Hedge Funds

Hedge funds are privately offered, professionally managed investment vehicles that seek, like all financial investments, a positive annual return, limited variations in value, and the preservation of capital. HedgeFundFacts.org reports that “hedge funds play a critical role in the financial markets, broadening the use of investment strategies, increasing the number of participating investors, and enlarging the pools of capital available.” Hedge funds are considered an “alternative investment” vehicle. The term “alternative investment” is the general term under which unregulated funds operate, and the category includes private equity and real estate. Mainstream funds are investment funds that everyday investors can purchase; mutual funds are the prime example of a mainstream fund. Institutions and individuals that want to invest in hedge funds must have a minimum level of income or assets. Individuals need investments in excess of $5 million; or net worth of at least $1 million; or income of at least $200,000 in the last two years. Institutions must have total assets of at least $5 million or no less than $25 million in investments or investable assets.

Some of the basic investing strategies utilized by modern hedge funds have been in use for thousands of years. The ancient Greek philosopher Aristotle told a story of another philosopher, Thales of Miletus, who came to the conclusion that there would be a bumper crop of olives. According to the Internet Encyclopedia of Philosophy, Thales “raised the money to put a deposit on the olive presses of Miletus and Chios, so that when the harvest was ready, he was able to let them out at a rate which brought him considerable profit.” Thus Thales profited by using a contrarian trading strategy in which assets are purchased or utilized when they are performing poorly and then sold when they perform well.

The hedge fund sector as we know it today began in 1949 when Alfred Winslow Jones, a journalist and sociologist, launched a hedge fund after becoming fascinated with stock-market forecasting. His investment strategies (short selling, leverage, and incentive fees) generated better-than-average investment returns, which prompted other financial firms to jump on board and start their own hedge funds. Today, there are more than 11,000 hedge funds in the United States.

Hedge fund managers, administrators, and analysts are the major players in this industry, but firms also need sales, legal, compliance, marketing, investor relations, and office support workers. A bachelor’s degree is the minimum requirement for most hedge fund careers, but those working on the investment side often have a master’s degree or even a Ph.D. in finance, mathematics, economics, financial engineering, quantitative finance, programming, marketing, or business administration. Others have advanced degrees in a specialty such as engineering or accounting.

Hedge fund firms are located throughout the United States, but many are headquartered on the East Coast, especially in New York City. There are also opportunities in Europe, Asia, and other regions. Senior portfolio managers earned total compensation (including bonuses) of $1,465,468 in 2014, according to the 2014 Hedge Fund Compensation Report by Institutional Investor’s Alpha. Junior-level portfolio managers earned mean annual salaries of $887,717. These are lofty salaries, but it’s important to remember that only the most experienced and talented investment professionals make this type of money.

Since the early 1990s, hedge funds have grown tremendously, not only in terms of assets under management, but also in the amount of media attention they’ve garnered for their brash strategies and the massive returns many have generated. Although they may remain largely a mystery to the general public, their effect on the global marketplace is felt more strongly with each passing day. In late 2014, hedge funds worldwide managed more than $2.85 trillion in assets, according to Hedge Fund Research, up from only $1.5 trillion in managed assets in 2006.

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