Wikipedia HedgeFund

8/9/2019 Wikipedia HedgeFund

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4 Strategies4.1 Global macro4.2 Directional4.3 Event-driven4.4 Relative value4.5 Miscellaneous

5 Hedge fund risk

6 Hedge fund structure6.1 Domicile6.2 Investment manager locations6.3 The legal entity6.4 Open-ended nature6.5 Side pockets6.6 Listed funds

7 Regulatory issues7.1 U.S. regulation

7.1.1 Comparison to U.S. private equity funds7.1.2 Comparison to U.S. mutual funds7.1.3 Proposed U.S. regulation

7.2 UK regulation7.3 Offshore regulation

8 Hedge fund indices8.1 Non-investable indices8.2 Investable indices8.3 Hedge Fund Replication

9 Debates and controversies9.1 Systemic risk9.2 Transparency9.3 Market capacity9.4 U.S. investigations9.5 Performance measurement9.6 Value in mean/variance efficient portfolios9.7 Notable hedge fund firms

10 Notes11 References12 External links

HistorySociologist, author, and financial journalist Alfred W. Jones is credited with the creation of the first

hedge fund in 1949.[2] Jones believed that price movements of an individual asset could be seen ashaving a component due to the overall market and a component due to the performance of the assetitself. To neutralize the effect of overall market movement, he balanced his portfolio by buying assetswhose price he expected to be stronger than the market and selling short assets he expected to be weakerthan 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

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on assets bought and vice-versa. Because the effect is to 'hedge' that part of the risk due to overallmarket 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 mayhave managed around $2.5 trillion at its peak in the summer of 2008.[2] The credit crunch has causedassets 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]

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).[5]

Fees

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

fund's profit.[2]

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.[6]Management fees are usually expressed as an annual percentage, but calculated and paid monthly orquarterly.

The business models of most hedge fund managers provide for the management fee to cover theoperating 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.[7] Managementfees associated with hedge funds have been under much scrutiny, with several large public pensionfunds, notably CalPERS, calling on managers to reduce fees.

Performance fees

Performance fees (or "incentive fees") are one of the defining characteristics of hedge funds. Themanager's performance fee is calculated as a percentage of the fund's profits, usually counting bothrealized and unrealized profits. By incentivising the manager to generate returns, performance fees areintended to align the interests of manager and investor more closely than flat fees do. In the businessmodels of most managers, the performance fee is largely available for staff bonuses and so can beextremely lucrative for managers who perform well. Several publications publish annual estimates of the




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earnings of top hedge fund managers.[8][9] Typically, hedge funds charge 20% of returns as a

performance fee.[10] 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,[11] while JimSimons' Medallion Fund charged a 45% performance fee.

Average incentive fees have declined since the start of the financial crisis, with the decline being morepronounced 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). Theaverage incentive fee for funds launched in 2009 was 17.6 percent, 1.6 percent below the broader

industry average.[12]

Performance fees have been criticized by many people, including notable investor Warren Buffett, whobelieve that, by allowing managers to take a share of profit but providing no mechanism for them toshare losses, performance fees give managers an incentive to take excessive risk rather than targetinghigh 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.[citation needed]

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."By whom? Citation?

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 fundwere launched at a NAV per share of $100, which then rose to $120 in its first year, a performance feewould be payable on the $20 return for each share. If the next year it dropped to $110, no fee would bepayable. If in the third year the NAV per share rose to $130, a performance fee would be payable onlyon 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 toreduce the incentive for managers to seek volatile trades. If a high water mark is not used, a fund thatends alternate years at $100 and $110 would generate a performance fee every other year, enriching themanager but not the investors.

The mechanism does not provide complete protection to investors: A manager who has lost a significantpercentage 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. [13] This tactic is dependent on themanager'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 thefund's annualized performance exceeds a benchmark rate, such as T-bill yield, LIBOR or a fixed

percentage.[2] This links performance fees to the ability of the manager to provide a higher return than analternative, usually lower risk, investment.

With a "soft" hurdle, a performance fee is charged on the entire annualized return if the hurdle rate iscleared. With a "hard" hurdle, a performance fee is only charged on returns above the hurdle rate. Prior




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to the credit crisis of 2008, demand for hedge funds tended to outstrip supply, making hurdle rates

relatively rare.[citation needed]

Withdrawal/redemption fees

Some funds charge investors a redemption fee (or "withdrawal fee" or "surrender charge") if theywithdraw 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 specifiedportion of an investment.

The purpose of the fee is to discourage short-term investment in the fund, thereby reducing turnover andallowing the use of more complex, illiquid or long-term strategies. The fee may also dissuade investorsfrom withdrawing funds after periods of poor performance.

Unlike management and performance fees, redemption fees are usually retained by the fund andtherefore benefit the remaining investors rather than the manager.

Strategies

Hedge funds employ many different trading strategies, which are classified in many different ways, withno standard system used. A hedge fund will typically commit itself to a particular strategy, particularinvestment types and leverage limits via statements in its offering documentation, thereby givinginvestors 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, currencyInstrument: long/short, futures, options, swaps

Exposure: directional, market neutralSector: 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 numericalmethods 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 returncharacteristics. The most common label for a hedge fund is "long/short equity", meaning that the fundtakes 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, generallyusing 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 softwarewithout any human intervention other than the initial programming of the software.




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Commodity Trading Advisors (CTA, Managed futures, Trading) - the fund trades infutures (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-termtrends.

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 orstock 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 equitymarket.

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.

Event-driven

(Special situations) Exploit pricing inefficiencies caused by anticipated specific corporate events.

Distressed securities (Distressed debt) - specialized in companies trading at discounts to theirvalue 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 corporatetransaction.

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 balancebetween long and short positions.

Convertible arbitrage - exploit pricing inefficiencies between convertible securities and thecorresponding stocks.




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Fixed income corporate - fixed income arbitrage strategy using corporate fixed incomeinstruments.

Asset-backed securities (Fixed-Income asset-backed) - fixed income arbitrage strategy usingasset-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 ormore markets.

Miscellaneous

Fund of hedge funds (Multi-manager) - a hedge fund with a diversified portfolio of numerousunderlying 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-managersinvesting in their own strategy.

130-30 funds - unhedged equity fund with 130% long and 30% short positions, the marketexposure is 100%.

Long-only absolute return funds - partly hedged fund excluding short selling but allowderivatives.

Hedge fund risk

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 havesome of these characteristics:

Leverage - in addition to money invested into the fund by investors, a hedge fund will typicallyborrow money or trade on margin, with certain funds borrowing sums many times greater than theinitial investment. If a hedge fund has borrowed $9 for every $1 received from investors, a loss ofonly 10% of the value of the investments of the hedge fund will wipe out 100% of the value of theinvestor'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 baseof $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.[14]

Short selling - due to the nature of short selling, the losses that can be incurred on a losing bet arein 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 underlyinginvestments that carry high degrees of risk, such as high yield bonds, distressed securities, andcollateralized debt obligations based on sub-prime mortgages.




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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 theportfolio, and other factors relevant to an investment decision.

Lack of regulation - hedge fund managers are, in some jurisdictions, not subject to as muchoversight from financial regulators as regulated funds, and therefore some may carry undisclosedstructural risks.

Short volatility - certain hedge fund strategies involve writing out of the money call or putoptions. 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 assumedto 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; riskierinvestments typically provide higher returns; secrecy helps to prevent imitation by competitors; andbeing unregulated reduces costs and allows the investment manager more freedom to make decisions ona 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 noemployees and no assets other than its investment portfolio and cash. The portfolio is managed by theinvestment 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 otherservice 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, clearingand settlement. Many prime brokers also provide custody services. Prime brokers are typicallyparts of large investment banks.

Administrator the administrator typically deals with the issue and redemption of interests andshares, calculates the net asset value of the fund, and performs related back office functions. Insome funds, particularly in the U.S., some of these functions are performed by the investmentmanager, a practice that gives rise to a potential conflict of interest inherent in having theinvestment manager both determine the NAV and benefit from its increase through performancefees. 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 funds expected investors. Regulatoryconsiderations will also play a role. Many hedge funds are established in offshore financial centres sothat the fund can avoid paying tax on the increase in the value of its portfolio. An investor will still pay




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tax on any profit it makes when it realizes its investment, and the investment manager, usually based in amajor 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 CaymanIslands was the most popular registration location and accounted for 39% of the number of global hedgefunds. 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.[15]

Investment manager locations

In contrast to the funds themselves, investment managers are primarily located onshore in order to drawon the major pools of financial talent and to be close to investors. With the bulk of hedge fundinvestment coming from the U.S. East coast principally New York City and the Gold Coast area ofConnecticut 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.[16]

London is Europes leading centre for hedge fund managers, with three-quarters of European hedge fundinvestments, 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. areleading locations for management of Asian hedge funds' assets with around a quarter of the total each.[17]

The legal entity

Limited partnerships are principally used for hedge funds aimed at US-based investors who pay tax, asthe investors will receive relatively favorable tax treatment in the US. The general partner of the limitedpartnership is typically the investment manager (though is sometimes an offshore corporation) and theinvestors 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 investinto a feeder fund, which will, in turn, invest all of its assets into the master fund. The assets of themaster fund will then be managed by the investment manager in the usual way. This allows severalfeeder funds (e.g. an offshore corporate fund, a U.S. limited partnership and a unit trust) to invest intothe same master fund, allowing an investment manager the benefit of managing the assets of a singleentity while giving all investors the best possible tax treatment.

The investment manager, which will have organized the establishment of the hedge fund, may retain aninterest 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 votingrights over only a limited range of issues, such as selection of the investment manager. The fundsstrategic decisions are taken by the board of directors of the fund, which is independent but generallyloyal to the investment manager.

Open-ended nature

Hedge funds are typically open-ended, in that the fund will periodically issue additional partnershipinterests or shares directly to new investors, the price of each being the net asset value (NAV) per




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interest/share. To realize the investment, the investor will redeem the interests or shares at the NAV perinterest/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 sumon redemption than it paid on investment. Investors do not typically trade shares or interests amongthemselves and hedge funds do not typically distribute profits to investors before redemption. Thiscontrasts with a closed-ended fund, which has a limited number of shares which are traded amonginvestors, and which distributes its profits.

Side pockets

Where a hedge fund holds assets that are hard to value reliably or are relatively illiquid (in comparisonto the redemption terms of the fund itself), the fund may employ a "side pocket". A side pocket is amechanism whereby the fund segregates the illiquid assets from the main portfolio of the fund andissues investors with a new class of interests or shares which participate only in the assets in the sidepocket. Those interests/shares cannot be redeemed by the investor. Once the fund is able to sell the sidepocket assets, the fund will generally redeem the side pocket interests/shares and pay investors theproceeds.

Side pockets are designed to address issues relating to the need to value an investor's holding in the fundif they choose to redeem. If an investor redeems when certain assets cannot be valued or sold, the fundcannot be confident that the calculation of his redemption proceeds would be accurate. Moreover, hisredemption proceeds could only be obtained by selling the liquid assets of the fund. If the illiquid assetssubsequently turned out to be worth less than expected, the remaining investors would bear the full losswhile the redeemed investor would have borne none. Side pockets therefore allow a fund to ensure thatall investors in the fund at the time the relevant assets became illiquid will bear any loss on them equallyand allow the fund to continue subscriptions and redemptions in the meantime in respect of the mainportfolio. 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 extensivelyfollowing 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 forthe assets.

Specific types of fund may also use side pockets in the ordinary course of their business. A fundinvesting in insurance products, for example, may routinely side pocket securities linked to naturaldisasters following the occurrence of such a disaster. Once the damage has been assessed, the securitycan 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. Sharesin 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",[18] the IPO of Fortress Investment Group

LLC was for the sale of the investment manager, not of the hedge funds that it managed.[19]




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Regulatory issues

Part of what gives hedge funds their competitive edge, and their cachet in the public imagination, is thatthey straddle multiple definitions and categories; some aspects of their dealings are well-regulated, whileothers are unregulated or at best quasi-regulated.

U.S. regulation

The typicalpublic 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 registeredinvestment companies. Aside from registration and reporting requirements, investment companies aresubject to strict limitations on short-selling and the use of leverage. There are other limitations andrestrictions placed on public investment company managers, including the prohibition on chargingincentive or performance fees.

Although hedge funds are investment companies, they have avoided the typical regulations forinvestment companies because of exceptions in the laws. The two major exemptions are set forth inSections 3(c)1 and 3(c)7 of the Investment Company Act of 1940. Those exemptions are for funds with100 or fewer investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3

(c) 7 Fund").[20] 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.)[21] A 3(c)1Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number ofinvestors. The Securities Act of 1933 disclosure requirements apply only if the company seeks fundsfrom 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.[22] A 3(c)7 fund with more than 499 investors

must register its securities with the SEC.[23]

In order to comply with 3(c)(1) or 3(c)(7), hedge funds raise capital via private placement under theSecurities 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,[citation needed] the exemptionsunder the Investment Company Act, combined with the restrictions contained in Regulation D,

effectively require hedge funds to be offered solely to accredited investors.[24] An accredited investor isan individual person with a minimum net worth of $1,000,000 or, alternatively, a minimum income ofUS$200,000 in each of the last two years and a reasonable expectation of reaching the same incomelevel in the current year. For banks and corporate entities, the minimum net worth is $5,000,000 in

invested assets.[24]

There have been attempts to register hedge fund investment managers. There are numerous issuessurrounding these proposed requirements. A client who is charged an incentive fee must be a "qualifiedclient" 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.[25]

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.[26] Therequirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over14 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.[27] The new rule was controversial,

with two commissioners dissenting.[28] The rule change was challenged in court by a hedge fund




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manager, and, in June 2006, the U.S. Court of Appeals for the District of Columbia overturned it andsent it back to the agency to be reviewed. See Goldstein v. SEC(http://www.seclaw.com/docs/ref/GoldsteinSEC04-1434.pdf) . In response to the court decision, in 2007the SEC adopted Rule 206(4)-8. Rule 206(4)-8, unlike the earlier challenged rule, "does not imposeadditional filing, reporting or disclosure obligations" but does potentially increase "the risk of

enforcement action" for negligent or fraudulent activity.[29]

In February 2007, the President's Working Group on Financial Markets rejected further regulation ofhedge funds and said that the industry should instead follow voluntary guidelines.[30][31][32] In November2009 the House Financial Services Committee passed a bill that would allow states to oversee hedgefunds and other investment advisors with $100m or less in assets under management, leaving largerinvestment managers up to the Securities and Exchange Commission. Because the SEC currentlyregulates advisers with $25m or more under management, the bill would shift 43% of these companies,

or roughly 710, back over to state oversight[33]

Comparison to U.S. private equity funds

Hedge funds are similar to private equity funds in many respects. Both are lightly regulated, privatepools 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 suchas 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.[citation needed]

Between 2004 and February 2006, some hedge funds adopted 25-month lock-up rules expressly toexempt 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.[citation needed]

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 notA 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 isno method of ascertaining pricing on a regular basis. In addition, mutual funds must have a prospectusavailable 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 thetotal returns are generated (net of fees) for their investors and then returned when the term ends, througha passthrough requiring CPAs and U.S. Tax W-forms. Hedge fund investors tolerate these policiesbecause 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 traditionallybeen found only in hedge funds.




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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 mergerarbitrage. Such funds are SEC regulated, but they offer hedge fund strategies and protection for mutualfund investors.

Also, a few mutual funds have introduced performance-based fees, where the compensation to themanager 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".[34] Under thesearrangements, 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, withinlimits and symmetrically, similarly to a hedge fund "0 and 50" fee: A 0% management fee coupled witha 50% performance fee if the fund outperforms its benchmark index. However, the 125 bp base fee isreduced (but not below zero) by 50% of underperformance and increased (but not to more than 250 bp)

by 50% of outperformance.[35]

Proposed U.S. regulation

Hedge funds are exempt from regulation in the United States. Several bills have been introduced in the110th Congress (200708), 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 inappropriatelyavoid Federal taxation;

H.R. 3417, which would establish a Commission on the Tax Treatment of Hedge Funds andPrivate Equity to investigate imposing regulations;

S. 1402, a bill to amend the Investment Advisors Act of 1940, with respect to the exemption toregistration requirements for hedge funds; and

S. 1624, a bill to amend the Internal Revenue Code of 1986 to provide that the exception from thetreatment of publicly traded partnerships as corporations for partnerships with passive-typeincome shall not apply to partnerships directly or indirectly deriving income from providinginvestment adviser and related asset management services.

S. 3268, a bill to amend the Commodity Exchange Act to prevent excessive price speculation withrespect to energy commodities. The bill would give the federal regulator of futures markets theresources 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 inan 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'sFinancial 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'sDirective on Alternative Investment Fund Managers.




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Offshore regulation

Many offshore centers are keen to encourage the establishment of hedge funds. To do this they offersome combination of professional services, a favorable tax environment, and business-friendlyregulation. Major centers include Cayman Islands, Dublin, Luxembourg, British Virgin Islands, andBermuda. The Cayman Islands have been estimated to be home to about 75% of worlds hedge funds,

with nearly half the industry's estimated $1.225 trillion AUM.[36]

Hedge funds have to file accounts and conduct their business in compliance with the requirements ofthese 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 beindependent of the fund manager.

Hedge fund indices

There are many indices that track the hedge fund industry, and these fall into three main categories. Intheir 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 acceptedas representative, and products such as futures and ETFs provide investable access to them in mostdeveloped markets. However hedge funds are illiquid, heterogeneous and ephemeral, which makes ithard to construct a satisfactory index. Non-investable indices are representative, but, due to variousbiases, their quoted returns may not be available in practice. Investable indices achieve liquidity at theexpense of limited representativeness. Clone indices seek to replicate some statistical properties ofhedgefunds but are not directly based on them. None of these approaches is wholly satisfactory.

Non-investable indices

Non-investable indices are indicative in nature, and aim to represent the performance of some database

of hedgefunds using some measure such as mean, median or weighted mean from a hedge funddatabase. The databases have diverse selection criteria and methods of construction, and no singledatabase captures all funds. This leads to significant differences in reported performance betweendifferent indices.

Although they aim to be representative, non-investable indices suffer from a lengthy and largelyunavoidable list of biases.

Funds participation in a database is voluntary, leading to self-selection bias because those funds thatchoose to report may not be typical of funds as a whole. For example, some do not report because ofpoor 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 departureseach year, which raises the problem of survivorship bias. If we examine only funds that have survived tothe present, we will overestimate past returns because many of the worst-performing funds have notsurvived, and the observed association between fund youth and fund performance suggests that this biasmay be substantial.

When a fund is added to a database for the first time, all or part of its historical data is recorded ex-postin the database. It is likely that funds only publish their results when they are favorable, so that the




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average performances displayed by the funds during their incubation period are inflated. This is knownas "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 isavailable to shareholders. To create an investable index, the index provider selects funds and developsstructured products or derivative instruments that deliver the performance of the index. When investorsbuy these products the index provider makes the investments in the underlying funds, making aninvestable 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 theconstructor. To make the index liquid, these terms must include provisions for redemptions that somemanagers may consider too onerous to be acceptable. This means that investable indices do not representthe total universe of hedge funds, and most seriously they may under-represent more successfulmanagers.

Hedge Fund Replication

The most recent addition to the field approach the problem in a different manner. Instead of reflectingthe performance of actual hedge funds they take a statistical approach to the analysis of historic hedgefund returns, and use this to construct a model of how hedge fund returns respond to the movements ofvarious investable financial assets. This model is then used to construct an investable portfolio of thoseassets. This makes the index investable, and in principle they can be as representative as the hedge funddatabase from which they were constructed.

However, they rely on a statistical modelling process. As replication indices have a relatively shorthistory it is not yet possible to know how reliable this process will be in practice, although initiallyindications are that much of hedge fund returns can be replicated in this manner without the problems ofilliquidity, transparency and fraud that exist in direct hedge fund investments.

Debates and controversies

Systemic risk

Hedge funds came under heightened scrutiny as a result of the failure of Long-Term CapitalManagement (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 LTCMdisaster. The excessive leverage (through derivatives) that can be used by hedge funds to achieve their

return[37] 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 financialstability and systemic risk: "... the increasingly similar positioning of individual hedge funds withinbroad hedge fund investment strategies is another major risk for financial stability, which warrants closemonitoring despite the essential lack of any possible remedies. Some believe that broad hedge fundinvestment strategies have also become increasingly correlated, thereby further increasing the potential

adverse effects of disorderly exits from crowded trades."[38][39] However the ECB statement has been

disputed by parts of the financial industry.[40]




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The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in

June 2007.[41] The funds invested in mortgage-backed securities. The funds' financial problemsnecessitated an infusion of cash into one of the funds from Bear Stearns but no outside assistance. It wasthe largest fund bailout since Long Term Capital Management's collapse in 1998. The U.S. Securities

and Exchange commission is investigating.[42]

Hedge funds did not determine the vastly greater 2008 banking crisis, although it is widely

acknowledged that they have made it worse. [43]

Transparency

As private, lightly regulated entities, hedge funds are not obliged to disclose their activities to thirdparties. This is in contrast to a regulated mutual fund (or unit trust), which will typically have to meetregulatory requirements for disclosure. An investor in a hedge fund usually has direct access to theinvestment advisor of the fund, and may enjoy more personalized reporting than investors in retailinvestment 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.[citation needed]

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.[44] A study was done on twomajor databases containing hedge fund data. The study noted that 465 common funds had significantdifferences 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.[45] With these limitations, investors have to do their own research, which may

cost on the scale of $50,000.[46]

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 inextreme cases can assist fraud. In a recent example, Kirk Wright of International Management

Associates has been accused of mail fraud and other securities violations[47] which allegedly defrauded

clients of close to $180 million.[48] In December 2008, Bernard Madoff was arrested for running a $50

billion Ponzi scheme.[49] While Madoff did not run a hedge fund, his case clearly does illustrate thevalue of independent verification of assets.

Market capacity

The rather disappointing hedge fund performance of the past five years calls into question the alternativeinvestment industry's value proposition. 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 asource 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.[50]

U.S. investigations

In June 2006, the Senate Judiciary Committee began an investigation into the links between hedge funds

and independent analysts.[51]




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The U.S. Securities and Exchange Commission (SEC) is also focusing resources on investigating insider

trading by hedge funds.[52][53]

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.

[54][55]

The question of how performance should be adjusted for the amount of risk that is being taken has led toliterature that is both abundant and controversial. Traditional indicators (Sharpe, Treynor, Jensen) workbest when returns follow a symmetrical distribution. In that case, risk is represented by the standarddeviation. Unfortunately, hedge fund returns are not normally distributed, and hedge fund return seriesare autocorrelated. Consequently, traditional performance measures suffer from theoretical problemswhen they are applied to hedge funds, making them even less reliable than is suggested by the shortness

of the available return series.[2]

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 Kaplanand 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.[2]

Value in mean/variance efficient portfolios

According to Modern Portfolio Theory, rational investors will seek to hold portfolios that aremean/variance efficient (that is, portfolios offer the highest level of return per unit of risk, and the lowestlevel of risk per unit of return). One of the attractive features of hedge funds (in particular market neutraland similar funds) is that they sometimes have a modest correlation with traditional assets such asequities. This means that hedge funds have a potentially quite valuable role in investment portfolios as

diversifiers, reducing overall portfolio risk.[2]

However, there are three reasons why one might not wish to allocate a high proportion of assets intohedge funds. These reasons are:

Hedge funds are highly individual and it is hard to estimate the likely returns or risks;1.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

2.

Hedge fund returns are reduced considerably by the high fee structures that are typically charged.3.

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

[56][57]

who performed a mean-variance optimization calculation on an opportunity set that consisted of a stock index fund, a bondindex fund, and ten hypothetical hedge funds. The optimizer found that a mean-variance efficientportfolio did not contain any allocation to hedge funds, largely because of the impact of performancefees. To demonstrate this, Kritzman repeated the optimization using an assumption that the hedge fundsincurred no performance fees. The result from this second optimization was an allocation of 74% tohedge funds.

The other factor reducing the attractiveness of hedge funds in a diversified portfolio is that they tend tounder-perform during equity bear markets, just when an investor needs part of their portfolio to add




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value.[2] For example, in January-September 2008, the Credit Suisse/Tremont Hedge Fund Index[58] wasdown 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 tomake hedge funds attractive this may not work in turbulent period, for example around the collapse ofLehman 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 assetsother than cash. The S&P 500 total return was -37.00% in 2008, and that was one of the best performingequity indices in the world. Several equity markets lost more than half their value. Most foreign anddomestic corporate debt indices also suffered in 2008, posting losses significantly worse than theaverage hedge fund. Mutual funds also performed much worse than hedge funds in 2008. According toLipper, the average U.S. domestic equity mutual fund decreased 37.6% in 2008. The averageinternational equity mutual fund declined 45.8%. The average sector mutual fund dropped 39.7%. Theaverage China mutual fund declined 52.7% and the average Latin America mutual fund plummeted57.3%. Real estate, both residential and commercial, also suffered significant drops in 2008. Insummary, hedge funds outperformed many similarly-risky investment options in 2008.

Notable hedge fund firms

Amaranth AdvisorsBridgewater AssociatesCitadel Investment GroupD.E. ShawFortress Investment GroupGLG PartnersLong-Term Capital ManagementMan GroupMarshall WaceRenaissance TechnologiesSAC Capital AdvisorsSoros Fund ManagementThe Children's Investment Fund Management (TCI)

Notes

^ "Hedge Funds Do About 60% Of Bond Trading, StudySays" (http://online.wsj.com/article/SB118843899101713108.html) . The Wall Street Journal. August 30,2007. http://online.wsj.com/article/SB118843899101713108.html. Retrieved 2007-12-19.Durbin Hunter

1.

^ abcdefgh AIMA Roadmap to Hedge Funds (http://www.aima.org/download.cfm/docid/6133E854-63FF-46FC-95347B445AE4ECFC)

2.

^ [1] (http://www.bloomberg.com/apps/news?pid=20601087&sid=atrq052in_gE&refer=home)3.^ [2] (http://www.finalternatives.com/node/9918)4.^ http://www.pionline.com/article/20100308/CHART2/1003099105.^ 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)

6.

^ Financial Rimes, "Hedge fund investors have a great chance to cut fees", James Mackintosh, 6 February2009. (http://www.ft.com/cms/s/0/cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac.html)

7.

^ "Trader Monthly's Top 100 for 2007Unveiled" (http://www.1440wallstreet.com/index.php/comments/trader_monthlys_top_100_for_2007_unveil1440 Wall Street, April 7, 2008.

8.




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http://www.1440wallstreet.com/index.php/comments/trader_monthlys_top_100_for_2007_unveiled/.Retrieved May 25, 2008.^ "Best-Paid Hedge Fund Managers" (http://www.iimagazine.com/article.aspx?articleID=1914753) .

Institutional Investor, Alpha magazine, May 25, 2008. http://www.iimagazine.com/article.aspx?articleID=1914753. Retrieved May 25, 2008.

9.

^ Hedge Fund Math: Why Fees Matter (Newsletter), Epoch Investment Partners Inc.(http://www.eipny.com/pdf/HedgeFundMathWhyFeesMatter110907.pdf)

10.

^ Forbes 400 Richest Americans: Stephen A. Cohen

(http://www.forbes.com/lists/2006/54/biz_06rich400_Steven-A-Cohen_PZMO.html)

11.

^ Opalesque (10 March 2010). "Incentive fees fall since start of the financialcrisis" (http://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.hthttp://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.html.

12.

^ Hedge Funds: Fees Down? Close Shop(http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005088_1711_db042.htm)

13.

^ Lessons from the Collapse of Hedge Fund, Long-Term Capital Management(http://riskinstitute.ch/146490.htm)

14.

^ Hedge Funds, pg 2 (http://www.thecityuk.com/media/2358/Hedge_Funds_2010.pdf) InternationalFinancial Services London

15.

^ http://sec.gov/rules/final/ia-2333.htm#IA16.^ Hedge Funds, pg 2 and 3 (http://www.thecityuk.com/media/2358/Hedge_Funds_2010.pdf) InternationalFinancial Services London

17.

^ Fortress files for first U.S. hedge fund IPO (http://www.marketwatch.com/news/story/story.aspx?siteid=mktw&guid=%7B8CF79DC0-8C69-49D3-907B-153CF689B082%7D) , Marketwatch

18.

^ FORTRESS INVESTMENT GROUP LLC(http://www.sec.gov/Archives/edgar/data/1380393/000095013606009310/file1.htm) , SEC RegistrationStatement

19.

^ The Investment Company Act of 1940 (http://www.law.uc.edu/CCL/InvCoAct/sec3.html)20.^ The Investment Company Act of 1940 (http://www.law.uc.edu/CCL/InvCoAct/sec2.html)21.^ Skeel D. (2005). Behind the Hedge (http://www.legalaffairs.org/issues/November-December-2005/feature_skeel_novdec05.msp) .Legal Affairs.

22.

^ http://www.hedgefundworld.com/forming_a_hedge_fund.htm23.

^ ab General Rules and Regulations promulgated under the Securities Act of 1933(http://www.law.uc.edu/CCL/33ActRls/rule501.html)

24.

^ Rules and Regulations promulgated under the Investment Advisers Act of 1940(http://www.law.uc.edu/CCL/InvAdvRls/rule205-3.html)

25.

^ Registration Under the Advisers Act of Certain Hedge Fund Advisers (http://sec.gov/rules/final/ia-2333.htm)

26.

^ Registration Under the Advisers Act of Certain Hedge Fund Advisers (http://sec.gov/rules/final/ia-2333.htm#P78_37183)

27.

^ Astarita MJ. New Hedge Fund Advisor Rule(http://www.seclaw.com/docs/NewHedgeFundAdvisorRule.htm) .

28.

^ 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.

29.

^ Officials Reject More Oversight of Hedge Funds(http://www.nytimes.com/2007/02/23/business/23hedge.html)

30.

^ Presidents 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)

31.

^ [3] (http://www.treasury.gov/press/releases/reports/principles.pdf)32.^ Opalesque (9 November 2009). "House Financial Services Committee passed bill allowing U.S. states tooversee smaller hedgefunds" (http://www.opalesque.com/55729/regulation/Regulatory_Update_House_Financial_Services_Commihttp://www.opalesque.com/55729/regulation/Regulatory_Update_House_Financial_Services_Committee_pas

33.

^ The Investment Advisers Act of 1940 (http://www.law.uc.edu/CCL/InvAdvAct/sec205.html)34.^ http://www.tfscapital.com/products/mutual/files/Prospectus.pdf35.^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 notoriouslyspeculative

36.




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^ http://www.ustreas.gov/press/releases/reports/hedgfund.pdf37.^ ECB Financial Stability Review June 2006, p. 142(http://www.ecb.int/pub/pdf/other/financialstabilityreview200606en.pdf)

38.

^ Gary Duncan (2006-06-02). "ECB warns on hedge fundrisk" (http://business.timesonline.co.uk/tol/business/economics/article670960.ece) . London: The Times.http://business.timesonline.co.uk/tol/business/economics/article670960.ece. Retrieved 2007-05-01.

39.

^ edhec-risk.com (http://www.edhec-risk.com/edito/RISKArticleEdito.2006-07-27.4050/attachments/EDHEC%20response%20to%20ECB%20statement%20on%20HFs.pdf)

40.

^ Blowing up the Lab on Wall Street (http://www.time.com/time/business/article/0,8599,1653556,00.html)41.^ 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)

42.

^ [4] (http://www.euractiv.com/en/financial-services/mccreevy-spares-hedge-funds-tight-regulation/article-181867) EurActiv, "McCreevy spares hedge funds from tight regulation"

43.

^ Cassar, G., & Gerakos, J. (2009). Determinants of Hedge Fund Internal Controls and Fees. Retrieved from[5] (http://www.hbs.edu/units/am/pdf/Gerakos.pdf)

44.

^ Liang, B. (2000). Hedge Funds: The Living and the Dead. Journal of Financial & Quantitative Analysis, 35(3), 309-326. Retrieved from Business Source Complete.

45.

^ Stulz, R. (2007). Hedge Funds Past, Present, and Future. Journal of Economic Perspectives, 21(2), 175-194. doi: 10.1257/jep.21.2.175

46.

^ SEC v. Kirk S. Wright, International Management Associates, LLC; International Management AssociatesAdvisory Group, LLC; International Management Associates Platinum Group, LLC; InternationalManagement Associates Emerald Fund, LLC; International Management Associates Taurus Fund, LLC;International Management Associates Growth & Income Fund, LLC; International Management AssociatesSunset Fund, LLC; Platinum II Fund, LP; and Emerald II Fund, LP, Civil Action(http://www.sec.gov/litigation/litreleases/lr19581.htm)

47.

^ Hedge fund manager faces fraud charges(http://money.cnn.com/2006/03/30/markets/wright_charged/index.htm)

48.

^ "Wall Street legend Bernard Madoff arrested over 50 billion Ponzischeme" (http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece) . The Times(London). December 12, 2008.http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece. Retrieved May 4, 2010.

49.

^ Ghin and Vaissi, 2006, The Right Place for Alternative Betas in Hedge Fund Performance: an Answer tothe Capacity Effect Fantasy, The Journal of Alternative Investments, Vol. 9, No. 1, pp. 9-18

50.

^ Scrutiny Urged for Hedge Funds (http://www.washingtonpost.com/wp-dyn/content/article/2006/06/28/AR2006062801909.html)51.

^ "Testimony Concerning Insider Trading by (http://www.sec.gov/news/testimony/2006/ts092606lct.htm#2)Linda Chatman Thomsen". Securities and Exchange Commission. September 26, 2006.http://www.sec.gov/news/testimony/2006/ts092606lct.htm#2. Retrieved 2007-12-19.

52.

^ "Hedge Funds to Face More Scrutiny From U.S. MarketRegulators" (http://www.bloomberg.com/apps/news?pid=20601087&sid=aFvR74yK0J20&refer=home) .Bloomberg News. December 5, 2006. http://www.bloomberg.com/apps/news?pid=20601087&sid=aFvR74yK0J20&refer=home. Retrieved 2007-12-19.

53.

^ High Performance - Barron's Online (http://online.barrons.com/article/SB119101983536943198.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_top)

54.

^ [6] (http://online.wsj.com/public/resources/documents/BA_HedgeFund50_071001.pdf)55.^ Portfolio Efficiency with Performance Fees, Economics and Political Strategy (newsletter), February

2007, Peter L. Bernstein Inc.

56.

^ 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?)

57.

^ Credit Suisse/Tremont Hedge Index web page (http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD)

58.




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References

Frank S. Partnoy & Randall S. Thomas, 'Gap Filling, Hedge Funds, and FinancialInnovation' (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 Journal1375

External links

CAIA Association (http://caia.org) founded in 2002 by the Center for International Securities andDerivatives Markets (CISDM) and the Alternative Investment Management Association (AIMA),it is the sponsoring body of the Chartered Alternative Investment Analyst(CAIA) designation

Center for International Securities and Derivatives Markets (http://cisdm.som.umass.edu) at theUniversity 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 theInternational 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

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 theInternational Association of Hedge Funds Professionals (IAHFP)

HEDGEweb Hedge Fund Research (http://www.hedgeweb.net/) Publishes hedge fund indices andanalysis of the growth and performance of the hedge fund industry.

Retrieved from "http://en.wikipedia.org/wiki/Hedge_fund"Categories: fundsHedge | Financial services | Investment | Financial terminology | Alternativeinvestment management companies | investorsInstitutional

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