Managing Hedge Fund Managers: Quantitative and Qualitative Performance Measures

Introduction

The Art and Science of Hedge Fund Investing-Are You Precisely Wrong or Approximately Correct?

Hedge funds have been around for more than 50 years, but their impact in the investment world has increased since the 1990s. Alfred Winslow Jones, trained as a sociologist and known professionally as a journalist, established a partnership in New York in 1949 that has become known as the first hedge fund. Jones wanted to protect his investments from market risk, and by shorting stocks he calculated he could sufficiently defend his portfolio against declining markets. Feeling confident that his strategy would be successful, Jones borrowed capital (leverage) to increase his long and short positions. So successful was this strategy that Jones saw his funds appreciate 670 percent between 1955 and 1965.

The interest in hedge funds remained relatively flat until the 1990s, when hedge fund managers Julian Robertson, Michael Steinhardt, and George Soros hit the news with the force of rock stars. In 1990, there were about 100 hedge funds with approximately $38.9 billion in assets under management. By 1995, there was about $185.7 billion invested in only about 170 funds. In 2005 the amount of assets under management rose to over $1.1 trillion invested in approximately 8,500 funds; however, 196 hedge funds controlled approximately $730 billion of the total.

THE EXPLOSION OF HEDGE FUNDS

There are currently over 15,400 single strategy hedge funds and over 6,100 funds of funds (FOFs), ...