The first hedge fund was created in the US in 1949 by Alfred W. Jones. Since then, investing through hedge funds has become very popular worldwide, especially during and after the 1990s. Today, there are about 15,000 hedge funds globally, managing an estimated total of around 4.5 trillion USD in assets.

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🌐 What are Hedge Funds?

Hedge funds are investment groups that collect money from investors to try to make high profits. They are run by professional managers who use different methods like borrowing money, trading contracts, and betting on falling prices to increase returns. Hedge funds usually accept only experienced or wealthy investors and have fewer rules than regular funds, giving them more freedom but also more risk. Before investing, it’s important to learn about the fund’s strategy, past results, and the team running it.

Lipper Hedge Funds Composite Index

Hedge fund investors have historically earned higher returns than average common stock investors. This can be seen by comparing the past 10 years of performance between the Lipper Hedge Funds Composite Index and the popular US S&P 500 Index. The Lipper Hedge Funds Composite tracks the performance changes of a group of hedge funds.

🔗 More: » What is Lipper at Wikipedia | » Thomson Reuters

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ℹ️ Basic Information About How Hedge Funds Operate

Here is some basic information about hedge funds.

• Hedge Fund Managers & Management Fees

A hedge fund has two main roles: the manager (general partner) and the investors (limited partners). Sometimes, the manager is also a limited partner if they invest their own money in the fund. Typically, the manager is a well-known expert with special skills and many connections. Investors (limited partners) pay the management fee, which is usually 1% of the fund’s total assets. In addition, the fee may include a share of the fund’s annual profits

• Investor Input - Two Types of Hedge Funds

Hedge funds are divided into two main types: open and closed. Open hedge funds are available to any investor willing to meet the minimum entry amount. Closed hedge funds have limited access, with the top manager selecting which investors can join.

• Investor Stake Liquidation / Output

Investors (limited partners) can choose to liquidate their shares by selling their stakes back to the fund. These stakes are bought from other limited partners, with prices based on the current book value.

1. Advantages of Investing in a Hedge Fund

Fund managers usually have extensive experience and connections in business and government. The large size of hedge funds gives them access to global investment opportunities. Hedge funds benefit from perks like low trading fees, tax breaks, and access to inside information. Another key advantage is that hedge funds can profit in both rising and falling markets by using financial tools like CFDs, options, futures, CDs, and short-selling.

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🗃️ Main Categories of Hedge Funds

Hedge funds are categorized by their investment strategy. Each fund varies in potential returns, risk, and value fluctuations.

Here are the main hedge fund categories:

1. Aggressive Growth Hedge Funds: These aim for high returns and take on high risk. They use high capital leverage and protect risks through derivatives like options, futures, CDs, and short-selling.

2. Distressed Securities Hedge Funds: These buy shares and loans of companies facing bankruptcy. They buy cheaply, hoping for large profits over time.

3. Emerging Markets Hedge Funds: These invest in emerging markets and often earn high returns. However, they may struggle to diversify risk because derivatives for hedging are limited, exposing them to higher risk.

4. Fund of Funds: These invest in other hedge funds (explained below).

5. Income Hedge Funds: These invest mainly in government bonds to keep risk low. Returns are also low, making them suitable for risk-averse investors like pension funds.

6. Macro Hedge Funds: These seek profits from macroeconomic changes, such as shifts in interest rates or inflation, using derivatives to turn small changes into big gains.

7. Opportunistic Hedge Funds: These use a wide range of strategies to exploit opportunities across different markets, often with heavy use of leverage.

8. Value Hedge Funds: These invest in stocks trading well below their true value (like real estate stocks), focusing on long-term returns.

'Fund of Funds' as the Best Investing Choice

A Fund of Funds acts like an ‘investment umbrella,’ buying stakes in multiple hedge funds. Its main advantage is maximum risk diversification across industries, countries, and currencies. This makes it a top choice, especially for investors with low risk tolerance, such as pension or insurance funds.

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🔍 Evaluating and Selecting Hedge Funds

Investors use several benchmarks to evaluate and choose hedge funds:

1. Market Beta: Measures how closely a fund’s performance follows the overall market. A beta near 1 means the fund behaves like an index fund, tracking market ups and downs.

2. Size Beta: Measures exposure to small-cap companies, which tend to offer higher returns but carry more risk.

3. Value Beta: Measures exposure to companies with financial problems and stock prices far from their true value.

4. Momentum Beta: Measures exposure to stocks and securities that have recently risen sharply, following a "follow the trend" approach.

Additionally, investors should carefully review a fund’s historical performance and the management team’s background before investing. It’s strongly advised to avoid funds with little or unknown management experience, even if their fees are low.

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🏦 Hedge Funds & Managers

Major Hedge Funds and Managers around the globe:

1. Angelo Gordon, Manager: John Angelo and Michael Gordon
2. AQR Capital Management, LLC, Manager: Clifford Asness
3. Appaloosa Management, Manager: David Tepper and Jack Walton
4. Avenue Capital, Manager: Marc Lasry, Sonia Gardner
5. The Blackstone Group | Kailix Advisors, Manager: J Tomlinson, Bruce Amlicke
6. Blue Ridge Capital, Manager: John Griffin
7. BP Capital Management, Manager: T Boone Pickens
8. Cerberus Capital Management LP, Manager: Steve Feinberg
9. Citadel Investment Group LLC, Manager: Ken Griffin
10. Clarium Capital Management, Manager: Peter Thiel
11. Farallon Capital Management Partners LP, Manager: Thomas Steyer
12. Fortis Investments, Manager: Wes Edens
13. Goldman Sachs Asset Management, Manager: Eric Schwartz, Peter Kraus
14. Highbridge Capital Management LLC /JP Morgan, Manager: Glen Dubin
15. Ospraie Management, Manager: Dwight Anderson
16. Renaissance Technologies, Manager: James Simmons
17. Soros Fund Management LLC, Manager: George Soros
18. Man Group / AHL, Manager: Tim Wong
19. RAB Capital, Manager: Philip Richards
20. Children's Investment Fund Management TCI, Manager: Chris Hohn
21. Thames River Capital, Manager: Charlier Porter

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□ Investing in Hedge Funds

G.P. for TradingCenter.org (c)