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Imageinserate FONDS & DERIVATE The history of hedge funds: Longer than you might think Many people, even sophisticated investors, believe that hedge funds are a very recent arrival on the investment scene. But that is a very popular misconception.Although Asia saw its first hedge funds only in the 1980s, the very first hedge fund seen anywhere in the world was, in fact, launched four decades earlier, in the United States. It is the widespread and growing popularity of hedge funds that is new, rather than the underlying concept. In fact, their popularity has grown exponentially since the start of the 1990s, and that growth currently shows no signs of slowing. conclude that there Jones that nobody can keep up with”. had to be a system This contained details of his invest- superior to those ment approach, together with the reve- used for managing lation that his partnership had outper- money at the time, formed the most successful mutual and he set about fund that year by 44%. Moreover, it proving it. was reported that between 1949 and Jones raised 1966 his fund had outperformed the US$100,000, US$ average mutual fund by 85% net of 40,000 of which fees. was his own mon- ey, and established A difficult period in the early 1970s an investment part- By the end of 1968 the number of nership utilizing hedge funds had increased to 210, from the theories he had just 80 at the start of the year. The pe- researched for his riod from 1970 to 1974 was a real test article. The style for hedge fund managers’ skill, as mar- used was simple, kets reacted violently to global macro- combining short economic events including accelerat- selling with lever- ing inflation exacerbated by two major age. The marketing financial and cultural shocks caused by line was equally Opec countries sharply raising the simple: “Specula- price of crude oil. This resulted in huge tive tools used for swings in stock prices, followed by a conservative pur- number of hedge fund closures during poses”. The perfor- the ensuing bear market. Most hedge mance of the Jones funds were equity long/short players Fund depended on with a notable long bias, hence many stock picking rath- managers lost significant amounts of er than market tim- capital. Thus, by the mid-1970s, the ing. Although “le- number of hedge fund managers had By Daniel Durrer verage” had already been used in other fallen to under 100 from the 1968 peak. Head of Fund Distribution portfolios, its purpose had been purely Intermediary Clients speculative borrowing as opposed to New trends in the late 1970s GAM Anlagefonds AG, Zurich efficient portfolio management. The By the late 1970s, many hedge funds idea behind hedging this way was to re- had started to drift away from their 1949: The first hedge fund duce a portfolio’s market volatility. In original roots. Equity long/short man- Alfred Winslow Jones, a Harvard grad- 1952, the fund became a limited part- agers found it hard to make money in uate from Melbourne, Australia, estab- nership, thus avoiding regulation by such a confined space and started ap- lished the first hedge fund in 1949. the American Securities and Exchange plying their analysis of global eco- During his time as a reporter for For- Commission (SEC). nomic affairs to the fixed income and tune magazine, he carried out research Jones’s hedge fund came to the currency markets as well as equities. on prevailing trends in investment public’s attention through a 1966 For- Michael Steinhardt, Julian Robertson management. This research led him to tune magazine article entitled “The and George Soros, investors who sure- 40 PRIVATE 6 / 2007 FONDS & DERIVATE ly need no introduction, are the most Hedge funds were dramatically thrust teresting hedge fund strategies have famous examples of managers that into the media spotlight in September become feasible with different risk/re- emerged from an equity long/short 1992 when Soros’ Quantum Fund turn profiles. Finally, there have been background to run hugely successful made US$2 billion from the devalua- notable improvements to hedge fund “macro” hedge funds. tion of the Pound Sterling, and its ejec- infrastructure and operational support tion from Europe’s fledgling Exchange services resulting in lower barriers to Commodity trading advisors Rate Mechanism. entry for new managers. By the mid-1980s a new type of trader had emerged. The Chicago trading ex- Continued growth in the 1990s Funds of hedge funds changes had been a breeding ground As equity markets engaged in one of The introduction of funds of hedge for exceptional traders for decades. their longest and most intensive rallies funds (FoHFs) was a logical step in the These “commodity trading advisors” in history in the 1990s, the number of development of the market, and their applied their skills to new markets, long/short equity hedge fund managers rapid success resulted from the ability resulting in the emergence of great continued to grow. By the mid-1990s, to offer investors absolute as opposed names such as Paul Tudor Jones, Louis the long/short universe had also very to relative returns. Such a development Bacon and Bruce Kovner. If it was the much taken hold in Europe. From the was almost inevitable. In 1969 Lever- fixed income trades in the early 1980s early 1990s arbitrage strategies had aged Capital Holdings was established that made the reputation and fortunes also started to appear, particularly in with pooled funds totalling US$18 to of long/short managers, it was the col- Europe. 20 million from George Soros, Mi- lapse of equities in the late 1980s that chael Steinhart and George Galloway. did the same for many of the new man- 2007: 4,000 or 10,000 hedge funds? The company listed in Amsterdam and agers. Opinions vary on the estimated num- initially invested in five hedge fund ber of hedge funds currently in exis- managers. Resurgence in the mid-1980s tence worldwide; Hedge Fund Re- Today, the size of the FoHF uni- A significant catalyst in the resurgence search put the figure at 9,767 at 30 verse is estimated to be around 2,300 of hedge funds was a cover story from June 2007. The total figure, though, is funds managing a record US$745 bil- Institutional Investor of May 1986. often muddied by multiple share clas- lion, or roughly half of all assets under This reported that Robertson’s Tiger ses, long-only absolute return funds, management in hedge funds. Com- Fund had been compounding at 43% multi-manager funds, individually pared to 80 funds with assets under p.a. during its first six years, net of ex- managed accounts and discrete man- management of approximately US$1.9 penses and incentive fees. Gross per- dates. A better figure may be the num- billion in 1990, it is clear that their role formance had been about 50% p.a., ber of incorporated entities running in the marketplace has evolved con- comparing very favourably with the funds, which would be in the 4,000 to siderably. FoHFs raised US$17.4 bil- S&P 500 return of about 19% during 5,000 range. The vast majority of as- lion in new assets in the second quarter the same period. sets reside with the largest 15% of of 2007, more than double the US$7.9 Rather than adopting a high stakes hedge funds. billion collected in the first quarter of gambling approach, Robertson con- this year. And expectations in the mar- sistently hedged his portfolio with Absolute return ket indicate more growth to come. short sales, following and improving and new hedge fund strategies upon the original Jones model. Suc- There have been numerous factors con- Part of the investment landscape cessful publicity, enhancing the image tributing to the continued growth in the Hedge funds were originally the pre- of professionalism and risk control, led global hedge fund market witnessed serve of wealthy individuals. In fact, to a resurgence of hedge fund invest- this decade, both in terms of assets un- until recent years, the industry at- ing, and the universe grew at a rapid der management and the number of tracted little institutional money be- pace. One notable casualty, however, funds. Firstly, people are moving from cause of concerns regarding regulation proved to be the hedge fund pioneer the capital growth phase of the 1990s issues, lack of transparency and high Jones, who had lost his footing. His to a period of capital preservation in profile casualties. But now, many dif- fund’s assets had fallen from a peak of the 2000s. Hedge funds as an asset ferent kinds of investors from across US$200 million to US$30million, re- class are ideal for generating absolute the market segments have come to rec- sulting in closure of the fund in 1986. returns, thus cash has naturally flowed ognize that hedge funds can offer a By 1990, Hedge Fund Research in. Secondly, traditional managers have wide and varied set of opportunities for estimates there were 610 hedge funds, been searching for different products to adding value to portfolios. Thus today, including funds of funds, mostly in the sell after long-only funds lost money in almost sixty years after the first hedge United States. The 1990s witnessed 2001 to 2002, and increased media in- fund was launched, these funds have growth in the high 20% per annum terest further fuelled investor interest. become a firm part of the investment range in terms of the number of man- Thirdly, as more sophisticated finan- landscape. agers plying their trade as hedge funds, cial instruments have been developed, www.gam.com.
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