what is a hedge fund

Without the disclosure that the securities laws require for most mutual funds, it can be more difficult to fully evaluate the terms of an investment in a hedge fund.
Hedge fund investors do not receive all of the federal and state protections that commonly apply to most mutual funds.
Depending on the amount of assets in the hedge funds advised by a manager, some hedge fund managers may not be required to register or to file public reports with the SEC.
For example, hedge funds are not required to provide the same level of disclosure as you would receive from mutual funds.
Like mutual funds, hedge funds pool investors’ money and invest the money in an effort to make a positive return.
Hedge funds, however, are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.
Unlike mutual funds, hedge funds are not subject to some of the regulations that are designed to protect investors.
Hedge funds typically have more flexible investment strategies than mutual funds.

George Soros tops Forbes’ list of the highest-earning hedge fund managers and traders, personally making an estimated $4 billion in 2013 as his Soros Fund Management generated returns of more than 22%.
To determine the highest-earning hedge fund managers and traders of 2013, we examined hedge fund returns and worked to understand the fee and ownership structure of a wide array of money management firms.
In 2013, the 56-year-old founder of Appaloosa Management outperformed the U.S. stock market and the vast majority of hedge fund managers, with his biggest fund posting net returns of more than 42%.
The king of the rich hedge fund industry, Ray Dalio, earned an estimated $900 million in 2013 even though it was a challenging time for his Bridgewater Associates hedge fund firm, which manages some $150 billion.
In total, the 25 highest-earning hedge fund managers and traders made $24.3 billion in 2013.
In 2013, hedge fund managers and traders bet on an economic revival in Japan, laid siege to corporate boards, invested in hospitals that could benefit from Obamacare and helped make General Motors a hot stock.
While the amount of money made by the top hedge fund managers in a year like 2013 is generally notable, the earnings of one hedge fund manager in particular is bound to raise a few eyebrows.
The Kensington and Wellington funds at his Chicago-based hedge fund firm, Citadel, had a pretty good 2013, even though they trailed the U.S. stock market.
The man who helped nurture Robbins, hedge fund manager Leon Cooperman, rounds out the top 10 earning hedge fund managers of 2013.
The 28% plunge of the yellow metal in 2013 not only hurt the returns of his relatively small Gold Fund, in which he has a large stake, it also dented the returns of the gold-denominated holdings he personally keeps in his other hedge funds.
Perhaps the most remarkable performance of 2013, however, belongs to former Goldman Sachs trader David Tepper, who has been setting a new standard for hedge fund managers.
TO SEE THE FULL LIST OF THE HIGHEST-EARNING HEDGE FUND MANAGERS AND TRADERS OF 2013 PLEASE CLICK HERE.
In fact, the legend of one of the most famous hedge fund managers of all time grew last year even though he did not beat the performance of the U.S. stock market.
The greatest comeback ever? After three very tough years, John Paulson, the hedge fund manager who once pulled off a legendary trade betting against mortgage securities, came roaring back in 2013.

Some of the more popular hedge fund investment strategies are Activist, Convertible Arbitrage, Emerging Markets, Equity Long Short, Fixed Income, Fund of Funds, Options Strategy, Statistical Arbitrage, and Macro.
Despite these recent challenges, hedge funds continue to offer investors a solid alternative to traditional investment funds—an alternative that brings the possibility of higher returns that are uncorrelated to the stock and bond markets.
Most hedge funds, in contrast, seek to generate returns over a specific period of time called a “lockup period,” during which investors cannot sell their shares.
Specifically, U.S. laws require that hedge fund investors be “accredited,” which means they must earn a minimum annual income, have a net worth of more than $1 million, and possess significant investment knowledge.
Hedge funds typically use long-short strategies, which invest in some balance of long positions (which means buying stocks) and short positions (which means selling stocks with borrowed money, then buying them back later when their price has, ideally, fallen).
Second, as a result of being relatively unregulated, hedge funds can invest in a wider range of securities than mutual funds can.
While many hedge funds do invest in traditional securities, such as stocks, bonds, commodities and , they are best known for using more sophisticated (and risky) investments and techniques.
In fact, the name “hedge fund” is derived from the fact that hedge funds often seek to increase gains, and offset losses, by hedging their investments using a variety of sophisticated methods, including leverage.
Many hedge funds also use an investment technique called leverage, which is essentially investing with borrowed money—a strategy that could significantly increase return potential, but also creates greater risk of loss.
Additionally, many hedge funds invest in “derivatives,” which are contracts to buy or sell another security at a specified price.
First, hedge funds are not currently regulated by the U.S. Securities and Exchange Commission (SEC), a financial industry oversight entity, as mutual funds are.
Hedge fund managers, in contrast, receive a percentage of the returns they earn for investors, in addition to earning a “management fee”, typically in the range of 1% to 4% of the net asset value of the fund.
Get comprehensive and up-to-date information on 6100 + Hedge Funds, Funds of Funds, and CTAs in the Barclay Global Hedge Fund Database.
Third, hedge funds are typically not as liquid as mutual funds, meaning it is more difficult to sell your shares.
As a result of these factors, hedge funds are typically open only to a limited range of investors.
A hedge fund is an alternative investment vehicle available only to sophisticated investors, such as institutions and individuals with significant assets.
Like mutual funds, hedge funds are pools of underlying securities.

A theoretical model used to calculate the fair market value of an option based on time to expiration, price of the underlying stock, historical volatility, strike price, and carrying costs.
A derivative security that gives the holder a contractual right to buy or sell a set amount of a stock, commodity, or other asset at a specified price on or before the option’s expiration date.
For example, a stockholder of ABC Company who is worried about declining stock prices can offset that risk by buying a put option on ABC, allowing him to sell his shares in the future at today’s price.
For example, if stock ABC is trading at $125 and the option’s strike price is $120, then the option is in the money.
For example, if stock ABC is trading at $120 and the option’s strike price is $125, then the option is out of the money.
For example, if stock ABC is trading at $125 and the option’s strike price is also $125, then the option is at the money.
Call option writers have the obligation to sell a stipulated quantity of the underlying asset specified in the contract at the specified strike price if the option is exercised by the holder.
For a put option, the strike price must be above the current market price of the stock for the option to be in the money.
For a put option, if the strike price is below the current market price of the stock, then the option is out of the money.
If you write a naked call and the option is exercised by the holder, then you would have to buy the stock at the market price to meet your obligation.
An instruction to a broker to sell a stock at the market price after the security has touched the specified stop price.
The price at which the stock or commodity underlying an option can be purchased (call option) or sold (put option) pursuant to the terms of the contract.
Being short means that you’re bearish, or negative on the market, and that your goal is to make money when the price of the security or commodity that you choose to short falls in price.
Being short means that you’re bearish, or negative on the market, and that your goal is to make money when the security or commodity that you choose to short falls in price.
A contract that gives the holder the right to sell a particular asset at a specified price at any time prior to the expiration of the option.
Call option holders have the right to buy a stipulated quantity of the underlying asset specified in the contract at a specified strike price.
A stock option, for example, is a type of derivative that gives you the right, but not the obligation, to buy shares of the stock at a predetermined price.
The value of a company as measured by the total number of stock shares outstanding times the market price of each share.

During the first decade of the 21st century hedge funds gained popularity worldwide, and by 2008 the worldwide hedge fund industry held US$1.93 trillion in assets under management (AUM).[21][22] However, the 2008 financial crisis caused many hedge funds to restrict investor withdrawals and their popularity and AUM totals declined.[23] AUM totals rebounded and in April 2011 were estimated at almost $2 trillion.[24][25] As of February 2011[update], 61% of worldwide investment in hedge funds comes from institutional sources.[26] In June 2011, the hedge funds with the greatest AUM was Bridgewater Associates (US$58.9 billion), Man Group (US$39.2 billion), Paulson & Co.
Hedge funds within the US are subject to regulatory, reporting and record keeping requirements.[140] Many hedge funds also fall under the jurisdiction of the Commodity Futures Trading Commission and are subject to rules and provisions of the 1922 Commodity Exchange Act which prohibits fraud and manipulation.[141] The Securities Act of 1933 required companies to file a registration statement with the SEC to comply with its private placement rules before offering their securities to the public.[142] The Securities Exchange Act of 1934 required a fund with more than 499 investors to register with the SEC.[143][144][145] The Investment Advisers Act of 1940 contained anti-fraud provisions that regulated hedge fund managers and advisers, created limits for the number and types of investors, and prohibited public offerings.
Hedge fund managers often invest money of their own in the fund they manage, which serves to align their own interests with those of the investors in the fund.[8][9] A hedge fund typically pays its investment manager an annual management fee (for example 1 percent of the assets of the fund), and a performance fee (for example 20% of the increase in the fund’s net asset value during the year).[1] Some hedge funds have several billion dollars of assets under management (AUM).
The U.S. regulations and restrictions that apply to hedge funds differ from its mutual funds.[137] Mutual funds, unlike hedge funds and other private funds, are subject to the Investment Company Act of 1940, which is a highly detailed and extensive regulatory regime.[138] According to a report by the International Organization of Securities Commissions the most common form of regulation pertains to restrictions on financial advisers and hedge fund managers in an effort to minimize client fraud.
Such risk may arise following a destabilizing event or events affecting a group of financial institutions linked through investment activity.[183] Organizations such as the National Bureau of Economic Research[183] and the European Central Bank have charged that hedge funds pose systemic risks to the financial sector,[184][185] and following the failure of hedge fund Long-Term Capital Management (LTCM) in 1998 there was widespread concern about the potential for systemic risk if a hedge fund failure led to the failure of its counterparties.
Funds may have "risk officers" who assess and manage risks but are not otherwise involved in trading, and may employ strategies such as formal portfolio risk models.[55] A variety of measuring techniques and models may be used to calculate the risk incurred by a hedge fund’s activities; fund managers may use different models depending on their fund’s structure and investment strategy.[53][56] Some factors, such as normality of return, are not always accounted for by conventional risk measurement methodologies.
According to the Financial Times, "big hedge funds have some of the most sophisticated and exacting risk management practices anywhere in asset management."[52] Hedge fund managers may hold a large number of investment positions for short durations and are likely to have a particularly comprehensive risk management system in place.
A lack of verification of financial documents by investors or by independent auditors has, in some cases, assisted in fraud.[200] In the mid-2000s, Kirk Wright of International Management Associates was accused of mail fraud and other securities violations[201][202] which allegedly defrauded clients of close to US$180 million.[203] In December 2008, Bernard Madoff was arrested for running a US$50 billion Ponzi scheme[204] which was incorrectly[205] described as a hedge fund,[206][207][208] and several feeder hedge funds, of which the largest was Fairfield Sentry, channeled money to it.
Hedge funds utilizing a global macro investing strategy take sizable positions in share, bond or currency markets in anticipation of global macroeconomic events in order to generate a risk-adjusted return.[36] Global macro fund managers use macroeconomic ("big picture") analysis based on global market events and trends to identify opportunities for investment that would profit from anticipated price movements.
In June 2006, the U.S. Court of Appeals for the District of Columbia overturned the rule and sent it back to the agency to be reviewed.[152] In response to the court decision, in 2007 the SEC adopted Rule 206(4)-8, which unlike the earlier challenged rule, "does not impose additional filing, reporting or disclosure obligations" but does potentially increase "the risk of enforcement action" for negligent or fraudulent activity.[153] Hedge fund managers with at least US$100 million in assets under management are required to file publicly quarterly reports disclosing ownership of registered equity securities and are subject to public disclosure if they own more than 5% of the class of any registered equity security.[144] Registered advisers must report their business practices and disciplinary history to the SEC and to their investors.
Because hedge funds are not sold to the general public or retail investors, the funds and their managers have historically been exempt from some of the regulation that governs other funds and investment managers with regard to how the fund may be structured and how strategies and techniques are employed.
In December 2004, the SEC began requiring hedge fund advisers, managing more than US$25 million and with more than 14 investors, to register with the SEC under the Investment Advisers Act.[149] The SEC stated that it was adopting a "risk-based approach" to monitoring hedge funds as part of its evolving regulatory regimen for the burgeoning industry.[150] The new rule was controversial, with two commissioners dissenting,[151] and was later challenged in court by a hedge fund manager.
Investment in hedge funds may provide diversification which can reduce the overall risk of an investor’s portfolio.[51] Managers of hedge funds use particular trading strategies and instruments with the specific aim of reducing market risks to produce risk-adjusted returns, which are consistent with investors’ desired level of risk.[52] Hedge funds ideally produce returns relatively uncorrelated with market indices.[53] While "hedging" can be a way of reducing the risk of an investment, hedge funds, like all other investment types, are not immune to risk.
Hedge funds are most often open-ended and allow additions or withdrawals by their investors (generally on a monthly or quarterly basis).[1] A hedge fund’s value is calculated as a share of the fund’s net asset value, meaning that increases and decreases in the value of the fund’s investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.
The other factor reducing the attractiveness of hedge funds in a diversified portfolio is that they tend to under-perform during equity bear markets, just when an investor needs part of their portfolio to add value.[75] For example, in January–September 2008, the Credit Suisse/Tremont Hedge Fund Index[217] was down 9.87%. According to the same index series, even "dedicated short bias" funds had a return of −6.08% during September 2008.
Hedge funds posted disappointing returns in 2008, but the average hedge fund return of -18.65% (the HFRI Fund Weighted Composite Index return) was far better than the returns generated by most assets other than cash or cash equivalents.[citation needed] The S&P 500 total return was -37.00% in 2008, and that was one of the best performing equity indices in the world.
The EU’s Directive on Alternative Investment Fund Managers (AIFMD) was the first EU directive focused on hedge fund managers.[139] According to the EU, the aim of the directive is to provide greater monitoring and control of alternative investment funds.[162] The directive required managers to disclose more information, on a more frequent basis.
Some types of funds, including hedge funds, are perceived as having a greater appetite for risk, with the intention of maximizing returns,[62] subject to the risk tolerance of investors and the fund manager.
These types of strategies have a greater exposure to the fluctuations of the overall market than do market neutral strategies.[33][36] Directional hedge fund strategies include US and international long/short equity hedge funds, where long equity positions are hedged with short sales of equities or equity index options.
The investment manager who organizes the hedge fund may retain an interest in the fund, either as the general partner of a limited partnership or as the holder of "founder shares" in a corporate fund.[126] For offshore funds structured as corporate entities, the fund may appoint a board of directors.
Instead of reflecting the performance of actual hedge funds they take a statistical approach to the analysis of historic hedge fund returns, and use this to construct a model of how hedge fund returns respond to the movements of various investable financial assets.
In the 1970s, hedge funds specialized in a single strategy and most fund managers followed the long/short equity model.[clarification needed] Many hedge funds closed during the recession of 1969–70 and the 1973–1974 stock market crash due to heavy losses.
An investor in a hedge fund usually has direct access to the investment adviser of the fund, and may enjoy more personalized reporting than investors in retail investment funds.
Hedge funds share many of the same types of risk as other investment classes, including liquidity risk and manager risk.[56] Liquidity refers to the degree to which an asset can be bought and sold or converted to cash; similar to private equity funds, hedge funds employ a lock-up period during which an investor cannot remove money.[36][62] Manager risk refers to those risks which arise from the management of funds.
US tax-exempt investors (such as pension plans and endowments) invest primarily in offshore hedge funds to preserve their tax exempt status and avoid unrelated business taxable income.[111] The investment manager, usually based in a major financial center, pays tax on its management fees per the tax laws of the state and country where it is located.[113] In 2011, half of the existing hedge funds were registered offshore and half onshore.
As of 2009[update], hedge funds represented 1.1% of the total funds and assets held by financial institutions.[10] As of June 2013, the estimated size of the global hedge fund industry was US$2.4 trillion.
When investors buy these products the index provider makes the investments in the underlying funds, making an investable index similar in some ways to a fund of hedge funds portfolio.
On the other hand, U.S. hedge funds are exempt from many of the standard registration and reporting requirements because they only accept accredited investors.[36] In 2010, regulations were enacted in the US and European Union, which introduced additional hedge fund reporting requirements.
Limited partnerships and other flow-through structures assure that investors in hedge funds are not subject to both entity-level and personal-level .[119] A hedge fund structured as a limited partnership must have a general partner.
Hedge fund management firms typically charge their funds both a management fee and a performance fee.
A side pocket is a mechanism whereby a fund compartmentalizes assets that are relatively illiquid or difficult to value reliably.[131] When an investment is side-pocketed, its value is calculated separately from the value of the fund’s main portfolio.[132] Because side pockets are used to hold illiquid investments, investors do not have the standard redemption rights with respect to the side pocket investment that they do with respect to the fund’s main portfolio.[132] Profits or losses from the investment are allocated on a pro rata basis only to those who are investors at the time the investment is placed into the side pocket and are not shared with new investors.[132][133] Funds typically carry side pocket assets "at cost" for purposes of calculating management fees and reporting net asset values.

Hedge funds can invest in any number of strategies and they are perhaps most readily identifiable by their structure, which is typically a limited partnership (the manager acting as the general partner and investors acting as the limited partners) with performance related fees, high minimum investment requirements and restrictions on types of investor, entry and exit periods.
Where a hedge fund applies a high water mark to an investor’s money, this means that the manager will only receive performance fees, on that particular pool of invested money, when its value is greater than its previous greatest value.
However the "Hedge Fund" definition has come to incorporate any absolute return fund investing within the financial markets (stocks, bonds, commodities, currencies, derivatives, etc) and/or applying non-traditional portfolio management techniques including, but not restricted to, shorting, leveraging, arbitrage, swaps, etc.
Offshore hedge funds are vehicles, registered/domiciled in offshore jurisdictions, designed to allow investment in a fund without being exposed to the strictures of tax law in any given onshore legislation.
Usually defined as "Accredited Investors", various institutions, corporate treasuries, endowments, fund of funds, family offices, private banks and pensions invest in hedge funds.
You name it and a hedge fund somewhere is probably doing it (or will be able to)! From buy-and-hold to currency arbitrage to futures and options to distressed debt positions, hedge funds can allocate to any and all (depending on their declared style and strategy).
The majority of the hedge fund universe is involved in relatively plain vanilla positions, but sexy finance makes the news so hedge funds collectively are invariably associated with the arcane minority.

If hedge-fund managers are playing a zero-sum game, what is their social utility? And if, as many critics contend, there isn’t any, how can they justify their vast remuneration? When I put these questions to Dalio, he insisted that, through pension funds, Bridgewater’s investors include teachers and other public-sector workers, and that the firm created more value for its clients last year than Amazon, eBay, and Yahoo combined.
In his Principles, Dalio acknowledged that his firm can seem strange to outsiders and newcomers: “Since Bridgewater’s culture is very different from what is typical in the world at large, people often encounter culture shock when they start here.” In part to minimize this shock, for years Bridgewater recruited young men and women straight out of college.
Unlike some other hedge funds, Bridgewater has never made much money in the U.S. stock market, an area where Dalio has less experience.
In July, 2007, Dalio and a co-author wrote in Bridgewater’s daily newsletter about “crazy lending and leveraging practices,” adding, “We want to avoid or fade this lunacy.” A couple of weeks later, after the subprime-mortgage market froze up, Dalio’s newsletter declared, “This is the financial market unraveling we have been expecting.
After the meeting, Dalio told me that the exchange had been typical for Bridgewater, where he encourages people to challenge one another’s views, regardless of rank, in what he calls a culture of “radical transparency.” Dalio had no qualms about upbraiding a junior employee in front of me and dozens of his colleagues.
Dalio acknowledged to me that Bridgewater was one of the funds that pulled a lot of money out of Lehman and other Wall Street firms, but he said he had little choice.
Last year, Dalio sold about twenty per cent of Bridgewater to some of its employees in a deal financed by several of the firm’s longtime clients, and he told me that ultimately he would like to sell his entire ownership stake to his colleagues.
Is Bridgewater really any different? Although the firm trades in more than a hundred markets, it is widely believed that the great bulk of its profit comes from two areas in which Dalio is an expert: the bond and currency markets of major industrial countries.
Last year, Dealbreaker, a Wall Street Web site, picked up a copy of the Principles and made fun of a section in which Dalio appeared to compare Bridgewater to a pack of hyenas feeding on a young wildebeest.
Dalio says that the tapes—some audio, some video—provide an objective record of what has been said; they can be used for training purposes, and they allow Bridgewater’s employees to keep up with what is going on at the firm, including his discussions with senior colleagues.
Ray Dalio, the sixty-one-year-old founder of Bridgewater Associates, the world’s biggest hedge fund, is tall and somewhat gaunt, with an expressive, lined face, gray-blue eyes, and longish gray hair that he parts on the left side.

The catchall term is used to describe an industry with an estimated $2.4 trillion in assets and an array of portfolios that feature dramatically different investment strategies, tolerance for risk and goals for returns.

Ken Griffin, 45, has staged an incredible comeback in the years following the financial crisis, which significantly dented his fortune and nearly destroyed his Citadel Group, a Chicago hedge fund firm that now manages some $24 billion.
Dalio’s Bridgewater Associates, the world’s biggest hedge fund firm (managing some $160 billion), posted solid performance figures in the first half of 2014, beating the stock market and most rival funds.
At age 84, George Soros remains America’s richest hedge fund manager with an estimated net worth of $24 billion.
John Paulson, the man who made his fortune betting against subprime mortgage securities, is the next richest  hedge fund manager with an estimated net worth of $13.7 billion.
Robbins led his flagship hedge fund to a 9.6% net return in the first six months of 2014, beating the Standard & Poor’s 500 index and most other hedge fund managers.
Robbins, 44, founder of Glenview Capital Management, has been one of the hottest hedge fund managers in the last three years.
While the vast majority of hedge fund managers have struggled to post strong returns in the years following the financial crisis, Tepper’s main hedge fund has generated annualized net returns of nearly 40% in the last five calendar years.
Dalio’s key All Weather fund, which lost money in 2013, rose 11.17% in the first six months of 2014; Bridgewater’s big Pure Alpha hedge fund returned 7.77%. Not everything went Dalio’s way.
In the first six months of the year, Ackman’s Pershing Square hedge fund returned 25% after fees, trouncing the stock market and most other hedge funds.
Steve Cohen, one of the most successful hedge fund managers ever, may have shut down his SAC Capital hedge fund after it pleaded guilty to insider-trading charges last year, but he continues to trade his own money.
In recent years, David Tepper has arguably been the most successful hedge fund manager in America.
Soros set the standard for hedge fund wealth in America, but he no longer manages one, having turned his hedge fund into a family office a few years ago.
He now manages $15 billion of hedge fund assets and is working to raise billions of dollars more in permanent capital.
Robbins’ big bet on hospital stocks like HCA Holdings HCA Holdings and Tenet Healthcare Tenet Healthcare helped fuel some eye-popping returns in 2013, including a net gain of 100% by his smaller Glenview Opportunities hedge fund.
The hedge fund firm he started in 2001 now manages $9 billion.
He is followed by James Simons, the king of quantitative traders, who has retired from his Renaissance Technologies hedge fund firm, but still plays a role there and benefits from its funds.

George Soros tops Forbes’ list of the highest-earning hedge fund managers and traders, personally making an estimated $4 billion in 2013 as his Soros Fund Management generated returns of more than 22%.
To determine the highest-earning hedge fund managers and traders of 2013, we examined hedge fund returns and worked to understand the fee and ownership structure of a wide array of money management firms.
In 2013, the 56-year-old founder of Appaloosa Management outperformed the U.S. stock market and the vast majority of hedge fund managers, with his biggest fund posting net returns of more than 42%.
The king of the rich hedge fund industry, Ray Dalio, earned an estimated $900 million in 2013 even though it was a challenging time for his Bridgewater Associates hedge fund firm, which manages some $150 billion.
In total, the 25 highest-earning hedge fund managers and traders made $24.3 billion in 2013.
In 2013, hedge fund managers and traders bet on an economic revival in Japan, laid siege to corporate boards, invested in hospitals that could benefit from Obamacare and helped make General Motors a hot stock.
While the amount of money made by the top hedge fund managers in a year like 2013 is generally notable, the earnings of one hedge fund manager in particular is bound to raise a few eyebrows.
The Kensington and Wellington funds at his Chicago-based hedge fund firm, Citadel, had a pretty good 2013, even though they trailed the U.S. stock market.
The man who helped nurture Robbins, hedge fund manager Leon Cooperman, rounds out the top 10 earning hedge fund managers of 2013.
The 28% plunge of the yellow metal in 2013 not only hurt the returns of his relatively small Gold Fund, in which he has a large stake, it also dented the returns of the gold-denominated holdings he personally keeps in his other hedge funds.
Perhaps the most remarkable performance of 2013, however, belongs to former Goldman Sachs trader David Tepper, who has been setting a new standard for hedge fund managers.
TO SEE THE FULL LIST OF THE HIGHEST-EARNING HEDGE FUND MANAGERS AND TRADERS OF 2013 PLEASE CLICK HERE.
In fact, the legend of one of the most famous hedge fund managers of all time grew last year even though he did not beat the performance of the U.S. stock market.
The greatest comeback ever? After three very tough years, John Paulson, the hedge fund manager who once pulled off a legendary trade betting against mortgage securities, came roaring back in 2013.

Hedge funds pool money from investors and invest in securities or other types of investments with the goal of getting positive returns.
Hedge funds are limited to wealthier investors who can afford the higher fees and risks of hedge fund investing, and institutional investors, including pension funds.
Hedge funds are not regulated as heavily as mutual funds and generally have more leeway than mutual funds to pursue investments and strategies that may increase the risk of investment losses.

A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives.
Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals.
As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).
They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million.

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Drawing on recent data on the performance of hedge funds, the new document outlines the benefits of hedge funds as an asset class and investment and also provides data on their returns and risk management features.
Hedge Fund Fundamentals is designed to help answer that question while providing greater understanding about the global hedge fund industry and its benefits to investors and the global economy.
This educational resource details the traditional calculation method that hedge funds use for their assets under management.

ED: Credit Arbitrage Strategies employ an investment process designed to isolate attractive opportunities in corporate fixed income securities; these include both senior and subordinated claims as well as bank debt and other outstanding obligations, structuring positions with little or no broad credit market exposure.
Macro: Currency: Discretionary strategies are reliant on the fundamental evaluation of market data, relationships and influences as they pertain primarily to currency markets including positions in global foreign exchange markets, both listed and unlisted, and as interpreted by an individual or group of individuals who make decisions on portfolio positions; strategies employ an investment process most heavily influenced by top down analysis of macroeconomic variables.
Strategies employ an investment process designed to identify opportunities in markets exhibiting trending or momentum characteristics across commodity assets classes, frequently with related ancillary exposure in commodity sensitive equities or other derivative instruments.
ED: Distressed Restructuring Strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.
In contrast to Equity Hedge strategies, the investment thesis is predicated on the yield differential realized from the securities as opposed to directional price appreciation of the underlying securities, and strategies typically contain greater than 50% of portfolio exposure to Energy Infrastructure positions.
Strategies employ an investment process focusing broadly on a wide spectrum of corporate life cycle investing, including but not limited to distressed, bankruptcy and post bankruptcy security issuance, announced acquisitions and corporate division spin-offs, asset sales and other security issuance impacting an individual capital structure focusing primarily on situations identified via fundamental research which are likely to result in a corporate transactions or other realization of shareholder value through the occurrence of some identifiable catalyst.
EH: Fundamental Growth strategies employ analytical techniques in which the investment thesis is predicated on assessment of the valuation characteristics on the underlying companies which are expected to have prospects for earnings growth and capital appreciation exceeding those of the broader equity market.
EH: Sector – Technology/Healthcare strategies employ investment processes designed to identify opportunities in securities in specific niche areas of the market in which the Manager maintain a level of expertise which exceeds that of a market generalist in identifying opportunities in companies engaged in all development, production and application of technology, biotechnology and as related to production of pharmaceuticals and healthcare industry.
RV: Fixed Income – Asset Backed includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the spread is a fixed income instrument backed physical collateral or other financial obligations (loans, credit cards) other than those of a specific corporation.
Strategies which employ an investment process designed to identify opportunities in markets exhibiting trending or momentum characteristics across currency assets classes, frequently with related ancillary exposure in sovereign fixed income.
Strategies employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently or prospectively engaged in a corporate transaction, security issuance/repurchase, asset sales, division spin-off or other catalyst oriented situation.
ED: Special Situations: Strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction, security issuance/repurchase, asset sales, division spin-off or other catalyst oriented situation.
EH: Sector – Energy/Basic Materials strategies which employ investment processes designed to identify opportunities in securities in specific niche areas of the market in which the Manager maintains a level of expertise which exceeds that of a market generalist in identifying companies engaged in the production & procurement of inputs to industrial processes, and implicitly sensitive to the direction of price trends as determined by shifts in supply and demand factors, and implicitly sensitive to the direction of broader economic trends.
RV: Yield Alternatives – Energy Infrastructure strategies employ an investment thesis which is predicated on realization of a valuation differential between related instruments in which one or multiple components of the spread contains exposure to Energy Infrastructure most typically achieved through investment in Master Limited Partnerships (MLPs), Utilities or Power Generation.
A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios.
A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios.
Strategies employ an investment process designed to isolate attractive opportunities between a variety of fixed income instruments, typically realizing an attractive spread between multiple sovereign bonds or between a corporate and risk free government bond.
Short Biased strategies may vary the investment level or the level of short exposure over market cycles, but the primary distinguishing characteristic is that the manager maintains consistent short exposure and expects to outperform traditional equity managers in declining equity markets.
RV: Yield Alternatives – Real Estate strategies employ an investment thesis which is predicated on realization of a valuation differential between related instruments in which one or multiple components of the spread contains exposure to investment in real estate directly (commercial or residential) or indirectly through Real Estate Investment Trusts (REITS).
Macro: Investment Managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets.
Strategies employ an investment process designed to isolate attractive opportunities between a variety of fixed income instruments, typically realizing an attractive spread between multiple corporate bonds or between a corporate and risk free government bond.
Macro: Discretionary Thematic strategies are primarily reliant on the evaluation of market data, relationships and influences, as interpreted by an individual or group of individuals who make decisions on portfolio positions; strategies employ an investment process most heavily influenced by top down analysis of macroeconomic variables.
Strategies employ an investment process designed to isolate attractive opportunities between a variety of fixed income instruments specifically securitized by collateral commitments which frequently include loans, pools and portfolios of loans, receivables, real estate, machinery or other tangible financial commitments.
Strategies employ an investment process based on systematic, quantitative evaluation of macroeconomic variables in which the portfolio positioning is predicated on convergence of differentials between markets, not necessarily highly correlated with each other, but currently diverging from their historical levels of correlation.
Strategies employ an investment process is predicated on a systematic, quantitative evaluation of macroeconomic variables in which the portfolio positioning is predicated on convergence of differentials between markets, not necessarily highly correlated with each other, but currently diverging from their historical levels of correlation.
Strategies employ investment processes designed to identify attractive opportunities in securities of companies which are experiencing or expected to experience abnormally high levels of growth compared with relevant benchmarks growth in earnings, profitability, sales or market share.
ED: Merger Arbitrage strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction.
RV: Fixed Income – Corporate includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the spread is a corporate fixed income instrument.
RV: Fixed Income – Convertible Arbitrage includes strategies in which the investment thesis is predicated on realization of a spread between related instruments in which one or multiple components of the spread is a convertible fixed income instrument.
Relative Value: Multi-Strategies employ an investment thesis is predicated on realization of a spread between related yield instruments in which one or multiple components of the spread contains a fixed income, derivative, equity, real estate, MLP or combination of these or other instruments.
Fixed Income: Corporate strategies differ from Event Driven: Credit Arbitrage in that the former more typically involve more general market hedges which may vary in the degree to which they limit fixed income market exposure, while the latter typically involve arbitrage positions with little or no net credit market exposure, but are predicated on specific, anticipated idiosyncratic developments.

No matter how skilled you are, or how difficult overall market conditions are, if you work for a hedge fund that loses a significant amount of money you will likely lose your job.
The first thing to realize about the pay at hedge funds is it is largely about how the fund performs.
The second thing to realize about the pay at hedge funds is that the principals and senior portfolio managers take home most of it.
They can be expected to vary sharply from year to year as capital flows between hedge funds and other investment vehicles and as returns vary.

Most hedge funds are not registered and can only be sold to carefully defined sophisticated investors.
Hedge funds and mutual funds are both “pooled” vehicles, but there are more differences than similarities.
For instance, a mutual fund is registered with the SEC, and can be sold to an unlimited number of investors.
Mutual funds may advertise freely; hedge funds may not.

Because fund managers are rewarded with performance incentive fees based on net value gains, but are not penalized on losses, some limiting measures are employed by hedge funds as a means of competing for investors, such as high water marks and hurdle rates.
In addition to management fees and incentive or performance fees, some hedge funds also charge withdrawal fees when money is removed by an investor from a hedge fund account.
In addition to management fees, hedge fund managers are typically paid a performance fee, calculated as a percentage of the profits gained by the fund under their management.
Hurdle rates, also referred to as minimum acceptable rates of return, are also used as a determining factor for hedge fund performance fees, by measuring fund performance against an external benchmark.
Hedge fund fees are often higher than those of mutual funds and they frequently involve both a management fee and a performance fee.
High water marks refer to performance fee policies that specify that the fund manager will only be paid a percentage of the profits if the net value of the fund exceeds the previous highest value achieved by the fund.

Investors who don’t have money with Pershing Square Capital Management are likely salivating at the hedge fund’s industry-leading 26 percent return from January through July.
A white paper by Commonfund, which manages nearly $25 billion for close to 1,500 endowments, pensions and other institutions, shows that putting money with the hottest hedge fund managers can work in the short term, but that sticking with them for three years or more is worse than picking managers at random.
The hedge and mutual fund manager has written that investors often try to catch short-term results in various asset classes but use a multiyear time frame, which often means they instead get hit with losing reversals—or miss winning ones—when the trade inevitably reverts to the mean.
The Absolute Return Composite Index, which aggregates hedge fund returns across all strategies, gained 3.79 percent this year through July.
No less than 97 percent of 284 institutional investors surveyed recently by Credit Suisse said they plan to be "highly active" in making hedge fund allocations during the second half of 2014.
The study also found that teasing out manager skill, or "alpha," from the general market ups and downs, or "beta," is critical to selecting hedge fund managers who will outperform.
According to industry research firm HFR, investors allocated $56.9 billion of new capital to hedge funds in the first half, pushing total global assets to more than $2.8 trillion, surpassing the previous record of $2.7 trillion from the prior quarter.
Kwait and Delano found that picking winning hedge funds produced returns of 13.29 percent after 18 months, versus an average of 10.62 percent for all funds.
But investing with Bill Ackman and other top-performing managers after a great run is probably a bad idea, according to a new study of long-term hedge fund industry performance.

Federal investigators have uncovered a flurry of communications between a Washington research firm and several hedge funds, opening a new front in an insider-trading probe focused on the firm’s 2013 investor alert about a change in government health-care policy, The Wall Street Journal reports.

The largest Americas-based hedge funds are controlling more money than ever before, according to a new analysis by Absolute Return, a hedge fund news site.
Absolute Return found that two of every three hedge funds controlling more than $1 billion increased in size this year.
Hedge funds controlled significantly less money in 2007 — before the financial crisis — with assets worth about $1.87 trillion, the WSJ reported.
In all, the global hedge fund industry is managing a record amount of money, Absolute Return noted.

Starting a hedge fund because it sounds like an easy ticket to models and bottles, because you can’t find another buy-side job, or because you think you have a brilliant investment idea but haven’t tried it yet are all surefire ways to lose money.
$100K of my friends money to start this whole hedge fund thing? I read something about Warren Buffett first 10 years when he started out by himself.
You say in the beginning “you haven’t picked the best time to start a hedge fund.” Yet, you don’t even have a date as to when this article was written.
Raising capital, setting up everything above, and figuring out your strategy are just the first steps of a long and grueling process when starting a successful hedge fund.
The actual hedge fund structure depends on whether your investors are taxable or tax-exempt, whether or not they’re US citizens, and the investment terms.
This past article was just fantastic.. Where else on the internet are you going to find a road map for starting your own hedge fund?? If my future hedge fund hits it big, I almost feel bound to make a donation to this site.
And you don’t need to be “exceptional” to trade or create a successful hedge fund.
Can you provide any resources for learning more about audits of past performance? Is there an equivalent process for real estate portfolios? I’ve worked in boutique RE PE for years and am thinking of starting my own fund or REIT, so I’m curious how someone would go about demonstrating RE acumen.
First, the bad news: you haven’t picked the best time to start a hedge fund (assuming that you are reading this anywhere in between 2011 and the present day).
I want to set up a hedge fund around an options strategy that has been working personally for 6+ months.
My husband has been a hedge fund lawyer at a top law firm for eight years.
You also need to be entrepreneurial – as the founder of your own hedge fund, not only are you a portfolio manager, you’re also a small business owner.
Though the best-known hedge fund law firms are in New York, any city with a bulge bracket bank presence will have a local firm or two known for hedge fund law.
The good news here is that IT expenses tend to be much lower for fundamentally-oriented funds with little active trading; if you’re a quant fund or you’re doing any kind of automated trading, though, you’ll need serious power and serious cash to pay for it.
I am curious on the operation side: what is the typical hedge fund in terms of number of employees/founders? My thought goes this way: say average worker pay is $350K/yr (analyst, trader, etc included), payroll is easy to reach $2M mark annually if there are more 3 founder/employees included.
Would like to start my own Hedge Fund which I am figuring I will be about 60 years old once I have gotten about 10 years experience in the industry.
If you can use your old numbers, they’ll need to reflect your investment decisions and show that the strategy used was similar to what you’re using in your new fund.

The pension fund paid $135 million in fees in the fiscal year that ended June 30 for hedge fund investments that earned 7.1 percent, contributing 0.4 percent to its total return, according to Calpers figures.
“I would expect their decision to divest from hedge funds will cause some public pension funds to re-evaluate their hedge fund strategy, although many public pension funds consider hedge funds to be a vital part of their diversified portfolios,” Brainard said yesterday by e-mail.
The California Public Employees’ Retirement System’s decision to divest its entire $4 billion from hedge funds came after officials concluded the program couldn’t be expanded enough to justify the costs.
16 (Bloomberg) — Bloomberg’s Erik Schatzker examines the decision by Calpers to divest its entire $4 billion investment in hedge funds, saying they’re too expensive and complex.
He shed speculative real estate investments and focused on private equity, emerging markets, hedge funds and public-works projects to help meet the fund’s targets.
While Calpers was one of the earliest pension funds to invest in hedge funds, it has lagged behind many of its peers in increasing investments.
The $298 billion pension, known as Calpers, said yesterday it would eliminate 24 hedge funds and six hedge fund-of-funds.
The largest U.S. pension is getting out of hedge funds even as other large public plans such as New Jersey’s add to the private portfolios.
Calpers first invested in hedge funds in 2002 to help meet target returns to cover the growing cost of government retiree benefits.
The $60 billion Massachusetts fund has 9.5 percent of assets in hedge funds.
Hedge funds have amassed a record $2.8 trillion in assets as institutional investors pour money into alternative investments.
Because of its size, Calpers is often a trend setter among pension funds on investment strategies, said Keith Brainard, research director of the National Association of State Retirement Administrators.

On November 20, the S.E.C. filed a complaint against a former SAC portfolio manager named Mathew Martoma, alleging that he’d orchestrated the largest insider trade in history—$276 million in illegal profits and avoided losses, more than five times the size of the Dell trade—by getting advance information about the clinical trial of an experimental Alzheimer’s drug.
There’s also an argument that it simply doesn’t make sense that a guy as smart as Steve Cohen, a guy who knows that the government has been watching him for years, a guy who already has more money than God, would ever take the risk of using inside information on such a huge trade.
With arrest after arrest in a massive, seven-year insider-trading investigation, U.S. Attorney Preet Bharara is getting closer to the biggest fish of them all: Steve Cohen, founder of SAC Capital, the $14 billion hedge fund, who some regard as the most successful stock picker of his time.
Splayed before five screens at his workstation on SAC’s library-quiet trading floor, Cohen himself manages only about $2 billion of the firm’s capital; the rest is handled by a hundred or so portfolio managers, known as P.M.’s, each of whom leads a small team, usually of two or three analysts, known as a “pod.” They can always see Cohen, thanks to the “Steve Cam,” a tiny camera trained on the boss sitting at his 50-foot black desk, divided into eight trading stations.
SAC’s name popped up in the early months of the Galleon investigation, all the way back in 2007, according to Bloomberg.com, when F.B.I. agents successfully “flipped” a now infamous Wall Street trader named David Slaine, who provided prosecutors with several examples of what he believed to be insider trading at SAC.
Ultimately, the government indicted Chiasson, Newman, and Horvath not just for the big Dell trade but also for conspiring to swap information on other stocks, including Nvidia.
It’s fueled, many believe, by the exorbitant fees SAC pays scores of Wall Street firms for processing its trades and other services; whereas other hedge funds trade via computer at fractions of a penny per share, SAC still does it the old-fashioned way, paying three to five cents, making it, by wide agreement, the largest payer of fees on Wall Street, $400 million a year by some estimates.
Once more a relentless U.S. attorney, this time 44-year-old Preet Bharara, has seemingly targeted the billionaire investor Steve Cohen, founder of SAC Capital Advisors, the $14 billion hedge fund based in Stamford, Connecticut.

In this case, the $100 million gain would be reduced by $4 million for that “hurdle” rate, as it is often called on Wall Street (because you have to clear that “hurdle” as the hedge fund manager before you are ever paid a dime under an arrangement like this).
The manager of the hedge fund, typically the person that created it, is paid a percentage of the profits he or she earns on the money investors have deposited with his company.
It can take the legal form of a limited liability company or a limited partnership so that if the company goes bankrupt, the creditors can’t go after the investors for more money than they’ve put into the hedge fund.
The 2 and 20 formula basically means that the hedge fund’s operating agreement calls for the hedge fund manager to receive 2% of assets and 20% of profits each year.
A hedge fund is simply a term used to describe an investment partnership setup by a money manager.
The term was originally used because the purpose of many of the first hedge funds was to make money regardless of if the market increased or decreased because the managers could either buy stocks or short them (shorting is a way to make money when a stock falls – for more information read The Basics of Shorting Stock).
Along comes a single investor that puts $100 million into my hedge fund.

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