Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Why Not Allocate 100 Percent to Hedge Funds?

Several important reasons explain why individual and institutional investors that are attracted to the segment do not invest a significant portion of their assets with hedge funds.

The Industry is Not Mature and has Lost Some Investor Confidence

Investing in hedge funds is a relatively new activity for the vast majority of investors, despite the fact that the first hedge fund was established in the late 1960s. The industry, its regulation, and its practices and protocols are all evolving from those associated with a new industry to those expected from a more established industry.

The industry is has gone through three discrete cycles that are common to any industry. The first phase was the embryonic or early formation phase pre-1990. The next initial growth and acceptance phase occurred between 1990 and 2002, immediately followed by the rapid growth phase between 2002 and 2007. During the rapid growth phase, the industry took many of its first steps toward eventual maturation but also suffered from growing pains, shortcuts, and some poor decisions. In 2008, the industry, like many industries that grow quickly and without precedent or regulatory frameworks to follow, entered a retrenchment phase as a result of its many failures, large losses, and a decline in investor confidence. Today, the industry is in a renewal phase after having addressed some of the excesses of its rapid growth period; corrected mistakes; improved controls, infrastructure, ...