Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks

Chapter 1

Hedge Fund History

“History doesn't repeat itself, but it does rhyme.”

Mark Twain

I recently read an article printed in the financial press that questioned the viability of hedge funds as an asset class. Following the bear market decline and the corresponding volatile market environment, the article suggested that investors had begun to question whether or not hedge funds actually hedge and whether or not the asset class was doomed. Managers responded that it had become too hard to find profitable shorts, as all the best shorts quickly become crowded trades—which can lead to short squeezes.

The author of the article suggested that many hedge fund managers had become overconfident going into the market decline and had begun to invest outside of their core mandates and, even worse, did not do a good job of matching the liquidity of their fund's underlying investments with that of their underlying investors. As a result, some hedge fund investors are still waiting to receive redemption proceeds.

Additionally, the article highlighted that the SEC is tracking hedge funds more closely and that they are currently determining how to best regulate them.

What is most striking about the article (titled “Hard Times Come to the Hedge Funds”) is that it was written by Carol Loomis and was published by Fortune magazine in June 1970.¹ The bear market referred to in the article occurred the previous year and had a disastrous impact on the hedge fund industry. Many hedge funds shut down ...