Hedge Fund - History

History

The origin of the first hedge fund is uncertain. During the US bull market of the 1920s, there were numerous such vehicles offered privately to wealthy investors. Of that period, the best known today, owing to the legacies of one of its founders, was the Graham-Newman Partnership founded by Benjamin Graham and Jerry Newman.

The fictional exploits of Jesse Livermore as chronicled in Reminiscences of a Stock Operator (1923) also describe speculative vehicles dubbed "pools" that are similar, if not the same, in form and function as what would later be called "hedge funds". Preceding Livermore, future statesman Bernard M. Baruch also operated such pools before removing his investors and was later known as the "lone wolf on Wall Street", as he managed his own fortune.

Warren Buffett, in a 2006 letter to the magazine publication of the Museum of American Finance asserted that the Graham-Newman partnership of the 1920s was the first hedge fund he was aware of, but suggested others may have preceded it.

Sociologist, author, and financial journalist Alfred W. Jones is credited with coining the phrase "hedged fund", in contrast to prior nomenclatures, and is often erroneously credited with creating the first hedge fund structure in 1949. To neutralize the effect of overall market movement, Jones, utilizing trading strategies of his predecessors' such as Benjamin Graham, balanced his portfolio by buying assets whose price he expected to increase, and selling short assets whose price he expected to decrease. Jones referred to his fund as being "hedged", a term then commonly used on Wall Street, to describe how the fund managed risk exposure from overall market movement. This type of portfolio became known as a hedge fund. A 1966 Fortune magazine article reported that Jones' fund had outperformed the best mutual funds despite his 20% performance fee. In 1968 there were almost 200 hedge funds, and the first fund of funds that utilized hedge funds was created in 1969 in Geneva.

Many funds ceased trading during the Recession of 1969–70 and the 1973–1974 stock market crash due to heavy losses. In the 1970s hedge funds typically specialized in a single strategy, and most fund managers followed the long/short equity model. As in prior weak financial markets and prolonged economic slowdowns, hedge funds again lost popularity during the downturn of the 1970s but received renewed attention in the late 1980s, following the success of several funds profiled in the media.

Mirroring the earlier booms in financial speculations in performance fees-structured investment vehicles of the 1920s and 1960s, during the 1990s the number of hedge funds increased significantly, with investments provided by the new wealth that was created during the 1990s stock market rise. The increased interest from traders and investors was due to the aligned-interest compensation structure and an investment vehicle that was designed to exceed general market returns. Over the next decade there was increased diversification in strategies, including: credit arbitrage, distressed debt, fixed income, quantitative, and multi-strategy, among others. A key factor of their growth over this and the next decade was increased allocations by US institutional investors, notably pension and endowment funds, following the success of David Swensen's investments in alternative investments and other non-marketable assets, such as hedge funds, timber, real estate and private equity, at Yale University's endowment fund.

During the first decade of the new century, hedge funds regained popularity worldwide and in 2008, the worldwide industry held US$1.93 trillion in assets under management. However the 2008 credit crunch was hard on hedge funds and they declined in value and hampered "liquidity in some markets" causing some hedge funds to restrict investor withdrawals.

Total assets under management then rebounded and in April 2011 were estimated at almost $2 trillion. As of February 2011, 61% of worldwide investment in hedge funds comes from institutional sources. As of 30 June 2011, the largest hedge funds by worldwide assets 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). At the end of that year, the 241 largest hedge fund firms in the United States held $1.335 trillion. The world's largest hedge fund manager in 2011, Bridgewater Associates, had $70 billion under management as of 1 March 2012 (2012 -03-01). In April 2012, the hedge fund industry reached a record high of US$2.13 trillion total assets under management.