The Fund Industry: How Your Money is Managed, 2nd Edition

CHAPTER 16

Hedge Funds

Everybody's talking about hedge funds—and it seems that everyone wants to either start one or invest in one. As a result, hedge funds have been a fast-growing segment of the investment management industry, more than quadrupling in size over the past 10 years, despite the disruptions of the 2008 financial crisis. At the end of 2013, assets stood at $2.6 trillion, according to Hedge Fund Research. This spectacular growth occurred despite the disruptions of the 2008 financial crisis—and even though most hedge fund managers voluntarily limited their asset gathering efforts in order to stay outside the scope of certain regulations.

And the growth prospects for hedge funds are terrific. Changes in regulations have many hedge fund managers thinking about expanding beyond their traditional markets. Entering these new markets will be neither cheap nor easy—partly because hedge fund managers will be facing competition from mutual fund sponsors, which are increasingly using hedge fund investment techniques in their own products, but the rewards could well be worth the risk.

In this chapter, we look at both the traditional hedge fund world and how hedge funds are evolving to take advantage of new opportunities. We review:

• Traditional hedge funds: how they are defined, the investment strategies they use, their advantages and disadvantages versus mutual funds, and their performance.
• Traditional hedge fund investors.
• The new hedge funds and the convergence between hedge ...