounts to their

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

Investing in certain types of hedge fund can be a riskier proposition than investing in a regulated fund,
despite a "hedge" being a means of reducing the risk of a bet or investment. Many hedge funds have
some of these characteristics:
Leverage - in addition to money invested into the fund by investors, a hedge fund will typically
borrow money or trade on margin, with certain funds borrowing sums many times greater than the
initial investment. If a hedge fund has borrowed $9 for every $1 received from investors, 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, once the creditors have called in their loans. In September 1998,
shortly before its collapse, Long-Term Capital Management had $125 billion of assets on a base
of $4 billion of investors' money, a leverage of over 30 times. It also had off-balance sheet
positions with a notional value of approximately $1 trillion.[14]
Short selling - due to the nature of short selling, the losses that can be incurred on a losing bet are
in theory limitless, unless the short position directly hedges a corresponding long position.
Ordinary funds very rarely use short selling in this way.
Appetite for risk - hedge funds are more likely than other types of funds to take on underlying
investments that carry high degrees of risk, such as high yield bonds, distressed securities, and
collateralized debt obligations based on sub-prime mortgages.
Lack of transparency - hedge funds are private entities with few public disclosure requirements.
It can therefore be difficult for an investor to assess trading strategies, diversification of the
portfolio, and other factors relevant to an investment decision.
Lack of regulation - hedge fund managers are, in some jurisdictions, not subject to as much
oversight from financial regulators as regulated funds, and therefore some may carry undisclosed
structural risks.
Short volatility - certain hedge fund strategies involve writing out of the money call or put
options. If these expire in the money the fund may make large losses.
Investors in hedge funds are, in most countries, required to be sophisticated investors who are assumed
to be aware of these risks, and willing to take these risks because of the corresponding rewards:
Leverage amplifies profits as well as losses; short selling opens up new investment opportunities; riskier
investments typically provide higher returns; secrecy helps to prevent imitation by competitors; and
being unregulated reduces costs and allows the investment manager more freedom to make decisions on
a purely commercial basis.
One approach to diagnosing hedge fund risk is operational due diligence.
Hedge fund structure

A hedge fund is a vehicle for holding and investing the money of its investors. The fund itself has no
employees and no assets other than its investment portfolio and cash. The portfolio is managed by the
investment manager, which is the actual business and has employees.
As well as the investment manager, the functions of a hedge fund are delegated to a number of other
service providers. The most common service providers are:
Prime broker – prime brokerage services include lending money, acting as counterparty to
derivative contracts, lending securities for the purpose of short selling, trade execution, clearing
and settlement. Many prime brokers also provide custody services. Prime brokers are typically
parts of large investment banks.
Administrator – the administrator typically deals with the issue and redemption of interests and
shares, calculates the net asset value of the fund, and performs related back office functions. In
some funds, particularly in the U.S., some of these functions are performed by the investment
manager, a practice that gives rise to a potential conflict of interest inherent in having the
investment manager both determine the NAV and benefit from its increase through performance
fees. Outside of the U.S., regulations often require this role to be taken by a third party.
Distributor - the distributor is responsible for marketing the fund to potential investors.
Frequently, this role is taken by the investment manager.
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. Regulatory
considerations will also play a role. 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. An investor will still pay
tax on any profit it makes when it realizes its investment, and the investment manager, usually based in a
major financial centre, will pay tax on the fees that it receives for managing the fund.
Around 60% of the number of hedge funds in 2009 were registered in offshore locations. The Cayman
Islands was the most popular registration location and accounted for 39% of the number of global hedge
funds. It was followed by Delaware (US) 27%, British Virgin Islands 7% and Bermuda 5%. Around 5%
of global hedge funds are registered in the EU, primarily in Ireland and Luxembourg.[15]
Investment manager locations

In contrast to the funds themselves, investment managers are primarily located onshore in order to draw
on the major pools of financial talent and to be close to investors. With the bulk of hedge fund
investment coming from the U.S. East coast – principally New York City and the Gold Coast area of
Connecticut – this has become the leading location for hedge fund managers. It was estimated there
were 7,000 investment managers in the United States in 2004.[16]
London is Europe’s leading centre for hedge fund managers, with three-quarters of European hedge fund
investments, about $400 billion, at the end of 2009. Asia, and more particularly China, is taking on a
more important role as a source of funds for the global hedge fund industry. The UK and the U.S. are
leading locations for management of Asian hedge funds' assets with around a quarter of the total each.
[17]
The legal entity

Limited partnerships are principally used for hedge funds aimed at US-based investors who pay tax, as
the investors will receive relatively favorable tax treatment in the US. 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. Offshore corporate funds are used for non-U.S. investors and U.S.
entities that do not pay tax (such as pension funds), as such investors do not receive the same tax
benefits from investing in a limited partnership. Unit trusts are typically marketed to Japanese investors.
Other than taxation, the type of entity used does not have a significant bearing on the nature of the fund.
Many hedge funds are structured as master-feeder funds. In such a structure, the investors will invest
into a feeder fund, which will, in turn, invest all of its assets into the master fund. The assets of the
master fund will then be managed by the investment manager in the usual way. This allows several
feeder funds (e.g. an offshore corporate fund, a U.S. limited partnership and a unit trust) to invest into
the same master fund, allowing an investment manager the benefit of managing the assets of a single
entity while giving all investors the best possible tax treatment.
The investment manager, which will have organized the establishment of the hedge fund, may retain an
interest in the hedge fund, either as the general partner of a limited partnership or as the holder of
“founder shares” in a corporate fund. Founder shares typically have no economic rights, and voting
rights over only a limited range of issues, such as selection of the investment manager. The fund’s
strategic decisions are taken by the board of directors of the fund, which is independent but generally
loyal to the investment manager.
Open-ended nature
Hedge funds are typically open-ended, in that the fund will periodically issue additional partnership
interests or shares directly to new investors, the price of each being the net asset value (“NAV”) per
interest/share. To realize the investment, the investor will redeem the interests or shares at the NAV per
interest/share prevailing at that time. Therefore, 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. Investors do not typically trade shares or interests among
themselves and hedge funds do not typically distribute profits to investors before redemption. This
contrasts with a closed-ended fund, which has a limited number of shares which are traded among
investors, and which distributes its profits.
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), the fund may employ a "side pocket". 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. Those interests/shares cannot be redeemed by the investor. Once the fund is able to sell the side
pocket assets, the fund will generally redeem the side pocket interests/shares and pay investors the
proceeds.
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. If an investor redeems when certain assets cannot be valued or sold, the fund
cannot be confident that the calculation of his redemption proceeds would be accurate. Moreover, his
redemption proceeds could only be obtained by selling the liquid assets of the fund. If the illiquid assets
subsequently turned out to be worth less than expected, the remaining investors would bear the full loss
while the redeemed investor would have borne none. 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. A similar problem, inverted, applies to subscriptions during the same period.
Side pockets are most commonly used by funds as an emergency measure. They were used extensively
following the collapse of Lehman Brothers in September 2008, when the market for certain types of
assets held by hedge funds collapsed, preventing the funds from selling or obtaining a market value for
the assets.
Specific types of fund may also use side pockets in the ordinary course of their business. A fund
investing in insurance products, for example, may routinely side pocket securities linked to natural
disasters following the occurrence of such a disaster. Once the damage has been assessed, the security
can again be valued with some accuracy.
Listed funds
Corporate hedge funds sometimes list their shares on smaller stock exchanges, such as the Irish Stock
Exchange, as this provides a low level of regulatory oversight that is required by some investors. Shares
in the listed hedge fund are not generally traded on the exchange.
A fund listing is distinct from the listing or initial public offering (“IPO”) of shares in an investment
manager. Although widely reported as a "hedge-fund IPO",[18] the IPO of Fortress Investment Group
LLC was for the sale of the investment manager, not of the hedge funds that it managed.[19]
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, while
others are unregulated or at best quasi-regulated.
U.S. regulation
The typical public 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 public investment company managers, including the prohibition on charging
incentive or performance fees.
Although hedge funds are investment companies, they have avoided the typical regulations for
investment companies because of exceptions in the laws. 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
100 or fewer investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3
(c) 7 Fund").[20] 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.)[21] A 3(c)1
Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number of
investors. The Securities Act of 1933 disclosure requirements apply only if the company seeks funds
from the general public, and the quarterly reporting requirements of the Securities Exchange Act of 1934
are only required if the fund has more than 499 investors.[22] A 3(c)7 fund with more than 499 investors
must register its securities with the SEC.[23]
In order to comply with 3(c)(1) or 3(c)(7), hedge funds raise capital via private placement under the
Securities Act of 1933, and normally the shares sold do not have to be registered under Regulation D.
Although it is possible to have non-accredited investors in a hedge fund,[citation needed] 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.[24] An accredited investor is
an individual person with a minimum net worth of $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. For banks and corporate entities, the minimum net worth is $5,000,000 in
invested assets.[24]
There have been attempts to register hedge fund investment managers. There are numerous issues
surrounding these proposed requirements. 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.[25]
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.[26] The
requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over
14 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.[27] The new rule was controversial,
with two commissioners dissenting.[28] 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
(http://www.seclaw.com/docs/ref/GoldsteinSEC04-1434.pdf) . In response to the court decision, in 2007
the SEC adopted Rule 206(4)-8. Rule 206(4)-8, unlike the earlier challenged rule, "does not impose
additional filing, reporting or disclosure obligations" but does potentially increase "the risk of
enforcement action" for negligent or fraudulent activity.[29]
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.[30][31][32] 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, leaving larger
investment managers up to the Securities and Exchange Commission. Because the SEC currently
regulates advisers with $25m or more under management, the bill would shift 43% of these companies,
or roughly 710, back over to state oversight[33]
Comparison to U.S. 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 relatively liquid assets, and permit investors to enter or leave the fund,
perhaps requiring some months notice. 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 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.[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
Some hedge funds that are based offshore report their prices to the Financial Times, but for most there is
no method of ascertaining pricing on a regular basis. In addition, mutual funds must have a prospectus
available to anyone that requests one (either electronically or via U.S. postal mail), and must disclose
their asset allocation quarterly, whereas hedge funds do not have to abide by these terms.
Hedge funds also ordinarily 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 U.S. Tax W-forms. Hedge fund investors tolerate these policies
because hedge funds are expected to generate higher total returns for their investors versus mutual funds.
Recently, however, the mutual fund industry has created products with features that have traditionally
been found only in hedge funds.
Mutual funds that utilize some of the trading strategies noted above have appeared. 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".[34] 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.[35]
Proposed U.S. regulation
Hedge funds are exempt from regulation in the United States. Several bills have been introduced in the
110th Congress (2007–08), however, relating to such funds. Among them are:
■ S. 681, a bill to restrict the use of offshore tax havens and abusive tax shelters to inappropriately
avoid Federal taxation;
■ H.R. 3417, which would establish a Commission on the Tax Treatment of Hedge Funds and
Private Equity to investigate imposing regulations;
■ S. 1402, a bill to amend the Investment Advisors Act of 1940, with respect to the exemption to
registration requirements for hedge funds; and
■ S. 1624, 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.
■ S. 3268, a bill to amend the Commodity Exchange Act to prevent excessive price speculation with
respect to energy commodities. The bill would give the federal regulator of futures markets the
resources to detect, prevent, and punish price manipulation and excessive speculation.
None of the bills has received serious consideration yet.
UK regulation
Hedge funds managed by UK hedge fund managers are always incorporated outside the UK, usually in
an offshore location such as the Cayman Islands, and are not directly regulated by the UK authorities.
However, a hedge fund manager based in the UK is required to be authorised and regulated by the UK's
Financial Services Authority, and accordingly the UK hedge fund industry is regulated.
As the UK is part of the European Union, the UK hedge fund industry will also be affected by the EU's
Directive on Alternative Investment Fund Managers.
Offshore regulation
Many offshore centers are keen to encourage the establishment of hedge funds. To do this they offer
some combination of professional services, a favorable tax environment, and business-friendly
regulation. Major centers include Cayman Islands, Dublin, Luxembourg, British Virgin Islands, and
Bermuda. 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.[36]
Hedge funds have to file accounts and conduct their business in compliance with the requirements of
these offshore centres. 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.
Hedge fund indices

There are many indices that track the hedge fund industry, and these fall into three main categories. In
their historical order of development they are Non-investable, Investable and Clone.
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 investable access to them in most
developed markets. However hedge funds are illiquid, heterogeneous and ephemeral, which makes it
hard to construct a satisfactory index. Non-investable indices are representative, but, due to various
biases, their quoted returns may not be available in practice. Investable indices achieve liquidity at the
expense of limited representativeness. Clone indices seek to replicate some statistical properties of
hedgefunds but are not directly based on them. None of these approaches is wholly satisfactory.
Non-investable indices
Non-investable indices are indicative in nature, and aim to represent the performance of some database
of hedgefunds using some measure such as mean, median or weighted mean from a hedge fund
database. The databases have diverse selection criteria and methods of construction, and no single
database captures all funds. This leads to significant differences in reported performance between
different indices.
Although they aim to be representative, non-investable indices suffer from a lengthy and largely
unavoidable list of biases.
Funds’ participation in a database is voluntary, leading to self-selection bias because those funds 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 hedge funds 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.
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 favorable, 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”.
Investable indices
Investable indices are an attempt to reduce these problems by ensuring that the return of the index is
available to shareholders. To create an investable index, the index provider selects funds and develops
structured products or derivative instruments that deliver the performance of the index. When investors
buy these products the index provider makes the investments in the underlying funds, making an
investable index similar in some ways to a fund of hedge funds portfolio.
To make the index investable, hedge funds must agree to accept investments on the terms given by the
constructor. To make the index liquid, these terms must include provisions for redemptions that some
managers may consider too onerous to be acceptable. This means that investable indices do not represent
the total universe of hedge funds, and most seriously they may under-represent more successful
managers.
Hedge Fund Replication

The most recent addition to the field approach the problem in a different manner. Instead of reflecting
the performance of actual hedge funds they take a statistical approach to the analysis of historic hedge
fund returns, and use this to construct a model of how hedge fund returns respond to the movements of
various investable financial assets. This model is then used to construct an investable portfolio of those
assets. This makes the index investable, and in principle they can be as representative as the hedge fund
database from which they were constructed.
However, they rely on a statistical modelling process. As replication indices have a relatively short
history it is not yet possible to know how reliable this process will be in practice, although initially
indications are that much of hedge fund returns can be replicated in this manner without the problems of
illiquidity, transparency and fraud that exist in direct hedge fund investments.
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, which necessitated a bailout coordinated (but not financed) by the U.S.
Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM
disaster. The excessive leverage (through derivatives) that can be used by hedge funds to achieve their
return[37] is outlined as one of the main factors of the hedge funds' contribution to systemic risk.
The ECB (European Central Bank) issued a warning in June 2006 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. Some believe that broad hedge fund
investment strategies have also become increasingly correlated, thereby further increasing the potential
adverse effects of disorderly exits from crowded trades."[38][39] However the ECB statement has been
disputed by parts of the financial industry.[40]
The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in
June 2007.[41] The funds invested in mortgage-backed securities. The funds' financial problems
necessitated an infusion of cash into one of the funds from Bear Stearns but no outside assistance. It was
the largest fund bailout since Long Term Capital Management's collapse in 1998. The U.S. Securities
and Exchange commission is investigating.[42]
Hedge funds did not determine the vastly greater 2008 banking crisis, although it is widely
acknowledged that they have made it worse. [43]
Transparency
As private, lightly regulated entities, hedge funds are not obliged to disclose their activities to third
parties. This is in contrast to a regulated mutual fund (or unit trust), which will typically have to meet
regulatory requirements for disclosure. An investor in a hedge fund usually has direct access to the
investment advisor of the fund, and may enjoy more personalized reporting than investors in retail
investment funds. This may include detailed discussions of risks assumed and significant positions.
However, this high level of disclosure is not available to non-investors, contributing to hedge funds'
reputation for secrecy, while some hedge funds have very limited transparency even to investors.
[citation needed]
Funds may choose to report some information in the interest of recruiting additional investors. Much of
the data available in consolidated databases is self-reported and unverified.[44] A study was done on two
major databases containing hedge fund data. The study noted that 465 common funds had significant
differences in reported information (e.g. returns, inception date, net assets value, incentive fee,
management fee, investment styles, etc.) and that 5% of return numbers and 5% of NAV numbers were
dramatically different.[45] With these limitations, investors have to do their own research, which may
cost on the scale of $50,000.[46]
Some hedge funds, mainly American, do not use third parties either as the custodian of their assets or as
their administrator (who will calculate the NAV of the fund). This can lead to conflicts 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[47] which allegedly defrauded
clients of close to $180 million.[48] In December 2008, Bernard Madoff was arrested for running a $50
billion Ponzi scheme.[49] While Madoff did not run a hedge fund, his case clearly does illustrate the
value of independent verification of assets.
Market capacity
The rather disappointing hedge fund performance of the past five years calls into question the alternative
investment industry's value proposition. Alpha appears to 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 managers, which
may dilute the talent available in the industry, though these causes are disputed.[50]
U.S. investigations
In June 2006, the Senate Judiciary Committee began an investigation into the links between hedge funds
and independent analysts.[51]
The U.S. Securities and Exchange Commission (SEC) is also focusing resources on investigating insider
trading by hedge funds.[52][53]
Performance measurement
Performance statistics are hard to obtain because of restrictions on advertising and the lack of centralised
collection. However summaries are occasionally available in various journals.[54][55]
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. Traditional indicators (Sharpe, Treynor, Jensen) work
best 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, making them even less reliable than is suggested by the shortness
of the available return series.[2]
Several innovative performance measures have been introduced in an attempt to deal with this problem:
Modified Sharpe ratio by Gregoriou and Gueyie (2003), Omega by Keating and Shadwick (2002),
Alternative Investments Risk Adjusted Performance (AIRAP) by Sharma (2004), and Kappa by Kaplan
and Knowles (2004). However, there is no consensus on the most appropriate absolute performance
measure, and traditional performance measures are still widely used in the industry.[2]
Value in mean/variance efficient portfolios

According to Modern Portfolio Theory, rational investors will seek to hold portfolios that are
mean/variance efficient (that is, portfolios offer the highest level of return per unit of risk, and the lowest
level of risk per unit of return). 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. This means that hedge funds have a potentially quite valuable role in investment portfolios as
diversifiers, reducing overall portfolio risk.[2]
However, there are three reasons why one might not wish to allocate a high proportion of assets into
hedge funds. These reasons are:
1. Hedge funds are highly individual and it is hard to estimate the likely returns or risks;
2. Hedge funds’ low correlation with other assets tends to dissipate during stressful market events,
making them much less useful for diversification than they may appear; and
3. Hedge fund returns are reduced considerably by the high fee structures that are typically charged.
Several studies have suggested that hedge funds are sufficiently diversifying to merit inclusion in
investor portfolios, but this is disputed for example by Mark Kritzman[56][57] who performed a mean-
variance optimization calculation on an opportunity set that consisted of a stock index fund, a bond
index fund, and ten hypothetical hedge funds. The optimizer found that a mean-variance efficient
portfolio did not contain any allocation to hedge funds, largely because of the impact of performance
fees. To demonstrate this, Kritzman repeated the optimization using an assumption that the hedge funds
incurred no performance fees. The result from this second optimization was an allocation of 74% to
hedge funds.
The other factor reducing the attractiveness of hedge funds in a diversified portfolio is that they tend to
under-perform during equity bear markets, just when an investor needs part of their portfolio to add
value.[2] For example, in January-September 2008, the Credit Suisse/Tremont Hedge Fund Index[58] was
down 9.87%. According to the same index series, even "dedicated short bias" funds had a return of -
6.08% during September 2008. In other words, even though low average correlations may appear to
make hedge funds attractive this may not work in turbulent period, for example around the collapse of
Lehman Brothers in September 2008.
Hedge funds posted disappointing returns in 2008, but the average hedge fund return of -18.65% (the
HFRI Fund Weighted Composite Index return) was far better than the returns generated by most assets
other than cash. The S&P 500 total return was -37.00% in 2008, and that was one of the best performing
equity indices in the world. Several equity markets lost more than half their value. Most foreign and
domestic corporate debt indices also suffered in 2008, posting losses significantly worse than the
average hedge fund. Mutual funds also performed much worse than hedge funds in 2008. According to
Lipper, the average U.S. domestic equity mutual fund decreased 37.6% in 2008. The average
international equity mutual fund declined 45.8%. The average sector mutual fund dropped 39.7%. The
average China mutual fund declined 52.7% and the average Latin America mutual fund plummeted
57.3%. Real estate, both residential and commercial, also suffered significant drops in 2008. In
summary, hedge funds outperformed many similarly-risky investment options in 2008.
Notable hedge fund firms

■ Amaranth Advisors
■ Bridgewater Associates
■ Citadel Investment Group
■ D.E. Shaw
■ Fortress Investment Group
■ GLG Partners
■ Long-Term Capital Management
■ Man Group
■ Marshall Wace
■ Renaissance Technologies
■ SAC Capital Advisors
■ Soros Fund Management
■ The Children's Investment Fund Management (TCI)
Notes
1. ^ "Hedge Funds Do About 60% Of Bond Trading, Study
Says" (http://online.wsj.com/article/SB118843899101713108.html) . The Wall Street Journal. August 30,
2007. http://online.wsj.com/article/SB118843899101713108.html. Retrieved 2007-12-19.Durbin Hunter
2. ^ a b c d e f g h AIMA Roadmap to Hedge Funds (http://www.aima.org/download.cfm/docid/6133E854-63FF-
46FC-95347B445AE4ECFC)
3. ^ [1] (http://www.bloomberg.com/apps/news?pid=20601087&sid=atrq052in_gE&refer=home)
4. ^ [2] (http://www.finalternatives.com/node/9918)
5. ^ http://www.pionline.com/article/20100308/CHART2/100309910
6. ^ New York Times, "2 + 20, And Other Hedge Math", Mark Hulbert, March 4, 2007.
(http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html?ref=yourmoney)
7. ^ Financial Rimes, "Hedge fund investors have a great chance to cut fees", James Mackintosh, 6 February
2009. (http://www.ft.com/cms/s/0/cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac.html)
8. ^ "Trader Monthly's Top 100 for 2007
Unveiled" (http://www.1440wallstreet.com/index.php/comments/trader_monthlys_top_100_for_2007_unveile
1440 Wall Street, April 7, 2008.
http://www.1440wallstreet.com/index.php/comments/trader_monthlys_top_100_for_2007_unveiled/.
Retrieved May 25, 2008.
9. ^ "Best-Paid Hedge Fund Managers" (http://www.iimagazine.com/article.aspx?articleID=1914753) .
Institutional Investor, Alpha magazine, May 25, 2008. http://www.iimagazine.com/article.aspx?
articleID=1914753. Retrieved May 25, 2008.
10. ^ Hedge Fund Math: Why Fees Matter (Newsletter), Epoch Investment Partners Inc.
(http://www.eipny.com/pdf/HedgeFundMathWhyFeesMatter110907.pdf)
11. ^ Forbes 400 Richest Americans: Stephen A. Cohen
(http://www.forbes.com/lists/2006/54/biz_06rich400_Steven-A-Cohen_PZMO.html)
12. ^ Opalesque (10 March 2010). "Incentive fees fall since start of the financial
crisis" (http://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.ht
http://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.html.
13. ^ Hedge Funds: Fees Down? Close Shop
(http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005088_1711_db042.htm)
14. ^ Lessons from the Collapse of Hedge Fund, Long-Term Capital Management
(http://riskinstitute.ch/146490.htm)
15. ^ Hedge Funds, pg 2 (http://www.thecityuk.com/media/2358/Hedge_Funds_2010.pdf) International
Financial Services London
16. ^ http://sec.gov/rules/final/ia-2333.htm#IA
17. ^ Hedge Funds, pg 2 and 3 (http://www.thecityuk.com/media/2358/Hedge_Funds_2010.pdf) International
Financial Services London
18. ^ Fortress files for first U.S. hedge fund IPO (http://www.marketwatch.com/news/story/story.aspx?
siteid=mktw&guid=%7B8CF79DC0-8C69-49D3-907B-153CF689B082%7D) , Marketwatch
19. ^ FORTRESS INVESTMENT GROUP LLC
(http://www.sec.gov/Archives/edgar/data/1380393/000095013606009310/file1.htm) , SEC Registration
Statement
20. ^ The Investment Company Act of 1940 (http://www.law.uc.edu/CCL/InvCoAct/sec3.html)
21. ^ The Investment Company Act of 1940 (http://www.law.uc.edu/CCL/InvCoAct/sec2.html)
22. ^ Skeel D. (2005). Behind the Hedge (http://www.legalaffairs.org/issues/November-December-
2005/feature_skeel_novdec05.msp) . Legal Affairs.
23. ^ http://www.hedgefundworld.com/forming_a_hedge_fund.htm
24. ^ a b General Rules and Regulations promulgated under the Securities Act of 1933
(http://www.law.uc.edu/CCL/33ActRls/rule501.html)
25. ^ Rules and Regulations promulgated under the Investment Advisers Act of 1940
(http://www.law.uc.edu/CCL/InvAdvRls/rule205-3.html)
26. ^ Registration Under the Advisers Act of Certain Hedge Fund Advisers (http://sec.gov/rules/final/ia-
2333.htm)
27. ^ Registration Under the Advisers Act of Certain Hedge Fund Advisers (http://sec.gov/rules/final/ia-
2333.htm#P78_37183)
28. ^ Astarita MJ. New Hedge Fund Advisor Rule
(http://www.seclaw.com/docs/NewHedgeFundAdvisorRule.htm) .
29. ^ Adelfio NE, Griffin N. (2007). United States: SEC Affirms Its Enforcement Authority With New Anti-
Fraud Rule Under the Advisers Act (http://www.mondaq.com/article.asp?articleid=51202) . Mondaq.
30. ^ Officials Reject More Oversight of Hedge Funds
(http://www.nytimes.com/2007/02/23/business/23hedge.html)
31. ^ President’s Working Group Releases Common Approach to Private Pools of Capital Guidance on hedge
fund issues focuses on systemic risk, investor protection (http://www.treasury.gov/press/releases/hp272.htm)
32. ^ [3] (http://www.treasury.gov/press/releases/reports/principles.pdf)
33. ^ Opalesque (9 November 2009). "House Financial Services Committee passed bill allowing U.S. states to
oversee smaller hedge
funds" (http://www.opalesque.com/55729/regulation/Regulatory_Update_House_Financial_Services_Commit
http://www.opalesque.com/55729/regulation/Regulatory_Update_House_Financial_Services_Committee_pas
34. ^ The Investment Advisers Act of 1940 (http://www.law.uc.edu/CCL/InvAdvAct/sec205.html)
35. ^ http://www.tfscapital.com/products/mutual/files/Prospectus.pdf
36. ^ Institutional Investor, May 15, 2006, Article Link (http://www.dailyii.com/article.asp?
ArticleID=1039798&LS=EMS73445) , although statistics in the Hedge Fund industry are notoriously
speculative
37. ^ http://www.ustreas.gov/press/releases/reports/hedgfund.pdf
38. ^ ECB Financial Stability Review June 2006, p. 142
(http://www.ecb.int/pub/pdf/other/financialstabilityreview200606en.pdf)
39. ^ Gary Duncan (2006-06-02). "ECB warns on hedge fund
risk" (http://business.timesonline.co.uk/tol/business/economics/article670960.ece) . London: The Times.
http://business.timesonline.co.uk/tol/business/economics/article670960.ece. Retrieved 2007-05-01.
40. ^ edhec-risk.com (http://www.edhec-risk.com/edito/RISKArticleEdito.2006-07-
27.4050/attachments/EDHEC%20response%20to%20ECB%20statement%20on%20HFs.pdf)
41. ^ Blowing up the Lab on Wall Street (http://www.time.com/time/business/article/0,8599,1653556,00.html)
42. ^ Times Online, "SEC Probing Bear Stearns hedge funds," June 27, 2007
(http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article1995259.ece)
43. ^ [4] (http://www.euractiv.com/en/financial-services/mccreevy-spares-hedge-funds-tight-regulation/article-
181867) EurActiv, "McCreevy spares hedge funds from tight regulation"
44. ^ Cassar, G., & Gerakos, J. (2009). Determinants of Hedge Fund Internal Controls and Fees. Retrieved from
[5] (http://www.hbs.edu/units/am/pdf/Gerakos.pdf)
45. ^ Liang, B. (2000). Hedge Funds: The Living and the Dead. Journal of Financial & Quantitative Analysis, 35
(3), 309-326. Retrieved from Business Source Complete.
46. ^ Stulz, R. (2007). Hedge Funds Past, Present, and Future. Journal of Economic Perspectives, 21(2), 175-
194. doi: 10.1257/jep.21.2.175
47. ^ SEC v. Kirk S. Wright, International Management Associates, LLC; International Management Associates
Advisory Group, LLC; International Management Associates Platinum Group, LLC; International
Management Associates Emerald Fund, LLC; International Management Associates Taurus Fund, LLC;
International Management Associates Growth & Income Fund, LLC; International Management Associates
Sunset Fund, LLC; Platinum II Fund, LP; and Emerald II Fund, LP, Civil Action
(http://www.sec.gov/litigation/litreleases/lr19581.htm)
48. ^ Hedge fund manager faces fraud charges
(http://money.cnn.com/2006/03/30/markets/wright_charged/index.htm)
49. ^ "Wall Street legend Bernard Madoff arrested over 50 billion Ponzi
scheme" (http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece) . The Times
(London). December 12, 2008.
http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece. Retrieved May 4, 2010.
50. ^ 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
51. ^ Scrutiny Urged for Hedge Funds (http://www.washingtonpost.com/wp-
dyn/content/article/2006/06/28/AR2006062801909.html)
52. ^ "Testimony Concerning Insider Trading by (http://www.sec.gov/news/testimony/2006/ts092606lct.htm#2)
Linda Chatman Thomsen". Securities and Exchange Commission. September 26, 2006.
http://www.sec.gov/news/testimony/2006/ts092606lct.htm#2. Retrieved 2007-12-19.
53. ^ "Hedge Funds to Face More Scrutiny From U.S. Market
Regulators" (http://www.bloomberg.com/apps/news?pid=20601087&sid=aFvR74yK0J20&refer=home) .
Bloomberg News. December 5, 2006. http://www.bloomberg.com/apps/news?
pid=20601087&sid=aFvR74yK0J20&refer=home. Retrieved 2007-12-19.
54. ^ High Performance - Barron's Online (http://online.barrons.com/article/SB119101983536943198.html?
mod=b_hps_9_0001_b_this_weeks_magazine_home_top)
55. ^ [6] (http://online.wsj.com/public/resources/documents/BA_HedgeFund50_071001.pdf)
56. ^ ’’Portfolio Efficiency with Performance Fees’’, Economics and Political Strategy (newsletter), February
2007, Peter L. Bernstein Inc.
57. ^ Hulbert, Mark ‘’2 + 20, and Other Hedge Fund Math’’, New York Times, March 4, 2007.
(http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html?)
58. ^ Credit Suisse/Tremont Hedge Index web page (http://www.hedgeindex.com/hedgeindex/en/default.aspx?
cy=USD)
References
■ Frank S. Partnoy & Randall S. Thomas, 'Gap Filling, Hedge Funds, and Financial
Innovation' (2006) Vanderbilt Law & Econ. Research Paper No. 06-21 (http://ssrn.com/abstract-
931254)
■ Marcel Kahan & Edward B. Rock, ‘Hedge Funds in Corporate Governance and Corporate
Control’ (2007) 155 University of Pennsylvania Law Review 1021
■ William W. Bratton, ‘Hedge Funds and Governance Targets’ (2007) 95 Georgetown Law Journal
1375
External links
■ CAIA Association (http://caia.org) founded in 2002 by the Center for International Securities and
Derivatives Markets (CISDM) and the Alternative Investment Management Association (AIMA),
it is the sponsoring body of the Chartered Alternative Investment Analyst(CAIA) designation
■ Center for International Securities and Derivatives Markets (http://cisdm.som.umass.edu) at the
University of Massachusetts Amherst is a research center specializing in hedge fund research
■ Hedge Fund Research Initiative (http://icf.som.yale.edu/research/hedgefund.shtml) of the
International Center for Finance at the Yale School of Management
■ What is a Hedge Fund? (http://www.barclayhedge.com/research/educational-articles/hedge-fund-
strategy-definition/what-is-a-hedge-fund.html) Educational Resource about Hedge Fund Industry
■ Alternative Asset Management Center (http://www.cox.smu.edu/web/alternative-asset-
management) a specialized research and teaching center at the Cox School of Business
■ Proposal for a Directive on Alternative Investment Fund Managers (http://www.hedge-funds-
association.com/Hedge_Funds_News_April_2010.htm) From the Reading Room of the
International Association of Hedge Funds Professionals (IAHFP)
■ HEDGEweb Hedge Fund Research (http://www.hedgeweb.net/) Publishes hedge fund indices and
analysis of the growth and performance of the hedge fund industry.
Retrieved from "http://en.wikipedia.org/wiki/Hedge_fund"
Categories: Hedge funds | Financial services | Investment | Financial terminology | Alternative
investment management companies | Institutional investors
■ This page was last modified on 27 July 2010 at 13:55.

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Hedge Fund: From Wikipedia, The Free Encyclopedia

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Hedge fund - Wikipedia, the free encyclopedia Page 1 of 21

Largest hedge fund managers

High water marks

Each strategy can be said to be built from a number of different elements:

■ Discretionary macro - trading is carried out by investment managers selecting investments,

(Equity hedge) Hedged investments with exposure to the equity market.

■ Distressed securities (Distressed debt) - specialized in companies trading at discounts to their

Hedge fund risk

One approach to diagnosing hedge fund risk is operational due diligence.

Hedge fund structure

Investment manager locations

The legal entity

Comparison to U.S. private equity funds

Comparison to U.S. mutual funds

Proposed U.S. regulation

None of the bills has received serious consideration yet.

Hedge fund indices

Hedge Fund Replication

Debates and controversies

Value in mean/variance efficient portfolios

Notable hedge fund firms

■ This page was last modified on 27 July 2010 at 13:55.

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