The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

OVERVIEW OF ALTERNATIVE ASSET PRODUCTS

In this section, we describe three types of the best known alternative assets: hedge funds, private equity, and commodities.

Hedge Funds

The U.S. securities law does not provide a definition of the pools of investment funds run by asset managers that are referred to as hedge funds. These entities as of this writing are not regulated. George Soros, chairman of Soros Fund Management, a firm that advises a privately owned group of hedge funds (the Quantum Group of Funds), defines a hedge fund as follows:

Hedge funds engage in a variety of investment activities. They cater to sophisticated investors and are not subject to the regulations that apply to mutual funds geared toward the general public. Fund managers are compensated on the basis of performance rather than as a fixed percentage of assets. “Performance funds” would be a more accurate description.⁵

The first page of a report by the President’s Working Group on Financial Markets, Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management published in April 1999, provides the following definition:

The term “hedge fund” is commonly used to describe a variety of different types of investment vehicles that share some common characteristics. Although it is not statutorily defined, the term encompasses any pooled investment vehicle that is privately organized, administered by professional money managers, and not widely available to the public.

The following is a description ...