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What is a Hedge Fund?

We have heard story of hedge fund managers yielding in great returns for their investors, there are famous hedge fund managers, just to name a few, Bill Ackman, George Soros, Paul Tudor Jones, Ray Dalio, Warren Buffet. All in the news headlines generating with their great returns for their hedge fund. During covid-19, there was a fund that focus on market risk strategy that yields 4,000% for their stakeholders when the whole market was down. Imagine you have participated in it and invested $100,000. Okay, you know the math.

Famously, there are also hedge fund scams and adverse media, from the case of the Bernard Madoff that is a Ponzi scheme and crashed $690Billion, to the US trader that short Tesla and lost $12billion, the lavish trader that lives on $740m of his investors’ money to recent Archegos Bill Hwang that blows up $32billion in half a day. What really happened and how come so many investors still want to invest in hedge fund? Let’s get started.

Source: Financial Times. Bill Hwang.

Before we talk about hedge fund, let’s look at what is investment? And how did this word came about?

Investment started in 1700BCE, it came about as a form of pledging as a collateral. It was known as the Code of the Hammurabi (see above image), written in Mesopotamia, which is modern day Iraq, this set the foundational laws for investment. Most modern investing go back to 17th century Europe and in 1602, to deal with printed stocks and bonds, the Amsterdam Stock Exchange was formed. And in 1759, the 1st pension fund was formed, Presbyterian Ministers’ Fund.

Okay, now you know how does this word investment came about, what has it got to do with hedge fund?

Well, the hedge fund idea, did not come about till much later, in 1940s. From the 1st pension fund till the first hedge fund, it took 181years to evolve!

The word “hedge fund” was designed and came from this Alfred Winslow Jones , he was an Australian whom parents shifted to USA and he became a journalist for fortune magazine, with no qualifications in science, math or financials, he look a the market risk and the risk in specific equities and one day, in 1949, he cited in his articles to created the 1st hedge fund.

It was 3 years later, that he perfected his idea and eventually launched his and also the world 1st hedge fund, never did he know this is going to create a phenomenon and ripple effects that is lasting for centuries.

His idea of hedge fund was pure and unique, with 3 criteria:

  • 1) Gather investments from a pool of investors.

  • 2) Charge a management fee of 2% for management the investors’ money.

  • 3) If he makes returns, he will take 20% off the returns as his bonus and return the rest to his investors.

Sounds familiar? Yes, this is the famous quote “2/20”, 2 is the 2% management fee, 20 is the 20% performance fee. Alfred Winslow Jones is the Big Daddy of hedge fund.

Source: https://blog.quandl.com/ - The Big Daddy and father of all hedge funds - Mr Alfred Winslow Jones in his old age.

14 years later, the year was 1966, it was proven that Alfred Winslow Jones hedge fund managed to beat all mutual funds performance by 44%, nett of all fees. The 1960s, was also the time where George Soros started his hedge fund and also an increase in a hybrid structure, funds of hedge funds, many funds were formed, investors were hungry for yield and invested in hedge funds.

There will always be a stand for time where market risk kicks in or a black swan event happening, the years in 1970s, it happens, the world 1st hedge fund crashed. Many hedge fund closes due to the struggled in market risk. But not for the Big Daddy, Alfred Winslow Jones, in fact, he only lost 10%, throughout his entire years of history, he only loses 3 years out of his 34 years!

1980s, after the crash, the hedge fund was resurged, the most famous one, Tiger Fund, started from $8m and raised $22billion! Eventually it crashed in 2000s, but the ripple effects was tremendous, Tiger Fund created 31 new managers, nickname tiger cubs, that they are now managing a total of $230billion!

1990s is where the real boom started, investors got super hungry, hunting for yields, many different strategies were formed, long short, macro, event driven, arbitrage, activism. Just to name a few famous hedge fund managers started fund started during this period, Ray Dalio, John Paulson, Daniel Och, David Tepper and Jack Walton.

Source: New York Times. Famous Hedge Fund Managers - how many do you know?

So, where are most of the hedge fund concentrated in? Have you guessed it? Yes, it is in America, with the influence of Alfred Winslow Jones, many are inspired and started their own hedge fund, America saw a total of estimate Hedge Fund size of $2.7 Trillion dollars under management.

I will talk about What problems does Hedge Fund solve? in my next article.

Entail Holdings is a hedge fund platform, if this article adds value to you and you would like to find out more about Entail Holdings Hedge fund, what we invest in and how you would like us to help you on your investment, drop me an email at mike.simbc@entailholdings.com

𝘋𝘪𝘴𝘤𝘭𝘢𝘪𝘮𝘦𝘳: 𝘛𝘩𝘪𝘴 𝘮𝘢𝘵𝘦𝘳𝘪𝘢𝘭 𝘴𝘩𝘢𝘭𝘭 𝘯𝘰𝘵 𝘣𝘦 𝘤𝘰𝘯𝘴𝘵𝘳𝘶𝘤𝘵𝘦𝘥 𝘢𝘴 𝘢𝘯 𝘰𝘧𝘧𝘦𝘳, 𝘳𝘦𝘤𝘰𝘮𝘮𝘦𝘯𝘥𝘢𝘵𝘪𝘰𝘯 𝘰𝘳 𝘴𝘰𝘭𝘪𝘤𝘪𝘵𝘢𝘵𝘪𝘰𝘯 𝘵𝘰 𝘤𝘰𝘯𝘤𝘭𝘶𝘥𝘦 𝘢 𝘵𝘳𝘢𝘯𝘴𝘢𝘤𝘵𝘪𝘰𝘯. 𝘛𝘩𝘪𝘴 𝘪𝘴 𝘱𝘶𝘳𝘦𝘭𝘺 𝘴𝘩𝘢𝘳𝘪𝘯𝘨 𝘰𝘧 𝘧𝘳𝘦𝘦 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯 𝘵𝘩𝘢𝘵 𝘪𝘴 𝘢𝘷𝘢𝘪𝘭𝘢𝘣𝘭𝘦 𝘧𝘳𝘰𝘮 𝘵𝘩𝘦 𝘸𝘦𝘣𝘴𝘪𝘵𝘦 𝘢𝘯𝘥 𝘤𝘰𝘯𝘴𝘰𝘭𝘪𝘥𝘢𝘵𝘦 𝘧𝘰𝘳 𝘦𝘥𝘶𝘤𝘢𝘵𝘪𝘰𝘯 𝘢𝘯𝘥 𝘪𝘯𝘧𝘰𝘳𝘮𝘢𝘵𝘪𝘰𝘯 𝘱𝘶𝘳𝘱𝘰𝘴𝘦𝘴.

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