This section details some of the important events in the history of hedge funds.
Back in 1949, Alfred Winslow Jones, a former reporter for Fortune, started the first hedge fund with an initial capital of only US$100 000. Jones’ core intuition was that by correctly combining two speculative techniques, i.e. using both short sales and leverage, it would be possible to reduce total portfolio risk and construct a conservative portfolio, featuring a low exposure to the general market performance. Jones also had two other major ideas: to cater to investors, he had invested all his savings in the fund he managed, and his profit came from a 20% stake in the generated performance rather than from the payment of a fixed
percentage of assets under management. This approach made it possible to bring the interests of manager and investor together.
Today, the archetype described above characterizes only a small number of hedge funds: the term is now used to refer to a vast realm of different management models. At present, a hedge fund has five main characteristics:
- The manager is free to use a wide range of financial instruments.
- The manager can short sell.
- The manager can use leverage.
- The manager’s profit comes from a management fee, which is fixed and accounts for 1.5–2.5 %, and from a 20–25% fee on profits. Generally, the performance or incentive fee is applied only if the value of the hedge fund unit grows above the historical peak in absolute terms or over a one-year period.
- The manager invests a sizable part of his personal assets in the fund he manages, so as to bring his own interests in line with those of his clients.
In 1967, Michael Steinhardt started Steinhardt, Fine, Berkowitz & Company with eight employees and an initial capitalization of $7.7 million. Steinhardt began his career as a stock picker and then, as his hedge fund grew, shifted to a multi-strategy fund. In the 1980s Steinhardt became head of a hedge fund group with roughly US$5 billion of assets under management and with over 100 employees. Steinhardt ended his hedge fund career in 1995 after suffering big losses in 1994.
By 1969, the US Securities and Exchange Commission (SEC) had started to keep a watchful eye over the blossoming industry of hedge funds as a result of the rapid growth A Few Initial Remarks 3 in the number of new hedge funds and of assets under management. At that time, the commission estimated that approximately 200 hedge funds were in existence, with $1.5 billion of assets under management. 1969 was also the year that George Soros created the “Double Eagle” hedge fund, the predecessor of the more renowned Quantum Fund.
The first fund of hedge funds1 was Leveraged Capital Holdings, created in
In 1971, the first US fund of funds was started by Grosvenor Partners, and in 1973, the Permal Group launched the European multi-manager and multi-strategy fund of funds, called Haussmann Holdings N.V. The people who were given the task of creating the investment team for Permal were Jean Perret and Steve Mallory (hence the name Permal).
Then, in 1980, Julian Robertson and Thorpe McKenzie created Tiger Management Corporation and launched the hedge fund Tiger with an initial capital of $8.8 million. In 1983, Gilbert de Botton started Global Asset Management (GAM), a company specializing in the management of funds of hedge funds, which in 1999 was acquired by UBS AG and by the end of 2004 had some E38 billion of Assets under Management (AuM).
At the beginning of the 1990s, Soros, Robertson and Steinhardt managed macro funds worth several billion dollars and invested in stocks, bonds, currencies and commodities all over the world, trying to anticipate macro-economic trends.
The early 1990s were the heyday of macro funds. The exit of the British pound and the Italian lira from the European Monetary System in September 1992 allowed Soros to cash in an incredible profit of $2 billion.
On
Later on, hedge funds bounced back into the headlines when in the first nine months of 1998 Long Term Capital Management, managed by John Meriwether and a think tank including two Nobel laureates in Economics (Myron Scholes and Robert Merton), generated a staggering $4 billion loss, starting a domino effect that left many banks, financial institutions and big brokers in many countries teetering on the brink of default. Only the prompt intervention of a bail-out team led by the Federal Reserve of Alan Greenspan avoided the onset of a systemic crisis.
In October 1998, when the Japanese yen appreciated against the dollar, Robertson suffered a loss of about $2 billion. In 1999, his long/short equity strategy, based on the analysis of fundamentals of listed companies, did not work at all in the market driven by the tail wind of the New Economy. After withdrawals from investors, assets under management had plunged from $25 billion in August 1998 to less than $8 billion at the end of March 2000.
At the end of March 2000, when the “dot-com” speculative bubble was at its peak, Robertson announced the liquidation of the Tiger Fund. In April 2000, George Soros changed his chief investment strategist and soon after the CEO of Soros Fund Management LLC as well. Soros announced to his investors that he would stop making large leveraged macro investments. To reduce the risk he would downsize his return objectives.
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