Final Paper.docx - Hedge Fund Managers 1 Hedge Fund...

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Hedge Fund Managers 1 Hedge Fund Managers Sheevani Babita Dhanie FIN 2100 Valencia College
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Hedge Fund Managers 2 “The classic hedge-fund creation story concerns a young trader at an investment bank. Opening his year-end bonus check, his jaw drops in amazement. “We thought you’d be happy,” says his supervisor. “That’s the largest first-year bonus we’ve ever given.” “Happy?” responds the young man, confused.” He’d wrung millions out of the market, and yet the firm rewarded him as a junior team member. He quit that day, the story goes, to start a hedge fund First, what is a hedge fund? A hedge fund is an alternative investment strictly available to only sophisticated investors, such as institutions and individuals with significant assets. Similar to mutual funds, hedge funds are pools of underlying securities. Though hedge fund and mutual funds are similar, there are also differences. Hedge funds are administered by a professional management firm. They are distinct from mutual funds as due to leverage. It is not capped by regulators. To make things a bit simpler, in the investment world, let’s say if someone says, “I run a hedge fund”, this is higher vocabulary to say, “I’m a consultant” to the business world. A hedge fund is a private partnership that either operates with little to no regulation from the U.S. Securities and Exchange Commission (SEC). In 1949, Alfred Winslow Jones started an investment partnership which is now referred to as the first hedge fund. Surprisingly, some of the first fundamentals remain today. The way
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Hedge Fund Managers 3 Jones structured his fund, it was exempt from the SEC regulations which were described in the Investment Company Act of 1940. This allowed him to use a wider variety of investment techniques as short selling, leverage and concentration of his portfolio. Jones eventually hired other managers and thus initiated the multi-manager hedge fund. This later evolved into the first fund of hedge funds. By 1968, 140 live hedge funds were documented. Mostly inspired imitations became about. “Mutual fund managers are paid fees regardless of their funds’ performance. Hedge fund managers, in contrast, receive a percentage of the returns they earn for investors, in addition to earning a ‘management fee’, typically in the range of 1% to 4% of the net asset value of the fund.” Regardless of what the market does, hedge funds are managed to generate a consistent level of return. They use a range of investment techniques and invests in a variety of assets that way a higher return for a given level of risk than what’s expected of normal investments. To break it down a little more, let’s cut down the words piece by piece. What is hedging? Hedging means “reducing risk”; and this exactly is what hedge funds are designed for – to reduce risk. Even though risk is already a function of return, a hedge fund manager has ways to reduce the risk without even cutting into investment income.
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