Handbook of Finance: Financial Markets and Instruments

Chapter 53. Hedge Funds

MARK J. P. ANSON, PhD, JD, CPA, CFA, CAIA

President and Executive Director of Nuveen Investment Services

Abstract: The global hedge fund market is estimated at $1.4 trillion. This capital has flowed into hedge funds because of their unrestricted ability to invest across asset classes, to go both long and short securities, and to invest without the burden or constraint of a traditional benchmark. However, investing in hedge funds is not easy. They may pursue esoteric strategies and may take on considerable leverage to boost their returns. Nonetheless, their popularity persists because of their ability to generate returns from pricing discrepancies in the financial markets. Still, successful investing in hedge funds requires considerable due diligence—a process that requires both time and patience.

Keywords: hedge fund, market directional, corporate restructuring, convergence trading, opportunistic, equity long/short, market timers, short sellers, distressed securities, merger arbitrage, event driven, fixed income arbitrage, convertible bond arbitrage, market neutral, statistical arbitrage, relative-value arbitrage, global macro, fund of funds, due diligence, absolute return

The phrase "hedge fund" is a term of art. It is not defined in the Securities Act of 1933 or the Securities Exchange Act of 1934. Additionally, "hedge fund" is not defined by the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Commodity Exchange Act, or, finally, the ...