The Little Book of Hedge Funds

Introduction

Anatomy of a Hedge Fund

The Password Is . . .

Hedge funds are the ultimate in today’s stock market—the logical extension of the current gun-slinging, go-go cult of success.

—Peter Landau, “Hedge Funds: Wall Street’s New Way to Make Money” (New York Magazine, 1968)

FOR MUCH OF THEIR history, hedge funds have been viewed as exclusive, intentionally vague, high-risk investments that were only accessible to the überelite. Often referred to as “Wall Street’s last bastions of secrecy, mystery, exclusivity, and privilege,” they have generally been resented, misunderstood, and vilified for causing market turbulence and creating legions of wealthy people who seemingly have “more money than God.” And yet, most do exactly what they say: They provide superior returns with less volatility. As such, investors continue to pour money into these alternative investments, with assets increasing from $38.9 billion in 1990 to $1.77 trillion in 2007 to $2.04 trillion in the third quarter of 2011.1 With posted gains of 19.98 percent and 10.4 percent in 2009 and 2010, respectively, an increasing number of individuals and institutions are eager to gain insight and access into this secret society. However, many mysterious hedge fund managers often shy away from unveiling their profitable secrets.

Isn’t it time that someone unravel the secret world of hedge funds? Isn’t it time to provide intellectually curious people with a comprehensive overview of the industry without clouding it with jargon, ...