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.[citation needed]

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.[1]
Contents
[hide]

* 1 History
* 2 Industry size
o 2.1 Largest hedge fund managers
* 3 Fees
o 3.1 Management fees
o 3.2 Performance fees
+ 3.2.1 High water marks
+ 3.2.2 Hurdle rates
o 3.3 Withdrawal/redemption fees
* 4 Strategies
o 4.1 Global macro
o 4.2 Directional
o 4.3 Event-driven
o 4.4 Relative value
o 4.5 Miscellaneous
* 5 Hedge fund risk
* 6 Hedge fund structure
o 6.1 Domicile
o 6.2 Investment manager locations
o 6.3 The legal entity
o 6.4 Open-ended nature
o 6.5 Side pockets
o 6.6 Listed funds
* 7 Regulatory issues
o 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
o 7.2 UK regulation
 o 7.3 Offshore regulation
* 8 Hedge fund indices
o 8.1 Non-investable indices
o 8.2 Investable indices
o 8.3 Hedge Fund Replication
* 9 Debates and controversies
o 9.1 Systemic risk
o 9.2 Transparency
o 9.3 Market capacity
o 9.4 U.S. investigations
o 9.5 Performance measurement
o 9.6 Value in mean/variance efficient portfolios
o 9.7 Notable hedge fund firms
* 10 Notes
* 11 References
* 12 External links

[edit] 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.
[edit] 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]
[edit] 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]
[edit] 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]
[edit] 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.
[edit] 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?
[edit] 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.
[edit] 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]
[edit] 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.
[edit] 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.
[edit] 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.
 o Commodity Trading Advisors (CTA, Managed futures, Trading) - the fund trades in
futures (or options) in commodity markets.
o Systematic diversified - the fund trades in diversified markets.
o Systematic currency - the fund trades in currency markets.
o Trend following - the fund attempts to profit from following long-term or short-term trends.
o 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.

[edit] 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.

[edit] 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.
* Multi-strategy - diversification through different styles to reduce risk.
* 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

[edit] 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.
* Multi-strategy - diversification through different styles to reduce risk.
* Regulatory arbitrage - the practice of taking advantage of regulatory differences between two
or more markets.

[edit] 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.

[edit] 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.

[edit] 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.

[edit] 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]
[edit] 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]
[edit] 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.
[edit] 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.
[edit] 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.
[edit] 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]
[edit] 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.
[edit] 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. 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]
[edit] 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]
[edit] 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]
[edit] 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.

[edit] 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.
[edit] 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.
[edit] Hedge fund indices
Question book-new.svg
This article needs additional citations for verification.
Please help improve this article by adding reliable references. Unsourced material may be
challenged and removed. (November 2008)

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.
[edit] 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”.
[edit] 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.
[edit] 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.
[edit] Debates and controversies
[edit] 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]
[edit] 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.[43] 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.[44] With these limitations,
investors have to do their own research, which may cost on the scale of $50,000.[45]

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[46] which allegedly defrauded clients of close to $180 million.[47] In December 2008,
Bernard Madoff was arrested for running a $50 billion Ponzi scheme.[48] While Madoff did not run
a hedge fund, his case clearly does illustrate the value of independent verification of assets.
[edit] Market capacity

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.[49]
[edit] U.S. investigations

In June 2006, the Senate Judiciary Committee began an investigation into the links between
hedge funds and independent analysts.[50]

The U.S. Securities and Exchange Commission (SEC) is also focusing resources on investigating
insider trading by hedge funds.[51][52]
[edit] 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.[53][54]

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]
[edit] 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[55][56] 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[57] 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.
[edit] 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)

[edit] Notes

1. ^ Karmin, Craig (August 30, 2007). "Hedge Funds Do About 60% Of Bond Trading, Study
Says". The Wall Street Journal. 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. Retrieved
2010-08-14.
3. ^ Kishan, Saijel (2008-11-27). "Satellite Halts Hedge Fund Withdrawals, Fires 30 After
Losses". Bloomberg. http://www.bloomberg.com/apps/news?
pid=20601087&sid=atrq052in_gE&refer=home. Retrieved 2010-08-14.
4. ^ "Hedge Fund Assets Hit $2 Trillion". FINalternatives. 2009-12-09.
http://www.finalternatives.com/node/9918. Retrieved 2010-08-14.
5. ^ "Updated The biggest hedge funds - Pensions & Investments". Pionline.com.
http://www.pionline.com/article/20100308/CHART2/100309910. Retrieved 2010-08-14.
6. ^ New York Times, "2 + 20, And Other Hedge Math", Mark Hulbert, March 4, 2007.
7. ^ "Financial Rimes, "Hedge fund investors have a great chance to cut fees", James
Mackintosh, 6 February 2009". Ft.com. 2009-02-06. http://www.ft.com/cms/s/0/cf7f91e2-f3f0-
11dd-9c4b-0000779fd2ac.html. Retrieved 2010-08-14.
8. ^ "Trader Monthly's Top 100 for 2007 Unveiled". 1440 Wall Street, April 7, 2008.
http://www.1440wallstreet.com/index.php/comments/trader_monthlys_top_100_for_2007_unveile
d/. Retrieved May 25, 2008.
9. ^ "Best-Paid Hedge Fund Managers". 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."
(PDF). http://www.eipny.com/pdf/HedgeFundMathWhyFeesMatter110907.pdf. Retrieved 2010-
08-14.
11. ^ "Forbes 400 Richest Americans: Stephen A. Cohen". Forbes.com. 2006-09-19.
http://www.forbes.com/lists/2006/54/biz_06rich400_Steven-A-Cohen_PZMO.html. Retrieved
2010-08-14.
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
.html.
13. ^ "Hedge Funds: Fees Down? Close Shop". Businessweek.com. 2005-08-08.
http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005088_1711_db042.htm. Retrieved
2010-08-14.
14. ^ "Lessons from the Collapse of Hedge Fund, Long-Term Capital Management".
Riskinstitute.ch. http://riskinstitute.ch/146490.htm. Retrieved 2010-08-14.
15. ^ Hedge Funds, pg 2 International Financial Services London
16. ^ "Final Rule: Registration Under the Advisers Act of Certain Hedge Fund Advisers; Release
No. Release No. IA-2333; File No. S7-30-04; December 2, 2004". Sec.gov.
http://sec.gov/rules/final/ia-2333.htm#IA. Retrieved 2010-08-14.
17. ^ Hedge Funds, pg 2 and 3 International Financial Services London
18. ^ Fortress files for first U.S. hedge fund IPO, Marketwatch
19. ^ FORTRESS INVESTMENT GROUP LLC, SEC Registration Statement
20. ^ Marx Law Library, University of Cincinnati College of Law. "The Investment Company Act
of 1940". Law.uc.edu. http://www.law.uc.edu/CCL/InvCoAct/sec3.html. Retrieved 2010-08-14.
21. ^ Marx Law Library, University of Cincinnati College of Law. "The Investment Company Act
of 1940". Law.uc.edu. http://www.law.uc.edu/CCL/InvCoAct/sec2.html. Retrieved 2010-08-14.
 22. ^ Skeel D. (2005). Behind the Hedge. Legal Affairs.
23. ^ http://www.hedgefundworld.com/forming_a_hedge_fund.htm
24. ^ a b Marx Law Library, University of Cincinnati College of Law. "General Rules and
Regulations promulgated under the Securities Act of 1933". Law.uc.edu.
http://www.law.uc.edu/CCL/33ActRls/rule501.html. Retrieved 2010-08-14.
25. ^ Marx Law Library, University of Cincinnati College of Law. "Rules and Regulations
promulgated under the Investment Advisers Act of 1940". Law.uc.edu.
http://www.law.uc.edu/CCL/InvAdvRls/rule205-3.html. Retrieved 2010-08-14.
26. ^ http://sec.gov/rules/final/ia-2333.htm
27. ^ http://sec.gov/rules/final/ia-2333.htm#P78_37183
28. ^ Astarita MJ. New Hedge Fund Advisor Rule.
29. ^ Adelfio NE, Griffin N. (2007). United States: SEC Affirms Its Enforcement Authority With
New Anti-Fraud Rule Under the Advisers Act. Mondaq.
30. ^ Officials Reject More Oversight of Hedge Funds
31. ^ "President’s Working Group Releases Common Approach to Private Pools of Capital
Guidance on hedge fund issues focuses on systemic risk, investor protection". Treasury.gov.
2007-02-22. http://www.treasury.gov/press/releases/hp272.htm. Retrieved 2010-08-14.
32. ^ [1][dead link]
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_Co
mmittee_passed236.html.
34. ^ Marx Law Library, University of Cincinnati College of Law. "The Investment Advisers Act of
1940". Law.uc.edu. http://www.law.uc.edu/CCL/InvAdvAct/sec205.html. Retrieved 2010-08-14.
35. ^ http://www.tfscapital.com/products/mutual/files/Prospectus.pdf
36. ^ Institutional Investor, May 15, 2006, Article Link, although statistics in the Hedge Fund
industry are notoriously speculative
37. ^ http://www.ustreas.gov/press/releases/reports/hedgfund.pdf
38. ^ "Financial Stability Review June 2006" (PDF).
http://www.ecb.int/pub/pdf/other/financialstabilityreview200606en.pdf. Retrieved 2010-08-14.
39. ^ Gary Duncan (2006-06-02). "ECB warns on hedge fund risk". London: The Times.
http://business.timesonline.co.uk/tol/business/economics/article670960.ece. Retrieved 2007-05-
01.
40. ^ "edhec-risk.com" (PDF). http://www.edhec-risk.com/edito/RISKArticleEdito.2006-07-
27.4050/attachments/EDHEC%20response%20to%20ECB%20statement%20on%20HFs.pdf.
Retrieved 2010-08-14.
41. ^ Bookstaber, Richard (2007-08-16). "Blowing up the Lab on Wall Street". Time.com.
http://www.time.com/time/business/article/0,8599,1653556,00.html. Retrieved 2010-08-14.
42. ^ Times Online, "SEC Probing Bear Stearns hedge funds," June 27, 2007[dead link]
43. ^ Cassar, G., & Gerakos, J. (2009). Determinants of Hedge Fund Internal Controls and
Fees. Retrieved from [2]
44. ^ Liang, B. (2000). Hedge Funds: The Living and the Dead. Journal of Financial &
Quantitative Analysis, 35(3), 309-326. Retrieved from Business Source Complete.
45. ^ Stulz, R. (2007). Hedge Funds Past, Present, and Future. Journal of Economic
Perspectives, 21(2), 175-194. doi: 10.1257/jep.21.2.175
46. ^ "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". Sec.gov.
http://www.sec.gov/litigation/litreleases/lr19581.htm. Retrieved 2010-08-14.
47. ^ By Amanda Cantrell, CNNMoney.com staff writer (2006-03-30). "Hedge fund manager
faces fraud charges". Money.cnn.com.
http://money.cnn.com/2006/03/30/markets/wright_charged/index.htm. Retrieved 2010-08-14.
48. ^ "Wall Street legend Bernard Madoff arrested over 50 billion Ponzi scheme". The Times
(London). December 12, 2008.
http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece. Retrieved May
4, 2010.
49. ^ 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
50. ^ Post Store (2006-06-29). "Scrutiny Urged for Hedge Funds". Washingtonpost.com.
http://www.washingtonpost.com/wp-dyn/content/article/2006/06/28/AR2006062801909.html.
Retrieved 2010-08-14.
51. ^ "Testimony Concerning Insider Trading by Linda Chatman Thomsen". Securities and
Exchange Commission. September 26, 2006.
http://www.sec.gov/news/testimony/2006/ts092606lct.htm#2. Retrieved 2007-12-19.
52. ^ "Hedge Funds to Face More Scrutiny From U.S. Market Regulators". Bloomberg News.
December 5, 2006. http://www.bloomberg.com/apps/news?
pid=20601087&sid=aFvR74yK0J20&refer=home. Retrieved 2007-12-19.
53. ^ Willoughby, Jack (2007-10-01). "High Performance - Barron's Online". Online.barrons.com.
http://online.barrons.com/article/SB119101983536943198.html?
mod=b_hps_9_0001_b_this_weeks_magazine_home_top. Retrieved 2010-08-14.
54. ^ The Wall Street Journal.
http://online.wsj.com/public/resources/documents/BA_HedgeFund50_071001.pdf.
55. ^ ’’Portfolio Efficiency with Performance Fees’’, Economics and Political Strategy
(newsletter), February 2007, Peter L. Bernstein Inc.
56. ^ Hulbert, Mark ‘’2 + 20, and Other Hedge Fund Math’’, New York Times, March 4, 2007.
57. ^ "Credit Suisse/Tremont Hedge Index web page". Hedgeindex.com.
http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD. Retrieved 2010-08-14.

[edit] References

* Frank S. Partnoy & Randall S. Thomas, 'Gap Filling, Hedge Funds, and Financial Innovation'
(2006) Vanderbilt Law & Econ. Research Paper No. 06-21
* 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

[edit] External links

* CAIA Association 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 at the University of Massachusetts
Amherst is a research center specializing in hedge fund research
* Hedge Fund Research Initiative of the International Center for Finance at the Yale School of
Management
* What is a Hedge Fund? Educational Resource about Hedge Fund Industry
* Alternative Asset Management Center a specialized research and teaching center at the Cox
School of Business
* Proposal for a Directive on Alternative Investment Fund Managers From the Reading Room
of the International Association of Hedge Funds Professionals (IAHFP)
* HEDGEweb Hedge Fund Research Publishes hedge fund indices and analysis of the growth
and performance of the hedge fund industry.

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List of asset management firms · Umbrella fund · UCITS
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