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History of hedge funds

14 Nov

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.