Hedge Fund

Hedge funds face fewer restrictions than funds sold to the general public, so they can invest more flexibly. They are typically open only to professional or wealthy investors and often require large minimum investments.

The first hedge fund is usually credited to Alfred Winslow Jones, who in 1949 combined buying shares he expected to rise with short selling shares he expected to fall, hedging against market movements. Today, hedge funds follow many strategies, including long/short equity, global macro, event-driven, market-neutral, credit and quantitative strategies.

Hedge funds traditionally charged a 2% annual management fee and 20% of profits, known as 2 and 20, although average fees have fallen. Many limit how often investors can withdraw money, such as quarterly with advance notice.

For example, in 1992, George Soros’s Quantum Fund famously bet against the British pound and reportedly made about 1 billion dollars when the UK left the European Exchange Rate Mechanism.

Hedge funds’ performance varies widely. Some have produced strong returns, while others have failed, sometimes dramatically, such as Long-Term Capital Management in 1998. They are regulated more lightly than retail funds, although oversight has increased since 2008.