3 hedge funds are thus structured by the exigencies

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3 Hedge funds are thus structured by the exigencies of avoiding having their capacities for action constrained by the Investment Company Act and its equivalents in other countries. What precisely is required to achieve this has varied, but common threads have been: a. availability not to the general public but only to individuals who are wealthy and/or deemed sophisticated investors. b. ‘non-solicitation’ – hedge funds cannot advertise, indeed in principle are restricted to communicating with potential investors by ‘word-of-mouth’ (Fung and Hsieh 1999, p. 315); c. sometimes a limitation on the number of investors permitted – for example, under section 3 of the Investment Company Act, no more than 100. What is generally regarded as the first hedge fund was A.W. Jones & Co., set up in 1949. (Jones had a PhD in sociology from Columbia University, but to our disappointment we can find no connection between his academic work and his hedge fund.) Jones’s striking success was made public by an article in Fortune (Loomis 1966), and it began to attract imitators, as, later, did George Soros’s Quantum Fund. The hedge-fund sector has not enjoyed entirely smooth growth – there have been well 3 Investment Company Act, section 3 (especially paragraph c.1) and section 12, paragraph a. The text of the act is available at , accessed 11 May 2005.
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9 publicised set-backs, such as the near-failure of Long-Term Capital Management (LTCM) in September 1998 (MacKenzie 2003) – but in recent years has expanded sharply. In 1990, there were fewer than 1,000 hedge funds, managing $25bn in assets; in 2004, there were more than 8,000 funds, managing almost $1,000bn; 4 by March 2006, assets under management had risen to over $1,500bn (Schurr 2006). At the time of writing in April 2006, hedge funds may be about to move into the retail investment mainstream for the first time. The U.K. Financial Services Authority is considering adding ‘funds of funds’ (which, as the name suggests, invest in portfolios of hedge funds) to its authorised product list and allowing them to take investments from the general public. Hedge funds’ annual management fees of 1 to 2 percent are in line with those of other actively-managed investments, but they also charge a performance fee, typically 20 percent of profits – that is, of increases in net asset value. (Normally, net asset value has to rise above its ‘high-water mark’ in previous periods before this fee applies.) To curb the incentive to excessive risk-taking created by this fee structure, hedge fund managers are conventionally expected to have as much as half of their own personal net worth invested in the fund that they manage, so that they suffer losses as well as benefit from gains. 4 Data from International Financial Services London, , accessed 23 May 2005.
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10 At times, hedge funds can become important owners of particular classes of security: in early September 2005, for example, hedge funds were reckoned to hold between a seventh and a quarter of the stock of Germany’s leading corporations, taken in aggregate (Jenkins and Milne 2005). Because nearly all hedge funds are
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  • Spring '16
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