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A hedge
fund is an investment vehicle launched by the US-based Alfred
Winslow Jones in the late 1940s. AW Jones & Co., was the
first hedge fund and today there are around 8800 active hedge
funds. The size of the industry is with an estimated a $1
tn and growing at about 25% per year. Irrespective of the
date of origin, the concept of hedge funds is rather new in
the investment world. Hedge funds vary dramatically in terms
of scope, strategy, and philosophy. Their heterogeneity in
nature makes definitions difficult. According to the website
www.45degreecapital.com, "A hedge fund can be defined
as an investment strategy that employs both long and short
positions, uses leverage and derivatives, and is much less
dependent on market direction than long-only investments such
as stocks, bonds and mutual funds."
The
most well-known as well as most misunderstood hedge fund was
perhaps Long Term Capital Management (LTCM), which first shot
into fame due to its "all-star" cast of founders.
In 1998, however, it plunged to notoriety through its near
default on a massive portfolio. The experience of LTCM reveals
that hedge funds are maverick, risky and aggressive investment
vehicles. It was a giant American hedge fund that lost $4.4
bn in six weeks and had to be bailed out with the help of
the US central bank to avert a market panic. The industry
has had its share of famous managers such as George Soros
and Julian Robertson, and who can forget AW Jones, the father
of the concept of hedge funds.
To
understand hedge funds thoroughly, it is important to understand
the differences between the various hedge fund strategies
because all hedge funds are not the same. They differ in nature
in terms of their investment returns, volatility, and risks
vary enormously among the different hedge fund strategies.
The strategies which are not linked or correlated to equity
markets are able to deliver consistent returns with extremely
low risk of loss. However, others may be more volatile than
mutual funds. |
