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64-703: The Quantum Group of Funds are privately owned hedge funds based in London , New York , Curaçao ( Kingdom of the Netherlands ) and Cayman Islands . They are advised by George Soros through his company Soros Fund Management . Soros started the fund in 1973 in partnership with Jim Rogers . In 1987, the funds lost $ 800 million on Japanese stocks shortly before the October 19, 1987 stock market crash . In 1992, on what became known as Black Wednesday , Soros' lead fund, Quantum Fund, became famous for profiting from

128-414: A bull market , distressed investing works best during a bear market . Risk arbitrage or merger arbitrage includes such events as mergers , acquisitions, liquidations, and hostile takeovers . Risk arbitrage typically involves buying and selling the stocks of two or more merging companies to take advantage of market discrepancies between acquisition price and stock price. The risk element arises from

192-439: A counterparty to derivative contracts , and lends securities for particular investment strategies, such as long/short equities and convertible bond arbitrage . It can provide custodial services for the fund's assets, and trade execution and clearing services for the hedge fund manager. Hedge fund administrators are typically responsible for valuation services, and often operations , and accounting . Calculation of

256-420: A financial asset of one entity and a financial liability or equity instrument of another entity". Financial instruments may be categorized by " asset class " depending on whether they are foreign exchange-based (reflecting foreign exchange instruments and transactions), equity-based (reflecting ownership of the issuing entity) or debt-based (reflecting a loan the investor has made to the issuing entity). If

320-1006: A lack of transparency . Another common perception of hedge funds is that their managers are not subject to as much regulatory oversight and/or registration requirements as other financial investment managers, and more prone to manager-specific idiosyncratic risks such as style drifts, faulty operations, or fraud. New regulations introduced in the US and the EU as of 2010 required hedge fund managers to report more information, leading to greater transparency. In addition, investors, particularly institutional investors, are encouraging further developments in hedge fund risk management, both through internal practices and external regulatory requirements. The increasing influence of institutional investors has led to greater transparency: hedge funds increasingly provide information to investors including valuation methodology, positions, and leverage exposure. Hedge funds share many of

384-535: A "fundamental growth" strategy invest in companies with more earnings growth than the overall stock market or relevant sector, while funds using a " fundamental value " strategy invest in undervalued companies. Funds that use quantitative and financial signal processing techniques for equity trading are described as using a "quantitative directional" strategy. Funds using a " short bias " strategy take advantage of declining equity prices using short positions. Event-driven strategies concern situations in which

448-440: A CTA from a regulatory perspective and the main divide is between systematic and discretionary strategies. A classification framework for CTA/Macro Strategies can be found in the reference. Directional investment strategies use market movements, trends, or inconsistencies when picking stocks across a variety of markets. Computer models can be used, or fund managers will identify and select investments. These types of strategies have

512-431: A computerized system, known as "systematic/quantitative". The amount of diversification within the fund can vary; funds may be multi-strategy, multi-fund, multi-market, multi-manager, or a combination. Sometimes hedge fund strategies are described as " absolute return " and are classified as either " market neutral " or "directional". Market neutral funds have less correlation to overall market performance by "neutralizing"

576-521: A fund has too much exposure to a particular investment, sector, trading strategy, or group of correlated funds. These risks may be managed through defined controls over conflict of interest , restrictions on allocation of funds, and set exposure limits for strategies. Many investment funds use leverage , the practice of borrowing money, trading on margin , or using derivatives to obtain market exposure in excess of that provided by investors' capital. Although leverage can increase potential returns,

640-446: A fund manager "drifting" away from an area of specific expertise, manager risk factors include valuation risk , capacity risk, concentration risk , and leverage risk . Valuation risk refers to the concern that the net asset value (NAV) of investments may be inaccurate; capacity risk can arise from placing too much money into one particular strategy, which may lead to fund performance deterioration; and concentration risk may arise if

704-470: A good year. Earnings at the very top are higher than in any other sector of the financial industry, and collectively the top 25 hedge fund managers regularly earn more than all 500 of the chief executives in the S&;P 500 . Most hedge fund managers are remunerated much less, however, and if performance fees are not earned then small managers at least are unlikely to be paid significant amounts. In 2011,

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768-403: A greater appetite for risk , with the intention of maximizing returns, subject to the risk tolerance of investors and the fund manager. Managers will have an additional incentive to increase risk oversight when their own capital is invested in the fund. Hedge fund management firms typically charge their funds both a management fee and a performance fee . Management fees are calculated as

832-604: A greater exposure to the fluctuations of the overall market than do market neutral strategies. 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 . Within directional strategies, there are a number of sub-strategies. " Emerging markets " funds focus on emerging markets such as China and India, whereas "sector funds" specialize in specific areas including technology, healthcare, biotechnology, pharmaceuticals, energy, and basic materials. Funds using

896-439: A large amount of flexibility (due to their ability to use leverage to take large positions in diverse investments in multiple markets), the timing of the implementation of the strategies is important in order to generate attractive, risk-adjusted returns. Global macro is often categorized as a directional investment strategy. Global macro strategies can be divided into discretionary and systematic approaches. Discretionary trading

960-445: A management fee of 2% on total assets and a 20% fee on realized gains. In the 1970s, hedge funds specialized in a single strategy with most fund managers following the long/short equity model. Many hedge funds closed during the recession of 1969–1970 and the 1973–1974 stock market crash due to heavy losses. They received renewed attention in the late 1980s. During the 1990s, the number of hedge funds increased significantly with

1024-400: A manager is only rewarded if the fund generates returns in excess of the returns that the investor would have received if they had invested their money elsewhere. Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawals during a specified period of time (typically a year), or when withdrawals exceed a predetermined percentage of the original investment. The purpose of

1088-422: A manager will sometimes close a fund that has suffered serious losses and start a new fund, rather than attempt to recover the losses over a number of years without a performance fee. Some performance fees include a " hurdle ", so that a fee is only paid on the fund's performance in excess of a benchmark rate ( e.g. , LIBOR ) or a fixed percentage. The hurdle is usually tied to a benchmark rate such as Libor or

1152-400: A percentage of the fund's net asset value and typically range from 1% to 4% per annum, with 2% being standard. They are usually expressed as an annual percentage, but calculated and paid monthly or quarterly. Management fees for hedge funds are designed to cover the operating costs of the manager, whereas the performance fee provides the manager's profits. However, due to economies of scale

1216-665: A position based on the predicted movement of the security or securities in question. Large institutional investors such as hedge funds are more likely to pursue event-driven investing strategies than traditional equity investors because they have the expertise and resources to analyze corporate transactional events for investment opportunities. Corporate transactional events generally fit into three categories: distressed securities , risk arbitrage , and special situations . Distressed securities include such events as restructurings, recapitalizations , and bankruptcies . A distressed securities investment strategy involves investing in

1280-410: A single strategy or multiple strategies for flexibility, risk management , or diversification. The hedge fund's prospectus , also known as an offering memorandum , offers potential investors information about key aspects of the fund, including the fund's investment strategy, investment type, and leverage limit. The elements contributing to a hedge fund strategy include the hedge fund's approach to

1344-627: A state of maturity that is consolidating around the larger, more established firms such as Citadel, Elliot, Millennium, Bridgewater, and others. The rate of new fund start ups is now outpaced by fund closings. In July 2017, hedge funds recorded their eighth consecutive monthly gain in returns with assets under management rising to a record $ 3.1 trillion. Hedge fund strategies are generally classified among four major categories: global macro , directional, event-driven , and relative value ( arbitrage ). Strategies within these categories each entail characteristic risk and return profiles. A fund may employ

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1408-401: A strategy based on predicting the final approval of new pharmaceutical drugs ; and legal catalyst strategy, which specializes in companies involved in major lawsuits. Relative value arbitrage strategies take advantage of relative discrepancies in price between securities. The price discrepancy can occur due to mispricing of securities compared to related securities, the underlying security or

1472-496: A substantial portion of the asset management industry, with assets totaling around $ 3.8 trillion as of 2021. The word "hedge", meaning a line of bushes around the perimeter of a field, has long been used as a metaphor for placing limits on risk. Early hedge funds sought to hedge specific investments against general market fluctuations by shorting other, similar assets. Nowadays, however, many different investment strategies are used, many of which do not "hedge" risk. During

1536-602: Is carried out by investment managers who identify and select investments, whereas systematic trading is based on mathematical models and executed by software with limited human involvement beyond the programming and updating of the software. These strategies can also be divided into trend or counter-trend approaches depending on whether the fund attempts to profit from following market trend (long or short-term) or attempts to anticipate and profit from reversals in trends. Within global macro strategies, there are further sub-strategies including "systematic diversified", in which

1600-666: Is common for hedge fund investment strategies to aim to achieve a positive return on investment regardless of whether markets are rising or falling (" absolute return "). Hedge funds can be considered risky investments; the expected returns of some hedge fund strategies are less volatile than those of retail funds with high exposure to stock markets because of the use of hedging techniques. Research in 2015 showed that hedge fund activism can have significant real effects on target firms, including improvements in productivity and efficient reallocation of corporate assets. Moreover, these interventions often lead to increased labor productivity, although

1664-438: Is now managing Soros' family money as well as working with retail investors. Hedge fund A hedge fund is a pooled investment fund that holds liquid assets and that makes use of complex trading and risk management techniques to improve investment performance and insulate returns from market risk . Among these portfolio techniques are short selling and the use of leverage and derivative instruments . In

1728-557: Is reduced but cannot be eliminated. According to a report by the Hennessee Group, hedge funds were approximately one-third less volatile than the S&P 500 between 1993 and 2010. Investors in hedge funds are, in most countries, required to be qualified investors who are assumed to be aware of the investment risks , and accept these risks because of the potential returns relative to those risks. Fund managers may employ extensive risk management strategies in order to protect

1792-453: Is the major case relating to fund administrator liability for failure to handle its NAV-related obligations properly. There, the hedge fund administrator and other defendants settled in 2016 by paying the Anwar investor plaintiffs $ 235 million. Financial instrument International Accounting Standards IAS 32 and 39 define a financial instrument as "any contract that gives rise to

1856-479: The 1990s stock market rise , the aligned-interest compensation structure ( i.e. , common financial interests), and the promise of above average returns as likely causes. Over the next decade, hedge fund strategies expanded to include credit arbitrage, distressed debt , fixed income , quantitative , and multi-strategy. US institutional investors , such as pension and endowment funds , began allocating greater portions of their portfolios to hedge funds. During

1920-688: The Japanese yen . The fund lost US$ 2 billion in investments in Russia during the 1998 Russian financial crisis . In July 2011, to avoid having to register with the SEC and comply with reporting requirements under the Dodd-Frank reform act , the Quantum Fund announced they would be turning the fund into a family investment group and returning all outside money to investors by the end of 2011. The fund

1984-408: The net asset value ("NAV") by the administrator, including the pricing of securities at current market value and calculation of the fund's income and expense accruals, is a core administrator task, because it is the price at which investors buy and sell shares in the fund. The accurate and timely calculation of NAV by the administrator is vital. The case of Anwar v. Fairfield Greenwich (SDNY 2015)

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2048-726: The 1,226 people on the Forbes World's Billionaires List for 2012, 36 of the financiers listed "derived significant chunks" of their wealth from hedge fund management. Among the richest 1,000 people in the United Kingdom, 54 were hedge fund managers, according to the Sunday Times Rich List for 2012. A portfolio manager risks losing his past compensation if he or she engages in insider trading . In Morgan Stanley v. Skowron , 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's faithless servant doctrine,

2112-654: The US bull market of the 1920s, there were numerous private investment vehicles available to wealthy investors. Of that period, the best known today is the Graham-Newman Partnership, founded by Benjamin Graham and his long-time business partner Jerry Newman. This was cited by Warren Buffett in a 2006 letter to the Museum of American Finance as an early hedge fund, and based on other comments from Buffett, Janet Tavakoli deems Graham's investment firm

2176-499: The United States and Europe following the financial crisis of 2007–2008 with the intention of increasing government oversight of hedge funds and eliminating certain regulatory gaps. While most modern hedge funds are able to employ a wide variety of financial instruments and risk management techniques, they can be very different from each other with respect to their strategies, risks, volatility and expected return profile. It

2240-547: The United States collectively held $ 1.335 trillion. In April 2012, the hedge fund industry reached a record high of US$ 2.13 trillion total assets under management. In the middle of the 2010s, the hedge fund industry experienced a general decline in the "old guard" fund managers. Dan Loeb called it a "hedge fund killing field" due to the classic long/short falling out of favor because of unprecedented easing by central banks . The US stock market correlation became untenable to short sellers . The hedge fund industry today has reached

2304-686: The United States, financial regulations require that hedge funds be marketed only to institutional investors and high-net-worth individuals . Hedge funds are considered alternative investments . Their ability to use leverage and more complex investment techniques distinguishes them from regulated investment funds available to the retail market, commonly known as mutual funds and ETFs . They are also considered distinct from private equity funds and other similar closed-end funds as hedge funds generally invest in relatively liquid assets and are usually open-ended . This means they typically allow investors to invest and withdraw capital periodically based on

2368-426: The benefits may not fully accrue to workers in terms of increased wages or work hours. A hedge fund usually pays its investment manager a management fee (typically, 2% per annum of the net asset value of the fund) and a performance fee (typically, 20% of the increase in the fund's net asset value during a year). Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be

2432-479: The bonds or loans of companies facing bankruptcy or severe financial distress, when these bonds or loans are being traded at a discount to their value. Hedge fund managers pursuing the distressed debt investment strategy aim to capitalize on depressed bond prices. Hedge funds purchasing distressed debt may prevent those companies from going bankrupt, as such an acquisition deters foreclosure by banks. While event-driven investing, in general, tends to thrive during

2496-541: The court held that a hedge fund's portfolio manager engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $ 31 million his employer paid him as compensation during his period of faithlessness. The court called the insider trading the "ultimate abuse of a portfolio manager's position". The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged

2560-631: The devaluation the pound when the currency left the Exchange Rate Mechanism . Soros had bet his entire fund in a short sale on the ultimately fulfilled prediction that the British currency would drop in value, netting him a profit of $ 1 billion. In 1997, Soros was blamed for forcing sharp devaluations in Southeast Asian currencies . On February 14, 1994, the funds had a major loss of $ 600 million in one day betting against

2624-609: The effect of market swings whereas directional funds utilize trends and inconsistencies in the market and have greater exposure to the market's fluctuations. Hedge funds using a global macro investing strategy take large positions in share, bond, or currency markets in anticipation of global macroeconomic events in order to generate a risk-adjusted return . 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. While global macro strategies have

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2688-431: The fee is to discourage short-term investing, reduce turnover, and deter withdrawals after periods of poor performance. Unlike management fees and performance fees, redemption fees are usually kept by the fund and redistributed to all investors. Hedge fund management firms are often owned by their portfolio managers , who are therefore entitled to any profits that the business makes. As management fees are intended to cover

2752-540: The firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits. Funds do not tend to report compensation, and so published lists of the amounts earned by top managers tend to be estimates based on factors such as the fees charged by their funds and the capital they are thought to have invested in them. Many managers have accumulated large stakes in their own funds and so top hedge fund managers can earn extraordinary amounts of money, perhaps up to $ 4 billion in

2816-736: The firm's reputation, a valuable corporate asset." A hedge fund is an investment vehicle that is most often structured as an offshore corporation , limited partnership , or limited liability company . The fund is managed by an investment manager in the form of an organization or company that is legally and financially distinct from the hedge fund and its portfolio of assets . Many investment managers utilize service providers for operational support. Service providers include prime brokers, banks, administrators, distributors, and accounting firms. Prime brokers clear trades and provide leverage and short-term financing . They are usually divisions of large investment banks. The prime broker acts as

2880-604: The first decade of the 21st century, hedge funds gained popularity worldwide, and, by 2008, the worldwide hedge fund industry held an estimated US$ 1.93 trillion in assets under management (AUM). However, the financial crisis of 2007–2008 caused many hedge funds to restrict investor withdrawals and their popularity and AUM totals declined. AUM totals rebounded and in April 2011 were estimated at almost $ 2 trillion. As of February 2011 , 61% of worldwide investment in hedge funds came from institutional sources. In June 2011,

2944-471: The first hedge fund. The sociologist Alfred W. Jones is credited with coining the phrase " hedged fund" and is credited with creating the first hedge fund structure in 1949. Jones referred to his fund as being "hedged", a term then commonly used on Wall Street to describe the management of investment risk due to changes in the financial markets . Jones also developed the popular 2-and-20 structure of hedge funds, in which hedge funds charged investors

3008-585: The four main categories, there are several strategies that do not entirely fit into these categories. For an investor who already holds large quantities of equities and bonds, investment in hedge funds may provide diversification and reduce the overall portfolio risk. Managers of hedge funds often aim to produce returns that are relatively uncorrelated with market indices and are consistent with investors' desired level of risk. While hedging can reduce some risks of an investment it usually increases others, such as operational risk and model risk , so overall risk

3072-652: The fund and investors. According to the Financial Times , "big hedge funds have some of the most sophisticated and exacting risk management practices anywhere in asset management." Hedge fund managers that hold a large number of investment positions for short periods are likely to have a particularly comprehensive risk management system in place, and it has become usual for funds to have independent risk officers who assess and manage risks but are not otherwise involved in trading. A variety of different measurement techniques and models are used to estimate risk according to

3136-654: The fund trades in diversified markets, or sector specialists such as "systematic currency", in which the fund trades in foreign exchange markets or any other sector specialisation. Other sub-strategies include those employed by commodity trading advisors (CTAs), where the fund trades in futures (or options ) in commodity markets or in swaps. This is also known as a "managed future fund". CTAs trade in commodities (such as gold) and financial instruments, including stock indices . They also take both long and short positions, allowing them to make profit in both market upswings and downswings. Most global macro managers tends to be

3200-436: The fund's net asset value , whereas private-equity funds generally invest in illiquid assets and return capital only after a number of years. Other than a fund's regulatory status, there are no formal or fixed definitions of fund types, and so there are different views of what can constitute a "hedge fund". Although hedge funds are not subject to the many restrictions applicable to regulated funds, regulations were passed in

3264-464: The fund's leverage, liquidity, and investment strategy. Non-normality of returns, volatility clustering and trends are not always accounted for by conventional risk measurement methodologies and so in addition to value at risk and similar measurements, funds may use integrated measures such as drawdowns . In addition to assessing the market-related risks that may arise from an investment, investors commonly employ operational due diligence to assess

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3328-418: The hedge fund management firms with the greatest AUM were Bridgewater Associates (US$ 58.9 billion), Man Group (US$ 39.2 billion), Paulson & Co. (US$ 35.1 billion), Brevan Howard (US$ 31 billion), and Och-Ziff (US$ 29.4 billion). Bridgewater Associates had $ 70 billion in assets under management as of March 2012 . At the end of that year, the 241 largest hedge fund firms in

3392-402: The hedge fund manager must identify an upcoming event that will increase or decrease the value of the company's equity and equity-related instruments. Other event-driven strategies include credit arbitrage strategies, which focus on corporate fixed income securities; an activist strategy, where the fund takes large positions in companies and uses the ownership to participate in the management;

3456-539: The management fee from larger funds can generate a significant part of a manager's profits, and as a result some fees have been criticized by some public pension funds, such as CalPERS , for being too high. The performance fee is typically 20% of the fund's profits during any year, though performance fees range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits. Performance fees have been criticized by Warren Buffett , who believes that because hedge funds share only

3520-456: The market overall. Hedge fund managers can use various types of analysis to identify price discrepancies in securities, including mathematical, technical , or fundamental techniques. Relative value is often used as a synonym for market neutral , as strategies in this category typically have very little or no directional market exposure to the market as a whole. Other relative value sub-strategies include: In addition to those strategies within

3584-592: The market, the particular instrument use, the market sector the fund specializes in ( e.g. , healthcare), the method used to select investments, and the amount of diversification within the fund. There are a variety of market approaches to different asset classes , including equity , fixed income , commodity , and currency . Instruments used include equities, fixed income, futures , options , and swaps . Strategies can be divided into those in which investments can be selected by managers, known as "discretionary/qualitative", or those in which investments are selected using

3648-413: The one-year Treasury bill rate plus a spread. A "soft" hurdle means the performance fee is calculated on all the fund's returns if the hurdle rate is cleared. A "hard" hurdle is calculated only on returns above the hurdle rate. By example the manager sets a hurdle rate equal to 5%, and the fund return 15%, incentive fees would only apply to the 10% above the hurdle rate. A hurdle is intended to ensure that

3712-499: The opportunity for larger gains is weighed against the possibility of greater losses. Hedge funds employing leverage are likely to engage in extensive risk management practices. In comparison with investment banks , hedge fund leverage is relatively low; according to a National Bureau of Economic Research working paper, the average leverage for investment banks is 14.2, compared to between 1.5 and 2.5 for hedge funds. Some types of funds, including hedge funds, are perceived as having

3776-481: The possibility that the merger or acquisition will not go ahead as planned; hedge fund managers will use research and analysis to determine if the event will take place. Special situations are events that impact the value of a company's stock, including the restructuring of a company or corporate transactions including spin-offs , share buy backs , security issuance/repurchase, asset sales, or other catalyst-oriented situations. To take advantage of special situations

3840-491: The profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the credit crunch . Almost all hedge fund performance fees include a " high water mark " (or "loss carryforward provision"), which means that the performance fee only applies to net profits ( i.e. , profits after losses in previous years have been recovered). This prevents managers from receiving fees for volatile performance, though

3904-416: The risk that error or fraud at a hedge fund might result in a loss to the investor. Considerations will include the organization and management of operations at the hedge fund manager, whether the investment strategy is likely to be sustainable, and the fund's ability to develop as a company. Since hedge funds are private entities and have few public disclosure requirements, this is sometimes perceived as

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3968-454: The same types of risk as other investment classes, including liquidity risk and manager risk. 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. Manager risk refers to those risks which arise from the management of funds. As well as specific risks such as style drift , which refers to

4032-490: The top manager earned $ 3 billion, the tenth earned $ 210 million, and the 30th earned $ 80 million. In 2011, the average earnings for the 25 highest-compensated hedge fund managers in the United States was $ 576 million while the mean total compensation for all hedge fund investment professionals was $ 690,786 and the median was $ 312,329. The same figures for hedge fund CEOs were $ 1,037,151 and $ 600,000, and for chief investment officers were $ 1,039,974 and $ 300,000, respectively. Of

4096-404: The underlying investment opportunity and risk are associated with an event. An event-driven investment strategy finds investment opportunities in corporate transactional events such as consolidations, acquisitions , recapitalizations , bankruptcies , and liquidations . Managers employing such a strategy capitalize on valuation inconsistencies in the market before or after such events, and take

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