Hedge Funds - History

History

During the US bull market of the 1920s, there were numerous private investment vehicles available to wealthy investors. Of that period, the best known today, is the Graham-Newman Partnership founded by Benjamin Graham and Jerry Newman which was cited by Warren Buffett, in a 2006 letter to the Museum of American Finance, as an early hedge fund.

Financial journalist Alfred W. Jones is credited with coining the phrase "hedged fund" and is erroneously credited with creating the first hedge fund structure in 1949. Jones referred to his fund as being "hedged", a term then commonly used on Wall Street, to describe the management of investment risk due to changes in the financial markets. In 1968 there were almost 200 hedge funds, and the first fund of funds that utilized hedge funds were created in 1969 in Geneva.

In the 1970s hedge funds specialized in a single strategy, and most fund managers followed the long/short equity model. Many hedge funds closed during the recession of 1969–70 and the 1973–1974 stock market crash due to heavy losses. They received renewed attention in the late 1980s. During the 1990s the number of hedge funds increased significantly, funded with wealth created during the 1990s stock market rise. The increased interest was due to the aligned-interest compensation structure (i.e. common financial interests) and the promise of above high returns. Over the next decade hedge fund strategies expanded to include: credit arbitrage, distressed debt, fixed income, quantitative, and multi-strategy. US institutional investors such as pension and endowment funds began allocating greater portions of their portfolios to hedge funds.

During the first decade of the 21st century, hedge funds gained popularity worldwide and by 2008, the worldwide hedge fund industry held US$1.93 trillion in assets under management (AUM). However, the 2008 financial crisis caused many hedge funds to restrict investor withdrawals and their popularity and AUM totals declined. AUM totals rebounded and in April 2011 were estimated at almost $2 trillion. As of February 2011, 61% of worldwide investment in hedge funds comes from institutional sources. In June 2011, the hedge funds with the greatest AUM was Bridgewater Associates (US$58.9 billion), Man Group (US$39.2 billion), Paulson & Co. (US$35.1 billion), Brevan Howard (US$31 billion), and Och-Ziff (US$29.4 billion). Bridgewater Associates, had $70 billion under management as of 1 March 2012 (2012-03-01). At the end of that year, the 241 largest hedge fund firms in the United States collectively held $1.335 trillion. In April 2012, the hedge fund industry reached a record high of US$2.13 trillion total assets under management.