Alternative Investments: CAIA Level I, 3rd Edition

CHAPTER 16 Structure of the Hedge Fund Industry

The term hedge fund originated with the first hedge fund, A.W. Jones & Co., which was established in 1949 and invested in both long and short equity positions. The intent was to limit market risk while focusing on stock selection. This hedge fund operated in relative obscurity until an article published in Fortune magazine in April 1966 spotlighted Alfred Winslow Jones.¹ The interest in Jones's product was large, and within two years, a survey conducted by the SEC established that the number of hedge funds had grown from 1 to 140. Many hedge funds were liquidated during the bear market of the early 1970s, and the hedge fund industry did not regain popularity until the end of the 1980s. The appeal of hedge funds increased tremendously in the 1990s, and by 2014, there were around 10,000 hedge funds with more than $2.8 trillion in total assets. For comparison, the amount of total assets for mutual funds was $30 trillion in 2013.

16.1 Distinguishing Hedge Funds

The term hedge fund has evolved and expanded to include funds that do not necessarily hold hedged positions. In this book, hedge funds are distinguished from their traditional counterpart, mutual funds, with the definition in the next section.

16.1.1 Three Primary Elements of Hedge Funds

A hedge fund is an investment pool or investment vehicle that (1) is privately organized in most jurisdictions; (2) usually offers performance-based fees to its managers; and (3) can usually ...