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A Brief History of Hedge Funds
Hedging risk has been an integral part of the financial markets for many years. In the 1800s, commodity producers and merchants began using forward contracts for protection against unfavorable price changes. This system is still very active today.
The term "hedge fund" dates back to only 1949. In 1949, almost all investment strategies took only long positions. A reporter for Fortune magazine, named Alfred Winslow Jones, published an article pointing out that investors could achieve higher returns if hedging were implemented into an investment strategy. This was the beginning of the Jones model of investing.
To prove his hypothesis, Jones launched an investment partnership incorporating two investment tools into his strategy: short selling and leverage. The purpose of these two strategies was to limit risk and enhance returns simultaneously.
In addition, Jones established two important characteristics that are still part of the industry today. He used an incentive fee of 20% of profits and he kept most of his own personal money in the fund. This ensured that his personal goals and the goals of his investors were in alignment.
Exceptional results were obtained through this hedged approach. During the period from 1962 to 1966, Jones outperformed the top mutual fund by more than 85%, net of fees. The success of Jones stimulated the interest of high net worth individuals in hedge funds.
Not only did Jones attract the interest of high net worth individuals to hedge funds, but also many top money managers were drawn to hedge fund because of the unique fee structure. A 20% incentive fee made it possible for managers to earn 10 to 20 times as much in compensation when compared to long-only money management services.
Between 1966 and 1968, nearly 140 new hedge funds were launched as a consequence of the new dynamics of investing and managing money. Many of these funds, however, did not follow the Jones model of hedging risk. Instead of hedging, only leverage was used to enhance returns, ignoring the short-selling aspect that Jones employed. Using a leveraged, long-only strategy made these funds highly susceptible to the market downturn that began in late 1968. Some hedge funds dropped in value by more than 70% within two years.
Large hedge fund losses due to the 1973-1974 bear market caused many investors to turn away from hedge funds. For the next ten years, few managers could attract the necessary capital to launch new partnerships. By 1984, there were only 68 funds in existence.
In the late 1980s, a small group of extremely talented hedge fund managers, including George Soros, Michael Steinhart, and Julian Robertson, gave hedge funds a restored credibility. Despite difficult market conditions, these managers produced annual returns of greater than 50%.
Many of the worldĦs best money managers left the traditional institutional and retail investment firms because of potentially higher fees and great flexibility with managing hedge fund products. By 1990, there were over 500 hedge funds worldwide with assets of about $38 billion.
Hedge funds now represent one of the largest segments of the investment management industry. Currently, it is estimated that there are over 6,000 hedge funds in existence with total money under management in excess of $1 trillion.
Sources:
Barclay Trading Group, Ltd.
Hedge Fund Research, Inc.
BARRA RogersCasey
RISK DISCLOSURE
WHEN CONSIDERING ALTERNATIVE INVESTMENTS YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS USE LEVERAGE AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
WITH RESPECT TO ALTERNATIVE INVESTMENTS IN GENERAL, YOU SHOULD BE AWARE THAT:WITH RESPECT TO AN INVESTMENT IN A FUND, YOU SHOULD BE AWARE THAT:
- RETURNS FROM SOME ALTERNATIVE INVESTMENTS CAN BE VOLATILE.
- YOU MAY LOSE ALL OR PORTION OF YOUR INVESTMENT.
- WITH RESPECT TO SINGLE MANAGER PRODUCTS THE MANAGER HAS TOTAL TRADING AUTHORITY. THE USE OF A SINGLE MANAGER COULD MEAN A LACK OF DIVERSIFICATION AND HIGHER RISK.
- MANY ALTERNATIVE INVESTMENTS ARE SUBJECT TO SUBSTANTIAL EXPENSES THAT MUST BE OFFSET BY TRADING PROFITS AND OTHER INCOME. A PORTION OF THOSE FEES IS PAID TO CAPITAL MANAGEMENT PARTNERS, INC.
- TRADING MAY TAKE PLACE ON FOREIGN EXCHANGES THAT MAY NOT OFFER THE SAME REGULATORY PROTECTION AS US EXCHANGES.
A FUND'S OFFERING MATERIALS OR A MANAGER'S DISCLOSURE DOCUMENT DESCRIBES THE VARIOUS RISKS AND CONFLICTS OF INTEREST RELATING TO AN INVESTMENT AND TO ITS OPERATIONS. YOU SHOULD READ THOSE DOCUMENTS CAREFULLY TO DETERMINE WHETHER AN INVESTMENT IS SUITABLE FOR YOU IN LIGHT OF, AMONG OTHER THINGS, YOUR FINANCIAL SITUATION, NEED FOR LIQUIDITY, TAX SITUATION, AND OTHER INVESTMENTS.
- THERE IS OFTEN A LACK OF TRANSPARENCY AS TO THE FUND'S UNDERLYING INVESTMENTS. AS TO FUND OF FUNDS, THE FUND'S MANAGER HAS COMPLETE DISCRETION TO INVEST IN VARIOUS SUB-FUNDS WITHOUT DISCLOSURE THEREOF TO YOU OR TO US. BECAUSE OF THIS LACK OF TRANSPARENCY, THERE IS NO WAY FOR YOU TO MONITOR THE SPECIFIC INVESTMENTS MADE BY THE FUND OR TO KNOW WHETHER THE SUB-FUND INVESTMENTS ARE CONSISTENT WITH THE FUND'S HISTORIC INVESTMENT PHILOSOPHY OR RISK LEVELS.
- A FUND OF FUNDS INVESTS IN OTHER FUNDS AND FEES ARE CHARGED AT BOTH THE FUND AND SUB-FUND LEVEL. THUS THE OVERALL FEES YOU WILL PAY WILL BE HIGHER THAT YOU WOULD PAY BY INVESTING DIRECTLY IN THE SUB-FUNDS. IN ADDITION, EACH SUB-FUND CHARGES AN INCENTIVE FEE ON NEW PROFITS REGARDLESS OF WHETHER THE OVERALL OPERATIONS OF THE FUND ARE PROFITABLE.
- THERE IS NO SECONDARY MARKET FOR FUND INTERESTS. TRANSFERS OF INTERESTS ARE SUBJECT TO LIMITATIONS. THE FUND'S MANAGER MAY DENY A REQUEST TO TRANSFER IF IT DETERMINES THAT THE TRANSFER MAY RESULT IN ADVERSE LEGAL OR TAX CONSEQUENCES FOR THE FUND.
KEEP IN MIND THAT THE PAST PERFORMANCE OF ANY INVESTMENT IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. YOU SHOULD ONLY COMMIT RISK CAPITAL TO A FUND INVESTMENT. ALTERNATIVE INVESTMENT PRODUCTS, INCLUDING HEDGE FUNDS, ARE NOT FOR EVERYONE AND ENTAIL RISKS THAT ARE DIFFERENT FROM MORE TRADITIONAL INVESTMENTS. YOU SHOULD OBTAIN INVESTMENT AND TAX ADVICE FROM YOUR ADVISERS BEFORE DECIDING TO INVEST.
CAPITAL MANAGEMENT PARTNERS, INC. (CMP) HAS ENTERED INTO SELLING AGREEMENTS WITH SOME OF THE FUNDS DESCRIBED ON THIS WEBSITE, PURSUANT TO WHICH IT IS PAID FEES BY THE FUND OR ITS MANAGER IN CONNECTION WITH FUND SALES MADE BY CMP. IN ADDITION, CMP MAY ACT AS AN INTRODUCING BROKER FOR INDIVIDUALLY MANAGED FUTURES ACCOUNTS AND TO SOME OF THE FUNDS AND AS SUCH, MAY RECEIVE A PORTION OF THE COMMODITY BROKERAGE COMMISSIONS THEY PAY IN CONNECTION WITH THEIR FUTURES TRADING OR RECEIVE A PORTION OF THE INTEREST INCOME (IF ANY) EARNED ON AN ACCOUNT'S ASSETS. CERTAIN CTAS MAY ALSO PAY CMP A PORTION OF THE FEES THEY RECEIVE FROM ACCOUNTS INTRODUCED TO THEM BY CMP. BEFORE SEEKING ANY ADVISOR'S SERVICES OR MAKING AN INVESTMENT IN A FUND, INVESTORS MUST READ AND EXAMINE THOROUGHLY THE RESPECTIVE DISCLOSURE DOCUMENT OR OFFERING MEMORANDUM.
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