Hedge Funds industry: Performance Characteristics, Roles, and New Challenges

I. Definition & Characteristics

a. What is a Hedge Fund?

A Hedge Fund is an investment company that is open to only a limited group of professional investors. They are intended for experienced investors and can not be publicly distributed. The reason for that is because investors are required to be aware of the risks they are taking.

The purpose of a hedge fund is to hold and to invest the money of its investors. The fund itself has no employees and no assets other than its investment portfolio and cash. The portfolio is managed by the investment manager, a separate entity which is the actual business and has employees.

b. Facts about the Hedge Fund Industry

It is hard to estimate the size of the hedge fund industry because we don’t really have statistics on hedge funds, and also because the industry is growing very rapidly.

Estimated to be a $1 trillion industry and growing at about 20% per year with approximately 8350 active hedge funds.

Largest hedge fund managers are: - JP Morgan Chase - Bridgewater Associates - Paulson & Co. - Brevan Howard - Soros Fund Management

c. What is the aim of Hedge Funds?

The primary aim of a Hedge Fund is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

To hedge means in English: to lower. Hedge funds seek to hedge some of the risks inherent in their investments by using a variety of methods.

II. Roles & Performance

a. Investments strategies used by Hedge Funds

Before someone decides to invest in a Hedge Fund, he needs to know and understand the differences between the various hedge fund strategies because all hedge funds are not the same. Each hedge fund has its own investment strategy and each strategy offers a different degree of risk, volatility and investment return.