CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd Edition

CHAPTER 11

Introduction to Hedge Funds

The term hedge fund originated with the first hedge fund, the Jones Hedge Fund, 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. The Jones Hedge Fund operated in relative obscurity until an article published in Fortune magazine spotlighted the Jones Hedge Fund. 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 2007, there were around 10,000 hedge funds with close to $1.8 trillion in total assets. This compares in size to mutual funds, where the amount of total assets was $11.5 trillion in mid-2007.

11.1 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.

11.1.1 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) usually can ...