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EspañolHEDGE FUND
A 'hedge fund' is a private investment fund charging a performance fee and typically open to only a very limited range of qualified investors. In the United States, hedge funds are open to accredited investors only. Because of this restriction, they are usually exempt from any direct regulation by the SEC, NASD and other regulatory bodies.
A hedge fund's activities are limited only by the contracts governing the particular fund, so they can follow complex investment strategies, being long or short assets and entering into futures, swaps and other derivative contracts. They often hedge their investments against adverse moves in equity and other markets, because a common objective is to generate returns that are not closely correlated to those of the broader financial markets.
In most countries hedge funds are prohibited from marketing to non-accredited investors, unlike regulated retail investment funds such as mutual funds and pension funds. As hedge funds are essentially a private pool of managed assets, and as their public access is commonly restricted by the government, they have little to no incentive to release their private information to the public.
Inarguably private entities, hedge funds have a corresponding reputation for secrecy, and less is known about the methods and activities of hedge funds than about publicly-accessible "retail" funds. However, since hedge fund assets can run into many billions of dollars, and thus their sway over markets—whether they succeed or fail—is substantial, there have been calls for regulation of these private investment funds.
The term ''hedge fund'' dates back to a fund founded by Alfred Winslow Jones in 1949. Jones' strategy was to sell short some stocks while buying others, thus some of the market risk was hedged. Many "investment pools", "investment syndicates", "investment partnerships" or "opportunity funds" that share characteristics of modern hedge were in operation long before. Such managers included Jesse Livermore, Bernard M. Baruch and Benjamin Graham. However, Jones was the first to combine short selling, the use of leverage, a limited partnership structure to avoid regulation, and a 20% incentive fee as compensation for the managing partner. And so Jones is widely regarded as the father of the modern hedge fund industry. [1]
While most of today's hedge funds still trade stocks both long and short, some do not trade stocks at all, instead focusing on other financial instruments including commodity futures, options, foreign currency and emerging market debt.
Assets under management of the hedge fund industry totaled $1.225 trillion at the end of the second quarter of 2006 according to the recently released data by Chicago-based Hedge Fund Research Inc (HFR). This was up '20%' on the previous year and nearly twice the total three years earlier. In a separate study published by Institutional Investor News and New York City-based HedgeFund.net, total estimated assets for the industry grew by 24% in 2006 to a total of $1.9 trillion. Performance is said to have accounted for 33% of the total increase.
Because hedge funds typically use leverage/gearing or debt to invest, the positions they can take in the financial markets are larger than their assets under management. The number of hedge funds increased 10% during the past year to reach around 9,000 according to HFR. Research conducted by TowerGroup predicts that hedge fund assets will grow at an annualized rate of 15% between 2006 and 2008 while the actual number of hedge funds is likely to remain relatively flat.
Hedge funds have increasingly become involved in "shareholder activism" in the United States, by taking large stakes in companies and mounting a takeover or insisting upon management improvements. In May 2007, Business Week magazine reported that a hedge fund, Millbrook Capital Management, had become the second-largest shareholder in Acxiom, an Arkansas company, and was opposing a takeover by ValueAct Capital hedge fund and Silver Lake Partners, a private equity fund. [2]
In the U.S., the political influence and campaign contributions of hedge funds have come under increasing scrutiny.[3]
Usually the hedge fund manager will receive both a management fee and a performance fee. As with other investment funds, the management fee is computed as a percentage of assets under management. Management fees might typically be 1.5% or 2.0%.
Performance fees, which give a share of positive returns to the manager, are one of the defining characteristics of hedge funds. The performance fee is computed as a percentage of the fund's profits, counting both paper profits and actual realized trading profits. Performance fees exist because investors are usually willing to pay managers more generously when the investors have themselves made money. For managers who perform well the performance fee is extremely lucrative.
Typically, hedge funds charge 20% of gross returns as a performance fee, but again the range is wide, with highly regarded managers demanding higher fees. In particular, Steven Cohen's SAC Capital Partners charges a 50% incentive fee (but no management fee) and Jim Simons' Renaissance Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund before returning all investors' capital and running solely on its employees' money.
Managers argue that performance fees help to align the interests of manager and investor better than flat fees that are payable even when performance is poor. However, performance fees have been criticized by many people including notable investor Warren Buffett for giving managers an incentive to take risk, possibly excessive risk, as opposed to high long-term returns. In an attempt to control these problems, fees are usually limited by high water marks and sometimes by hurdle rates.
A "High water mark" is often used. This means that the manager does not receive incentive fees unless the value of the fund exceeds the highest net asset value it has previously achieved. For example, if a fund was launched at a net asset value (NAV) of 100 and rose to 130 in its first year, a performance fee would be payable on the 30% return. If the next year it dropped to 120, no fee is payable. If in the third year the NAV rises to 143, a performance fee will be payable only on the 10% return from 130 to 143 rather than on the full return from 120 to 143.
This measure is 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 performance fee every other year, enriching the manager but not the investors. However, this mechanism does not provide complete protection to investors: a manager that has lost money may simply decide to close the fund and start again with a clean slate -- provided that he can persuade investors to trust him with their money. A high water mark is sometimes referred to as a "Loss Carryforward Provision".
Some funds also specify a 'hurdle', which signifies that the fund will not charge a performance fee until its annualized performance exceeds a benchmark rate, such as T-bills or a fixed percentage, over some period. This links performance fees to the ability of the manager to do better than the investor would have done if he had put the money in a bank account.
Though logically appealing, this practice has diminished as demand for hedge funds has outstripped supply and hurdles are now rare.
Hedge funds do not constitute a homogeneous asset class. The bulk of hedge funds describe themselves as long / short equity, perhaps because this is the least specific of the available descriptions, but many different approaches are used taking different exposures, exploiting different market opportunities, using different techniques and different instruments:
★ Global macro – seeking assets that are mispriced relative to global alternatives.
★ Arbitrage – seeking related assets that have deviated from some anticipated relationship.
★
★ Convertible arbitrage – between a convertible bond and equity.
★
★ Fixed income arbitrage – between related bonds.
★
★ Risk arbitrage – between securities whose prices appear to imply different probabilities for an event.
★
★ Statistical arbitrage (or 'StatArb') – between securities that have deviated from some statistically estimated relationship.
★
★ Derivative arbitrage – between a derivative security and the underlying security.
★ Long / short equity – generic term covering all hedged investment in equities.
★
★ Short bias – emphasizing or investing solely short.
★
★ Equity market neutral – maintaining a close balance between long and short positions.
★ Event driven – specialized in the analysis of a particular kind of event
★
★ Distressed securities – companies that are or may become bankrupt
★
★ Regulation D – distressed companies issuing securities
★
★ Merger arbitrage - between an acquiring public company and a target public company
★ Other
★
★ Emerging markets
★
★ Fund of hedge funds
★
★ Quantitative
There are a number of indices that track the hedge fund industry. These indices come in two types, Investable and Non-investable, both with substantial problems. There are also new types of tracking product launched by Goldman Sachs and Merrill Lynch, "clone indices" that aim to replicate the returns of hedge fund indices without actually holding hedgefunds at all.
Investable indices are created from funds that can be bought and sold, and only Hedge Funds that agree to accept investments on terms acceptable to the constructor of the index are included. Investability is an attractive property for an index because it makes the index more relevant to the choices available to investors in practice, and is taken for granted in traditional equity indices such as the S&P500 or FTSE100. However, such indices do not represent the total universe of hedge funds and may under-represent the more successful managers, who may not find the index terms attractive. Fund indexes include BarclayHedge, Hedge Fund Research, Eurekahedge Indices, CSFB Tremont and FTSE Hedge.[1] [2][3][4][5]
The index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index, making investable indices similar in some ways to Fund of hedge fund portfolios.
Non-investable indices are indicative in nature, and aim to represent the performance of the universe of hedgefunds using some measure such as mean, median or weighted mean from some hedgefund database. There are diverse selection criteria and methods of construction, and no single database captures all funds. This leads to significant differences in reported performance between different databases.
Non-investable indices inherit the databases' shortcomings in terms of scope and quality of data. Funds’ participation in a database is voluntary, leading to “self reporting 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 hedgefunds 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. As the HFR and CISDM databases began in 1994, it is likely that they will be more accurate over the period 1994/2000 than the CSFB database, which only began in 2000.
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 favourable, 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”.
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 liquid access to them in most developed markets. However, among hedgefunds no index combines these characteristics. Investable indices achieve liquidity at the expense of representativeness. Non-investable indices are representative, but their quoted returns may not be available in practice. Neither is wholly satisfactory.
Legal structure is usually determined by the tax environment of the fund investors. Many hedge funds are domiciled -- have their legal residence -- offshore in countries unrelated to either the manager, investor or investment operations of the fund, with the objective of making taxes payable only by the investor and not additionally by the fund.
Funds ordinarily are run by hedge fund management companies, which may operate one or many funds domiciled in multiple jurisdictions.
For U.S-based investors who pay tax, hedge funds are often structured as limited partnerships because these receive relatively favourable tax treatment in the US. The hedge fund manager (usually structured as a corporate entity) is the general partner or manager and the investors are the limited partners or members respectively. The funds are pooled in the partnership or company and the general partner or manager makes all the investment decisions. [4]
Non-US investors and U.S. entities that do not pay tax (such as pension funds) do not receive the same benefits from limited partnerships, and funds for these investors are often structured as offshore or unit trusts or investment companies. Hybrid or "Master-feeder " structures that contain both a US limited partnership and an offshore company allow hedge funds to attract capital from several different tax regimes.
At the end of 2004, 55% of the number of hedge funds, managing nearly two-thirds of total hedge fund assets, were registered offshore. The most popular offshore location was the Cayman Islands followed by British Virgin Islands and Bermuda. The U.S. was the most popular onshore location accounting for 34% of the number of funds and 24% of assets. EU countries were the next most popular location with 9% of the number of funds and 11% of assets. Asia accounted for the majority of the remaining assets.
Onshore locations are far more important in terms of the location of hedge fund managers. New York City and the Gold Coast area of Connecticut (particularly Stamford, Connecticut and Greenwich, Connecticut) together are the world's leading location for hedge fund managers with about twice as many hedge fund managers as the next largest centre, London. This is not surprising considering that the US is the source of the bulk of hedge fund investments. London is Europe’s leading centre for the management of hedge funds. At end-2006, three-quarters of European hedge fund investments, totalling $400bn/£200bn, were managed within the UK, the vast majority from London. Assets managed out of London grew more than fourfold between 2002 and 2005 from $61bn to $225bn. Australia was the most important centre for the management of Asia-Pacific hedge funds. Managers located there accounted for around a quarter of the $140bn in Asia-Pacific hedge funds’ assets in 2006.[5]
Hedge funds that have filed for IPOs have done so outside the United States. Although widely reported as a "hedge-fund IPO" [6], the Fortress Investment Group LLC IPO filed November 8, 2006 is for the sale of the manager, not of the hedge funds it manages.[7]
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, others are unregulated or at best quasi-regulated.
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 fall within the statutory definition of an investment company, the limited-access, private nature of hedge funds permits them to operate pursuant to exemptions from the registration requirements. 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 fewer than 100 investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3(c) 7 Fund"). [7] 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.) [8] A 3(c)1 Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number of investors. Both types of funds can charge performance or incentive fees.
In order to comply with 3(c)(1) or 3(c)(7), hedge funds are sold via ''private'' placement under the Securities Act of 1933. Thus interests in a hedge fund cannot be offered or advertised to the general public, and are normally offered under Regulation D. Although it is possible to have non-accredited investors in a hedge fund, 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. [9]. An accredited investor is an individual with a minimum net worth of US $5,000,000 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.
The regulatory landscape for Investment Advisors is changing, and there have been attempts to register hedge fund investment managers. There are numerous issues surrounding these proposed requirements. One issue of importance to hedge fund managers is the requirement that 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. [10]
For the funds, the tradeoff of operating under these exemptions is that they have fewer investors to sell to, but they have few government-imposed restrictions on their investment strategies. The presumption is that hedge funds are pursuing more risky strategies, which may or may not be true depending on the fund, and that the ability to invest in these funds should be restricted to wealthier investors who are presumed to be more sophisticated and who have the financial reserves to absorb a possible loss.
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.[11] The requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over 15 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.[12] 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.
Although the SEC is currently examining how it can address the Goldstein decision, commentators have stated that the SEC currently has neither the staff nor expertise to comprehensively monitor the estimated 8,000 U.S. and international hedge funds. See New Hedge Fund Advisor Rule. One of the Commissioners, Roel Campos, has said that the SEC is forming internal teams that will identify and evaluate irregular trading patterns or other phenomena that may threaten individual investors, the stability of the industry, or the financial world. "It's pretty clear that we will not be knocking on [hedge fund] doors very often," Campos told several hundred hedge fund managers, industry lawyers and others. And even if it did, "the SEC will never have the degree of knowledge or background that you do."
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.[13][14][15]
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.
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.
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
Additionally, mutual funds must have a prospectus available to anyone that requests them (either electronically or via US postal mail), and must disclose their asset allocation quarterly, while hedge funds do not have to abide by these terms. Hedge funds also frequently 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 US Tax W-forms. Hedge fund investors tolerate these policies because hedge funds usually generate higher total returns for their investors versus mutual funds.
Recently, however, the mutual fund industry has created products with features that have traditionally only been found in hedge funds.
Mutual funds have appeared which utilize some of the trading strategies noted above. 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".[16] 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. [17]
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[8].
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.
As private, lightly regulated partnerships, hedge funds do not have to disclose their activities to third parties. This is in contrast to a fully 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 personalised 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.
A byproduct of restrictions on marketing and the lack of regulation is that there are no official hedge fund statistics. An industry consulting group, HFR (hfr.com), reported at the end of the second quarter 2003 that there are 5,660 hedge funds world wide managing $665 billion. To put that in perspective, at the same time the US mutual fund sector held assets of $7.818 trillion (according to the Investment Company Institute).
Analysis of the rather disappointing hedge fund performance in 2004 and 2005 called into question the alternative investment industry's value proposition. Alpha may 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 and more managers, which may dilute the talent available in the industry.
However, the market capacity effect has been questioned by the EDHEC Risk and Asset Management Research Centre through a decomposition of hedge fund returns between pure alpha, dynamic betas, and static betas.[9]
While pure alpha is generated by exploiting market opportunities, the dynamic betas depend on the manager’s skill in adapting the exposures to different factors, and these authors claim that these two sources of return do not exhibit any erosion. This suggests that the market environment (static betas) explains a large part of the poor performance of hedge funds in 2004 and 2005.
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 by the U.S. Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster.
The ECB (European Central Bank) has issued a warning 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. This risk is further magnified by evidence that broad hedge fund investment strategies have also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades."[10]
The Times wrote about this review:
"In one of the starkest warnings yet from an official institution over the role of the burgeoning but secretive industry, the ECB sounded a note of alarm over the possible repercussions from any collapse of a hedge fund, or group of funds."[11]
However, the ECB statement itself has been criticized by a part of the financial research community. These arguments are developed by the EDHEC Risk and Asset Management Research Centre:[18].
The main conclusions of the study are that “the ECB article’s conclusion of a risk of “disorderly exits from crowded trades” is based on mere speculation. While the question of systemic risk is of importance, we do not dispose of enough data to reliably address this question at this stage”, “ it would be worthwhile for financial regulators to work towards obtaining data on hedge fund leverage and counterparty credit risk. Such data would allow a reliable assessment of the question of systemic risk”, and “besides evaluating potential systemic risk, it should be recognised that hedge funds play an important role as “providers of liquidity and diversification”.
The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in June 2007.[19] 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.[12]
The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. Traditional indicators (Sharpe, Treynor, Jensen) work 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.
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). An overview of these performance measures is available in ''Géhin, W., 2006, The Challenge of Hedge Fund Performance Measurement: a Toolbox rather than a Pandora’s Box, EDHEC Risk and Asset Management Research Center, Position Paper, December''. However, there is no consensus on the most appropriate absolute performance measure, and traditional performance measures are still used in the industry.
In June 2006. the U.S. Senate Judiciary Committee began an investigation into the links between hedge funds and independent analysts, and other issues related to the funds. Connecticut Attorney General Richard Blumenthal testified that an appeals court ruling striking down oversight of the funds by federal regulators left investors "in a regulatory void, without any disclosure or accountability."[20] The hearings heard testimony from, among others, Gary Aguirre, a staff attorney who was recently fired by the SEC. [21] [22]
Some hedge funds, mainly American, do not use a third party as custodian of their assets. This can lead to conflict 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 [23] which allegedly defrauded clients of close to $180 million.[24]
''Institutional Investor'' magazine annually ranks top-earning hedge fund managers. Earnings from a hedge fund are simply 100% of the capital gains on the manager's own equity stake in the fund plus 20% to 50% (depending on policy) of the gains on the other investors' capital.
The 2004 top earner was Edward Lampert of ESL Investments Inc. who earned $1.02 billion during the year (PR Newswire link).
The 2005 top earner was James Harris Simons with an earning of $1.6 billion according to Alpha magazine.[13] However, Trader Monthly reported that Simons only earned about $1 billion and that the top earner was instead T. Boone Pickens with an estimated earning of over $1.5 billion during the year.[14]
The full top 10 list of hedge fund earners according to Trader Monthly includes:
★ 1. T. Boone Pickens - estimated 2005 earnings $1.5bn +
★ 2. Steven A. Cohen, SAC Capital Advisers - $1bn +
★ 3. James H. Simons, Renaissance Technologies Corp. - $900m - $1bn
★ 4. Paul Tudor Jones, Tudor Investment Corp. - $800m - $900m
★ 5. Stephen Feinberg, Cerberus Capital Management - $500 - $600m
★ 6. Bruce Kovner, Caxton Associates - $500m - $600m
★ 7. Eddie Lampert, ESL Investments - $500m - $600m
★ 8. David E. Shaw, D. E. Shaw & Co. - $400m - $500m
★ 9. Jeffrey Gendell, Tontine Partners - $300m - $400m
★ 10. Louis Bacon, Moore Capital Management - $300m - $350m
The 2006 top earner was John Arnold according to Trader Monthly Magazine.
The list includes:
★ 1. John D. Arnold, Houston, Texas- of Centauras Energy- $1.5-2B
★ 2. James Simons, East Setauket, New York- of Renaissance Technologies Corp.- $1.5-2B
★ 3. Eddie Lampert, Greenwich, Connecticut- of ESL Investments- $1-1.5B
Sometimes also known as alternative investment management companies.
★ Amaranth Advisors
★ Bridgewater Associates
★ Caxton Associates
★ Centaurus Energy
★ Citadel Investment Group
★ D. E. Shaw & Co.
★ Fortress Investment Group
★ Goldman Sachs Asset Management
★ Long Term Capital Management
★ Man Group
★ Pirate Capital LLC
★ Renaissance Technologies
★ SAC Capital Advisors
★ Soros Fund Management
Funds of hedge funds invest in a portfolio of underlying hedge funds rather than investing in securities directly. They hire the hedge fund managers on behalf of their clients following due diligence on the managers in addition to building diversified portfolios of these managers. They are ranked by Dec 2005 Assets Under Management (though this cannot be taken as the final word on the matter given the intense privacy that surrounds much of the industry). See Institutional Investor Magazine Link for the 100 largest hedge funds:
http://www.deshaw.com/articles/Alpha.pdf
★ Union Bancaire Privée (UBP) (Geneva, Switzerland) $20.8 billion ([25])
★ Grosvenor Capital Management (Chicago, IL) $20.2 billion ([26])
★ HSBC Private Bank (Suisse) / HSBS Republic Investments (London, UK) $20.2 billion ([27])
★ Permal Asset Management (New York, NY) $18.8 billion ([28])
★ Crédit Agricole Alternative Investment Products Group (Paris, France) $18.5 billion ([29])
★ Société Générale (Paris, France) $15.9 billion ([30])
★ Quellos Capital Management (Seattle, WA) $15.0 billion ([www.quellos.com])
★ Ivy Asset Management (Jericho, NY) $14.9 billion ([31])
★ Financial Risk Management (FRM) (London, UK) $ 13.3 billion ([32])
★ Pictet & Cie. (Geneva, Switzerland) $13.0 billion ([33])
★ Man Investments (London, UK and Pfaffikon, Switzerland) $12.7 billion ([34])
★ Notz Stucki & Cie. (Geneva, Switzerland) $10.7 billion ([35])
★ Blackstone Alternative Asset Management (New York, NY) $9.3 billion ([36])
★ Arden Asset Management (New York, NY) $9.2 billion ([37])
★ Black River Asset Management (Minnetonka, MN) $9 billion ([38])
★ Pacific Alternative Asset Management Co. (PAAMCO) (Irvine, CA) $8.9 billion]] ([39])
★ J.P. Morgan Alternative Asset Management (New York, NY) $8.8 billion ([40])
★ Mesirow Advanced Strategies (Chicago, IL) $8.2 billion ([41])
★ Tremont Capital Management (Rye, NY) $8.2 billion ([42])
★ CSFB Alternative Capital (New York, NY) $7.9 billion ([43])
★ AIG Global Investment Group (New York, NY) $6.7 billion ([44])
★ Harris Alternatives (Chicago, IL) $6.7 billion ([45])
★ DB Absolute Return Strategies (New York, NY) $6.6 billion ([46])
★ RBS Asset Management (London, UK) $6.5 billion ([47])
★ Lehman Brothers Alternative Investment Management (New York, NY) $6.2 billion ([48])
★ EIM (Nyon, Switzerland) $6.0 billion ([49])
★ Commodity pool
★ Derivatives market
★ Investment fund
★ Venture capital
★ Mutual funds
★ Mutual-fund scandal (2003)
★ Securities
★ Finance
★ Financial markets
★ Financial regulation
★ Taxation of Priv Equity and Hedge Funds
1. Steve Johnson, A short history of bankruptcy, death, suicides and fortunes, ''Financial Times'', April 27 2007
2. Now It's Hedge Fund vs. Hedge Fund, Business Week, May 18, 2007
3. For Schumer, the Double-Edged Sword of Cozying Up to Hedge Funds, The New York Times, June 22, 2007
4. [6] A Practitioner's Guide to Alternative Investment Funds
5. Hedge Funds, pg 2 International Financial Services London
6. Fortress files for first US hedge fund IPO, Marketwatch
7. FORTRESS INVESTMENT GROUP LLC, SEC Registration Statement
8. ''Institutional Investor'', 15 May 2006, Article Link, although statistics in the Hedge Fund industry are notoriously speculative
9. 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
10. ECB Financial Stability Review June 2006, p. 142
11. ECB warns on hedge fund risk
12. Times Online, "SEC Probing Bear Stearns hedge funds," June 27, 2007
13. 3M is average pay for top hedge fund managers
14. Traders Monthly. Top Hedge Fund Earners of 2005.
★ Agarwal, V., and N.Y. Naik, 2000, ''Multi-Period Performance Persistence Analysis of Hedge Funds'', Journal of Financial and Quantitative Analysis, Vol. 35, No. 3.
★ Amenc, N., L. Martellini, and M. Vaissié, 2003, ''Benefits and Risks of Alternative Investment Strategies'', Journal of Asset Management, Vol. 4, No. 2, pp. 96–118.
★ Asness, C., R. Krail, and J. Liew, 2000, ''Do Hedge Funds Hedge?'', Journal of Portfolio Management, Vol. 28, No. 1, pp. 6–19.
★ Caslin, J. J., 2004, ''Hedge Funds'', British Actuarial Journal, Vol. 10, No. 3, pp. 441-521.
★ De Souza, C., and S. Gokcan, 2004, ''Hedge Fund Investing: A Quantitative Approach to Hedge Fund Manager Selection and De-Selection'', Journal of Wealth Management.
★ Fransolet, L. and J. Loeys, 2004, ''Have Hedge Funds Eroded Market Opportunities?'', Journal of Alternative Investments, Vol. 7, No. 3, pp. 10–33.
★ Géhin, W., and M. Vaissié, 2005, ''Lighthouses Or Tricks Of Light? An In-Depth Look at Creating a Quality Hedge Fund Benchmark'', The Journal of Indexes, May/June.
★ Géhin, W., and M. 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.
★ Amenc, N., L. Martellini, and M. Vaissié, 2003, ''Indexing Hedge Fund Indexes'', EDHEC Risk and Asset Management Research Center, Position Paper, December.
★ Amenc, N., and L. Martellini, 2003, ''Optimal Mixing of Hedge Funds with Traditional Investments'', EDHEC Risk and Asset Management Research Center, Position Paper, February.
★ Amenc, N., and M. Vaissié, 2006, ''Determinants of Funds of Hedge Funds’ Performance'', EDHEC Risk and Asset Management Research Center, Position Paper, February.
★ Géhin, W., 2006, ''The Challenge of Hedge Fund Performance Measurement: a Toolbox Rather Than a Pandora’s Box'', EDHEC Risk and Asset Management Research Center, Position Paper, December.
★ Géhin, W., and M. Vaissié, 2004, ''Hedge Fund Indices: Investable, Non-Investable and Strategy Benchmarks'', EDHEC Risk and Asset Management Research Center, Position Paper.
★ Giraud, J.R., 2005, ''Mitigating Hedge Funds’ Operational Risks: Benefits and limitations of managed account platforms'', EDHEC Risk and Asset Management Research Center, Position Paper, December.
★ Goltz, F., L. Martellini, and M. Vaissié, 2004, ''Hedge Fund Indices from an Academic Perspective: Reconciling Investability and Representativity'', EDHEC Risk and Asset Management Research Center, Position Paper, November.
★ Martellini, L. and V. Ziemann, 2005, ''The Benefits of Hedge Funds in Asset Liability Management'', EDHEC Risk and Asset Management Research Center, Position Paper, October.
★ Handbook of Alternative Assets, , Mark, Anson, John Wiley and Sons, 2005, ISBN 0-471-21826-X
★ Managing a Hedge Fund: A Complete Guide to Trading, Business Strategies, Risk Management and Regulations, , Keith, Black, McGraw-Hill, 2004, ISBN 007143481X
★ Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, , Steven, Drobny, Wiley, 2006, ISBN 0-471-79447-3
★ Funds of Hedge Funds, , Greg, Gregoriou, Butterworth-Heineman, an imprint of Elsevier, 2006, ISBN 0-7506-7984-0
★ Ineichen, Alexander M., ''Asymmetric Returns - The Future of Active Asset Management'', New York: John Wiley & Sons, 2006, forthcoming. ISBN 0-470-04266-4
★ Running Money : Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score, , Andy, Kessler, Collins, 2004, ISBN 0-06-074064-7
★ Handbook of hedge Funds, , François-Serge, Lhabitant, John Wiley & Sons, 2004, ISBN 0-470-02663-4
★ Hedge Fund Investment Management, , Izzy, Nelken, Butterworth-Heineman, an imprint of Elsevier, 2005, ISBN 0-7506-6007-4
★ A Practitioner's Guide to Alternative Investment Funds, , Timothy, Spangler, , 2005, ISBN 1-898830-98-3
★ Weiss, Gary, ''Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments'', New York: Portfolio, 2006. Argues that hedge funds tend to underperform market indexes and are excessively hyped by the media. ISBN 1-59184-094-5
★ Regional Percentile Return Rankings: Full Year 2006
★ HedgeFund.net
★ EDHEC Risk and Asset Management Research Centre of the EDHEC Business School
★ Hedge Fund Research Initiative of the International Center for Finance at the Yale School of Management
★ BarclayHedge
★ Eurekahedge
★ FINalternatives.com
★ Hedge Fund Weblog
★ HedgeCo.net
★ HedgeFund.net
★ FiNTAG Daily Hedge Fund News
★ Hedge Fund Alert
★ Hedge Funds Review
★ Daily Hedge News
★ BarclayHedge Indices
★ Eurekahedge Indices
★ Hedge Fund Indices
★ CSFB Credit Suisse/Tremont Hedge Fund Index
★ HFRX Indices
★ FTSE Hedge Indices
★ DOW Jones Hedge Fund Indexes
★ EDHEC Alternative Indexes
★ EDHEC Investable Hedge Fund Indices
★ HFRI Monthly Performance Indices
★ HFN Real Time Averages
★ Hedge Fund Consistency Index
★ Alternative Investment Management Association (AIMA)
★ the Hedge Fund Association (HFA)
★ Managed Funds Association (MFA)
★ Chartered Alternative Investment Analyst Association (CAIA)
★ Investment Funds Multilingual Glossary by Reglo
★ Harvard Business School's Baker Library Guide to Hedge Funds
★ SECLaw.com's Hedge Fund Information Center
★ Report of President's Working Group on Financial Markets
★ Collection of Articles and PowerPoint Presentations on Hedge Fund Regulation
★ Hedge Funds vs. Mutual Funds
★ Hedge Funds 101: A Primer For Regulators; Commodity Futures Trading Commission, Nov. 30, 2004
★ ''The long and short'' - ''The Guardian'', September 24 2005 - This article explains hedge funds in layman's terms, why they are of interest to the general reader and contains interviews with fund managers.
★ What is a Hedge Fund? University of Iowa Center for International Finance and Development
★ Institutional Investors 2004 Ranking
★ Hedge Funds: Risk and Return, study by Prof. Burton G. Malkiel critical of published hedge fund performance numbers
★ http://www.hdmgmt.co.uk/gam.html Case Study of ISO 9001 investment process project at a significant hedge fund
★ http://www.cisdm.org Center for International Securities and Derivatives Markets at the University of Massachusetts is a research center specializing in hedge fund research
★ How to Set Up Your Own Hedge Fund and Due Diligence, Disclosure and Fund Managers - by Hannah Terhune, JD LLM (Taxation, New York University)
★ ''Economic powers to study growing influence of hedge funds'' -''The International Herald Tribune'', February 10 2007- This article explains how Hedge Funds are being scrutinized by National Governments for lack of regulation and have slowly become an international policy issue
★ http://www.fondosdeinversionlibre.com Web specialized in Spanish Hedge Funds
★ Glossary by Hedge Fund Alert
★ EZX Inc. A popular OMS used by many Hedge Funds
A hedge fund's activities are limited only by the contracts governing the particular fund, so they can follow complex investment strategies, being long or short assets and entering into futures, swaps and other derivative contracts. They often hedge their investments against adverse moves in equity and other markets, because a common objective is to generate returns that are not closely correlated to those of the broader financial markets.
In most countries hedge funds are prohibited from marketing to non-accredited investors, unlike regulated retail investment funds such as mutual funds and pension funds. As hedge funds are essentially a private pool of managed assets, and as their public access is commonly restricted by the government, they have little to no incentive to release their private information to the public.
Inarguably private entities, hedge funds have a corresponding reputation for secrecy, and less is known about the methods and activities of hedge funds than about publicly-accessible "retail" funds. However, since hedge fund assets can run into many billions of dollars, and thus their sway over markets—whether they succeed or fail—is substantial, there have been calls for regulation of these private investment funds.
Origins and development
The term ''hedge fund'' dates back to a fund founded by Alfred Winslow Jones in 1949. Jones' strategy was to sell short some stocks while buying others, thus some of the market risk was hedged. Many "investment pools", "investment syndicates", "investment partnerships" or "opportunity funds" that share characteristics of modern hedge were in operation long before. Such managers included Jesse Livermore, Bernard M. Baruch and Benjamin Graham. However, Jones was the first to combine short selling, the use of leverage, a limited partnership structure to avoid regulation, and a 20% incentive fee as compensation for the managing partner. And so Jones is widely regarded as the father of the modern hedge fund industry. [1]
While most of today's hedge funds still trade stocks both long and short, some do not trade stocks at all, instead focusing on other financial instruments including commodity futures, options, foreign currency and emerging market debt.
Assets under management of the hedge fund industry totaled $1.225 trillion at the end of the second quarter of 2006 according to the recently released data by Chicago-based Hedge Fund Research Inc (HFR). This was up '20%' on the previous year and nearly twice the total three years earlier. In a separate study published by Institutional Investor News and New York City-based HedgeFund.net, total estimated assets for the industry grew by 24% in 2006 to a total of $1.9 trillion. Performance is said to have accounted for 33% of the total increase.
Because hedge funds typically use leverage/gearing or debt to invest, the positions they can take in the financial markets are larger than their assets under management. The number of hedge funds increased 10% during the past year to reach around 9,000 according to HFR. Research conducted by TowerGroup predicts that hedge fund assets will grow at an annualized rate of 15% between 2006 and 2008 while the actual number of hedge funds is likely to remain relatively flat.
Hedge funds have increasingly become involved in "shareholder activism" in the United States, by taking large stakes in companies and mounting a takeover or insisting upon management improvements. In May 2007, Business Week magazine reported that a hedge fund, Millbrook Capital Management, had become the second-largest shareholder in Acxiom, an Arkansas company, and was opposing a takeover by ValueAct Capital hedge fund and Silver Lake Partners, a private equity fund. [2]
In the U.S., the political influence and campaign contributions of hedge funds have come under increasing scrutiny.[3]
Fees
Usually the hedge fund manager will receive both a management fee and a performance fee. As with other investment funds, the management fee is computed as a percentage of assets under management. Management fees might typically be 1.5% or 2.0%.
Performance fees
Performance fees, which give a share of positive returns to the manager, are one of the defining characteristics of hedge funds. The performance fee is computed as a percentage of the fund's profits, counting both paper profits and actual realized trading profits. Performance fees exist because investors are usually willing to pay managers more generously when the investors have themselves made money. For managers who perform well the performance fee is extremely lucrative.
Typically, hedge funds charge 20% of gross returns as a performance fee, but again the range is wide, with highly regarded managers demanding higher fees. In particular, Steven Cohen's SAC Capital Partners charges a 50% incentive fee (but no management fee) and Jim Simons' Renaissance Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund before returning all investors' capital and running solely on its employees' money.
Managers argue that performance fees help to align the interests of manager and investor better than flat fees that are payable even when performance is poor. However, performance fees have been criticized by many people including notable investor Warren Buffett for giving managers an incentive to take risk, possibly excessive risk, as opposed to high long-term returns. In an attempt to control these problems, fees are usually limited by high water marks and sometimes by hurdle rates.
High water marks
A "High water mark" is often used. This means that the manager does not receive incentive fees unless the value of the fund exceeds the highest net asset value it has previously achieved. For example, if a fund was launched at a net asset value (NAV) of 100 and rose to 130 in its first year, a performance fee would be payable on the 30% return. If the next year it dropped to 120, no fee is payable. If in the third year the NAV rises to 143, a performance fee will be payable only on the 10% return from 130 to 143 rather than on the full return from 120 to 143.
This measure is 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 performance fee every other year, enriching the manager but not the investors. However, this mechanism does not provide complete protection to investors: a manager that has lost money may simply decide to close the fund and start again with a clean slate -- provided that he can persuade investors to trust him with their money. A high water mark is sometimes referred to as a "Loss Carryforward Provision".
Hurdle rates
Some funds also specify a 'hurdle', which signifies that the fund will not charge a performance fee until its annualized performance exceeds a benchmark rate, such as T-bills or a fixed percentage, over some period. This links performance fees to the ability of the manager to do better than the investor would have done if he had put the money in a bank account.
Though logically appealing, this practice has diminished as demand for hedge funds has outstripped supply and hurdles are now rare.
Strategies
Hedge funds do not constitute a homogeneous asset class. The bulk of hedge funds describe themselves as long / short equity, perhaps because this is the least specific of the available descriptions, but many different approaches are used taking different exposures, exploiting different market opportunities, using different techniques and different instruments:
★ Global macro – seeking assets that are mispriced relative to global alternatives.
★ Arbitrage – seeking related assets that have deviated from some anticipated relationship.
★
★ Convertible arbitrage – between a convertible bond and equity.
★
★ Fixed income arbitrage – between related bonds.
★
★ Risk arbitrage – between securities whose prices appear to imply different probabilities for an event.
★
★ Statistical arbitrage (or 'StatArb') – between securities that have deviated from some statistically estimated relationship.
★
★ Derivative arbitrage – between a derivative security and the underlying security.
★ Long / short equity – generic term covering all hedged investment in equities.
★
★ Short bias – emphasizing or investing solely short.
★
★ Equity market neutral – maintaining a close balance between long and short positions.
★ Event driven – specialized in the analysis of a particular kind of event
★
★ Distressed securities – companies that are or may become bankrupt
★
★ Regulation D – distressed companies issuing securities
★
★ Merger arbitrage - between an acquiring public company and a target public company
★ Other
★
★ Emerging markets
★
★ Fund of hedge funds
★
★ Quantitative
Hedge Fund Indices
There are a number of indices that track the hedge fund industry. These indices come in two types, Investable and Non-investable, both with substantial problems. There are also new types of tracking product launched by Goldman Sachs and Merrill Lynch, "clone indices" that aim to replicate the returns of hedge fund indices without actually holding hedgefunds at all.
Investable indices are created from funds that can be bought and sold, and only Hedge Funds that agree to accept investments on terms acceptable to the constructor of the index are included. Investability is an attractive property for an index because it makes the index more relevant to the choices available to investors in practice, and is taken for granted in traditional equity indices such as the S&P500 or FTSE100. However, such indices do not represent the total universe of hedge funds and may under-represent the more successful managers, who may not find the index terms attractive. Fund indexes include BarclayHedge, Hedge Fund Research, Eurekahedge Indices, CSFB Tremont and FTSE Hedge.[1] [2][3][4][5]
The index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index, making investable indices similar in some ways to Fund of hedge fund portfolios.
Non-investable indices are indicative in nature, and aim to represent the performance of the universe of hedgefunds using some measure such as mean, median or weighted mean from some hedgefund database. There are diverse selection criteria and methods of construction, and no single database captures all funds. This leads to significant differences in reported performance between different databases.
Non-investable indices inherit the databases' shortcomings in terms of scope and quality of data. Funds’ participation in a database is voluntary, leading to “self reporting 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 hedgefunds 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. As the HFR and CISDM databases began in 1994, it is likely that they will be more accurate over the period 1994/2000 than the CSFB database, which only began in 2000.
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 favourable, 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”.
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 liquid access to them in most developed markets. However, among hedgefunds no index combines these characteristics. Investable indices achieve liquidity at the expense of representativeness. Non-investable indices are representative, but their quoted returns may not be available in practice. Neither is wholly satisfactory.
Legal structure
Legal structure is usually determined by the tax environment of the fund investors. Many hedge funds are domiciled -- have their legal residence -- offshore in countries unrelated to either the manager, investor or investment operations of the fund, with the objective of making taxes payable only by the investor and not additionally by the fund.
Funds ordinarily are run by hedge fund management companies, which may operate one or many funds domiciled in multiple jurisdictions.
For U.S-based investors who pay tax, hedge funds are often structured as limited partnerships because these receive relatively favourable tax treatment in the US. The hedge fund manager (usually structured as a corporate entity) is the general partner or manager and the investors are the limited partners or members respectively. The funds are pooled in the partnership or company and the general partner or manager makes all the investment decisions. [4]
Non-US investors and U.S. entities that do not pay tax (such as pension funds) do not receive the same benefits from limited partnerships, and funds for these investors are often structured as offshore or unit trusts or investment companies. Hybrid or "Master-feeder " structures that contain both a US limited partnership and an offshore company allow hedge funds to attract capital from several different tax regimes.
At the end of 2004, 55% of the number of hedge funds, managing nearly two-thirds of total hedge fund assets, were registered offshore. The most popular offshore location was the Cayman Islands followed by British Virgin Islands and Bermuda. The U.S. was the most popular onshore location accounting for 34% of the number of funds and 24% of assets. EU countries were the next most popular location with 9% of the number of funds and 11% of assets. Asia accounted for the majority of the remaining assets.
Onshore locations are far more important in terms of the location of hedge fund managers. New York City and the Gold Coast area of Connecticut (particularly Stamford, Connecticut and Greenwich, Connecticut) together are the world's leading location for hedge fund managers with about twice as many hedge fund managers as the next largest centre, London. This is not surprising considering that the US is the source of the bulk of hedge fund investments. London is Europe’s leading centre for the management of hedge funds. At end-2006, three-quarters of European hedge fund investments, totalling $400bn/£200bn, were managed within the UK, the vast majority from London. Assets managed out of London grew more than fourfold between 2002 and 2005 from $61bn to $225bn. Australia was the most important centre for the management of Asia-Pacific hedge funds. Managers located there accounted for around a quarter of the $140bn in Asia-Pacific hedge funds’ assets in 2006.[5]
Hedge funds that have filed for IPOs have done so outside the United States. Although widely reported as a "hedge-fund IPO" [6], the Fortress Investment Group LLC IPO filed November 8, 2006 is for the sale of the manager, not of the hedge funds it manages.[7]
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, others are unregulated or at best quasi-regulated.
US 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 fall within the statutory definition of an investment company, the limited-access, private nature of hedge funds permits them to operate pursuant to exemptions from the registration requirements. 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 fewer than 100 investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3(c) 7 Fund"). [7] 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.) [8] A 3(c)1 Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number of investors. Both types of funds can charge performance or incentive fees.
In order to comply with 3(c)(1) or 3(c)(7), hedge funds are sold via ''private'' placement under the Securities Act of 1933. Thus interests in a hedge fund cannot be offered or advertised to the general public, and are normally offered under Regulation D. Although it is possible to have non-accredited investors in a hedge fund, 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. [9]. An accredited investor is an individual with a minimum net worth of US $5,000,000 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.
The regulatory landscape for Investment Advisors is changing, and there have been attempts to register hedge fund investment managers. There are numerous issues surrounding these proposed requirements. One issue of importance to hedge fund managers is the requirement that 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. [10]
For the funds, the tradeoff of operating under these exemptions is that they have fewer investors to sell to, but they have few government-imposed restrictions on their investment strategies. The presumption is that hedge funds are pursuing more risky strategies, which may or may not be true depending on the fund, and that the ability to invest in these funds should be restricted to wealthier investors who are presumed to be more sophisticated and who have the financial reserves to absorb a possible loss.
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.[11] The requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over 15 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.[12] 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.
Although the SEC is currently examining how it can address the Goldstein decision, commentators have stated that the SEC currently has neither the staff nor expertise to comprehensively monitor the estimated 8,000 U.S. and international hedge funds. See New Hedge Fund Advisor Rule. One of the Commissioners, Roel Campos, has said that the SEC is forming internal teams that will identify and evaluate irregular trading patterns or other phenomena that may threaten individual investors, the stability of the industry, or the financial world. "It's pretty clear that we will not be knocking on [hedge fund] doors very often," Campos told several hundred hedge fund managers, industry lawyers and others. And even if it did, "the SEC will never have the degree of knowledge or background that you do."
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.[13][14][15]
Comparison to 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.
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.
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
Additionally, mutual funds must have a prospectus available to anyone that requests them (either electronically or via US postal mail), and must disclose their asset allocation quarterly, while hedge funds do not have to abide by these terms. Hedge funds also frequently 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 US Tax W-forms. Hedge fund investors tolerate these policies because hedge funds usually generate higher total returns for their investors versus mutual funds.
Recently, however, the mutual fund industry has created products with features that have traditionally only been found in hedge funds.
Mutual funds have appeared which utilize some of the trading strategies noted above. 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".[16] 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. [17]
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[8].
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.
Debates and controversies
Privacy issues
As private, lightly regulated partnerships, hedge funds do not have to disclose their activities to third parties. This is in contrast to a fully 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 personalised 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.
A byproduct of restrictions on marketing and the lack of regulation is that there are no official hedge fund statistics. An industry consulting group, HFR (hfr.com), reported at the end of the second quarter 2003 that there are 5,660 hedge funds world wide managing $665 billion. To put that in perspective, at the same time the US mutual fund sector held assets of $7.818 trillion (according to the Investment Company Institute).
Market capacity
Analysis of the rather disappointing hedge fund performance in 2004 and 2005 called into question the alternative investment industry's value proposition. Alpha may 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 and more managers, which may dilute the talent available in the industry.
However, the market capacity effect has been questioned by the EDHEC Risk and Asset Management Research Centre through a decomposition of hedge fund returns between pure alpha, dynamic betas, and static betas.[9]
While pure alpha is generated by exploiting market opportunities, the dynamic betas depend on the manager’s skill in adapting the exposures to different factors, and these authors claim that these two sources of return do not exhibit any erosion. This suggests that the market environment (static betas) explains a large part of the poor performance of hedge funds in 2004 and 2005.
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 by the U.S. Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster.
The ECB (European Central Bank) has issued a warning 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. This risk is further magnified by evidence that broad hedge fund investment strategies have also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades."[10]
The Times wrote about this review:
"In one of the starkest warnings yet from an official institution over the role of the burgeoning but secretive industry, the ECB sounded a note of alarm over the possible repercussions from any collapse of a hedge fund, or group of funds."[11]
However, the ECB statement itself has been criticized by a part of the financial research community. These arguments are developed by the EDHEC Risk and Asset Management Research Centre:[18].
The main conclusions of the study are that “the ECB article’s conclusion of a risk of “disorderly exits from crowded trades” is based on mere speculation. While the question of systemic risk is of importance, we do not dispose of enough data to reliably address this question at this stage”, “ it would be worthwhile for financial regulators to work towards obtaining data on hedge fund leverage and counterparty credit risk. Such data would allow a reliable assessment of the question of systemic risk”, and “besides evaluating potential systemic risk, it should be recognised that hedge funds play an important role as “providers of liquidity and diversification”.
The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in June 2007.[19] 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.[12]
Performance measurement
The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. Traditional indicators (Sharpe, Treynor, Jensen) work 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.
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). An overview of these performance measures is available in ''Géhin, W., 2006, The Challenge of Hedge Fund Performance Measurement: a Toolbox rather than a Pandora’s Box, EDHEC Risk and Asset Management Research Center, Position Paper, December''. However, there is no consensus on the most appropriate absolute performance measure, and traditional performance measures are still used in the industry.
Relationships with analysts
In June 2006. the U.S. Senate Judiciary Committee began an investigation into the links between hedge funds and independent analysts, and other issues related to the funds. Connecticut Attorney General Richard Blumenthal testified that an appeals court ruling striking down oversight of the funds by federal regulators left investors "in a regulatory void, without any disclosure or accountability."[20] The hearings heard testimony from, among others, Gary Aguirre, a staff attorney who was recently fired by the SEC. [21] [22]
Transparency
Some hedge funds, mainly American, do not use a third party as custodian of their assets. This can lead to conflict 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 [23] which allegedly defrauded clients of close to $180 million.[24]
Hedge fund data
Top earners
''Institutional Investor'' magazine annually ranks top-earning hedge fund managers. Earnings from a hedge fund are simply 100% of the capital gains on the manager's own equity stake in the fund plus 20% to 50% (depending on policy) of the gains on the other investors' capital.
The 2004 top earner was Edward Lampert of ESL Investments Inc. who earned $1.02 billion during the year (PR Newswire link).
The 2005 top earner was James Harris Simons with an earning of $1.6 billion according to Alpha magazine.[13] However, Trader Monthly reported that Simons only earned about $1 billion and that the top earner was instead T. Boone Pickens with an estimated earning of over $1.5 billion during the year.[14]
The full top 10 list of hedge fund earners according to Trader Monthly includes:
★ 1. T. Boone Pickens - estimated 2005 earnings $1.5bn +
★ 2. Steven A. Cohen, SAC Capital Advisers - $1bn +
★ 3. James H. Simons, Renaissance Technologies Corp. - $900m - $1bn
★ 4. Paul Tudor Jones, Tudor Investment Corp. - $800m - $900m
★ 5. Stephen Feinberg, Cerberus Capital Management - $500 - $600m
★ 6. Bruce Kovner, Caxton Associates - $500m - $600m
★ 7. Eddie Lampert, ESL Investments - $500m - $600m
★ 8. David E. Shaw, D. E. Shaw & Co. - $400m - $500m
★ 9. Jeffrey Gendell, Tontine Partners - $300m - $400m
★ 10. Louis Bacon, Moore Capital Management - $300m - $350m
The 2006 top earner was John Arnold according to Trader Monthly Magazine.
The list includes:
★ 1. John D. Arnold, Houston, Texas- of Centauras Energy- $1.5-2B
★ 2. James Simons, East Setauket, New York- of Renaissance Technologies Corp.- $1.5-2B
★ 3. Eddie Lampert, Greenwich, Connecticut- of ESL Investments- $1-1.5B
Notable hedge fund management companies
Sometimes also known as alternative investment management companies.
★ Amaranth Advisors
★ Bridgewater Associates
★ Caxton Associates
★ Centaurus Energy
★ Citadel Investment Group
★ D. E. Shaw & Co.
★ Fortress Investment Group
★ Goldman Sachs Asset Management
★ Long Term Capital Management
★ Man Group
★ Pirate Capital LLC
★ Renaissance Technologies
★ SAC Capital Advisors
★ Soros Fund Management
Top 25 funds of hedge funds by assets
Funds of hedge funds invest in a portfolio of underlying hedge funds rather than investing in securities directly. They hire the hedge fund managers on behalf of their clients following due diligence on the managers in addition to building diversified portfolios of these managers. They are ranked by Dec 2005 Assets Under Management (though this cannot be taken as the final word on the matter given the intense privacy that surrounds much of the industry). See Institutional Investor Magazine Link for the 100 largest hedge funds:
http://www.deshaw.com/articles/Alpha.pdf
★ Union Bancaire Privée (UBP) (Geneva, Switzerland) $20.8 billion ([25])
★ Grosvenor Capital Management (Chicago, IL) $20.2 billion ([26])
★ HSBC Private Bank (Suisse) / HSBS Republic Investments (London, UK) $20.2 billion ([27])
★ Permal Asset Management (New York, NY) $18.8 billion ([28])
★ Crédit Agricole Alternative Investment Products Group (Paris, France) $18.5 billion ([29])
★ Société Générale (Paris, France) $15.9 billion ([30])
★ Quellos Capital Management (Seattle, WA) $15.0 billion ([www.quellos.com])
★ Ivy Asset Management (Jericho, NY) $14.9 billion ([31])
★ Financial Risk Management (FRM) (London, UK) $ 13.3 billion ([32])
★ Pictet & Cie. (Geneva, Switzerland) $13.0 billion ([33])
★ Man Investments (London, UK and Pfaffikon, Switzerland) $12.7 billion ([34])
★ Notz Stucki & Cie. (Geneva, Switzerland) $10.7 billion ([35])
★ Blackstone Alternative Asset Management (New York, NY) $9.3 billion ([36])
★ Arden Asset Management (New York, NY) $9.2 billion ([37])
★ Black River Asset Management (Minnetonka, MN) $9 billion ([38])
★ Pacific Alternative Asset Management Co. (PAAMCO) (Irvine, CA) $8.9 billion]] ([39])
★ J.P. Morgan Alternative Asset Management (New York, NY) $8.8 billion ([40])
★ Mesirow Advanced Strategies (Chicago, IL) $8.2 billion ([41])
★ Tremont Capital Management (Rye, NY) $8.2 billion ([42])
★ CSFB Alternative Capital (New York, NY) $7.9 billion ([43])
★ AIG Global Investment Group (New York, NY) $6.7 billion ([44])
★ Harris Alternatives (Chicago, IL) $6.7 billion ([45])
★ DB Absolute Return Strategies (New York, NY) $6.6 billion ([46])
★ RBS Asset Management (London, UK) $6.5 billion ([47])
★ Lehman Brothers Alternative Investment Management (New York, NY) $6.2 billion ([48])
★ EIM (Nyon, Switzerland) $6.0 billion ([49])
Terminology
★ Commodity pool
★ Derivatives market
★ Investment fund
★ Venture capital
See also
★ Mutual funds
★ Mutual-fund scandal (2003)
★ Securities
★ Finance
★ Financial markets
★ Financial regulation
★ Taxation of Priv Equity and Hedge Funds
References
1. Steve Johnson, A short history of bankruptcy, death, suicides and fortunes, ''Financial Times'', April 27 2007
2. Now It's Hedge Fund vs. Hedge Fund, Business Week, May 18, 2007
3. For Schumer, the Double-Edged Sword of Cozying Up to Hedge Funds, The New York Times, June 22, 2007
4. [6] A Practitioner's Guide to Alternative Investment Funds
5. Hedge Funds, pg 2 International Financial Services London
6. Fortress files for first US hedge fund IPO, Marketwatch
7. FORTRESS INVESTMENT GROUP LLC, SEC Registration Statement
8. ''Institutional Investor'', 15 May 2006, Article Link, although statistics in the Hedge Fund industry are notoriously speculative
9. 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
10. ECB Financial Stability Review June 2006, p. 142
11. ECB warns on hedge fund risk
12. Times Online, "SEC Probing Bear Stearns hedge funds," June 27, 2007
13. 3M is average pay for top hedge fund managers
14. Traders Monthly. Top Hedge Fund Earners of 2005.
Further reading
Research Articles
★ Agarwal, V., and N.Y. Naik, 2000, ''Multi-Period Performance Persistence Analysis of Hedge Funds'', Journal of Financial and Quantitative Analysis, Vol. 35, No. 3.
★ Amenc, N., L. Martellini, and M. Vaissié, 2003, ''Benefits and Risks of Alternative Investment Strategies'', Journal of Asset Management, Vol. 4, No. 2, pp. 96–118.
★ Asness, C., R. Krail, and J. Liew, 2000, ''Do Hedge Funds Hedge?'', Journal of Portfolio Management, Vol. 28, No. 1, pp. 6–19.
★ Caslin, J. J., 2004, ''Hedge Funds'', British Actuarial Journal, Vol. 10, No. 3, pp. 441-521.
★ De Souza, C., and S. Gokcan, 2004, ''Hedge Fund Investing: A Quantitative Approach to Hedge Fund Manager Selection and De-Selection'', Journal of Wealth Management.
★ Fransolet, L. and J. Loeys, 2004, ''Have Hedge Funds Eroded Market Opportunities?'', Journal of Alternative Investments, Vol. 7, No. 3, pp. 10–33.
★ Géhin, W., and M. Vaissié, 2005, ''Lighthouses Or Tricks Of Light? An In-Depth Look at Creating a Quality Hedge Fund Benchmark'', The Journal of Indexes, May/June.
★ Géhin, W., and M. 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.
Research Papers
★ Amenc, N., L. Martellini, and M. Vaissié, 2003, ''Indexing Hedge Fund Indexes'', EDHEC Risk and Asset Management Research Center, Position Paper, December.
★ Amenc, N., and L. Martellini, 2003, ''Optimal Mixing of Hedge Funds with Traditional Investments'', EDHEC Risk and Asset Management Research Center, Position Paper, February.
★ Amenc, N., and M. Vaissié, 2006, ''Determinants of Funds of Hedge Funds’ Performance'', EDHEC Risk and Asset Management Research Center, Position Paper, February.
★ Géhin, W., 2006, ''The Challenge of Hedge Fund Performance Measurement: a Toolbox Rather Than a Pandora’s Box'', EDHEC Risk and Asset Management Research Center, Position Paper, December.
★ Géhin, W., and M. Vaissié, 2004, ''Hedge Fund Indices: Investable, Non-Investable and Strategy Benchmarks'', EDHEC Risk and Asset Management Research Center, Position Paper.
★ Giraud, J.R., 2005, ''Mitigating Hedge Funds’ Operational Risks: Benefits and limitations of managed account platforms'', EDHEC Risk and Asset Management Research Center, Position Paper, December.
★ Goltz, F., L. Martellini, and M. Vaissié, 2004, ''Hedge Fund Indices from an Academic Perspective: Reconciling Investability and Representativity'', EDHEC Risk and Asset Management Research Center, Position Paper, November.
★ Martellini, L. and V. Ziemann, 2005, ''The Benefits of Hedge Funds in Asset Liability Management'', EDHEC Risk and Asset Management Research Center, Position Paper, October.
Books
★ Handbook of Alternative Assets, , Mark, Anson, John Wiley and Sons, 2005, ISBN 0-471-21826-X
★ Managing a Hedge Fund: A Complete Guide to Trading, Business Strategies, Risk Management and Regulations, , Keith, Black, McGraw-Hill, 2004, ISBN 007143481X
★ Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, , Steven, Drobny, Wiley, 2006, ISBN 0-471-79447-3
★ Funds of Hedge Funds, , Greg, Gregoriou, Butterworth-Heineman, an imprint of Elsevier, 2006, ISBN 0-7506-7984-0
★ Ineichen, Alexander M., ''Asymmetric Returns - The Future of Active Asset Management'', New York: John Wiley & Sons, 2006, forthcoming. ISBN 0-470-04266-4
★ Running Money : Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score, , Andy, Kessler, Collins, 2004, ISBN 0-06-074064-7
★ Handbook of hedge Funds, , François-Serge, Lhabitant, John Wiley & Sons, 2004, ISBN 0-470-02663-4
★ Hedge Fund Investment Management, , Izzy, Nelken, Butterworth-Heineman, an imprint of Elsevier, 2005, ISBN 0-7506-6007-4
★ A Practitioner's Guide to Alternative Investment Funds, , Timothy, Spangler, , 2005, ISBN 1-898830-98-3
★ Weiss, Gary, ''Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments'', New York: Portfolio, 2006. Argues that hedge funds tend to underperform market indexes and are excessively hyped by the media. ISBN 1-59184-094-5
External links
Academic research
★ Regional Percentile Return Rankings: Full Year 2006
★ HedgeFund.net
★ EDHEC Risk and Asset Management Research Centre of the EDHEC Business School
★ Hedge Fund Research Initiative of the International Center for Finance at the Yale School of Management
Industry news
★ BarclayHedge
★ Eurekahedge
★ FINalternatives.com
★ Hedge Fund Weblog
★ HedgeCo.net
★ HedgeFund.net
★ FiNTAG Daily Hedge Fund News
★ Hedge Fund Alert
★ Hedge Funds Review
★ Daily Hedge News
Indices
★ BarclayHedge Indices
★ Eurekahedge Indices
★ Hedge Fund Indices
★ CSFB Credit Suisse/Tremont Hedge Fund Index
★ HFRX Indices
★ FTSE Hedge Indices
★ DOW Jones Hedge Fund Indexes
★ EDHEC Alternative Indexes
★ EDHEC Investable Hedge Fund Indices
★ HFRI Monthly Performance Indices
★ HFN Real Time Averages
★ Hedge Fund Consistency Index
Trade associations
★ Alternative Investment Management Association (AIMA)
★ the Hedge Fund Association (HFA)
★ Managed Funds Association (MFA)
★ Chartered Alternative Investment Analyst Association (CAIA)
Other links
★ Investment Funds Multilingual Glossary by Reglo
★ Harvard Business School's Baker Library Guide to Hedge Funds
★ SECLaw.com's Hedge Fund Information Center
★ Report of President's Working Group on Financial Markets
★ Collection of Articles and PowerPoint Presentations on Hedge Fund Regulation
★ Hedge Funds vs. Mutual Funds
★ Hedge Funds 101: A Primer For Regulators; Commodity Futures Trading Commission, Nov. 30, 2004
★ ''The long and short'' - ''The Guardian'', September 24 2005 - This article explains hedge funds in layman's terms, why they are of interest to the general reader and contains interviews with fund managers.
★ What is a Hedge Fund? University of Iowa Center for International Finance and Development
★ Institutional Investors 2004 Ranking
★ Hedge Funds: Risk and Return, study by Prof. Burton G. Malkiel critical of published hedge fund performance numbers
★ http://www.hdmgmt.co.uk/gam.html Case Study of ISO 9001 investment process project at a significant hedge fund
★ http://www.cisdm.org Center for International Securities and Derivatives Markets at the University of Massachusetts is a research center specializing in hedge fund research
★ How to Set Up Your Own Hedge Fund and Due Diligence, Disclosure and Fund Managers - by Hannah Terhune, JD LLM (Taxation, New York University)
★ ''Economic powers to study growing influence of hedge funds'' -''The International Herald Tribune'', February 10 2007- This article explains how Hedge Funds are being scrutinized by National Governments for lack of regulation and have slowly become an international policy issue
★ http://www.fondosdeinversionlibre.com Web specialized in Spanish Hedge Funds
★ Glossary by Hedge Fund Alert
★ EZX Inc. A popular OMS used by many Hedge Funds
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