Hedge Funds : Introduction And Overview

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I. Hedge funds: Introduction and Overview
A hedge fund is a regulated investment fund that is typically open to a limited range of investors who pay a performance fee to the fund’s investment manager. Every hedge fund has its own investment philosophy that determines the type of investments made and strategies employed. In general, the hedge fund community undertakes a much wider range of investment and trading activities than traditional long-only investment funds. Hedge funds invest in a broader range of assets, including long and short positions in equity, bonds, commodities, and derivatives. Hedging out unwanted risk has been a common activity in the financial markets for centuries. In the 1800s, for example, commodity producers and merchants started using forward contracts to protect themselves against futures changes in commodity prices—these contracts hedged out the risk of adverse market fluctuations beyond their control. Such forward contracts are still traded to this day in the futures market. Alfred Jones is credited with the creation of the term “Hedge Fund” in 1949. He created A.W. Jones, a partnership with four friends, and through this vehicle he invested $100,000 in stocks, using both long and short positions. During the first year, the fund returned 17.3%. The idea has caught fire since.
Hedge funds were later popularized by the likes of managers such as Julian Robertson and George Soros. They have been trading since the mid-1980s, generally outperforming
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