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.
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