Hedge fund 1

Hedge fund
A hedge fund is an investment fund open to a limited range of investors that undertakes a wider range of investment
and trading activities than traditional long-only investment funds, and that, in general, pays a performance fee to its
investment manager. Every hedge fund has its own investment strategy that determines the type of investments and
the methods of investment it undertakes. Hedge funds, as a class, invest in a broad range of investments including
shares, debt and commodities. Some people consider the fund created in 1949 by Alfred Winslow Jones to be the
first hedge fund.[1]
As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments using a variety
of methods, most notably short selling and derivatives. However, the term "hedge fund" has also come to be applied
to certain funds that, as well as (or instead of) hedging certain risks, use short selling and other "hedging" methods as
a trading strategy to generate a return on their capital.
In most jurisdictions hedge funds are open only to a limited range of professional or wealthy investors who meet
certain criteria set by regulators, and are accordingly exempted from many regulations that govern ordinary
investment funds. The exempted regulations typically cover short selling, the use of derivatives and leverage, fee
structures, and the rules by which investors can remove their capital from the fund. Light regulation and the presence
of performance fees are the distinguishing characteristics of hedge funds.
The net asset value of a hedge fund can run into many billions of dollars, and the gross assets of the fund will usually
be higher still due to leverage. Hedge funds dominate certain specialty markets such as trading within derivatives
with high-yield ratings and distressed debt.[2]

History
Sociologist, author, and financial journalist Alfred W. Jones is credited with the creation of the first hedge fund in
1949.[1] Jones believed that price movements of an individual asset could be seen as having a component due to the
overall market and a component due to the performance of the asset itself. To neutralize the effect of overall market
movement, he balanced his portfolio by buying assets whose price he expected to be stronger than the market and
selling short assets he expected to be weaker than the market. He saw that price movements due to the overall market
would be cancelled out, because, if the overall market rose, the loss on shorted assets would be cancelled by the
additional gain on assets bought and vice-versa. Because the effect is to 'hedge' that part of the risk due to overall
market movements, this became known as a hedge fund.

Industry size
Estimates of industry size vary widely due to the lack of central statistics, the lack of a single definition of hedge
funds and the rapid growth of the industry. As a general indicator of scale, the industry may have managed around
$2.5 trillion at its peak in the summer of 2008.[1] The credit crunch has caused assets under management (AUM) to
fall sharply through a combination of trading losses and the withdrawal of assets from funds by investors.[3] Recent
estimates find that hedge funds have more than $2 trillion in AUM.[4] A recent survey of hedge fund administrators
indicates single manager hedge funds have over $2.5 trillion in assets under administration ($AuA)[5]
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Largest hedge fund managers

The 25 largest hedge fund managers had $519.7 billion in assets under management as of December 31, 2009. The
largest manager is JP Morgan Chase ($53.5 billion) followed by Bridgewater Associates ($43.6 billion), Paulson &
Co. ($32 billion), Brevan Howard ($27 billion), and Soros Fund Management ($27 billion).[6]

Fees
A hedge fund manager will typically receive both a management fee and a performance fee (also known as an
incentive fee) from the fund. A typical manager may charge fees of "2 and 20", which refers to a management fee of
2% of the fund's net asset value each year and a performance fee of 20% of the fund's profit.[1]

Management fees
As with other investment funds, the management fee is calculated as a percentage of the fund's net asset value.
Management fees typically range from 1% to 4% per annum, with 2% being the standard figure.[7] Management fees
are usually expressed as an annual percentage, but calculated and paid monthly or quarterly.
The business models of most hedge fund managers provide for the management fee to cover the operating costs of
the manager, leaving the performance fee for employee bonuses. However, the management fees for large funds may
form a significant part of the manager's profits.[8] Management fees associated with hedge funds have been under
much scrutiny, with several large public pension funds, notably CalPERS, calling on managers to reduce fees.

Performance fees
Performance fees (or "incentive fees") are one of the defining characteristics of hedge funds. The manager's
performance fee is calculated as a percentage of the fund's profits, usually counting both realized and unrealized
profits. By incentivising the manager to generate returns, performance fees are intended to align the interests of
manager and investor more closely than flat fees do. In the business models of most managers, the performance fee
is largely available for staff bonuses and so can be extremely lucrative for managers who perform well. Several
publications publish annual estimates of the earnings of top hedge fund managers.[9] [10] Typically, hedge funds
charge 20% of returns as a performance fee.[11] However, the range is wide with highly regarded managers charging
higher fees. For example Steven Cohen's SAC Capital Partners charges a 35-50% performance fee,[12] while Jim
Simons' Medallion Fund charged a 45% performance fee.
Average incentive fees have declined since the start of the financial crisis, with the decline being more pronounced
in funds of hedge funds (FOFs). Incentive fees for single manager funds fell to 19.2 percent (versus 19.34 percent in
Q1 08) while FOFs fell to 6.9 percent (versus 8.05 percent in Q1 08). The average incentive fee for funds launched
in 2009 was 17.6 percent, 1.6 percent below the broader industry average.[13]
Performance fees have been criticized by many people, including notable investor Warren Buffett, who believe that,
by allowing managers to take a share of profit but providing no mechanism for them to share losses, performance
fees give managers an incentive to take excessive risk rather than targeting high long-term returns. In an attempt to
control this problem, fees are usually limited by a high water mark. Ironically, Mr. Buffett charged incentive fees
until his firm was very large.
As the hedge fund remuneration structure is highly attractive it has been remarked that hedge funds are best viewed
"... not as a unique asset class but as a unique ‘fee structure’."
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High water marks

A high water mark (or "loss carryforward provision") is often applied to a performance fee calculation. This means
that the manager receives performance fees only on increases in the net asset value (NAV) of the fund in excess of
the highest net asset value it has previously achieved. For example, if a fund were launched at a NAV per share of
$100, which then rose to $120 in its first year, a performance fee would be payable on the $20 return for each share.
If the next year it dropped to $110, no fee would be payable. If in the third year the NAV per share rose to $130, a
performance fee would be payable only on the $10 profit from $120 (the high water mark) to $130, rather than on
the full return during that year from $110 to $130.
High water marks are intended to link the manager's interests more closely to those of investors and to reduce the
incentive for managers to seek volatile trades.. If a high water mark is not used, a fund that ends alternate years at
$100 and $110 would generate a performance fee every other year, enriching the manager but not the investors.
The mechanism does not provide complete protection to investors: A manager who has lost a significant percentage
of the fund's value may close the fund and start again with a clean slate, rather than continue working for no
performance fee until the loss has been made up for.[14] This tactic is dependent on the manager's ability to persuade
investors to trust him or her with their money in the new fund.

Hurdle rates
Some managers specify a hurdle rate, signifying that they will not charge a performance fee until the fund's
annualized performance exceeds a benchmark rate, such as T-bill yield, LIBOR or a fixed percentage.[1] This links
performance fees to the ability of the manager to provide a higher return than an alternative, usually lower risk,
investment.
With a "soft" hurdle, a performance fee is charged on the entire annualized return if the hurdle rate is cleared. With a
"hard" hurdle, a performance fee is only charged on returns above the hurdle rate. Prior to the credit crisis of 2008,
demand for hedge funds tended to outstrip supply, making hurdle rates relatively rare.

Withdrawal/redemption fees
Some funds charge investors a redemption fee (or "withdrawal fee" or "surrender charge") if they withdraw money
from the fund. A redemption fee is often charged only during a specified period of time (typically a year) following
the date of investment, or only to withdrawals representing a specified portion of an investment.
The purpose of the fee is to discourage short-term investment in the fund, thereby reducing turnover and allowing the
use of more complex, illiquid or long-term strategies. The fee may also dissuade investors from withdrawing funds
after periods of poor performance.
Unlike management and performance fees, redemption fees are usually retained by the fund and therefore benefit the
remaining investors rather than the manager.

Strategies
Hedge funds employ many different trading strategies, which are classified in many different ways, with no standard
system used. A hedge fund will typically commit itself to a particular strategy, particular investment types and
leverage limits via statements in its offering documentation, thereby giving investors some indication of the nature of
the particular fund.
Each strategy can be said to be built from a number of different elements:
• Style: global macro, directional, event-driven, relative value (arbitrage), managed futures (CTA)
• Market: equity, fixed income, commodity, currency
• Instrument: long/short, futures, options, swaps
• Exposure: directional, market neutral
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• Sector: emerging market, technology, healthcare etc.

• Method: discretionary/qualitative (where the individual investments are selected by managers),
systematic/quantitative (or "quant" - where the investments are selected according to numerical methods using a
computerized system)
• Diversification: multi-manager, multi-strategy, multi-fund, multi-market
The four main strategy groups are based on the investment style and have their own risk and return characteristics.
The most common label for a hedge fund is "long/short equity", meaning that the fund takes both long and short
positions in shares traded on public stock exchanges.

Global macro
(Macro, Trading) Global Macro funds attempt to anticipate global macroeconomic events, generally using all
markets and instruments to generate a return.
• Discretionary macro - trading is carried out by investment managers selecting investments, instead of being
generated by software.
• Systematic macro - trading is carried out using mathematical models, executed by software without any human
intervention other than the initial programming of the software.
• Commodity Trading Advisors (CTA, Managed futures, Trading) - the fund trades in futures (or options) in
commodity markets.
• Systematic diversified - the fund trades in diversified markets.
• Systematic currency - the fund trades in currency markets.
• Trend following - the fund attempts to profit from following long-term or short-term trends.
• Non-trend following (Counter trend) - the fund attempts to profit from anticipating reversals in such trends.
• Multi-strategy - the fund uses a combination of strategies.

Directional
(Equity hedge) Hedged investments with exposure to the equity market.
• Long/short equity (Equity hedge) - long equity positions hedged with short sales of stocks or stock market index
options.
• Emerging markets - specialized in emerging markets, such as China, India etc.
• Sector funds - expertise in niche areas such as technology, healthcare, biotechnology, pharmaceuticals, energy,
basic materials.
• Fundamental growth - invest in companies with more earnings growth than the broad equity market.
• Fundamental value - invest in undervalued companies.
• Quantitative Directional - equity trading using quantitative techniques.
• Short bias - take advantage of declining equity markets using short positions.
• Multi-strategy - diversification through different styles to reduce risk.
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Event-driven
(Special situations) Exploit pricing inefficiencies caused by anticipated specific corporate events.
• Distressed securities (Distressed debt) - specialized in companies trading at discounts to their value because of
(potential) bankruptcy.
• Merger arbitrage (Risk arbitrage) - exploit pricing inefficiencies between merging companies.
• Special situations - specialized in restructuring companies or companies engaged in a corporate transaction.
• Multi-strategy - diversification through different styles to reduce risk.
• Credit arbitrage - specialized in corporate fixed income securities.
• Regulation D - specialized in private equities.
• Activist - take large positions in companies and use the ownership to be active in the management

Relative value
(Arbitrage, Market neutral) Exploit pricing inefficiencies between related assets that are mispriced.
• Fixed income arbitrage - exploit pricing inefficiencies between related fixed income securities.
• Equity market neutral (Equity arbitrage) - being market neutral by maintaining a close balance between long
and short positions.
• Convertible arbitrage - exploit pricing inefficiencies between convertible securities and the corresponding
stocks.
• Fixed income corporate - fixed income arbitrage strategy using corporate fixed income instruments.
• Asset-backed securities (Fixed-Income asset-backed) - fixed income arbitrage strategy using asset-backed
securities.
• Credit long / short - as long / short equity but in credit markets instead of equity markets.
• Statistical arbitrage - equity market neutral strategy using statistical models.
• Volatility arbitrage - exploit the change in implied volatility instead of the change in price.
• Yield alternatives - non-fixed income arbitrage strategies based on the yield instead of the price.
• Multi-strategy - diversification through different styles to reduce risk.
• Regulatory arbitrage - the practice of taking advantage of regulatory differences between two or more markets.

Miscellaneous
• Fund of hedge funds (Multi-manager) - a hedge fund with a diversified portfolio of numerous underlying hedge
funds.
• Fund of fund of hedge funds (F3, F cube) - a fund invested in other funds of hedge funds.
• Multi-strategy - a hedge fund exploiting a combination of different hedge fund strategies to reduce market risk.
• Multi-manager - a hedge fund wherein the investment is spread along separate sub-managers investing in their
own strategy.
• 130-30 funds - unhedged equity fund with 130% long and 30% short positions, the market exposure is 100%.
• Long-only absolute return funds - partly hedged fund excluding short selling but allow derivatives.
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Hedge fund risk

According to hedge fund legend and authority, Paul Steinborn, investing in certain types of hedge fund can be a
riskier proposition than investing in a regulated fund, despite a "hedge" being a means of reducing the risk of a bet or
investment. Many hedge funds have some of these characteristics:
Leverage - in addition to money invested into the fund by investors, a hedge fund will typically borrow money
or trade on margin, with certain funds borrowing sums many times greater than the initial investment. If a
hedge fund has borrowed $9 for every $1 received from investors, a loss of only 10% of the value of the
investments of the hedge fund will wipe out 100% of the value of the investor's stake in the fund, once the
creditors have called in their loans. In September 1998, shortly before its collapse, Long-Term Capital
Management had $125 billion of assets on a base of $4 billion of investors' money, a leverage of over 30
times. It also had off-balance sheet positions with a notional value of approximately $1 trillion.[15]
Short selling - due to the nature of short selling, the losses that can be incurred on a losing bet are in theory
limitless, unless the short position directly hedges a corresponding long position. Ordinary funds very rarely
use short selling in this way.
Appetite for risk - hedge funds are more likely than other types of funds to take on underlying investments
that carry high degrees of risk, such as high yield bonds, distressed securities, and collateralized debt
obligations based on sub-prime mortgages.
Lack of transparency - hedge funds are private entities with few public disclosure requirements. It can
therefore be difficult for an investor to assess trading strategies, diversification of the portfolio, and other
factors relevant to an investment decision.
Lack of regulation - hedge fund managers are, in some jurisdictions, not subject to as much oversight from
financial regulators as regulated funds, and therefore some may carry undisclosed structural risks.
Short volatility - certain hedge fund strategies involve writing out of the money call or put options. If these
expire in the money the fund may make large losses.
Investors in hedge funds are, in most countries, required to be sophisticated investors who are assumed to be aware
of these risks, and willing to take these risks because of the corresponding rewards: Leverage amplifies profits as
well as losses; short selling opens up new investment opportunities; riskier investments typically provide higher
returns; secrecy helps to prevent imitation by competitors; and being unregulated reduces costs and allows the
investment manager more freedom to make decisions on a purely commercial basis.
One approach to diagnosing hedge fund risk is operational due diligence.

Hedge fund structure

A hedge fund is a vehicle for holding and investing 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, which is
the actual business and has employees.
As well as the investment manager, the functions of a hedge fund are delegated to a number of other service
providers. The most common service providers are:
Prime broker – prime brokerage services include lending money, acting as counterparty to derivative
contracts, lending securities for the purpose of short selling, trade execution, clearing and settlement. Many
prime brokers also provide custody services. Prime brokers are typically parts of large investment banks.
Administrator – the administrator typically deals with the issue and redemption of interests and shares,
calculates the net asset value of the fund, and performs related back office functions. In some funds,
particularly in the U.S., some of these functions are performed by the investment manager, a practice that
gives rise to a potential conflict of interest inherent in having the investment manager both determine the NAV
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and benefit from its increase through performance fees. Outside of the U.S., regulations often require this role
to be taken by a third party.
Distributor - the distributor is responsible for marketing the fund to potential investors. Frequently, this role is
taken by the investment manager.

Domicile
The legal structure of a specific hedge fund – in particular its domicile and the type of legal entity used – is usually
determined by the tax environment of the fund’s expected investors. Regulatory considerations will also play a role.
Many hedge funds are established in offshore financial centres so that the fund can avoid paying tax on the increase
in the value of its portfolio. An investor will still pay tax on any profit it makes when it realizes its investment, and
the investment manager, usually based in a major financial centre, will pay tax on the fees that it receives for
managing the fund.
Around 60% of the number of hedge funds in 2009 were registered in offshore locations. The Cayman Islands was
the most popular registration location and accounted for 39% of the number of global hedge funds. It was followed
by Delaware (US) 27%, British Virgin Islands 7% and Bermuda 5%. Around 5% of global hedge funds are
registered in the EU, primarily in Ireland and Luxembourg.[16]

Investment manager locations

In contrast to the funds themselves, investment managers are primarily located onshore in order to draw on the major
pools of financial talent and to be close to investors. With the bulk of hedge fund investment coming from the U.S.
East coast – principally New York City and the Gold Coast area of Connecticut – this has become the leading
location for hedge fund managers. It was estimated there were 7,000 investment managers in the United States in
2004.[17]
London is Europe’s leading centre for hedge fund managers, with three-quarters of European hedge fund
investments, about $400 billion, at the end of 2009. Asia, and more particularly China, is taking on a more important
role as a source of funds for the global hedge fund industry. The UK and the U.S. are leading locations for
management of Asian hedge funds' assets with around a quarter of the total each.[18]

The legal entity

Limited partnerships are principally used for hedge funds aimed at US-based investors who pay tax, as the investors
will receive relatively favorable tax treatment in the US. The general partner of the limited partnership is typically
the investment manager (though is sometimes an offshore corporation) and the investors are the limited partners.
Offshore corporate funds are used for non-U.S. investors and U.S. entities that do not pay tax (such as pension
funds), as such investors do not receive the same tax benefits from investing in a limited partnership. Unit trusts are
typically marketed to Japanese investors. Other than taxation, the type of entity used does not have a significant
bearing on the nature of the fund.
Many hedge funds are structured as master-feeder funds. In such a structure, the investors will invest into a feeder
fund, which will, in turn, invest all of its assets into the master fund. The assets of the master fund will then be
managed by the investment manager in the usual way. This allows several feeder funds (e.g. an offshore corporate
fund, a U.S. limited partnership and a unit trust) to invest into the same master fund, allowing an investment manager
the benefit of managing the assets of a single entity while giving all investors the best possible tax treatment.
The investment manager, which will have organized the establishment of the hedge fund, may retain an interest in
the hedge fund, either as the general partner of a limited partnership or as the holder of “founder shares” in a
corporate fund. Founder shares typically have no economic rights, and voting rights over only a limited range of
issues, such as selection of the investment manager. The fund’s strategic decisions are taken by the board of directors
Hedge fund 8

of the fund, which is independent but generally loyal to the investment manager.

Open-ended nature
Hedge funds are typically open-ended, in that the fund will periodically issue additional partnership interests or
shares directly to new investors, the price of each being the net asset value (“NAV”) per interest/share. To realize the
investment, the investor will redeem the interests or shares at the NAV per interest/share prevailing at that time.
Therefore, if the value of the underlying investments has increased (and the NAV per interest/share has therefore
also increased) then the investor will receive a larger sum on redemption than it paid on investment. Investors do not
typically trade shares or interests among themselves and hedge funds do not typically distribute profits to investors
before redemption. This contrasts with a closed-ended fund, which has a limited number of shares which are traded
among investors, and which distributes its profits.

Side pockets
Where a hedge fund holds assets that are hard to value reliably or are relatively illiquid (in comparison to the
redemption terms of the fund itself), the fund may employ a "side pocket". A side pocket is a mechanism whereby
the fund segregates the illiquid assets from the main portfolio of the fund and issues investors with a new class of
interests or shares which participate only in the assets in the side pocket. Those interests/shares cannot be redeemed
by the investor. Once the fund is able to sell the side pocket assets, the fund will generally redeem the side pocket
interests/shares and pay investors the proceeds.
Side pockets are designed to address issues relating to the need to value an investor's holding in the fund if they
choose to redeem. If an investor redeems when certain assets cannot be valued or sold, the fund cannot be confident
that the calculation of his redemption proceeds would be accurate. Moreover, his redemption proceeds could only be
obtained by selling the liquid assets of the fund. If the illiquid assets subsequently turned out to be worth less than
expected, the remaining investors would bear the full loss while the redeemed investor would have borne none. Side
pockets therefore allow a fund to ensure that all investors in the fund at the time the relevant assets became illiquid
will bear any loss on them equally and allow the fund to continue subscriptions and redemptions in the meantime in
respect of the main portfolio. A similar problem, inverted, applies to subscriptions during the same period.
Side pockets are most commonly used by funds as an emergency measure. They were used extensively following the
collapse of Lehman Brothers in September 2008, when the market for certain types of assets held by hedge funds
collapsed, preventing the funds from selling or obtaining a market value for the assets.
Specific types of fund may also use side pockets in the ordinary course of their business. A fund investing in
insurance products, for example, may routinely side pocket securities linked to natural disasters following the
occurrence of such a disaster. Once the damage has been assessed, the security can again be valued with some
accuracy.

Listed funds
Corporate hedge funds sometimes list their shares on smaller stock exchanges, such as the Irish Stock Exchange, as
this provides a low level of regulatory oversight that is required by some investors. Shares in the listed hedge fund
are not generally traded on the exchange.
A fund listing is distinct from the listing or initial public offering (“IPO”) of shares in an investment manager.
Although widely reported as a "hedge-fund IPO",[19] the IPO of Fortress Investment Group LLC was for the sale of
the investment manager, not of the hedge funds that it managed.[20]
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Regulatory issues
Part of what gives hedge funds their competitive edge, and their cachet in the public imagination, is that they straddle
multiple definitions and categories; some aspects of their dealings are well-regulated, while others are unregulated or
at best quasi-regulated.

U.S. regulation
The typical public investment company in the United States is required to be registered with the U.S. Securities and
Exchange Commission (SEC). Mutual funds are the most common type of registered investment companies. Aside
from registration and reporting requirements, investment companies are subject to strict limitations on short-selling
and the use of leverage. There are other limitations and restrictions placed on public investment company managers,
including the prohibition on charging incentive or performance fees.
Although hedge funds are investment companies, they have avoided the typical regulations for investment
companies because of exceptions in the laws. The two major exemptions are set forth in Sections 3(c)1 and 3(c)7 of
the Investment Company Act of 1940. Those exemptions are for funds with 100 or fewer investors (a "3(c) 1 Fund")
and funds where the investors are "qualified purchasers" (a "3(c) 7 Fund").[21] A qualified purchaser is an individual
with over US$5,000,000 in investment assets. (Some institutional investors also qualify as accredited investors or
qualified purchasers.)[22] A 3(c)1 Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an
unlimited number of investors. The Securities Act of 1933 disclosure requirements apply only if the company seeks
funds from the general public, and the quarterly reporting requirements of the Securities Exchange Act of 1934 are
only required if the fund has more than 499 investors.[23] A 3(c)7 fund with more than 499 investors must register its
securities with the SEC.[24]
In order to comply with 3(c)(1) or 3(c)(7), hedge funds raise capital via private placement under the Securities Act of
1933, and normally the shares sold do not have to be registered under Regulation D. Although it is possible to have
non-accredited investors in a hedge fund, the exemptions under the Investment Company Act, combined with the
restrictions contained in Regulation D, effectively require hedge funds to be offered solely to accredited investors.[25]
An accredited investor is an individual person with a minimum net worth of $1,000,000 or, alternatively, a minimum
income of US$200,000 in each of the last two years and a reasonable expectation of reaching the same income level
in the current year. For banks and corporate entities, the minimum net worth is $5,000,000 in invested assets.[25]
There have been attempts to register hedge fund investment managers. There are numerous issues surrounding these
proposed requirements. A client who is charged an incentive fee must be a "qualified client" under Advisers Act
Rule 205-3. To be a qualified client, an individual must have US$750,000 in assets invested with the adviser or a net
worth in excess of US$1.5 million, or be one of certain high-level employees of the investment adviser.[26]
In December 2004, the SEC issued a rule change that required most hedge fund advisers to register with the SEC by
February 1, 2006, as investment advisers under the Investment Advisers Act.[27] The requirement, with minor
exceptions, applied to firms managing in excess of US$25,000,000 with over 14 investors. 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.[28] The new rule was controversial, with two commissioners dissenting.[29] The rule change
was challenged in court by a hedge fund manager, and, in June 2006, the U.S. Court of Appeals for the District of
Columbia overturned it and sent it back to the agency to be reviewed. See Goldstein v. SEC [30]. In response to the
court decision, in 2007 the SEC adopted Rule 206(4)-8. Rule 206(4)-8, 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.[31]
In February 2007, the President's Working Group on Financial Markets rejected further regulation of hedge funds
and said that the industry should instead follow voluntary guidelines.[32] [33] [34] In November 2009 the House
Financial Services Committee passed a bill that would allow states to oversee hedge funds and other investment
advisors with $100m or less in assets under management, leaving larger investment managers up to the Securities
Hedge fund 10

and Exchange Commission. Because the SEC currently regulates advisers with $25m or more under management,
the bill would shift 43% of these companies, or roughly 710, back over to state oversight[35]

Comparison to U.S. private equity funds

Hedge funds are similar to private equity funds in many respects. Both are lightly regulated, private pools of capital
that invest in securities and compensate their managers with a share of the fund's profits. Most hedge funds invest in
relatively liquid assets, and permit investors to enter or leave the fund, perhaps requiring some months notice.
Private equity funds invest primarily in very illiquid assets such as early-stage companies and so investors are
"locked in" for the entire term of the fund. Hedge funds often invest in private equity companies' acquisition funds.
Between 2004 and February 2006, some hedge funds adopted 25-month lock-up rules expressly to exempt
themselves from the SEC's new registration requirements and cause them to fall under the registration exemption
that had been intended to exempt private equity funds.

Comparison to U.S. mutual funds

Like hedge funds, mutual funds are pools of investment capital (i.e., money people want to invest). However, there
are many differences between the two, including:
• Mutual funds are regulated by the SEC, while hedge funds are not
• A hedge fund investor must be an accredited investor with certain exceptions (employees, etc.)
• Mutual funds must price and be liquid on a daily basis
Some hedge funds that are based offshore report their prices to the Financial Times, but for most there is no method
of ascertaining pricing on a regular basis. In addition, mutual funds must have a prospectus available to anyone that
requests one (either electronically or via U.S. postal mail), and must disclose their asset allocation quarterly, whereas
hedge funds do not have to abide by these terms.
Hedge funds also ordinarily do not have daily liquidity, but rather "lock up" periods of time where the total returns
are generated (net of fees) for their investors and then returned when the term ends, through a passthrough requiring
CPAs and U.S. Tax W-forms. Hedge fund investors tolerate these policies because hedge funds are expected to
generate higher total returns for their investors versus mutual funds.
Recently, however, the mutual fund industry has created products with features that have traditionally been found
only in hedge funds.
Mutual funds that utilize some of the trading strategies noted above have appeared. Grizzly Short Fund (GRZZX),
for example, is always net short, while Arbitrage Fund (ARBFX) specializes in merger arbitrage. Such funds are
SEC regulated, but they offer hedge fund strategies and protection for mutual fund investors.
Also, a few mutual funds have introduced performance-based fees, where the compensation to the manager is based
on the performance of the fund. However, under Section 205(b) of the Investment Advisers Act of 1940, such
compensation is limited to so-called "fulcrum fees".[36] Under these arrangements, fees can be performance-based so
long as they increase and decrease symmetrically.
For example, the TFS Capital Small Cap Fund (TFSSX) has a management fee that behaves, within limits and
symmetrically, similarly to a hedge fund "0 and 50" fee: A 0% management fee coupled with a 50% performance fee
if the fund outperforms its benchmark index. However, the 125 bp base fee is reduced (but not below zero) by 50%
of underperformance and increased (but not to more than 250 bp) by 50% of outperformance.[37]
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Proposed U.S. regulation

Hedge funds are exempt from regulation in the United States. Several bills have been introduced in the 110th
Congress (2007–08), however, relating to such funds. Among them are:
• S. 681, a bill to restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal
taxation;
• H.R. 3417, which would establish a Commission on the Tax Treatment of Hedge Funds and Private Equity to
investigate imposing regulations;
• S. 1402, a bill to amend the Investment Advisors Act of 1940, with respect to the exemption to registration
requirements for hedge funds; and
• S. 1624, a bill to amend the Internal Revenue Code of 1986 to provide that the exception from the treatment of
publicly traded partnerships as corporations for partnerships with passive-type income shall not apply to
partnerships directly or indirectly deriving income from providing investment adviser and related asset
management services.
• S. 3268, a bill to amend the Commodity Exchange Act to prevent excessive price speculation with respect to
energy commodities. The bill would give the federal regulator of futures markets the resources to detect, prevent,
and punish price manipulation and excessive speculation.
None of the bills has received serious consideration yet.

UK regulation
Hedge funds managed by UK hedge fund managers are always incorporated outside the UK, usually in an offshore
location such as the Cayman Islands, and are not directly regulated by the UK authorities. However, a hedge fund
manager based in the UK is required to be authorised and regulated by the UK's Financial Services Authority, and
accordingly the UK hedge fund industry is regulated.
As the UK is part of the European Union, the UK hedge fund industry will also be affected by the EU's Directive on
Alternative Investment Fund Managers.

Offshore regulation
Many offshore centers are keen to encourage the establishment of hedge funds. To do this they offer some
combination of professional services, a favorable tax environment, and business-friendly regulation. Major centers
include Cayman Islands, Dublin, Luxembourg, British Virgin Islands, and Bermuda. The Cayman Islands have been
estimated to be home to about 75% of world’s hedge funds, with nearly half the industry's estimated $1.225 trillion
AUM.[38]
Hedge funds have to file accounts and conduct their business in compliance with the requirements of these offshore
centres. Typical rules concern restrictions on the availability of funds to retail investors (Dublin), protection of client
confidentiality (Luxembourg) and the requirement for the fund to be independent of the fund manager.

Hedge fund indices

There are many indices that track the hedge fund industry, and these fall into three main categories. In their historical
order of development they are Non-investable, Investable and Clone.
In traditional equity investment, indices play a central and unambiguous role. They are widely accepted as
representative, and products such as futures and ETFs provide investable access to them in most developed markets.
However hedge funds are illiquid, heterogeneous and ephemeral, which makes it hard to construct a satisfactory
index. Non-investable indices are representative, but, due to various biases, their quoted returns may not be available
in practice. Investable indices achieve liquidity at the expense of limited representativeness. Clone indices seek to
replicate some statistical properties of hedge funds but are not directly based on them. None of these approaches is
Hedge fund 12

wholly satisfactory.

Non-investable indices
Non-investable indices are indicative in nature, and aim to represent the performance of some database of hedge
funds using some measure such as mean, median or weighted mean from a hedge fund database. The databases have
diverse selection criteria and methods of construction, and no single database captures all funds. This leads to
significant differences in reported performance between different indices.
Although they aim to be representative, non-investable indices suffer from a lengthy and largely unavoidable list of
biases.
Funds’ participation in a database is voluntary, leading to self-selection bias because those funds that choose to
report may not be typical of funds as a whole. For example, some do not report because of poor results or because
they have already reached their target size and do not wish to raise further money.
The short lifetimes of many hedge funds means that there are many new entrants and many departures each year,
which raises the problem of survivorship bias. If we examine only funds that have survived to the present, we will
overestimate past returns because many of the worst-performing funds have not survived, and the observed
association between fund youth and fund performance suggests that this bias may be substantial.
When a fund is added to a database for the first time, all or part of its historical data is recorded ex-post in the
database. It is likely that funds only publish their results when they are favorable, so that the average performances
displayed by the funds during their incubation period are inflated. This is known as "instant history bias” or “backfill
bias”.

Investable indices
Investable indices are an attempt to reduce these problems by ensuring that the return of the index is available to
shareholders. To create an investable index, the index provider selects funds and develops structured products or
derivative instruments that deliver the performance of the index. 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.
To make the index investable, hedge funds must agree to accept investments on the terms given by the constructor.
To make the index liquid, these terms must include provisions for redemptions that some managers may consider too
onerous to be acceptable. This means that investable indices do not represent the total universe of hedge funds, and
most seriously they may under-represent more successful managers.

Hedge fund replication

The most recent addition to the field approach the problem in a different manner. 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. This model is then used to construct an investable portfolio of those assets. This makes the index investable,
and in principle they can be as representative as the hedge fund database from which they were constructed.
However, they rely on a statistical modelling process. As replication indices have a relatively short history it is not
yet possible to know how reliable this process will be in practice, although initially indications are that much of
hedge fund returns can be replicated in this manner without the problems of illiquidity, transparency and fraud that
exist in direct hedge fund investments.
Hedge fund 13

Debates and controversies

Systemic risk
Hedge funds came under heightened scrutiny as a result of the failure of Long-Term Capital Management (LTCM)
in 1998, which necessitated a bailout coordinated (but not financed) by the U.S. Federal Reserve. Critics have
charged that hedge funds pose systemic risks highlighted by the LTCM disaster. The excessive leverage (through
derivatives) that can be used by hedge funds to achieve their return[39] is outlined as one of the main factors of the
hedge funds' contribution to systemic risk.
The ECB (European Central Bank) issued a warning in June 2006 on hedge fund risk for financial stability and
systemic risk: "... the increasingly similar positioning of individual hedge funds within broad hedge fund investment
strategies is another major risk for financial stability, which warrants close monitoring despite the essential lack of
any possible remedies. Some believe that broad hedge fund investment strategies have also become increasingly
correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades."[40] [41]
However the ECB statement has been disputed by parts of the financial industry.[42]
The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in June
2007.[43] The funds invested in mortgage-backed securities. The funds' financial problems necessitated an infusion
of cash into one of the funds from Bear Stearns but no outside assistance. It was the largest fund bailout since Long
Term Capital Management's collapse in 1998. The U.S. Securities and Exchange commission is investigating.[44]

Transparency
As private, lightly regulated entities, hedge funds are not obliged to disclose their activities to third parties. This is in
contrast to a regulated mutual fund (or unit trust), which will typically have to meet regulatory requirements for
disclosure. An investor in a hedge fund usually has direct access to the investment advisor of the fund, and may
enjoy more personalized reporting than investors in retail investment funds. This may include detailed discussions of
risks assumed and significant positions. However, this high level of disclosure is not available to non-investors,
contributing to hedge funds' reputation for secrecy, while some hedge funds have very limited transparency even to
investors.
Funds may choose to report some information in the interest of recruiting additional investors. Much of the data
available in consolidated databases is self-reported and unverified.[45] A study was done on two major databases
containing hedge fund data. The study noted that 465 common funds had significant differences in reported
information (e.g. returns, inception date, net assets value, incentive fee, management fee, investment styles, etc.) and
that 5% of return numbers and 5% of NAV numbers were dramatically different.[46] With these limitations, investors
have to do their own research, which may cost on the scale of $50,000.[47]
Some hedge funds, mainly American, do not use third parties either as the custodian of their assets or as their
administrator (who will calculate the NAV of the fund). This can lead to conflicts of interest, and in extreme cases
can assist fraud. In a recent example, Kirk Wright of International Management Associates has been accused of mail
fraud and other securities violations[48] which allegedly defrauded clients of close to $180 million.[49] In December
2008, Bernard Madoff was arrested for running a $50 billion Ponzi scheme.[50] While Madoff did not run a hedge
fund, several hedge funds (so called feeder funds), of which the largest was Fairfield Sentry, were overseen by
Madoff and practically all their funds were funnelled to Madoff. This case clearly does illustrate the value of
independent verification of assets.
Hedge fund 14

Market capacity
Alpha appears to have been becoming rarer for two related reasons. First, the increase in traded volume may have
been reducing the market anomalies that are a source of hedge fund performance. Second, the remuneration model is
attracting more managers, which may dilute the talent available in the industry, though these causes are disputed.[51]

U.S. investigations
In June 2006, the Senate Judiciary Committee began an investigation into the links between hedge funds and
independent analysts.[52]
The U.S. Securities and Exchange Commission (SEC) is also focusing resources on investigating insider trading by
hedge funds.[53] [54]

Performance measurement
Performance statistics are hard to obtain because of restrictions on advertising and the lack of centralised collection.
However summaries are occasionally available in various journals.[55] [56]
The question of how performance should be adjusted for the amount of risk that is being taken has led to literature
that is both abundant and controversial. Traditional indicators (Sharpe, Treynor, Jensen) work best when returns
follow a symmetrical distribution. In that case, risk is represented by the standard deviation. Unfortunately, hedge
fund returns are not normally distributed, and hedge fund return series are autocorrelated. Consequently, traditional
performance measures suffer from theoretical problems when they are applied to hedge funds, making them even
less reliable than is suggested by the shortness of the available return series.[1]
Several innovative performance measures have been introduced in an attempt to deal with this problem: Modified
Sharpe ratio by Gregoriou and Gueyie (2003), Omega by Keating and Shadwick (2002), Alternative Investments
Risk Adjusted Performance (AIRAP) by Sharma (2004), and Kappa by Kaplan and Knowles (2004). However, there
is no consensus on the most appropriate absolute performance measure, and traditional performance measures are
still widely used in the industry.[1]

Value in mean/variance efficient portfolios

According to Modern Portfolio Theory, rational investors will seek to hold portfolios that are mean/variance efficient
(that is, portfolios offer the highest level of return per unit of risk, and the lowest level of risk per unit of return). One
of the attractive features of hedge funds (in particular market neutral and similar funds) is that they sometimes have a
modest correlation with traditional assets such as equities. This means that hedge funds have a potentially quite
valuable role in investment portfolios as diversifiers, reducing overall portfolio risk.[1]
However, there are three reasons why one might not wish to allocate a high proportion of assets into hedge funds.
These reasons are:
1. Hedge funds are highly individual and it is hard to estimate the likely returns or risks;
2. Hedge funds’ low correlation with other assets tends to dissipate during stressful market events, making them
much less useful for diversification than they may appear; and
3. Hedge fund returns are reduced considerably by the high fee structures that are typically charged.
Several studies have suggested that hedge funds are sufficiently diversifying to merit inclusion in investor portfolios,
but this is disputed for example by Mark Kritzman[57] [58] who performed a mean-variance optimization calculation
on an opportunity set that consisted of a stock index fund, a bond index fund, and ten hypothetical hedge funds. The
optimizer found that a mean-variance efficient portfolio did not contain any allocation to hedge funds, largely
because of the impact of performance fees. To demonstrate this, Kritzman repeated the optimization using an
assumption that the hedge funds incurred no performance fees. The result from this second optimization was an
allocation of 74% to hedge funds.
Hedge fund 15

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.[1] For
example, in January-September 2008, the Credit Suisse/Tremont Hedge Fund Index[59] was down 9.87%. According
to the same index series, even "dedicated short bias" funds had a return of -6.08% during September 2008. In other
words, even though low average correlations may appear to make hedge funds attractive this may not work in
turbulent period, for example around the collapse of Lehman Brothers in 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. The S&P
500 total return was -37.00% in 2008, and that was one of the best performing equity indices in the world. Several
equity markets lost more than half their value. Most foreign and domestic corporate debt indices also suffered in
2008, posting losses significantly worse than the average hedge fund. Mutual funds also performed much worse than
hedge funds in 2008. According to Lipper, the average U.S. domestic equity mutual fund decreased 37.6% in 2008.
The average international equity mutual fund declined 45.8%. The average sector mutual fund dropped 39.7%. The
average China mutual fund declined 52.7% and the average Latin America mutual fund plummeted 57.3%. Real
estate, both residential and commercial, also suffered significant drops in 2008. In summary, hedge funds
outperformed many similarly-risky investment options in 2008.

Notable hedge fund firms

• Amaranth Advisors
• Bridgewater Associates
• Citadel Investment Group
• D.E. Shaw
• Fortress Investment Group
• GLG Partners
• Long-Term Capital Management
• Man Group
• Marshall Wace
• Renaissance Technologies
• SAC Capital Advisors
• Soros Fund Management
• Mea Bona LLC
• The Children's Investment Fund Management (TCI)

Notes
[1] "AIMA Roadmap to Hedge Funds" (http:/ / www. aima. org/ download. cfm/ docid/ 6133E854-63FF-46FC-95347B445AE4ECFC). .
Retrieved 2010-08-14.
[2] Karmin, Craig (August 30, 2007). "Hedge Funds Do About 60% Of Bond Trading, Study Says" (http:/ / online. wsj. com/ article/
SB118843899101713108. html). The Wall Street Journal. . Retrieved 2007-12-19.Durbin Hunter
[3] Kishan, Saijel (2008-11-27). "Satellite Halts Hedge Fund Withdrawals, Fires 30 After Losses" (http:/ / www. bloomberg. com/ apps/
news?pid=20601087& sid=atrq052in_gE& refer=home). Bloomberg. . Retrieved 2010-08-14.
[4] "Hedge Fund Assets Hit $2 Trillion" (http:/ / www. finalternatives. com/ node/ 9918). FINalternatives. 2009-12-09. . Retrieved 2010-08-14.
[5] "Q2 2010 HFN Administrator Survey" (http:/ / www. hedgefund. net/ reports/ Admin_Survey/ q210_survey. htm). Channel Capital Group
Inc.. 2010-09-07. . Retrieved 2010-09-14.
[6] "Updated The biggest hedge funds - Pensions & Investments" (http:/ / www. pionline. com/ article/ 20100308/ CHART2/ 100309910).
Pionline.com. . Retrieved 2010-08-14.
[7] New York Times, "2 + 20, And Other Hedge Math", Mark Hulbert, March 4, 2007. (http:/ / www. nytimes. com/ 2007/ 03/ 04/ business/
yourmoney/ 04stra. html?ref=yourmoney)
[8] "Financial Rimes, "Hedge fund investors have a great chance to cut fees", James Mackintosh, 6 February 2009" (http:/ / www. ft. com/ cms/
s/ 0/ cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac. html). Ft.com. 2009-02-06. . Retrieved 2010-08-14.
Hedge fund 16

[9] "Trader Monthly's Top 100 for 2007 Unveiled" (http:/ / www. 1440wallstreet. com/ index. php/ comments/
trader_monthlys_top_100_for_2007_unveiled/ ). 1440 Wall Street, April 7, 2008. . Retrieved May 25, 2008.
[10] "Best-Paid Hedge Fund Managers" (http:/ / www. iimagazine. com/ article. aspx?articleID=1914753). Institutional Investor, Alpha
magazine, May 25, 2008. . Retrieved May 25, 2008.
[11] "Hedge Fund Math: Why Fees Matter (Newsletter), Epoch Investment Partners Inc." (http:/ / www. eipny. com/ pdf/
HedgeFundMathWhyFeesMatter110907. pdf) (PDF). . Retrieved 2010-08-14.
[12] "Forbes 400 Richest Americans: Stephen A. Cohen" (http:/ / www. forbes. com/ lists/ 2006/ 54/ biz_06rich400_Steven-A-Cohen_PZMO.
html). Forbes.com. 2006-09-19. . Retrieved 2010-08-14.
[13] Opalesque (10 March 2010). "Incentive fees fall since start of the financial crisis" (http:/ / www. opalesque. com/ IndustryUpdates/ 691/
HFR_Hedge_fund_liquidations_fall_to_levels217. html). .
[14] "Hedge Funds: Fees Down? Close Shop" (http:/ / www. businessweek. com/ bwdaily/ dnflash/ aug2005/ nf2005088_1711_db042. htm).
Businessweek.com. 2005-08-08. . Retrieved 2010-08-14.
[15] "Lessons from the Collapse of Hedge Fund, Long-Term Capital Management" (http:/ / riskinstitute. ch/ 146490. htm). Riskinstitute.ch. .
Retrieved 2010-08-14.
[16] Hedge Funds, pg 2 (http:/ / www. thecityuk. com/ media/ 2358/ Hedge_Funds_2010. pdf) International Financial Services London
[17] "Final Rule: Registration Under the Advisers Act of Certain Hedge Fund Advisers; Release No. Release No. IA-2333; File No. S7-30-04;
December 2, 2004" (http:/ / sec. gov/ rules/ final/ ia-2333. htm#IA). Sec.gov. . Retrieved 2010-08-14.
[18] Hedge Funds, pg 2 and 3 (http:/ / www. thecityuk. com/ media/ 2358/ Hedge_Funds_2010. pdf) International Financial Services London
[19] Fortress files for first U.S. hedge fund IPO (http:/ / www. marketwatch. com/ news/ story/ story. aspx?siteid=mktw&
guid={8CF79DC0-8C69-49D3-907B-153CF689B082}), Marketwatch
[20] FORTRESS INVESTMENT GROUP LLC (http:/ / www. sec. gov/ Archives/ edgar/ data/ 1380393/ 000095013606009310/ file1. htm),
SEC Registration Statement
[21] Marx Law Library, University of Cincinnati College of Law. "The Investment Company Act of 1940" (http:/ / www. law. uc. edu/ CCL/
InvCoAct/ sec3. html). Law.uc.edu. . Retrieved 2010-08-14.
[22] Marx Law Library, University of Cincinnati College of Law. "The Investment Company Act of 1940" (http:/ / www. law. uc. edu/ CCL/
InvCoAct/ sec2. html). Law.uc.edu. . Retrieved 2010-08-14.
[23] Skeel D. (2005). Behind the Hedge (http:/ / www. legalaffairs. org/ issues/ November-December-2005/ feature_skeel_novdec05. msp).
Legal Affairs.
[24] http:/ / www. hedgefundworld. com/ forming_a_hedge_fund. htm
[25] Marx Law Library, University of Cincinnati College of Law. "General Rules and Regulations promulgated under the Securities Act of 1933"
(http:/ / www. law. uc. edu/ CCL/ 33ActRls/ rule501. html). Law.uc.edu. . Retrieved 2010-08-14.
[26] Marx Law Library, University of Cincinnati College of Law. "Rules and Regulations promulgated under the Investment Advisers Act of
1940" (http:/ / www. law. uc. edu/ CCL/ InvAdvRls/ rule205-3. html). Law.uc.edu. . Retrieved 2010-08-14.
[27] http:/ / sec. gov/ rules/ final/ ia-2333. htm
[28] http:/ / sec. gov/ rules/ final/ ia-2333. htm#P78_37183
[29] Astarita MJ. New Hedge Fund Advisor Rule (http:/ / www. seclaw. com/ docs/ NewHedgeFundAdvisorRule. htm).
[30] http:/ / www. seclaw. com/ docs/ ref/ GoldsteinSEC04-1434. pdf
[31] Adelfio NE, Griffin N. (2007). United States: SEC Affirms Its Enforcement Authority With New Anti-Fraud Rule Under the Advisers Act
(http:/ / www. mondaq. com/ article. asp?articleid=51202). Mondaq.
[32] Officials Reject More Oversight of Hedge Funds (http:/ / www. nytimes. com/ 2007/ 02/ 23/ business/ 23hedge. html)
[33] "President’s Working Group Releases Common Approach to Private Pools of Capital Guidance on hedge fund issues focuses on systemic
risk, investor protection" (http:/ / www. treasury. gov/ press/ releases/ hp272. htm). Treasury.gov. 2007-02-22. . Retrieved 2010-08-14.
[34] (http:/ / www. treasury. gov/ press/ releases/ reports/ principles. pdf)
[35] Opalesque (9 November 2009). "House Financial Services Committee passed bill allowing U.S. states to oversee smaller hedge funds"
(http:/ / www. opalesque. com/ 55729/ regulation/ Regulatory_Update_House_Financial_Services_Committee_passed236. html). .
[36] Marx Law Library, University of Cincinnati College of Law. "The Investment Advisers Act of 1940" (http:/ / www. law. uc. edu/ CCL/
InvAdvAct/ sec205. html). Law.uc.edu. . Retrieved 2010-08-14.
[37] http:/ / www. tfscapital. com/ products/ mutual/ files/ Prospectus. pdf
[38] Institutional Investor, May 15, 2006, Article Link (http:/ / www. dailyii. com/ article. asp?ArticleID=1039798& LS=EMS73445), although
statistics in the Hedge Fund industry are notoriously speculative
[39] http:/ / www. ustreas. gov/ press/ releases/ reports/ hedgfund. pdf
[40] "Financial Stability Review June 2006" (http:/ / www. ecb. int/ pub/ pdf/ other/ financialstabilityreview200606en. pdf) (PDF). . Retrieved
2010-08-14.
[41] Gary Duncan (2006-06-02). "ECB warns on hedge fund risk" (http:/ / business. timesonline. co. uk/ tol/ business/ economics/ article670960.
ece). London: The Times. . Retrieved 2007-05-01.
[42] "edhec-risk.com" (http:/ / www. edhec-risk. com/ edito/ RISKArticleEdito. 2006-07-27. 4050/ attachments/ EDHEC response to ECB
statement on HFs. pdf) (PDF). . Retrieved 2010-08-14.
[43] Bookstaber, Richard (2007-08-16). "Blowing up the Lab on Wall Street" (http:/ / www. time. com/ time/ business/ article/
0,8599,1653556,00. html). Time.com. . Retrieved 2010-08-14.
Hedge fund 17

[44] Times Online, "SEC Probing Bear Stearns hedge funds," June 27, 2007 (http:/ / business. timesonline. co. uk/ tol/ business/ industry_sectors/
banking_and_finance/ article1995259. ece)
[45] Cassar, G., & Gerakos, J. (2009). Determinants of Hedge Fund Internal Controls and Fees. Retrieved from (http:/ / www. hbs. edu/ units/
am/ pdf/ Gerakos. pdf)
[46] Liang, B. (2000). Hedge Funds: The Living and the Dead. Journal of Financial & Quantitative Analysis, 35(3), 309-326. Retrieved from
Business Source Complete.
[47] Stulz, R. (2007). Hedge Funds Past, Present, and Future. Journal of Economic Perspectives, 21(2), 175-194. doi: 10.1257/jep.21.2.175
[48] "SEC v. Kirk S. Wright, International Management Associates, LLC; International Management Associates Advisory Group, LLC;
International Management Associates Platinum Group, LLC; International Management Associates Emerald Fund, LLC; International
Management Associates Taurus Fund, LLC; International Management Associates Growth & Income Fund, LLC; International Management
Associates Sunset Fund, LLC; Platinum II Fund, LP; and Emerald II Fund, LP, Civil Action" (http:/ / www. sec. gov/ litigation/ litreleases/
lr19581. htm). Sec.gov. . Retrieved 2010-08-14.
[49] By Amanda Cantrell, CNNMoney.com staff writer (2006-03-30). "Hedge fund manager faces fraud charges" (http:/ / money. cnn. com/
2006/ 03/ 30/ markets/ wright_charged/ index. htm). Money.cnn.com. . Retrieved 2010-08-14.
[50] "Wall Street legend Bernard Madoff arrested over 50 billion Ponzi scheme" (http:/ / www. timesonline. co. uk/ tol/ news/ world/
us_and_americas/ article5331997. ece). The Times (London). December 12, 2008. . Retrieved May 4, 2010.
[51] Géhin and Vaissié, 2006, The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy, The
Journal of Alternative Investments, Vol. 9, No. 1, pp. 9-18
[52] Post Store (2006-06-29). "Scrutiny Urged for Hedge Funds" (http:/ / www. washingtonpost. com/ wp-dyn/ content/ article/ 2006/ 06/ 28/
AR2006062801909. html). Washingtonpost.com. . Retrieved 2010-08-14.
[53] "Testimony Concerning Insider Trading by [[Linda Chatman Thomsen (http:/ / www. sec. gov/ news/ testimony/ 2006/ ts092606lct.
htm#2)]"]. Securities and Exchange Commission. September 26, 2006. . Retrieved 2007-12-19.
[54] "Hedge Funds to Face More Scrutiny From U.S. Market Regulators" (http:/ / www. bloomberg. com/ apps/ news?pid=20601087&
sid=aFvR74yK0J20& refer=home). Bloomberg News. December 5, 2006. . Retrieved 2007-12-19.
[55] Willoughby, Jack (2007-10-01). "High Performance - Barron's Online" (http:/ / online. barrons. com/ article/ SB119101983536943198.
html?mod=b_hps_9_0001_b_this_weeks_magazine_home_top). Online.barrons.com. . Retrieved 2010-08-14.
[56] The Wall Street Journal. http:/ / online. wsj. com/ public/ resources/ documents/ BA_HedgeFund50_071001. pdf.
[57] ’’Portfolio Efficiency with Performance Fees’’, Economics and Political Strategy (newsletter), February 2007, Peter L. Bernstein Inc.
[58] Hulbert, Mark ‘’2 + 20, and Other Hedge Fund Math’’, New York Times, March 4, 2007. (http:/ / www. nytimes. com/ 2007/ 03/ 04/ business/
yourmoney/ 04stra. html?)
[59] "Credit Suisse/Tremont Hedge Index web page" (http:/ / www. hedgeindex. com/ hedgeindex/ en/ default. aspx?cy=USD). Hedgeindex.com.
. Retrieved 2010-08-14.

References
• Frank S. Partnoy & Randall S. Thomas, 'Gap Filling, Hedge Funds, and Financial Innovation' (2006) Vanderbilt
Law & Econ. Research Paper No. 06-21 (http://ssrn.com/abstract-931254)
• Marcel Kahan & Edward B. Rock, ‘Hedge Funds in Corporate Governance and Corporate Control’ (2007) 155
University of Pennsylvania Law Review 1021
• William W. Bratton, ‘Hedge Funds and Governance Targets’ (2007) 95 Georgetown Law Journal 1375

External links
• CAIA Association (http://caia.org) founded in 2002 is the sponsoring body of the Chartered Alternative
Investment Analyst(CAIA) designation, the only professional designation in the area of hedge funds and other
alternative investments.
• Center for International Securities and Derivatives Markets (http://cisdm.som.umass.edu) at the University of
Massachusetts Amherst is a research center specializing in hedge fund research
• Hedge Fund Research Initiative (http://icf.som.yale.edu/research/hedgefund.shtml) of the International
Center for Finance at the Yale School of Management
• What is a Hedge Fund? (http://www.barclayhedge.com/research/educational-articles/
hedge-fund-strategy-definition/what-is-a-hedge-fund.html) Educational Resource about Hedge Fund Industry
• Alternative Asset Management Center (http://www.cox.smu.edu/web/alternative-asset-management) a
specialized research and teaching center at the Cox School of Business
Hedge fund 18

• Proposal for a Directive on Alternative Investment Fund Managers (http://www.hedge-funds-association.com/

Hedge_Funds_News_April_2010.htm) From the Reading Room of the International Association of Hedge Funds
Professionals (IAHFP)
• HEDGEweb Hedge Fund Research (http://www.hedgeweb.net/) Publishes hedge fund indices and analysis of
the growth and performance of the hedge fund industry.
Article Sources and Contributors 19

Article Sources and Contributors

Hedge fund  Source: http://en.wikipedia.org/w/index.php?oldid=388189127  Contributors: -Majestic-, 100sweneht, 31810me, 4score, 65matt, ABensted, AP1787, Aaaxs, Aaron7e7, Aaronchall,
Achatterjee, Adaaasswwaassa, Adam.Heman, Adambro, Adonisz, AdvancedCurrencyFX, Aecis, Agorboun, Agrippina Minor, Ajcdb, Alansohn, Aleksweiler01, AlistairMcMillan, Aloys11,
Alphachimp, Altenmann, Amyjbensted, Andreruzneves, Antandrus, Arjan1071, Arjun01, Art Markham, Arthena, Aude, Authoress, Avandalen, Avb, Avdalen, Avnjay, Avriette, Avsb, Awormus,
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