Hedge Funds

The first hedge fund was officially founded in 1949 by Alfred Winslow Jones, but separate characteristics of the modern hedge funds were operated long before him. In 1949, he was  the first one to use short selling, a limited partnership structure and leverage, and a 20% incentive fee to compensate the managing partner.

Most hedge funds are situated offshore, independently of the residence of their manager, investors or investments in order to make the investors only to pay taxes, and not also the fund. 75% of the world's hedge funds are estimated to be located in the Cayman Islands. Other major offshore centers are British Virgin Islands, Dublin, Luxembourg and the Bermudas.

Since hedge funds are open only to qualified investors they are most commonly exempt from regulations of the SEC, NASD and other qualified bodies, they have to conduct their business in concordance to the offshore bank's regulation. Offshore banks usually require the fund to be independent of the fund manager, confidentiality and restrictions on the availability of funds for retail investors.

Hedge funds have a reputation for secrecy, but they operate billions of dollars and have a great influence on the markets. For example, the “Institutional Investor” magazine each year publishes a list of the ten best ranked hedge funds. Notable hedge funds are BluMont Capital, Citadel Investment Group, Fortress Investment Group, Goldman Sachs, Man Group, Renaissance Technology and others.

The most common ways of how hedge funds operate are the following:

Global macro technique is to seek assets that are mispriced relative to alternatives.

Long/short equity is a term used to describe all hedged investments in equities.

A shot bias emphasizes that the investment is solely short, and an equity market neutral makes the balance between short and long positions;

Event driven opportunities are those specialized in the analysis of a particular kind of event, like distressed securities, also known as companies that are or may become bankrupt;

Regulation D concerning distressed companies issuing securities or Merger Arbitrage between an acquiring public company and a target public company.

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30/09/2006
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