The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry

CHAPTER 3

Hedge Funds

 

 

 

 

Alfred Jones is credited with the creation of the first hedge fund in 1949. Jones believed that price movements of an individual asset could be seen as having a component due to the overall market, the systemic portion, and a component due to the performance of the asset itself, the idiosyncratic portion. In order to neutralize the effect of overall market movement, he balanced his portfolio by buying stocks whose price he expected to rise and selling short stocks he expected to fall. This helped in removing the systemic portion of the price movements, and he was left with the idiosyncratic performance of his long stock and short stock positions. This concept produced returns that were not market dependent and tended to hedge the market exposure to his portfolio. Thus was born the concept of a hedge fund and the principle of producing alpha or market independent returns.

As hedge funds are not required to register with any regulatory body like the SEC, it is hard to determine the actual number of hedge funds in existence. Hedge funds are operated from several countries around the world, but the majority of them are based in New York and Connecticut in the United States. In Asia, as the Chinese economy is starting to drive the market dynamics, we have seen Hong Kong and Singapore emerge as the two biggest hedge fund hubs. In Europe, London is considered the preferred location for hedge funds, especially hedge funds that trade in markets around the world. ...