Hedge fund trends in 2012

Hedge fund trends tend to change over time – hence why they’re trends! Hedge funds themselves have a long and storied history of changing over time; think of the massive diversification into the internet with the Dot Com boom, and more recently, the newest regulations with the Dodd-Frank Act reshaping traditional hedge funds as we know them.

Recent hedge fund trends are all over the map (and there is no guarantee that these trends will continue), but here is a small selection:

• Hedge funds in the early part of 2012 have shown a move toward global markets. The fact that hedge funds have a very large global presence, and that there is virtually no limit to what kind of investments can be made inside of a hedge fund portfolio, means that now is the perfect time to invest in emerging global markets.

• The uber rich have been careful with their assets lately, seemingly looking to protect themselves against margin calls and looming finance changes. Many hedge funds have taken their assets out of funds in the form of cash. Hedge fund portfolios are still going strong, though, with 2012 seeing the best performance in the beginning of a year since 2006.

• Managed futures are up, as are global macros!

• Larger funds are seeing larger inflows. Small funds are still mostly experiencing redemptions, but not the kind of net inflows that larger funds are seeing. The number stands as funds with more than one billion dollars in assets receiving 78% of inflows.

• Hedge funds that beat their ‘peers’ in 2011 had similar results in 2012 – at least thus far. 57% of those peer-beating funds saw net inflows in the first quarter.

• The trend did seem to be that those hedge funds which saw positive results in 2011 continued to do so into 2012. The majority of large hedge funds saw net inflows in the first quarter of 2012, where 63% of mid-size funds with positive performance in 2011 saw net inflows into 2012.

• There was a marked trend of investors who discovered their investments had under-performed shifting out of them and heading for seemingly greener pastures. This is usually the case (no investor typically has the patience to “hang around” an under performing fund), but the numbers were higher in the first quarter of 2012.

One of the biggest changes of 2011, leading into 2012, is the continued implementation of the government’s insider trading charges and other legal actions. Some funds have closed, many managers are under investigation, and some funds are doing poorly in general due to the continued investigation and allegations. While it is true that some funds have had a rough year so far, a good portion of funds are seeing decent to good profits on their invested assets. It remains to be seen if these positive trends will continue through the rest of 2012. It is evident to some that in the wake of the Dodd-Frank Act that regulation may begin to increase on hedge fund investments across the globe.

History of hedge funds

Hedge funds have become increasingly more well-known and popular over the last decade or so, after experiencing some historical ups and downs in terms of popularity. Hedge funds are certainly not new. This unique investment structure may have also changed a bit since its inception, but still resembles the original “model” of a hedge fund in many cases.

The person commonly credited with having “invented” the hedge fund is Alfred Winslow Jones (he also coined the term “hedged fund”). This Harvard graduate was a very remarkable man, and inventing the hedge fund was only one of his achievements. The hedge fund as we would recognize it in these modern times “debuted” in 1949, when Jones opened an equity fund as a private partnership. This did several things, and what was probably most important about it was that this merger meant the hedge fund was exempt from SEC regulation. Additionally, he combined leverage and short sales in a unique way to give him flexibility, and by doing so created a new model for investment practices. In 1952, Jones turned the private partnership into a limited partnership, and also paid a “performance fee” – these are two aspects of the modern hedge fund that are ubiquitous today.

Once Jones established (or, according to people who do not attribute the invention of the hedge fund to Jones himself, popularized) the general structure of hedge funds, they caught on. People were intrigued by the chance to invest without slavishly following the market’s trends, and also by the chance to invest in relative secrecy, not being regulated by the SEC. Throughout the following decades, hedge funds rose in popularity. By 1968, there were nearly two hundred.

Things changed during the following recession and stock market crash in the 1970s. Because of the substantial loss that the financial sector had seen, fewer people were willing and able to deal with hedge fund investments. However, by the 1980s, hedge funds had increased in popularity and were coming out of the slump of the 1970s, where the majority of hedge fund investments were single-strategy. By the 1990s, the media had popularized hedge funds more than ever before, and they were considered lucrative and full of new investors because of the stock market rise at the time. As the decade progressed, more strategies were added to the hedge fund investment “repertoire,” and hedge funds became truly and incredibly diversified.

The heyday of the hedge fund was probably in the mid to late 2000s. However, with the financial crisis at the end of the decade came a drop in popularity for hedge funds. The difficult financial times meant that a portion of hedge funds failed completely, and investor withdrawals were restricted due to liquidity issues. Despite the difficulties presented by the credit crunch/financial crisis, hedge funds continue to be popular and to thrive. Though they are often high risk, and though there will probably always be hedge fund failures, this unique type of investment continues to attract investors from around the entire world.

What is a hedge fund?

A hedge fund is a specific type of investment fund that is typically the domain of investors with a lot of experience. The reason why a hedge fund is perhaps better suited to a sophisticated investor is because the investors often have to fulfill certain requirements in order to be considered accredited/qualified. Hedge funds are also primarily run by a limited partnership, or a limited liability company, which places a money manager in charge of making decisions about investments made with the hedge fund.

For your average investor, a hedge fund would not be something they deal with, due to the fund’s complicated nature. For those with investment experience (and a lot of money to invest), hedge fund investments can be lucrative. A hedge fund has the benefit of being extremely versatile, and works in many ways like an entire portfolio; the money manager can choose to invest in a variety of different areas in order to maximize return under any market conditions. Hedge fund investments deal with more than just stocks, bonds and basic trading – hedge fund investments can be used to support startups, currency, and much more. Essentially, anywhere a money manager sees the opportunity to reap huge gains at little risk; a hedge fund investment may take place. This can involve either short or long positions. Hedge fund investments can be centered on one country, or can reach a global scale – it is up to the wisdom of the money manager to decide what market to engage in.

For the most part, most hedge funds are unregulated as many states do not require registration with the Securities and Exchange Commission. However, despite the “unregulated” status, the money managers (who are skilled investment professionals) are indeed required to adhere to the same market regulations as everyone else as they go about the business of managing the hedge fund portfolio. There is nothing illegal or dubious about hedge funds, when properly managed.

The term “hedge fund” refers in some cases to “hedging” against the market, or deliberately using techniques designed to reduce financial risk. In recent years, however, the “hedging” side of hedge funds (i.e., reducing risk as much as possible in terms of investment choices) has become rather fluid. Some money managers prefer to invest in volatile, fast-moving markets because the returns can be even more substantial.

Because of the many different financial techniques employed by hedge fund experts, there is no single definition or example of a hedge fund to be found. Some portfolios may reflect a cautious financial mind, and some may be far more adventurous. A good hedge fund manager will do their best to combine several strategies for making big returns at once, rather than relying on one method. Many hedge fund managers have an area of expertise and will focus on their field of skill. When entering into a hedge fund partnership as an investor, be sure to know exactly what the portfolio manager specializes in, and how much experience they have with hedge fund investments in total.