Handbook of Hedge Funds

1

Introduction

Sveta, what is a hedge fund?

Tanya

Over the past 50 years, the alternative investment industry has grown from a handful of fund managers in the USA into a global business at the forefront of investment innovation. But despite this apparent success, few topics in the financial world seem to evoke such a mixed response as that of alternative investments. Some love them and explain that they are the ultimate tool to bolster returns or help diversifying efficiently traditional portfolios. For example, Alan Greenspan called them “major contributors to the flexibility of the financial system” because they provide a critical source of liquidity for the markets. But at the same time, others hate them, affirm that they are big enough to destabilize markets, claim that their fees would be outlandish or even illegal if extracted from a plain old mutual fund, and suggest prohibiting their activities. As an illustration, Michel Sapin, the French finance minister, recalled that “during the Revolution such people were known as agioteurs, and they were beheaded”. More moderately, Franz Müntefering, the chairman of the ruling social democratic party in Germany, recently compared alternative investment funds to “locusts” that wreck havoc on the corporate economy.

Surprisingly, finding a universally accepted definition of what constitutes an alternative investment is devilishly difficult. Some have characterized alternative investments as no-holdsbarred pools of capital that escape ...