Editing Hedge fund

{{Short description|Type of investment fund}}
{{Use dmy dates|date=February 2018}}

A '''hedge fund''' is a [[Pooling (resource management)|pooled]] [[investment fund]] that holds [[Market liquidity|liquid]] assets and that makes use of complex [[trader (finance)|trading]] and [[risk management]] techniques to aim to improve investment performance and insulate returns from [[beta (finance)|market risk]]. Among these [[portfolio (finance)|portfolio techniques]] are [[short (finance)|short selling]] and the use of  [[leverage (finance)|leverage]] and [[derivative (finance)|derivative instruments]].<ref name="Lins"/> In the United States, [[financial regulation]]s require that hedge funds be marketed only to [[institutional investor]]s and [[high-net-worth individual]]s.

Hedge funds are considered [[alternative investment]]s. Their ability to use leverage and more complex investment techniques distinguishes them from regulated investment funds available to the retail market, commonly known as [[mutual fund]]s and [[Exchange-traded fund|ETFs]]. They are also considered distinct from [[private-equity fund|private equity fund]]s and other similar [[closed-end fund]]s as hedge funds generally invest in relatively [[liquid asset]]s and are usually [[open-end fund|open-ended]]. This means they typically allow investors to invest and withdraw capital periodically based on the fund's [[net asset value]], whereas private-equity funds generally invest in [[Market liquidity|illiquid assets]] and return capital only after a number of years.<ref name="FINRA13">{{cite web |url=http://www.finra.org/certainInvestors/ProtectYourself/InvestorAlerts/MutualFunds/P278033 |title=Alternative Funds Are Not Your Typical Mutual Funds |date=11 June 2013 |work=finra.org |publisher=[[Financial Industry Regulatory Authority]] |access-date=16 April 2014 |archive-url=https://web.archive.org/web/20140514055052/http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/MutualFunds/P278033 |archive-date=14 May 2014 |url-status=dead |df=dmy-all }}</ref><ref name="Stowell12">{{cite book |title=Investment Banks, Hedge Funds, and Private Equity |first=David |last=Stowell |year=2012 |publisher=Academic Press |isbn=978-0-12-404632-0 |page=237 |url=https://books.google.com/books?id=B5624MOzmHwC&pg=PA237 |access-date=18 April 2014 |archive-url=https://web.archive.org/web/20160809195442/https://books.google.com/books?id=B5624MOzmHwC&pg=PA237 |archive-date=9 August 2016 |url-status=live |df=dmy-all }}</ref> Other than a fund's regulatory status, there are no formal or fixed definitions of fund types, and so there are different views of what can constitute a "hedge fund".

Although hedge funds are not subject to the many restrictions applicable to regulated funds, regulations were passed in the United States and Europe following the [[2008 financial crisis]] with the intention of increasing government oversight of hedge funds and eliminating certain regulatory gaps.<ref name="Ismail">{{cite news |title=Institutions Damp Hedge Fund 'Startup Spirit,' Citi's Roe Says |first=Netty |last=Ismail |url=http://www.businessweek.com/news/2011-02-21/institutions-damp-hedge-fund-startup-spirit-citi-s-roe-says.html |archive-url=https://web.archive.org/web/20110225001817/http://www.businessweek.com/news/2011-02-21/institutions-damp-hedge-fund-startup-spirit-citi-s-roe-says.html |newspaper=Bloomberg Businessweek |date=21 February 2011 |archive-date=25 February 2011 |access-date=9 January 2015}}</ref> While most modern hedge funds are able to employ a wide variety of [[financial instrument]]s and risk management techniques,<ref name="PWGOFM">{{cite web |url=http://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf |title=Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management |author=The President's Working Group on Financial Markets |publisher=U.S. Department of the Treasury |date=April 1999 |access-date=27 September 2013 |archive-url=https://web.archive.org/web/20131007175449/http://www.treasury.gov/resource-center/fin-mkts/Documents/hedgfund.pdf |archive-date=7 October 2013 |url-status=live |df=dmy-all }}</ref> they can be very different from each other with respect to their strategies, risks, volatility and expected return profile. It is common for hedge fund investment strategies to aim to achieve a positive [[return on investment]] regardless of whether markets are rising or falling ("[[absolute return]]"). Hedge funds can be considered risky investments; the expected returns of some hedge fund strategies are less volatile than those of retail funds with high exposure to stock markets because of the use of hedging techniques. Research in 2015 showed that hedge fund activism can have significant real effects on target firms, including improvements in productivity and efficient reallocation of corporate assets. Moreover, these interventions often lead to increased labor productivity, although the benefits may not fully accrue to workers in terms of increased wages or work hours.<ref>{{Cite journal |last1=Alon |first1=Brav |last2=Wei |first2=Jiang |last3=Hyunseob |first3=Kim |date=2015 |title=The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes |url=https://doi.org/10.1093/rfs/hhv037 |journal=The Review of Financial Studies |volume=28 |issue=10 |pages=2723–2769|doi=10.1093/rfs/hhv037 }}</ref>

A hedge fund usually pays its investment manager a management fee (typically, 2% per annum of the net asset value of the fund) and a [[performance fee]] (typically, 20% of the increase in the fund's net asset value during a year).<ref name="Lins"/> Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be a substantial portion of the [[asset management]] industry,<ref>Lemke, Lins, Hoenig & Rube, ''Hedge Funds and Other Private Funds: Regulation and Compliance'' (Thomson West, 2014 ed.)</ref> with assets totaling around $3.8 trillion as of 2021.<ref>{{Cite web|date=2021-04-21|title=Hedge fund assets hit record $3.8 trillion in first quarter|url=https://www.reuters.com/business/hedge-fund-assets-hit-record-38-trillion-first-quarter-2021-04-21/|access-date=2021-08-05|website=Reuters|archive-date=5 August 2021|archive-url=https://web.archive.org/web/20210805145825/https://www.reuters.com/business/hedge-fund-assets-hit-record-38-trillion-first-quarter-2021-04-21/|url-status=live}}</ref>

==Etymology==
The word "hedge", meaning a line of bushes around the perimeter of a field, has long been used as a metaphor for placing limits on risk.<ref>{{cite web |url=http://www.phrases.org.uk/meanings/hedge-your-bets.html |title=Hedge your bets |author=<!--Staff writer(s); no by-line.--> |website=The Phrase Finder |access-date=25 July 2014 |archive-url=https://web.archive.org/web/20140729140903/http://www.phrases.org.uk/meanings/hedge-your-bets.html |archive-date=29 July 2014 |url-status=dead |df=dmy-all }}</ref> Early hedge funds sought to hedge specific investments against general market fluctuations by [[shorting]] other, similar assets.<ref name="Coggan 2010">{{cite book |last=Coggan |first=Philip |date=2010 |title=Guide to Hedge Funds |location=London |publisher=Profile Books |isbn=978-1-84668-382-4}}</ref>{{rp|4}} Nowadays, however, many different investment strategies are used, many of which do not "hedge" risk.<ref name="Coggan 2010" />{{rp|16–34}}<ref>{{cite web |url=http://www.investopedia.com/terms/h/hedgefund.asp |title=Hedge Fund |author=<!--Staff writer(s); no by-line.--> |website=Investopedia |access-date=25 July 2014 |archive-url=https://web.archive.org/web/20140728062639/http://www.investopedia.com/terms/h/hedgefund.asp |archive-date=28 July 2014 |url-status=live |df=dmy-all }}</ref>

==History==
During the US [[bull market]] of the 1920s, there were numerous private [[investment vehicle]]s available to wealthy investors. Of that period, the best known today is the Graham-Newman Partnership, founded by [[Benjamin Graham]] and his long-time business partner Jerry Newman.<ref>{{cite web|last=Laughner |first=B. |url=https://www.questia.com/magazine/1P3-3351108591/the-graham-newman-collection |title=The Graham-Newman Collection |archive-url=https://web.archive.org/web/20171117175314/https://www.questia.com/magazine/1P3-3351108591/the-graham-newman-collection |archive-date=17 November 2017 |publisher= |date=Spring 2014}}</ref> This was cited by [[Warren Buffett]] in a 2006 letter to the [[Museum of American Finance]] as an early hedge fund,<ref name="bloomberg.com">{{cite web |first=Chet |last=Currier |url=https://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1UhnH5DkE34 |title=Buffett Says Hedge Funds Are Older Than You Think |publisher=Bloomberg |date=29 September 2006 |access-date=26 November 2011 |url-status=dead |archive-url=https://web.archive.org/web/20131025132323/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1UhnH5DkE34 |archive-date=25 October 2013 |df=dmy-all }}</ref> and based on other comments from Buffett, [[Janet Tavakoli]] deems Graham's [[investment firm]] the first hedge fund.<ref name="janet">{{cite book|last1=Tavakoli|first1=Janet|title=Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street|year=2010|publisher=Wiley|isbn=978-0-470-63242-0}}</ref>

The sociologist [[Alfred Winslow Jones|Alfred W. Jones]] is credited with coining the phrase "''hedged'' fund"<ref name=Ubide>{{cite news |title=Demystifying Hedge Funds |first=Angel |last=Ubide |url=http://www.imf.org/external/pubs/ft/fandd/2006/06/basics.htm |magazine=Finance & Development |publisher=International Monetary Fund |date=June 2006 |access-date=3 March 2011 |archive-url=https://web.archive.org/web/20110628223927/http://www.imf.org/external/pubs/ft/fandd/2006/06/basics.htm |archive-date=28 June 2011 |url-status=live |df=dmy-all }}</ref><ref name=Ineichen>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |pages=[https://archive.org/details/absolutereturnsr0000inei/page/8 8–21] |url=https://archive.org/details/absolutereturnsr0000inei/page/8 }}</ref> and is credited with creating the first hedge fund structure in 1949.<ref name=Anson>{{cite book |title=The Handbook of Alternative Assets |last=Anson |first=Mark J.P. |year=2006 |publisher=John Wiley & Sons |isbn= 978-0-471-98020-9 |page=36}}</ref> 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 market]]s.<ref name=Lhabitant>{{cite book |title=Handbook of Hedge Funds |last=Lhabitant |first=François-Serge |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2 |page=10}}</ref> Jones also developed the popular 2-and-20 structure of hedge funds, in which hedge funds charged investors a management fee of 2% on total assets and a 20% fee on realized gains.<ref>{{cite news |last1=Picker |first1=Leslie |title=Two and twenty is long dead. Hedge fund fees fall further below onetime industry standard |url=https://www.cnbc.com/2021/06/28/two-and-twenty-is-long-dead-hedge-fund-fees-fall-further-below-one-time-industry-standard.html |access-date=29 September 2024 |work=[[CNBC]] |date=28 June 2021 |language=en}}</ref>

In the 1970s, hedge funds specialized in a single strategy with most fund managers following the [[long/short equity]] model. Many hedge funds closed during the [[recession of 1969–1970]] and the [[1973–1974 stock market crash]] due to heavy losses. They received renewed attention in the late 1980s.<ref name=Ineichen/>

[[File:Cumulative hedge fund and other risk asset returns, 1997-2012.png| thumb|350px |Cumulative hedge fund and other risk asset returns (1997–2012)]]
During the 1990s, the number of hedge funds increased significantly with the [[Dot-com bubble|1990s stock market rise]],<ref name="Ubide"/> the aligned-interest compensation structure (''i.e.'', common financial interests), and the promise of above average returns<ref>{{cite book |title=Hedge funds of funds investing: an investor's guide |last=Nicholas |first=Joseph G. |year=2004 |publisher=John Wiley & Sons |isbn=978-1-57660-124-2 |page=11}}</ref> as likely causes. Over the next decade, hedge fund strategies expanded to include credit arbitrage, [[distressed debt]], [[fixed income]], [[quantitative analysis (finance)|quantitative]], and multi-strategy.<ref name=Ineichen/> US [[institutional investor]]s, such as pension and [[Financial endowment|endowment funds]], began allocating greater portions of their [[portfolio (finance)|portfolio]]s to hedge funds.<ref>{{Cite news|url=https://www.bloomberg.com/view/articles/2015-11-09/the-reason-pension-plans-stick-with-hedge-funds|title=The Reason Pension Plans Stick With Hedge Funds|date=2015-11-09|work=Bloomberg.com|access-date=2018-04-09|language=en|archive-url=https://web.archive.org/web/20180410200241/https://www.bloomberg.com/view/articles/2015-11-09/the-reason-pension-plans-stick-with-hedge-funds|archive-date=10 April 2018|url-status=live|df=dmy-all}}</ref><ref>For an example, see [[Ontario Teachers' Pension Plan]], which has more than $150 million in [[Pershing Square Capital Management|Pershing Square]] VI International, L.P., one of [[Bill Ackman|Bill Ackman's]] funds. See full list of major investments here [https://www.otpp.com/investments/performance/major-investments] {{Webarchive|url=https://web.archive.org/web/20180221235747/https://www.otpp.com/investments/performance/major-investments|date=21 February 2018}}</ref>

During the first decade of the 21st century, hedge funds gained popularity worldwide, and, by 2008, the worldwide hedge fund industry held an estimated US$1.93&nbsp;trillion in [[assets under management]] (AUM).<ref>{{cite news |title=Hedge fund industry assets swell to US$1.92 trillion |first=Svea |last=Herbst-Bayliss |url=https://www.reuters.com/article/us-hedgefunds-assets-idUSTRE70I6JY20110119 |work=Reuters |date=19 January 2011 |access-date=22 April 2011 |archive-url=https://web.archive.org/web/20110603114957/http://www.reuters.com/article/2011/01/19/us-hedgefunds-assets-idUSTRE70I6JY20110119 |archive-date=3 June 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite news|last=Kishan |first=Saijel |url=https://www.bloomberg.com/apps/news?pid=20601087&sid=atrq052in_gE&refer=home |title=Satellite Halts Hedge Fund Withdrawals, Fires 30 After Losses |publisher=Bloomberg |date=27 November 2008 |access-date=14 August 2010}}</ref> However, the [[2008 financial crisis]] caused many hedge funds to restrict investor withdrawals and their popularity and AUM totals declined.<ref name="WSJ">{{cite news |work=[[The Wall Street Journal]] |date=6 December 2010 |title=Hedge-Fund Firms Woo the Little Guy |first=Jaime Levy |last=Pessin}}</ref> AUM totals rebounded and in April 2011 were estimated at almost $2 trillion.<ref name="WSJ 2011">{{cite news |url=https://www.wsj.com/articles/SB10001424052702304887904576399983107988642 |work=[[The Wall Street Journal]] |title=Bridgewater Goes Large |first=Michael |last=Corkery |date=22 June 2011 |url-access=subscription |access-date=12 August 2017 |archive-date=9 July 2017 |archive-url=https://web.archive.org/web/20170709231652/https://www.wsj.com/articles/SB10001424052702304887904576399983107988642 |url-status=live }}</ref><ref>{{cite news |url=https://www.wsj.com/articles/SB10001424052748704204604576269114056530484 |title=Hedge Funds Bounce Back |last1=Strasberg |first1=Jenny |last2=Eder |first2=Steve |date=18 April 2011 |work=[[The Wall Street Journal]] Online |access-date=22 April 2011 |df=dmy-all |url-access=subscription |archive-date=11 June 2015 |archive-url=https://web.archive.org/web/20150611092258/http://www.wsj.com/articles/SB10001424052748704204604576269114056530484 |url-status=live }}</ref> {{as of|2011|2}}, 61% of worldwide investment in hedge funds came from institutional sources.<ref name=Williamson>{{cite web |url=http://www.pionline.com/article/20110210/DAILYREG/110219980 |title=Institutional Share Growing For Hedge Funds |date=10 February 2011 |work=FINalternatives |access-date=10 March 2011 |archive-url=https://web.archive.org/web/20120318085518/http://www.pionline.com/article/20110210/DAILYREG/110219980 |archive-date=18 March 2012 |url-status=live |df=dmy-all }}</ref>

In June 2011, the hedge fund management firms with the greatest AUM were [[Bridgewater Associates]] (US$58.9&nbsp;billion), [[Man Group]] (US$39.2&nbsp;billion), [[Paulson & Co.]] (US$35.1&nbsp;billion), [[Brevan Howard]] (US$31&nbsp;billion), and [[Och-Ziff]] (US$29.4&nbsp;billion).<ref>{{cite web |url=http://www.pionline.com/article/20110919/PRINTSUB/110919925 |title=Updated The biggest hedge funds – Pensions & Investments |publisher=Pionline.com |access-date=14 August 2010 |archive-date=19 October 2011 |archive-url=https://web.archive.org/web/20111019214820/http://www.pionline.com/article/20110919/PRINTSUB/110919925 |url-status=live }}</ref> Bridgewater Associates had $70 billion in assets under management {{as of|2012|03|lc=y}}.<ref>{{cite news |title=Dalio Earns $3.9bn to Top Hedge Fund Pay List |first=Dan |last=McCrum |url=https://www.cnbc.com/2012/03/30/dalio-earns-39bn-to-top-hedge-fund-pay-list.html |newspaper=The Financial Times |date=30 March 2012 |access-date=14 June 2012 |archive-url=https://web.archive.org/web/20130527033012/https://www.cnbc.com/id/46901989/Dalio_Earns_3_9bn_to_Top_Hedge_Fund_Pay_List |archive-date=27 May 2013 |url-status=live |df=dmy-all }}</ref><ref>{{cite news |title=The 40 Highest-Earning Hedge Fund Managers |first=Nathan |last=Vardi |url=https://www.forbes.com/sites/nathanvardi/2012/03/01/the-40-highest-earning-hedge-fund-managers-3/2/ |work=Forbes |date=3 March 2012 |access-date=14 June 2012 |archive-url=https://web.archive.org/web/20120602191743/http://www.forbes.com/sites/nathanvardi/2012/03/01/the-40-highest-earning-hedge-fund-managers-3/2/ |archive-date=2 June 2012 |url-status=live |df=dmy-all }}</ref> At the end of that year, the 241 largest hedge fund firms in the United States collectively held $1.335 trillion.<ref>{{cite news |title=Billion dollar club |first=Amel |last=Robleh |url=http://www.absolutereturn-alpha.com/Article/2988498/Research-and-Rankings-Billion-Dollar-Club/Billion-Dollar-Club.html |work=Absolute Return |date=5 March 2012 |access-date=14 June 2012 |archive-url=https://web.archive.org/web/20120829095258/http://www.absolutereturn-alpha.com/Article/2988498/Research-and-Rankings-Billion-Dollar-Club/Billion-Dollar-Club.html |archive-date=29 August 2012 |url-status=dead |df=dmy-all }}</ref> In April 2012, the hedge fund industry reached a record high of US$2.13 trillion total assets under management.<ref name=Chung>{{cite news |title=Hedge-Fund Assets Rise to Record Level |last=Chung |first=Juliet |url=https://www.wsj.com/articles/SB10001424052702304331204577354043852093400 |newspaper=The Wall Street Journal |date=19 April 2012 |access-date=14 June 2012 |archive-url=https://web.archive.org/web/20150611043844/http://www.wsj.com/articles/SB10001424052702304331204577354043852093400 |archive-date=11 June 2015 |url-status=live |df=dmy-all }}</ref> In the middle of the 2010s, the hedge fund industry experienced a general decline in the "old guard" fund managers. Dan Loeb called it a "hedge fund killing field" due to the classic long/short falling out of favor because of unprecedented easing by [[central bank]]s. The US [[stock market]] correlation became untenable to [[short seller]]s.<ref>{{cite news|url=https://www.ft.com/content/9e7ce258-0c8d-11e6-9456-444ab5211a2f |archive-url=https://ghostarchive.org/archive/20221210/https://www.ft.com/content/9e7ce258-0c8d-11e6-9456-444ab5211a2f |archive-date=10 December 2022 |url-status=live|title=Daniel Loeb warns of hedge fund 'killing field'|website=Financial Times|date=27 April 2016|access-date=26 April 2018 |df=dmy-all |url-access=subscription}}</ref> The hedge fund industry today has reached a state of maturity that is consolidating around the larger, more established firms such as Citadel, Elliot, Millennium, Bridgewater, and others. The rate of new fund start ups is now outpaced by fund closings.<ref>{{cite news| url = https://www.bloomberg.com/news/articles/2019-06-28/hedge-funds-ranks-shrink-again-as-closings-outnumber-launches| title = Hedge Funds' Ranks Shrink Again as Closings Outnumber Launches – Bloomberg| website = [[Bloomberg News]]| date = 28 June 2019| access-date = 16 October 2019| archive-date = 16 November 2020| archive-url = https://web.archive.org/web/20201116082727/https://www.bloomberg.com/news/articles/2019-06-28/hedge-funds-ranks-shrink-again-as-closings-outnumber-launches| url-status = live}}</ref>

In July 2017, hedge funds recorded their eighth consecutive monthly gain in returns with assets under management rising to a record $3.1 trillion.<ref>{{cite news |url=https://www.ft.com/content/798587b0-6d4a-11e7-b9c7-15af748b60d0 |archive-url=https://ghostarchive.org/archive/20221210/https://www.ft.com/content/798587b0-6d4a-11e7-b9c7-15af748b60d0 |archive-date=10 December 2022 |url-status=live |title=Hedge funds regain lustre |work=Financial Times |publisher=ft.com |date=20 July 2017 |access-date=18 September 2017 |df=dmy-all |url-access=subscription}}</ref>

==Notable hedge fund managers==

[[File:Tom Steyer by Gage Skidmore.jpg|thumb|[[Tom Steyer]], hedge-fund manager of [[NextGen America]]]]
[[File:George Soros 47th Munich Security Conference 2011 crop.jpg|thumb|[[George Soros]], fund manager of [[Quantum Group of Funds]]]]
[[File:Web Summit 2018 - Forum - Day 2, November 7 HM1 7481 (44858045925).jpg|thumb|[[Ray Dalio]], fund manager of [[Bridgewater Associates]]]]

* [[John Meriwether]] of [[Long-Term Capital Management]], most successful returns from 27% to 59% through 1993 to 1998 until its collapse and liquidation. 
* [[George Soros]] of [[Quantum Group of Funds]]
* [[Ray Dalio]] of [[Bridgewater Associates]], the world's largest hedge fund firm with US$160 billion in [[assets under management]] as of 2017<ref>{{Cite news|url=http://fortune.com/2017/09/13/ray-dalio-bridgewater-associates-book/ |title=How Ray Dalio Built the World's Biggest Hedge Fund |work=Fortune |access-date=2018-03-04 |language=en |archive-url=https://web.archive.org/web/20180502225409/http://fortune.com/2017/09/13/ray-dalio-bridgewater-associates-book/|archive-date=2 May 2018|url-status=live|df=dmy-all}}</ref><ref>{{cite magazine |last1=Cassidy |first1=John |title=Mastering the Machine: How Ray Dalio built the world's largest and strangest hedge fund |magazine=The New Yorker |date=July 25, 2011 |pages=56–65 |series=The World of Business}}</ref>
* [[Steve Cohen (businessman)|Steve Cohen]] of [[Point72 Asset Management]], formerly known as SAC Capital Advisors<ref name="wsj20140311">{{cite news |last=Copeland|first=Rob|title=SAC Seeks a New Start as 'Point72' |url=https://www.wsj.com/articles/SB10001424052702304704504579432973254039940 |access-date=12 May 2014 |newspaper=[[The Wall Street Journal]] |date=11 March 2014 |archive-url=https://web.archive.org/web/20141215163236/http://www.wsj.com/articles/SB10001424052702304704504579432973254039940|archive-date=15 December 2014 |url-status=live |df=dmy-all}}</ref><ref name="nytimes sac blinks">{{cite news | url=https://dealbook.nytimes.com/2013/11/04/after-a-decade-sac-capital-blinks/ | title=After a Decade, SAC Capital Blinks | work=The New York Times/Dealbook | date=4 November 2013 | access-date=6 November 2013 | first1=Ben | last1=Protess | first2=Peter | last2=Lattman | archive-url=https://web.archive.org/web/20131106004334/http://dealbook.nytimes.com/2013/11/04/after-a-decade-sac-capital-blinks/ | archive-date=6 November 2013 | url-status=live | df=dmy-all }}</ref>
* [[John Paulson]] of [[Paulson & Co.]], whose hedge funds as of December 2015 had $19 billion assets under management<ref name="ForbesBillionaires">{{citation |url=https://www.forbes.com/profile/john-paulson/ |work=Forbes |title=The World's Billionaires |author=John Paulson |date=30 December 2015 |access-date=31 December 2015 |archive-url=https://web.archive.org/web/20151230131013/http://www.forbes.com/profile/john-paulson/ |archive-date=30 December 2015 |url-status=live |df=dmy-all }}</ref> 
* [[David Tepper]] of [[Appaloosa Management]]
* [[Paul Tudor Jones]] of [[Tudor Investment Corporation]]
* [[Daniel Och]] of [[Och-Ziff Capital Management Group]]<ref>{{cite web |url=https://www.bloomberg.com/quote/OZM:US/profile |title=Company Profile for Och-Ziff Capital Management Group LLC (OZM) |publisher=Bloomberg L.P.|access-date=3 June 2013 |date=2013|archive-url=https://web.archive.org/web/20130712035852/http://www.bloomberg.com/quote/OZM:US/profile |archive-date=12 July 2013|url-status=live|df=dmy-all}}</ref> with more than $40 billion in assets under management in 2013<ref name="2011HedgeFund100">{{cite news |title=The 2011 Hedge Fund 100 Ranking |url=http://www.institutionalinvestor.com/Research/3196/Hedge-Fund-100-Ranking.html |newspaper=Institutional Investor, Inc. |date=12 May 2011 |access-date=31 December 2015 |archive-url=https://web.archive.org/web/20120418175705/http://www.institutionalinvestor.com/Research/3196/Hedge-Fund-100-Ranking.html |archive-date=18 April 2012 |url-status=live|df=dmy-all}}</ref> 
* [[Israel Englander]] of [[Millennium Management, LLC]]
* [[Leon Cooperman]] of Omega Advisors<ref name="Forbes profile">"[https://www.forbes.com/profile/leon-g-cooperman/ Forbes profile: Leon G. Cooperman] {{Webarchive|url=https://web.archive.org/web/20170729171137/https://www.forbes.com/profile/leon-g-cooperman/ |date=29 July 2017}}". [[Forbes.com]].</ref> 
* [[Michael Platt (financier)|Michael Platt]] of [[BlueCrest Capital Management]] (UK), Europe's third-largest hedge-fund firm<ref name="Bloomberg">{{cite web|last1=Westbrook|first1=Jesse|title=Man Who Said No to Soros Builds BlueCrest Into Empire |url=https://www.bloomberg.com/news/2013-12-20/man-who-said-no-to-soros-builds-bluecrest-into-empire.html |website=Bloomberg L.P. |access-date=27 August 2014|date=Dec 2013 |archive-url=https://web.archive.org/web/20140903082504/http://www.bloomberg.com/news/2013-12-20/man-who-said-no-to-soros-builds-bluecrest-into-empire.html|archive-date=3 September 2014|url-status=live|df=dmy-all}}</ref> 
* [[James Dinan]] of [[York Capital Management]]<ref name="BloombergFindsValue">[https://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVUQ2LyoqQ3U Bloomberg: "York Capital's Dinan Finds Value in Tel Aviv Funds, Tyco Duplex" By Richard Teitelbaum] {{Webarchive|url=https://web.archive.org/web/20150924163007/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aVUQ2LyoqQ3U |date=24 September 2015 }} 7 September 2006</ref> 
* [[Stephen Mandel (hedge fund manager)|Stephen Mandel]] of [[Lone Pine Capital]] with $26.7 billion under management as of June 2015<ref name="insidermonkey">{{cite web|title=Hedge Fund – Lone Pine Capital|url=http://www.insidermonkey.com/hedge-fund/lone+pine+capital/19/|website=insidermonkey|access-date=18 October 2015|date=2015|archive-url=https://web.archive.org/web/20151015031810/http://www.insidermonkey.com/hedge-fund/lone+pine+capital/19|archive-date=15 October 2015|url-status=live|df=dmy-all}}</ref> 
* [[Larry Robbins]] of Glenview Capital Management with $9.2 billion of assets under management as of July 2014<ref>{{cite news |url=https://blogs.wsj.com/moneybeat/2014/07/17/in-investor-letter-glenview-looks-back-at-2008-looks-ahead-to-more-babies/ |title=In Investor Letter, Glenview Looks Back at 2008, Looks Ahead to More Babies |first=Juliet |last=Chung |newspaper=Wall Street Journal |date=17 July 2014 |access-date=4 August 2017 |archive-url=https://web.archive.org/web/20170709235513/https://blogs.wsj.com/moneybeat/2014/07/17/in-investor-letter-glenview-looks-back-at-2008-looks-ahead-to-more-babies/ |archive-date=9 July 2017 |url-status=live |df=dmy-all }}</ref> 
* [[Glenn Dubin]] of [[Highbridge Capital Management]]<ref>[https://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBU6v8TgCwoA Bloomberg News: "Highbridge Duo Survives Rout After Hedge Fund Sale to JPMorgan" By Richard Teitelbaum and Jenny Strasburg] {{Webarchive|url=https://web.archive.org/web/20151001195451/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBU6v8TgCwoA |date=1 October 2015 }} 29 February 2008</ref><ref>[http://www.institutionalinvestor.com/Article/1029930/Inside-Highbridge.html Institutional Investor: "Inside Highbridge"] {{Webarchive|url=https://web.archive.org/web/20160304054333/http://www.institutionalinvestor.com/Article/1029930/Inside-Highbridge.html |date=4 March 2016 }} 24 June 2004</ref>
* [[Paul Singer (businessman)|Paul Singer]] of [[Elliott Management Corporation]], an activist hedge fund with more than US$23 billion in assets under management in 2013,<ref>{{cite news |last=Carreyrou |first=John |title=Hedge Funds Clash Over Argentina Debt |url=https://www.wsj.com/articles/SB10001424052702303874504579372923716382850 |access-date=14 February 2014 |newspaper=Wall Street Journal |date=11 February 2013 |archive-url=https://web.archive.org/web/20150205163550/http://www.wsj.com/articles/SB10001424052702303874504579372923716382850|archive-date=5 February 2015|url-status=live|df=dmy-all}}</ref> and a portfolio worth $8.1 billion as of the first quarter of 2015<ref name="4th quarter returns">{{cite web |title=Paul Singer Bio, Returns, Net Worth |url=http://www.insidermonkey.com/hedge-fund/elliott+management/60/ |publisher=Insider Monkey |access-date=16 April 2015 |archive-url=https://web.archive.org/web/20150416052937/http://www.insidermonkey.com/hedge-fund/elliott+management/60 |archive-date=16 April 2015 |url-status=live |df=dmy-all}}</ref><ref name="New York Times activist">{{cite news |last1=Moyer |first1=Liz  |title=Elliott Management Takes 11% Stake in Cabela's |url=https://www.nytimes.com/2015/10/29/business/dealbook/elliott-management-takes-11-stake-in-cabelas.html |work=The New York Times |date=28 October 2015 |access-date=29 November 2015 |archive-url=https://web.archive.org/web/20151031122816/http://www.nytimes.com/2015/10/29/business/dealbook/elliott-management-takes-11-stake-in-cabelas.html |archive-date=31 October 2015 |url-status=live |df=dmy-all}}</ref>
* [[David E. Shaw]] of [[D. E. Shaw & Co.]]
* [[Michael Hintze, Baron Hintze]] of [[CQS (Hedge Fund)|CQS]] with $14.4 billion of assets under management as of June 2015<ref>{{cite web |title=QE Chinese Style |url=https://www.cqscapital.com/cmsfiles/Insights/CQS_Insights_QE_Chinese_Style.pdf |website=CQS Insights |publisher=CQS Capital |language=en |url-status=dead}}</ref>
* [[David Einhorn (hedge fund manager)|David Einhorn]] of [[Greenlight Capital]]<ref>{{cite news |url=https://dealbook.nytimes.com/2012/10/25/david-einhorn-continues-his-take-down-of-fed-policy/ |title=David Einhorn Continues His Take Down of Fed Policy |publisher=DealBook |access-date=14 March 2013 |first=William |last=Alden |date=25 October 2012 |archive-url=https://web.archive.org/web/20130424042056/http://dealbook.nytimes.com/2012/10/25/david-einhorn-continues-his-take-down-of-fed-policy/ |archive-date=24 April 2013 |url-status=live |df=dmy-all}}</ref><ref name="nymag">Hugo Lindgren, [https://nymag.com/news/businessfinance/47844/ "The Confidence Man"] {{Webarchive|url=https://web.archive.org/web/20160205061009/http://nymag.com/news/businessfinance/47844/ |date=5 February 2016 }}, ''[[New York Magazine]]'', 2008/06/15.</ref>
* [[Bill Ackman]] of [[Pershing Square Capital Management]] LP
* [[Kenneth C. Griffin|Kenneth Griffin]] of [[Citadel LLC|Citadel]] with over $62 billion in assets under management as of December 2022.<ref>{{Cite news |last=Cooban |first=Anna |date=23 January 2023 |title=Greatest trade ever? Citadel's $16 billion haul smashes hedge fund records |work=[[CNN]] |url=https://www.cnn.com/2023/01/23/investing/citadel-top-hedge-fund/index.html |access-date=1 August 2023 |archive-date=1 August 2023 |archive-url=https://web.archive.org/web/20230801211109/https://www.cnn.com/2023/01/23/investing/citadel-top-hedge-fund/index.html |url-status=live }}</ref><ref>{{Cite news |last=Wigglesworth |first=Robin |date=23 January 2023 |title=RIP the cult of the Tiger cub |work=[[Financial Times]] |url=https://www.ft.com/content/a7cb8f43-e521-4408-8e18-d4020877a171 |archive-url=https://web.archive.org/web/20230513205230/https://www.ft.com/content/a7cb8f43-e521-4408-8e18-d4020877a171 |access-date=1 August 2023 |archive-date=13 May 2023 |url-status=live }}</ref>

==Strategies==
[[Image:AmericanProspectusSample.jpg|thumb|right|250px|A prospectus from the US]]
Hedge fund strategies are generally classified among four major categories: [[global macro]], directional, [[Event-driven investing|event-driven]], and [[relative value (economics)|relative value]] ([[arbitrage]]).<ref name="Hedge Fund Tools">{{cite web |url=http://www.capitalbeacon.com/Hedge_Fund_Tools.html |title=Hedge Fund Tools – Investment Strategies |publisher=Capital Beacon |access-date=18 March 2011 |archive-url=https://web.archive.org/web/20100929230727/http://www.capitalbeacon.com/Hedge_Fund_Tools.html |archive-date=29 September 2010 |url-status=live |df=dmy-all }}</ref> Strategies within these categories each entail characteristic risk and return profiles. A fund may employ a single strategy or multiple strategies for flexibility, [[risk management]], or diversification.<ref name="Connor">{{cite web|url = https://www.iam.uk.com/Portals/0/pdf/lse-publications/An-Introduction-to-Hedge-Fund-Strategies.pdf|title = An Introduction to Hedge Fund Strategy|first1 = Gregory|last1 = Connor|first2 = Teo|last2 = Lasarte|work = The London School of Economics and Political Science|publisher = International Asset Management Ltd.|access-date = 17 March 2011|archive-url = https://web.archive.org/web/20150513043335/http://www.iam.uk.com/Portals/0/pdf/lse-publications/An-Introduction-to-Hedge-Fund-Strategies.pdf|archive-date = 13 May 2015|url-status = dead|df = dmy-all}}</ref> The hedge fund's [[prospectus (finance)|prospectus]], also known as an [[offering memorandum]], offers potential investors information about key aspects of the fund, including the fund's investment strategy, investment type, and [[leverage (finance)|leverage]] limit.<ref name=Sadek>{{cite web |url=http://www.fortress-strategy.com/Decimation.pdf |title=Decimation of Fortunes: Where Do We Go From Here? |first=Bill |last=Sadek |publisher=Fortress Strategy USA |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20160406133117/http://www.fortress-strategy.com/Decimation.pdf |archive-date=6 April 2016 |url-status=dead |df=dmy-all }}</ref>

The elements contributing to a hedge fund strategy include the hedge fund's approach to the market, the particular instrument use, the [[market sector]] the fund specializes in (''e.g.'', healthcare), the method used to select investments, and the amount of diversification within the fund. There are a variety of market approaches to different [[asset class]]es, including [[Stock|equity]], [[fixed income]], [[commodity]], and [[currency]]. Instruments used include equities, fixed income, [[futures contract|futures]], [[option (finance)|options]], and [[swap (finance)|swaps]]. Strategies can be divided into those in which investments can be selected by managers, known as "discretionary/qualitative", or those in which investments are selected using a computerized system, known as "systematic/quantitative".<ref name=Ineichen192>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |page=[https://archive.org/details/absolutereturnsr0000inei/page/192 192] |url=https://archive.org/details/absolutereturnsr0000inei/page/192 }}</ref> The amount of diversification within the fund can vary; funds may be multi-strategy, multi-fund, multi-market, multi-manager, or a combination.

Sometimes hedge fund strategies are described as "[[absolute return]]" and are classified as either "[[market neutral]]" or "directional". Market neutral funds have less correlation to overall market performance by "neutralizing" the effect of market swings whereas directional funds utilize trends and inconsistencies in the market and have greater exposure to the market's fluctuations.<ref name=Connor/><ref name=Coggan>{{cite book |title=Guide to Hedge Funds |last=Coggan |first=Philip |year=2011 |publisher=The Economist Newspaper Ltd. |edition=2nd}}</ref>

===Global macro===
{{Main|Global macro}}
Hedge funds using a global macro investing strategy take large [[Position (finance)|positions]] in share, bond, or currency markets in anticipation of global [[Macroeconomics|macroeconomic events]] in order to generate a [[risk-adjusted return]].<ref name=Coggan/> Global macro fund managers use macroeconomic ("big picture") analysis based on global market events and trends to identify opportunities for investment that would profit from anticipated price movements. While global macro strategies have a large amount of flexibility (due to their ability to use leverage to take large positions in diverse investments in multiple markets), the timing of the implementation of the strategies is important in order to generate attractive, risk-adjusted returns.<ref name=Bartolo>{{cite web |url=http://www.cai.emory.edu/documents/HF_Strategies.pdf |title=Hedge Fund Strategies Guide |first=Michael |last=Bartolo |date=September 2008 |work=Goizueta Business School |publisher=Emory University |access-date=17 March 2011 |url-status=dead |archive-url=https://web.archive.org/web/20091128042720/http://cai.emory.edu/documents/HF_Strategies.pdf |archive-date=28 November 2009 |df=dmy-all }}</ref> Global macro is often categorized as a directional investment strategy.<ref name=Coggan/>

Global macro strategies can be divided into discretionary and systematic approaches. Discretionary trading is carried out by investment managers who identify and select investments, whereas [[systematic trading]] is based on [[mathematics|mathematical models]] and executed by [[software]] with limited human involvement beyond the programming and updating of the software. These strategies can also be divided into [[trend following|trend]] or counter-trend approaches depending on whether the fund attempts to profit from following [[market trend]] (long or short-term) or attempts to anticipate and profit from reversals in trends.<ref name=Ineichen192/>

Within global macro strategies, there are further sub-strategies including "systematic diversified", in which the fund trades in diversified markets, or sector specialists such as "systematic currency", in which the fund trades in [[foreign exchange market]]s or any other sector specialisation.<ref name="wavetheory_2010">{{cite book |title=Wave Theory for Alternative Investments |first=Stephen |last=Walker |year=2010 |publisher=McGraw-Hill Companies |isbn=978-0-07-174286-3}}</ref>{{rp|348}} Other sub-strategies include those employed by [[commodity trading advisor]]s (CTAs), where the fund trades in [[Futures contract|futures]] (or [[option (finance)|options]]) in [[commodity]] markets or in swaps.<ref>{{cite book |title=Investment strategies of hedge funds |first=Filippo |last=Stefanini |year=2006 |publisher=John Wiley & Sons |isbn= 978-0-470-02627-4 |page=223}}</ref> This is also known as a "managed future fund".<ref name=Coggan/> CTAs trade in commodities (such as gold) and financial instruments, including [[stock indices]]. They also take both long and short positions, allowing them to make profit in both market upswings and downswings.<ref>{{cite book |title=Evaluating hedge fund performance |last=Tran |first=Vinh Q. |year=2006 |publisher=John Wiley & Sons |isbn=978-0-471-68171-7 |page=54}}</ref> Most global macro managers tends to be a CTA from a regulatory perspective and the main divide is between systematic and discretionary strategies. A classification framework for CTA/Macro Strategies can be found in the reference.<ref>{{cite web|url=https://nilssonhedge.com/database-info/hedge-fund-classification/cta-classification/|title=CTA Classification|date=30 May 2019|access-date=28 July 2019|archive-date=28 July 2019|archive-url=https://web.archive.org/web/20190728145628/https://nilssonhedge.com/database-info/hedge-fund-classification/cta-classification/|url-status=live}}</ref>

===Directional===
[[File:Short (finance).png|thumb|294px|Schematic representation of short selling in two steps. The short seller [[securities lending|borrows shares]] and immediately sells them. The short seller then expects the price to decrease, when the seller can profit by purchasing the shares to return to the lender.]]
Directional investment strategies use market movements, trends, or inconsistencies when picking stocks across a variety of markets. Computer models can be used, or fund managers will identify and select investments. These types of strategies have a greater exposure to the fluctuations of the overall market than do market neutral strategies.<ref name=Connor/><ref name=Coggan/> Directional hedge fund strategies include US and international [[long/short equity]] hedge funds, where [[Long (finance)|long equity]] positions are hedged with [[Short (finance)|short sales]] of equities or equity [[Index (economics)|index]] [[Option (finance)|options]].

Within directional strategies, there are a number of sub-strategies. "[[Emerging markets]]" funds focus on emerging markets such as China and India,<ref name="wavetheory_2010" />{{rp|351}} whereas "sector funds" specialize in specific areas including technology, healthcare, biotechnology, pharmaceuticals, energy, and basic materials. Funds using a "fundamental growth" strategy invest in companies with more [[earnings]] growth than the overall [[stock market]] or relevant sector, while funds using a "[[fundamental value]]" strategy invest in undervalued companies.<ref name="wavetheory_2010" />{{rp|344}} Funds that use [[Statistics|quantitative]] and [[financial signal processing]] techniques for equity [[Trader (finance)|trading]] are described as using a "quantitative directional" strategy.<ref name="wavetheory_2010" />{{rp|345}} Funds using a "[[Short selling|short bias]]" strategy take advantage of declining equity prices using short positions.<ref>{{cite book |title=Create Your Own ETF Hedge Fund |first=David |last=Fry |year=2008 |publisher=John Wiley & Sons |isbn= 978-0-470-13895-3 |page=68}}</ref>

===Event-driven===
{{Main|Event-driven investing}}
Event-driven strategies concern situations in which the underlying investment opportunity and risk are associated with an event.<ref>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |page=[https://archive.org/details/absolutereturnsr0000inei/page/182 182] |url=https://archive.org/details/absolutereturnsr0000inei/page/182 }}</ref> An event-driven investment strategy finds investment opportunities in corporate transactional events such as consolidations, [[acquisitions]], [[recapitalization]]s, [[Bankruptcy|bankruptcies]], and [[liquidation]]s. Managers employing such a strategy capitalize on [[valuation (finance)|valuation]] inconsistencies in the market before or after such events, and take a position based on the predicted movement of the [[Security (finance)|security]] or securities in question. Large [[institutional investor]]s such as hedge funds are more likely to pursue event-driven investing strategies than traditional equity investors because they have the expertise and resources to analyze corporate transactional events for investment opportunities.<ref name=Bartolo/><ref>{{Cite news|url=https://pugvestor.com/ways-invest-money-stocks/|title=Different ways to invest money in stocks |date=30 March 2017|work=Pugvestor|access-date=14 April 2017|language=en-US|archive-url=https://web.archive.org/web/20180109045554/https://pugvestor.com/ways-invest-money-stocks/|archive-date=9 January 2018|url-status=dead|df=dmy-all}}</ref><ref name=Event-Driven>{{cite web |url=http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-event-driven.html |title=Understanding Event-Driven Investing |publisher=BarclayHedge Ltd. |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20101230081550/http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-event-driven.html |archive-date=30 December 2010 |url-status=dead |df=dmy-all }}</ref>

Corporate transactional events generally fit into three categories: [[distressed securities]], [[risk arbitrage]], and [[special situation]]s.<ref name=Bartolo/> [[Distressed securities]] include such events as restructurings, [[recapitalization]]s, and [[Bankruptcy|bankruptcies]].<ref name=Bartolo/> A distressed securities investment strategy involves investing in the bonds or loans of companies facing bankruptcy or severe financial distress, when these [[bond (finance)|bond]]s or [[loan]]s are being traded at a [[discounts and allowances|discount]] to their value. Hedge fund managers pursuing the distressed debt investment strategy aim to capitalize on depressed bond prices. Hedge funds purchasing distressed debt may prevent those companies from going bankrupt, as such an acquisition deters [[foreclosure]] by banks.<ref name=Coggan/> While event-driven investing, in general, tends to thrive during a [[bull market]], distressed investing works best during a [[bear market]].<ref name=Event-Driven/>

[[Risk arbitrage]] or [[merger arbitrage]] includes such events as [[Mergers and acquisitions|mergers]], acquisitions, liquidations, and [[hostile takeover]]s.<ref name=Bartolo/> Risk arbitrage typically involves buying and selling the stocks of two or more merging companies to take advantage of market discrepancies between acquisition price and stock price. The risk element arises from the possibility that the merger or acquisition will not go ahead as planned; hedge fund managers will use research and analysis to determine if the event will take place.<ref name=Event-Driven/><ref>{{cite web |url=http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-merger-arbitrage.html |title=Understanding Merger Arbitrage |publisher=BarclayHedge Ltd. |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20110315111628/http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/hedge-fund-strategy-merger-arbitrage.html |archive-date=15 March 2011 |url-status=live |df=dmy-all }}</ref>

Special situations are events that impact the value of a company's stock, including the [[restructuring]] of a company or corporate transactions including [[Corporate spin-off|spin-off]]s, share [[Share repurchase|buy backs]], security issuance/repurchase, asset sales, or other catalyst-oriented situations. To take advantage of special situations the hedge fund manager must identify an upcoming event that will increase or decrease the value of the company's equity and equity-related instruments.<ref name="Strategy Definitions">{{cite web |url=http://www.hedgefundresearch.com/index.php?fuse=indices-str#2703 |title=HFR I Strategy Definitions |publisher=Hedge Fund Research Inc. |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20110720022439/http://www.hedgefundresearch.com/index.php?fuse=indices-str#2703 |archive-date=20 July 2011 |url-status=live |df=dmy-all }}</ref>

Other event-driven strategies include credit arbitrage strategies, which focus on corporate [[fixed income]] securities; an activist strategy, where the fund takes large positions in companies and uses the ownership to participate in the management; a strategy based on predicting the final approval of new [[pharmaceutical drug]]s; and legal catalyst strategy, which specializes in companies involved in major lawsuits.

===Relative value===
{{Main|Relative value (economics)}}
Relative value arbitrage strategies take advantage of relative discrepancies in price between securities. The price discrepancy can occur due to mispricing of securities compared to related securities, the [[Underlying|underlying security]] or the market overall. Hedge fund managers can use various types of analysis to identify price discrepancies in securities, including mathematical, [[Technical analysis|technical]], or [[Fundamental analysis|fundamental]] techniques.<ref>{{cite web |url=http://www.barclayhedge.com/research/definitions/Relative-Value-Arbitrage-definition.html |title=Relative Value Arbitrage definition |publisher=BarclayHedge Ltd. |access-date=20 March 2011 |archive-url=https://web.archive.org/web/20110225193036/http://www.barclayhedge.com/research/definitions/Relative-Value-Arbitrage-definition.html |archive-date=25 February 2011 |url-status=live |df=dmy-all }}</ref> Relative value is often used as a synonym for [[market neutral]], as strategies in this category typically have very little or no directional market exposure to the market as a whole.<ref>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |page=[https://archive.org/details/absolutereturnsr0000inei/page/181 181] |url=https://archive.org/details/absolutereturnsr0000inei/page/181 }}</ref> Other relative value sub-strategies include:

*[[Fixed income arbitrage]]: exploit pricing inefficiencies between related fixed income securities.
*[[Equity market neutral]]: exploit differences in stock prices by being [[Long (finance)|long]] and [[Short (finance)|short]] in stocks within the same sector, industry, market capitalization, country, which also creates a hedge against broader market factors.
*[[Convertible arbitrage]]: exploit pricing inefficiencies between [[Convertible security|convertible securities]] and the corresponding [[stock]]s.
*Asset-backed securities (fixed-income asset-backed): [[fixed income arbitrage]] strategy using [[Asset-backed security|asset-backed securities]].
*Credit long/short: the same as long/short equity, but in [[credit market]]s instead of equity markets.
*[[Statistical arbitrage]]: identifying pricing inefficiencies between securities through mathematical modelling techniques
*[[Volatility arbitrage]]: exploit the change in [[volatility (finance)|volatility]], instead of the change in price.
*Yield alternatives: non-[[fixed income arbitrage]] strategies based on the yield, instead of the price.
*Regulatory arbitrage: exploit regulatory differences between two or more markets.
* [[Risk arbitrage]]: exploit market discrepancies between acquisition price and stock price.
*[[Value investing]]: buying securities that appear underpriced by some form of fundamental analysis.

===Miscellaneous===
In addition to those strategies within the four main categories, there are several strategies that do not entirely fit into these categories.

*[[Fund of hedge funds]] (multi-manager): a hedge fund with a diversified portfolio of numerous underlying single-manager hedge funds.
*Multi-manager: a hedge fund wherein the investment is spread along separate sub-managers investing in their own strategy.
*Multi-strategy: a hedge fund using a combination of different strategies.
*[[130-30 funds]]: equity funds with 130% long and 30% short positions, leaving a net long position of 100%.
*[[Risk parity]]: equalizing risk by allocating funds to a wide range of categories while maximizing gains through financial leveraging.
*AI-driven: using sophisticated [[machine learning]] models and sometimes [[big data]].

==Risk==
For an investor who already holds large quantities of equities and bonds, investment in hedge funds may provide diversification and reduce the overall portfolio risk.<ref name=Davidoff>{{cite news |url=http://www.dealbook.nytimes.com/2009/09/17/to-reduce-hedge-fund-risk-let-everyone-in/ |title=To Reduce Hedge Fund Risk, Let Everyone In |last1=Davidoff |first1=Steven M. |date=17 September 2009 |work=The New York Times |access-date=27 March 2011 |archive-url=https://web.archive.org/web/20111228021244/http://dealbook.nytimes.com/2009/09/17/to-reduce-hedge-fund-risk-let-everyone-in/ |archive-date=28 December 2011 |url-status=dead |df=dmy-all }}</ref> Managers of hedge funds often aim to produce returns that are relatively [[Financial correlation|uncorrelated]] with market indices and are consistent with investors' desired level of risk.<ref name=Jones/><ref name=Lo>{{cite journal |last=Lo |first=Andrew |year=2001 |title=Risk Management for Hedge Funds: Introduction and Overview |journal=Financial Analysts Journal |volume=57 |issue=6 |pages=16–33 |url=http://www.alphasimplex.com/pdfs/RiskMgmtForHF.pdf |access-date=29 March 2011 |doi=10.2469/faj.v57.n6.2490 |archive-url=https://web.archive.org/web/20110627013040/http://www.alphasimplex.com/pdfs/RiskMgmtForHF.pdf |archive-date=27 June 2011 |url-status=dead |df=dmy-all |citeseerx=10.1.1.370.8177 |s2cid=218511194 }}</ref> While [[hedge (finance)|hedging]] can reduce some risks of an investment it usually increases others, such as [[operational risk]] and [[model risk]], so overall risk is reduced but cannot be eliminated. According to a report by the Hennessee Group, hedge funds were approximately one-third less volatile than the [[S&P 500]] between 1993 and 2010.<ref>{{cite web |url=http://www.thehedgefundjournal.com/news/2010/07/22/hennessee-protecting-capital-during-market-downturns.php |title=Hennessee: Protecting capital during market downturns |date=22 July 2010 |work=Hedge Fund Journal |access-date=30 March 2011 |archive-url=https://web.archive.org/web/20111006212623/http://www.thehedgefundjournal.com/news/2010/07/22/hennessee-protecting-capital-during-market-downturns.php |archive-date=6 October 2011 |url-status=live |df=dmy-all }}</ref>

===Risk management===
Investors in hedge funds are, in most countries, required to be qualified investors who are assumed to be aware of the [[investment risk]]s, and accept these risks because of the potential [[Rate of return|return]]s relative to those risks. Fund managers may employ extensive [[Financial risk management|risk management]] strategies in order to protect the fund and investors. According to the ''[[Financial Times]]'', "big hedge funds have some of the most sophisticated and exacting risk management practices anywhere in asset management."<ref name=Jones>{{cite news |title=Hedge funds: Stringent controls on losses and investment |first=Sam |last=Jones |url=http://www.ft.com/cms/s/0/5f253ab8-5371-11e0-86e6-00144feab49a.html#ixzz1ICqUvUmv |archive-url=https://ghostarchive.org/archive/20221210201217/https://www.ft.com/content/5f253ab8-5371-11e0-86e6-00144feab49a#ixzz1ICqUvUmv |archive-date=10 December 2022 |url-access=subscription |newspaper=Financial Times |date=21 March 2011 |access-date=30 March 2011 |url-status=live }}</ref> Hedge fund managers that hold a large number of investment positions for short periods are likely to have a particularly comprehensive risk management system in place, and it has become usual for funds to have independent risk officers who assess and manage risks but are not otherwise involved in trading.<ref name=Cassar/> A variety of different measurement techniques and models are used to estimate risk according to the fund's leverage, liquidity, and investment strategy.<ref name=Lo/><ref>Jaeger, Robert. A. (2003) Mcgraw Hill, All About Hedge Funds "A hedge fund is an actively managed investment fund"</ref> Non-normality of returns, volatility clustering and trends are not always accounted for by conventional risk measurement methodologies and so in addition to [[value at risk]] and similar measurements, funds may use integrated measures such as [[Drawdown (economics)|drawdowns]].<ref name="risk">{{Citation|title=López de Prado, M. and A. Peijan: Measuring Loss Potential of Hedge Fund Strategies| work=Journal of Alternative Investments|volume= 7|issue= 1 |pages= 7–31|year=2004|ssrn=641702| last1=Lopez De Prado| first1=Marcos| last2=Peijan| first2=Achim}}</ref>

In addition to assessing the market-related risks that may arise from an investment, investors commonly employ [[operational due diligence]] to assess the risk that error or [[fraud]] at a hedge fund might result in a loss to the investor. Considerations will include the organization and management of operations at the hedge fund manager, whether the investment strategy is likely to be sustainable, and the fund's ability to develop as a company.<ref>{{cite book |title=Hedge funds: crossing the institutional frontier |last=Jaffer |first=Sohail |year=2006 |publisher=Euromoney Books |isbn=978-1-84374-268-5 |pages=113–114}}</ref>

===Transparency, and regulatory considerations===
Since hedge funds are private entities and have few public [[Prospectus (finance)|disclosure]] requirements, this is sometimes perceived as a [[Transparency (market)|lack of transparency]].<ref name=IneichenRisk>{{cite book |title=Absolute Returns: the risks and opportunities of hedge fund investing |first=Alexander |last=Ineichen |year=2002 |publisher=John Wiley & Sons |isbn=978-0-471-25120-0 |pages=[https://archive.org/details/absolutereturnsr0000inei/page/441 441–444] |url=https://archive.org/details/absolutereturnsr0000inei/page/441 }}</ref> Another common perception of hedge funds is that their managers are not subject to as much regulatory oversight and/or [[registration statement|registration]] requirements as other financial investment managers, and more prone to manager-specific idiosyncratic risks such as style drifts, faulty operations, or fraud.<ref name=Jaeger/> New regulations introduced in the US and the EU as of 2010 required hedge fund managers to report more information, leading to greater transparency.<ref name=Chay>{{cite web |url=http://www.asiaone.com/Business/News/My%2BMoney/Story/A1Story20101129-249737.html |title=Call For Joint Effort to Protect Hedge Fund Business |first=Felda |last=Chay |date=27 November 2010 |work=The Business Times Singapore |publisher=Singapore Press Holdings |access-date=8 March 2011 |archive-url=https://web.archive.org/web/20101229035529/http://www.asiaone.com/Business/News/My%2BMoney/Story/A1Story20101129-249737.html |archive-date=29 December 2010 |url-status=dead |df=dmy-all }}</ref> In addition, investors, particularly institutional investors, are encouraging further developments in hedge fund risk management, both through internal practices and external regulatory requirements.<ref name=Jones/> The increasing influence of institutional investors has led to greater transparency: hedge funds increasingly provide information to investors including valuation methodology, positions, and leverage exposure.<ref>{{cite web |url=http://www.benefitscanada.com/investments/other-investments/institutional-investors-changing-the-rules-of-hedge-fund-investing-9126 |title=Institutional investors changing the rules of hedge fund investing |last1=White |first1=Jody |date=25 January 2010 |work=BenefitsCanada.com |access-date=30 March 2011 |archive-url=https://web.archive.org/web/20110728013636/http://www.benefitscanada.com/investments/other-investments/institutional-investors-changing-the-rules-of-hedge-fund-investing-9126 |archive-date=28 July 2011 |url-status=live |df=dmy-all }}</ref>

===Risks shared with other investment types===
Hedge funds share many of the same types of risk as other investment classes, including [[liquidity risk]] and manager risk.<ref name=Jaeger>{{cite web |url=http://www.math.ethz.ch/~embrechts/RM/jaeger.pdf |title=Risk Management for Hedge Fund Portfolios |first=Lars |last=Jaeger |date=28 April 2005 |work=Presentation at ETHZ [Eidgenössische Technische Hochschule Zürich] |publisher=Partners Group |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20101122071129/http://www.math.ethz.ch/~embrechts/RM/jaeger.pdf |archive-date=22 November 2010 |url-status=dead |df=dmy-all }}</ref> [[Market liquidity|Liquidity]] refers to the degree to which an asset can be bought and sold or converted to cash; similar to private-equity funds, hedge funds employ a [[lock-up period]] during which an investor cannot remove money.<ref name="Coggan"/><ref name="What is a Hedge Fund"/> Manager risk refers to those risks which arise from the management of funds. As well as specific risks such as [[style drift]], which refers to a fund manager "drifting" away from an area of specific expertise, manager risk factors include [[valuation risk]], capacity risk, [[concentration risk]], and [[Leverage (finance)#Leverage and risk|leverage risk]].<ref name=IneichenRisk/> Valuation risk refers to the concern that the [[net asset value]] (NAV) of investments may be inaccurate;<ref name=Strachman>{{cite book |title=Fund of Funds Investing: A Roadmap to Portfolio Diversification |last1=Strachman |first1=Daniel A. |last2=Bookbinder |first2=Richard S. |year=2009 |publisher=John Wiley & Sons |isbn=978-0-470-25876-7 |pages=120–121}}</ref> capacity risk can arise from placing too much money into one particular strategy, which may lead to fund performance deterioration;<ref name=Avellanda>{{cite web |url=http://math.nyu.edu/faculty/avellane/HFCapacity.pdf |title=What is a Hedge Fund |last1=Avellanda |first1=Marco |last2=Besson |first2=Paul |publisher=New York University |access-date=28 March 2011 |archive-url=https://web.archive.org/web/20110526220222/http://math.nyu.edu/faculty/avellane/HFCapacity.pdf |archive-date=26 May 2011 |url-status=live |df=dmy-all }}</ref> and concentration risk may arise if a fund has too much exposure to a particular investment, sector, trading strategy, or group of [[Financial correlation|correlated]] funds.<ref name="Concentration Risk">{{cite web |url=http://knowledgebase.abcquant.com/index.php?option=com_kb&task=article&article=11 |title=Concentration Risk |year=2008 |publisher=Quant Risk Group |access-date=29 March 2011 |archive-url=https://web.archive.org/web/20110819124158/http://knowledgebase.abcquant.com/index.php?option=com_kb&task=article&article=11 |archive-date=19 August 2011 |url-status=dead |df=dmy-all }}</ref> These risks may be managed through defined controls over [[conflict of interest]],<ref name=Strachman/> restrictions on allocation of funds,<ref name=Avellanda/> and set exposure limits for strategies.<ref name="Concentration Risk"/>

Many investment funds use [[Leverage (finance)|leverage]], the practice of [[Debt|borrowing]] money, trading on [[margin (finance)|margin]], or using [[Derivative (finance)|derivatives]] to obtain market exposure in excess of that provided by investors' capital. Although leverage can increase potential returns, the opportunity for larger gains is weighed against the possibility of greater losses.<ref name="What is a Hedge Fund"/> Hedge funds employing leverage are likely to engage in extensive risk management practices.<ref name=Cassar>{{cite web |url=http://efmaefm.org/0EFMSYMPOSIUM/Toronto-2011/papers/Gerakos.pdf |title=How Do Hedge Funds Manage Portfolio Risk? |first1=Gavin |last1=Cassar |first2=Joseph |last2=Gerakos |work=EFM Symposium |publisher=European Financial Management Association |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20110815125023/http://efmaefm.org/0EFMSYMPOSIUM/Toronto-2011/papers/Gerakos.pdf |archive-date=15 August 2011 |url-status=dead |df=dmy-all }}</ref><ref name=IneichenRisk/> In comparison with [[investment bank]]s, hedge fund leverage is relatively low; according to a [[National Bureau of Economic Research]] working paper, the average leverage for investment banks is 14.2, compared to between 1.5 and 2.5 for hedge funds.<ref name=AngGorovyy />

Some types of funds, including hedge funds, are perceived as having a greater [[risk|appetite for risk]], with the intention of maximizing returns,<ref name="What is a Hedge Fund">{{cite web |url=http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/what-is-a-hedge-fund.html |title=What is a Hedge Fund |publisher=BarclayHedge Ltd. |access-date=28 March 2011 |archive-url=https://web.archive.org/web/20110316110730/http://www.barclayhedge.com/research/educational-articles/hedge-fund-strategy-definition/what-is-a-hedge-fund.html |archive-date=16 March 2011 |url-status=live |df=dmy-all }}</ref> subject to the [[risk tolerance]] of investors and the fund manager. Managers will have an additional incentive to increase risk oversight when their own capital is invested in the fund.<ref name=Cassar/>

==Fees and remuneration==
===Fees paid to hedge funds===
Hedge fund management firms typically charge their funds both a [[management fee]] and a [[performance fee]].

Management fees are calculated as a percentage of the fund's [[net asset value]] and typically range from 1% to 4% per annum, with 2% being standard.<ref>{{cite news |url=http://www.ft.com/cms/s/0/cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac.html |title=Hedge fund investors have a great chance to cut fees |work=[[Financial Times]] |date=6 February 2009 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20110520075056/http://www.ft.com/cms/s/0/cf7f91e2-f3f0-11dd-9c4b-0000779fd2ac.html |archive-date=20 May 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite news |last=Hulbert |first=Mark |url=https://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |title=2 + 20, And Other Hedge Math |work=[[The New York Times]] |date=4 March 2007 |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20111209204544/http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |archive-date=9 December 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite magazine |url=http://www.businessweek.com/magazine/content/07_20/b4034053.htm |title=Hedge Fund Fees: The Pressure Builds |magazine=Businessweek |date=4 March 2007 |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20110815142741/http://www.businessweek.com/magazine/content/07_20/b4034053.htm |archive-date=15 August 2011 |url-status=dead |df=dmy-all }}</ref> They are usually expressed as an annual percentage, but calculated and paid monthly or quarterly. Management fees for hedge funds are designed to cover the operating costs of the manager, whereas the performance fee provides the manager's profits. However, due to [[economies of scale]] the management fee from larger funds can generate a significant part of a manager's profits, and as a result some fees have been criticized by some public pension funds, such as [[CalPERS]], for being too high.<ref>Imogen Rose-Smith, [https://www.institutionalinvestor.com/article/2bsytmbx8uech0rm5e5fk/corner-office/public-pension-plans-bet-their-future-on-hedge-funds "Public Pension Plans Bet Their Future On Hedge Funds"] {{Webarchive|url=https://web.archive.org/web/20231110223809/https://www.institutionalinvestor.com/article/2bsytmbx8uech0rm5e5fk/corner-office/public-pension-plans-bet-their-future-on-hedge-funds |date=10 November 2023 }}, ''Institutional Investor'', 20 June 2011.</ref>

The [[performance fee]] is typically 20% of the fund's profits during any year, though performance fees range between 10% and 50%. Performance fees are intended to provide an incentive for a manager to generate profits.<ref>{{cite web |url=http://www.eipny.com/pdf/HedgeFundMathWhyFeesMatter110907.pdf |title=Hedge Fund Math: Why Fees Matter |publisher=Epoch Investment Partners Inc. |date=November 9, 2007 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20110710173416/http://www.eipny.com/pdf/HedgeFundMathWhyFeesMatter110907.pdf |archive-date=10 July 2011 |url-status=dead |df=dmy-all }}</ref><ref>{{cite magazine |url=https://www.forbes.com/lists/2006/54/biz_06rich400_Steven-A-Cohen_PZMO.html |title=The 400 Richest Americans: Stephen A. Cohen |magazine=Forbes.com |date=19 September 2006 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100923022118/http://www.forbes.com/lists/2006/54/biz_06rich400_Steven-A-Cohen_PZMO.html |archive-date=23 September 2010 |url-status=dead |df=dmy-all }}</ref> Performance fees have been criticized by [[Warren Buffett]], who believes that because hedge funds share only the profits and not the losses, such fees create an incentive for high-risk investment management. Performance fee rates have fallen since the start of the [[credit crunch]].<ref>{{cite web|url=http://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.html|title=HFR: Hedge fund liquidations fall to pre-crisis levels as launches increase in Q4-09, average incentive fees decline |date=10 March 2010|publisher=Opalesque|access-date=10 March 2010|archive-url=https://web.archive.org/web/20111004164418/http://www.opalesque.com/IndustryUpdates/691/HFR_Hedge_fund_liquidations_fall_to_levels217.html|archive-date=4 October 2011|url-status=live|df=dmy-all}}</ref>

Almost all hedge fund performance fees include a "[[high water mark]]" (or "loss carryforward provision"), which means that the performance fee only applies to net profits (''i.e.'', profits after losses in previous years have been recovered). This prevents managers from receiving fees for volatile performance, though a manager will sometimes close a fund that has suffered serious losses and start a new fund, rather than attempt to recover the losses over a number of years without a performance fee.<ref>{{cite magazine |url=http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005088_1711_db042.htm |title=Hedge Funds: Fees Down? Close Shop |magazine=Businessweek |date=8 August 2005 |first1=Amey |last1=Stone   |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100118204507/http://www.businessweek.com/bwdaily/dnflash/aug2005/nf2005088_1711_db042.htm |archive-date=18 January 2010 |url-status=dead |df=dmy-all }}</ref>

Some performance fees include a "[[hurdle]]", so that a fee is only paid on the fund's performance in excess of a [[benchmark price|benchmark]] rate (''e.g.'', [[LIBOR]]) or a fixed percentage.<ref name="Roadmap">{{cite web |url=http://www.aima.org/download.cfm/docid/6133E854-63FF-46FC-95347B445AE4ECFC |title=AIMA Roadmap to Hedge Funds |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100915101041/http://aima.org/download.cfm/docid/6133E854-63FF-46FC-95347B445AE4ECFC |archive-date=15 September 2010 |url-status=dead |df=dmy-all }}</ref> The hurdle is usually tied to a benchmark rate such as Libor or the one-year Treasury bill rate plus a spread.<ref name="HedgeFund Database">{{Cite web|url=http://www.hedgeco.net/hedgeducation/hedge-fund-glossary/hurdle-rate.php|title=HedgeFund Database|access-date=29 October 2019|archive-date=29 October 2019|archive-url=https://web.archive.org/web/20191029100208/http://www.hedgeco.net/hedgeducation/hedge-fund-glossary/hurdle-rate.php|url-status=dead}}</ref> A "soft" hurdle means the performance fee is calculated on all the fund's returns if the hurdle rate is cleared. A "hard" hurdle is calculated only on returns above the hurdle rate.<ref>Cathleen M. Rittereiser, Lawrence E. Kochard, [https://books.google.com/books?id=VXwKDSqr8UwC&dq=hedge+fund+fee+hard+hurdle&pg=PA110 A "Top Hedge Fund Investors: Stories, Strategies, and Advice"] {{Webarchive|url=https://web.archive.org/web/20160810014550/https://books.google.com/books?id=VXwKDSqr8UwC&pg=PA110&lpg=PA110&dq=hedge+fund+fee+hard+hurdle&source=bl&ots=44-wFvHigv&sig=oT-vDViKoerKzaLGCbcb6mgTZd4&hl=en&sa=X&ei=Ci_3T4XcIqq80QGjqaT6Bg&ved=0CJMEEOgBMAk#v=onepage&q=hedge%20fund%20fee%20hard%20hurdle&f=false |date=10 August 2016 }}, John Wiley & Sons, 20 July 2010 p. 110</ref> By example the manager sets a hurdle rate equal to 5%, and the fund return 15%, incentive fees would only apply to the 10% above the hurdle rate.<ref name="HedgeFund Database"/> A hurdle is intended to ensure that a manager is only rewarded if the fund generates returns in excess of the returns that the investor would have received if they had invested their money elsewhere.

Some hedge funds charge a redemption fee (or withdrawal fee) for early withdrawals during a specified period of time (typically a year), or when withdrawals exceed a predetermined percentage of the original investment.<ref>{{cite web |url=http://www.hedgeworld.com/education/index.cgi?page=hedge_fund_basics |title=Hedge Funds |publisher=HedgeWorld |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20111021084359/http://hedgeworld.com/education/index.cgi?page=hedge_fund_basics |archive-date=21 October 2011 |url-status=dead |df=dmy-all }}</ref> The purpose of the fee is to discourage short-term investing, reduce turnover, and deter withdrawals after periods of poor performance. Unlike management fees and performance fees, redemption fees are usually kept by the fund and redistributed to all investors.

===Remuneration of portfolio managers===
Hedge fund management firms are often owned by their [[portfolio manager]]s, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits. Funds do not tend to report compensation, and so published lists of the amounts earned by top managers tend to be estimates based on factors such as the fees charged by their funds and the capital they are thought to have invested in them.<ref name=Goldstein>{{cite news |title=Paulson, at $4.9 billion, tops hedge fund earner list |first=Matthew |last=Goldstein |url=https://www.reuters.com/article/us-hedgefunds-richlist-idUSTRE7304N320110401 |work=Reuters |date=1 April 2011 |access-date=26 July 2012 |archive-url=https://web.archive.org/web/20121019020419/http://www.reuters.com/article/2011/04/01/us-hedgefunds-richlist-idUSTRE7304N320110401 |archive-date=19 October 2012 |url-status=live |df=dmy-all }}</ref> Many managers have accumulated large stakes in their own funds and so top hedge fund managers can earn extraordinary amounts of money, perhaps up to $4 billion in a good year.<ref name=Schwartz>{{cite news |title=Pay of Hedge Fund Managers Roared Back Last Year |first=Nelson D. |last=Schwartz |url=https://www.nytimes.com/2010/04/01/business/01hedge.html |newspaper=New York Times |date=31 March 2010 |access-date=8 August 2012 |archive-url=https://web.archive.org/web/20120630095938/http://www.nytimes.com/2010/04/01/business/01hedge.html |archive-date=30 June 2012 |url-status=live |df=dmy-all }}</ref><ref>{{cite book |title=Chasing Alpha |last=Augar |first=Philip |year=2009 |publisher=Bodley Head |location=London |isbn=978-1-84792-036-2 |page=65}}</ref>

Earnings at the very top are higher than in any other sector of the financial industry,<ref name=bbchedge>{{cite news |url=https://www.bbc.co.uk/news/business-11942117 |title=Masters of the universe: meet the world's best-paid men |first=Richard |last=Anderson |date=2 February 2011 |publisher=BBC |access-date=28 July 2012 |archive-url=https://web.archive.org/web/20121110111757/http://www.bbc.co.uk/news/business-11942117 |archive-date=10 November 2012 |url-status=live |df=dmy-all }}</ref> and collectively the top 25 hedge fund managers regularly earn more than all 500 of the chief executives in the [[S&P 500]].<ref>{{cite journal |ssrn=2134208 |title=Executive Compensation and Corporate Governance in the U.S.: Perceptions, Facts and Challenges |author=Kaplan, Steven N. |date=22 August 2012 |journal=Chicago Booth Research Paper No. 12-42; Fama-Miller Working Paper |publisher=Social Science Research Network }}</ref> Most hedge fund managers are remunerated much less, however, and if performance fees are not earned then small managers at least are unlikely to be paid significant amounts.<ref name=bbchedge/>

In 2011, the top manager earned $3 billion, the tenth earned $210 million, and the 30th earned $80 million.<ref>{{cite news|last=Vardi|first=Nathan|date=3 January 2012|title=The 40 Highest-Earning Hedge Fund Managers|work=Forbes|url=https://www.forbes.com/sites/nathanvardi/2012/03/01/the-40-highest-earning-hedge-fund-managers-3/|url-status=live|access-date=12 July 2021|archive-url=https://web.archive.org/web/20120723220442/http://www.forbes.com/lists/2012/hedge-fund-managers-12_land.html|archive-date=23 July 2012|df=dmy-all}}</ref> In 2011, the average earnings for the 25 highest-compensated hedge fund managers in the United States was $576 million<ref name=Westbrook>{{cite news |title=Pay For Top-Earning U.S. Hedge Fund Managers Falls 35%, AR Says |first=Jesse |last=Westbrook |url=https://www.bloomberg.com/news/2012-03-30/pay-for-top-earning-u-s-hedge-fund-managers-falls-35-ar-says.html |work=Bloomberg |date=30 March 2012 |access-date=8 August 2012 |archive-url=https://web.archive.org/web/20120615130222/http://www.bloomberg.com/news/2012-03-30/pay-for-top-earning-u-s-hedge-fund-managers-falls-35-ar-says.html |archive-date=15 June 2012 |url-status=live |df=dmy-all }}</ref> while the mean total compensation for all hedge fund investment professionals was $690,786 and the median was $312,329. The same figures for hedge fund CEOs were $1,037,151 and $600,000, and for chief investment officers were $1,039,974 and $300,000, respectively.<ref name=Tunick>{{cite news |title=Compensation Survey:Banking on the Back Office |first=Britt Erica |last=Tunick |url=http://www.absolutereturn-alpha.com/Article/3036783/Compensation-Survey-Banking-on-the-Back-Office.html |archive-url=https://archive.today/20130116044009/http://www.absolutereturn-alpha.com/Article/3036783/Compensation-Survey-Banking-on-the-Back-Office.html |url-status=dead |archive-date=16 January 2013 |magazine=Absolute Return + Alpha |date=1 June 2012 |access-date=8 August 2012 }}</ref>

Of the 1,226 people on the ''Forbes'' World's Billionaires List for 2012,<ref>{{cite magazine |url=https://www.forbes.com/billionaires/list/ |title=The World's Billionaires |date=March 2012 |magazine=Forbes |access-date=9 August 2012 |archive-url=https://web.archive.org/web/20110802223425/http://www.forbes.com/wealth/billionaires/list |archive-date=2 August 2011 |url-status=live |df=dmy-all }}</ref> 36 of the financiers listed "derived significant chunks" of their wealth from hedge fund management.<ref>{{cite news |url=https://www.forbes.com/sites/edwindurgy/2012/03/09/billionaire-hedge-fund-managers/ |title=Billionaire Hedge Fund Managers |first=Edwin |last=Durgy |date=9 March 2012 |work=Forbes |access-date=9 August 2012 |archive-url=https://web.archive.org/web/20120728122211/http://www.forbes.com/sites/edwindurgy/2012/03/09/billionaire-hedge-fund-managers/ |archive-date=28 July 2012 |url-status=live |df=dmy-all }}</ref> Among the richest 1,000 people in the United Kingdom, 54 were hedge fund managers, according to the ''Sunday Times'' Rich List for 2012.<ref>{{cite web |url=http://hereisthecity.com/2012/04/27/alan-howard-tops-hedge-fund-rich-list-with-personal-fortune-of-1/ |archive-url=https://archive.today/20130126192208/http://hereisthecity.com/2012/04/27/alan-howard-tops-hedge-fund-rich-list-with-personal-fortune-of-1/ |url-status=dead |archive-date=2013-01-26 |title=Sunday Times Hedge Fund Rich List 2012 |date=April 2012 |work=HITC Business |publisher=Here Is The City |access-date=12 July 2012 }}</ref>

A portfolio manager risks losing his past compensation if he or she engages in [[insider trading]]. In ''[[Chip Skowron|Morgan Stanley v. Skowron]]'', 989 F. Supp. 2d 356 (S.D.N.Y. 2013), applying New York's [[faithless servant]] doctrine, the court held that a hedge fund's portfolio manager engaging in insider trading in violation of his company's code of conduct, which also required him to report his misconduct, must repay his employer the full $31 million his employer paid him as compensation during his period of faithlessness.<ref name="auto6">{{Cite book|url=https://books.google.com/books?id=3RaGDwAAQBAJ&q=%22faithless+servant%22&pg=PA472|title=Employment Law: Private Ordering and Its Limitations|first1=Timothy P.|last1=Glynn|first2=Rachel S.|last2=Arnow-Richman|first3=Charles A.|last3=Sullivan|date= 2019|publisher=Wolters Kluwer Law & Business|isbn=978-1-5438-0106-4|via=Google Books}}</ref><ref name="auto4">{{cite web|url=https://www.ibtimes.co.uk/faithless-ex-morgan-stanley-fund-manager-ordered-repay-31m-former-employer-1429819|first=Jerin|last=Matthew|title='Faithless' Ex-Morgan Stanley Fund Manager Ordered to Repay $31m to Former Employer|date=December 20, 2013|website=International Business Times UK|access-date=7 August 2019|archive-date=12 July 2023|archive-url=https://web.archive.org/web/20230712231643/https://www.ibtimes.co.uk/faithless-ex-morgan-stanley-fund-manager-ordered-repay-31m-former-employer-1429819|url-status=live}}</ref><ref>{{cite web|url=https://dealbook.nytimes.com/2013/12/23/the-huge-costs-of-being-a-faithless-servant/|title=The Huge Costs of Being a 'Faithless Servant'|first=Peter J.|last=Henning|date=December 23, 2013|website=New York Times DealBook|access-date=7 August 2019|archive-date=23 December 2013|archive-url=https://web.archive.org/web/20131223170550/https://dealbook.nytimes.com/2013/12/23/the-huge-costs-of-being-a-faithless-servant/|url-status=live}}</ref><ref>{{cite web|url=https://www.greenwichtime.com/news/article/Morgan-Stanley-seeks-10-2-million-from-convicted-4193127.php|title=Morgan Stanley seeks $10.2 million from convicted former trader|date=January 15, 2013|work=GreenwichTime|access-date=7 August 2019|archive-date=27 June 2019|archive-url=https://web.archive.org/web/20190627172218/https://www.greenwichtime.com/news/article/Morgan-Stanley-seeks-10-2-million-from-convicted-4193127.php|url-status=dead}}</ref> The court called the insider trading the "ultimate abuse of a portfolio manager's position".<ref name="auto4"/> The judge also wrote: "In addition to exposing Morgan Stanley to government investigations and direct financial losses, Skowron's behavior damaged the firm's reputation, a valuable corporate asset."<ref name="auto4"/>

==Structure==
A hedge fund is an [[Investment fund|investment vehicle]] that is most often structured as an [[offshore corporation]], [[limited partnership]], or [[limited liability company]].<ref>Gerald T. Lins, Thomas P. Lemke, Kathryn L. Hoenig & Patricia Schoor Rube, ''Hedge Funds and Other Private Funds: Regulation and Compliance'' §§ 2:7–2:12 (2013–2014 ed.).</ref> The fund is managed by an [[investment management|investment manager]] in the form of an organization or company that is legally and financially distinct from the hedge fund and its portfolio of [[asset]]s.<ref name=BusinessKnowledge>{{cite book |url=https://books.google.com/books?id=uI-cJ0ZAf5sC&q=hedge+fund+no+employees&pg=PA122 |title=Business Knowledge for IT in Hedge Funds |year=2008 |isbn=978-0-9554124-5-5 |publisher=Essvale Corporation Limited |page=122}}</ref><ref name=StrachmanBook2>{{cite book |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |location=Hoboken, New Jersey |page=47 }}</ref> Many investment managers utilize service providers for operational support.<ref name=StrachmanBook3>{{cite book |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |location=Hoboken, New Jersey |page=23 }}</ref> Service providers include prime brokers, banks, administrators, distributors, and accounting firms.

===Prime broker===
[[Prime broker]]s [[clearing (finance)|clear]] [[trade]]s and provide leverage and short-term [[financing]].<ref name=Anson3/><ref name=Stowell>{{cite book |url=https://books.google.com/books?id=B5624MOzmHwC&q=prime+broker+hedge+funds+investment+banks&pg=PT275 |first=David |last=Stowell |title=Investment Banks, Hedge Funds, and Private Equity |year=2012 |publisher=Academic Press |isbn=978-0-12-415820-7}}</ref> They are usually divisions of large investment banks.<ref name=Stowell4>{{cite book |url=https://books.google.com/books?id=5G5pj7SRIwMC&q=Prime+brokers+are+usually+divisions+of+large+investment+banks&pg=PA101 |first=David |last=Stowell |title=An Introduction to Investment Banks, Hedge Funds, and Private Equity|year=2010 |isbn=978-0-12-374503-3 |publisher=Academic Press |page=101}}</ref> The prime broker acts as a [[counterparty]] to [[Derivative (finance)|derivative contracts]], and lends securities for particular investment strategies, such as [[Long/short equity|long/short equities]] and [[Convertible arbitrage|convertible bond arbitrage]].<ref name=Athanassiou>{{cite book |url=https://books.google.com/books?id=zcgH-EBCa48C&q=prime+broker+counterparty+derivative+contracts&pg=PA283 |first=Phoebus |last=Athanassiou |title=Research Handbook on Hedge Funds, Private Equity and Alternative Investments |year=2012 |publisher=Edward Elgar Publishing |page=283 |isbn=978-1-84980-278-9}}</ref><ref name=Fabozzi>{{cite book |url=https://books.google.com/books?id=7LOD1CmBD-cC&q=prime+broker+lending+securities&pg=PA749 |first=Frank J. |last=Fabozzi |title=Handbook of Finance, Financial Markets and Instruments |year=2008 |publisher=Wiley |page=749 |isbn=978-0-470-07814-3}}</ref> It can provide [[custodian bank|custodial services]] for the fund's assets, and trade execution and clearing services for the hedge fund manager.<ref name=Lhabitant3>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=prime+broker+custodial&pg=SA4-PA2 |title=Handbook of Hedge Funds |pages=1–4 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref>

===Administrator===
[[Fund administration|Hedge fund administrators]] are typically responsible for [[Valuation (finance)|valuation]] services, and often [[Operations management|operations]], and [[Accountancy|accounting]].

Calculation of the [[net asset value]] ("NAV") by the administrator, including the pricing of securities at current market value and calculation of the fund's income and expense accruals, is a core administrator task, because it is the price at which investors buy and sell shares in the fund.<ref name=autogenerateda>{{Cite web |url=http://files.irishfunds.ie/1433105561-2009-9-guide-to-sound-practices-for-hedge-fund-administrators.pdf |title=''Guide to Sound Practices for Hedge Fund Administrators'' |access-date=7 February 2019 |archive-url=https://web.archive.org/web/20171202125611/https://files.irishfunds.ie/1433105561-2009-9-guide-to-sound-practices-for-hedge-fund-administrators.pdf |archive-date=2 December 2017 |url-status=live |df=dmy-all }}</ref> The accurate and timely calculation of NAV by the administrator is vital.<ref name=autogenerateda/><ref>{{Cite web |url=https://www.iomfsa.im/media/2320/soundpracticeguidelines.pdf |title=Sound Practice Guidelines for Administrators of Alternative Funds including Experienced Investor Funds in the Isle of Man |access-date=7 February 2019 |archive-url=https://web.archive.org/web/20190207015409/https://www.iomfsa.im/media/2320/soundpracticeguidelines.pdf |archive-date=7 February 2019 |url-status=live |df=dmy-all }}</ref> The case of ''Anwar v. Fairfield Greenwich'' (SDNY 2015) is the major case relating to fund administrator liability for failure to handle its NAV-related obligations properly.<ref name=autogeneratedb>{{Cite web |url=https://www.nixonpeabody.com/en/ideas/articles/2016/05/10/madoff-anwar-case-with-235-million-in-settlement-monies-finally-comes-to-a-close |title=Madoff Anwar case, with $235 million in settlement monies, finally comes to a close |access-date=7 February 2019 |archive-url=https://web.archive.org/web/20190207015945/https://www.nixonpeabody.com/en/ideas/articles/2016/05/10/madoff-anwar-case-with-235-million-in-settlement-monies-finally-comes-to-a-close |archive-date=7 February 2019 |url-status=live |df=dmy-all }}</ref><ref name=autogeneratedc>[https://www.law360.com/articles/691802/the-citco-settlement-and-what-lies-ahead-for-pwc "The Citco Settlement And What Lies Ahead For PwC"], {{Webarchive|url=https://web.archive.org/web/20190207020039/https://www.law360.com/articles/691802/the-citco-settlement-and-what-lies-ahead-for-pwc |date=7 February 2019}} Law360.</ref> There, the hedge fund administrator and other defendants settled in 2016 by paying the ''Anwar'' investor plaintiffs $235 million.<ref name=autogeneratedb/><ref name=autogeneratedc/>

Administrator [[back office]] support allows fund managers to concentrate on trades.<ref name=Lhabitant2>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=hedge+fund+administrator+back+office&pg=SA4-PA7 |title=Handbook of Hedge Funds |page=4-2 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> Administrators also process [[Subscription (finance)|subscriptions]] and redemptions and perform various shareholder services.<ref name=BusinessKnowledge2>{{cite book |url=https://books.google.com/books?id=uI-cJ0ZAf5sC&q=hedge+fund+administrator+subscription&pg=PA121 |title=Business Knowledge for IT in Hedge Funds |year=2008 |isbn=978-0-9554124-5-5 |publisher=Essvale Corporation Limited |page=121}}</ref><ref name=Vishwanath>{{cite book |url=https://books.google.com/books?id=oowq_PkME3UC&q=hedge+fund+administrator+subscription&pg=PA596 |last1=Vishwanath |first1=Ramanna |last2=Krishnamurti |first2=Chandrasekhar |title=Investment Management: A Modern Guide to Security Analysis and Stock Selection |year=2009 |isbn=978-3-540-88801-7 |publisher=Springer |page=596}}</ref> Hedge funds in the United States are not required to appoint an administrator and all of these functions can be performed by an investment manager.<ref name=Nelken>{{cite book |url=https://books.google.com/books?id=Hn_Qg43bKX8C&q=hedge+fund+administrator+NAV+US+investment+manager&pg=PA51 |title=Hedge Fund Investment Management |first=Izzy |last=Nelken |isbn=978-0-7506-6007-5 |publisher=Butterworth-Heinemann |year=2005 |page=51}}</ref> A number of [[conflict of interest]] situations may arise in this arrangement, particularly in the calculation of a fund's net asset value.<ref name=Jorian>{{cite book |url=https://books.google.com/books?id=bGQxlDjujmMC&q=Hedge+fund+NAV+outside+of+US+investment+manager&pg=PA421 |title=Financial Risk Manager Handbook |first=Philippe |last=Jorion |publisher=Wiley |year=2009 |isbn=978-0-470-47961-2 |page=421}}</ref> Most funds employ external [[auditor]]s, thereby arguably offering a greater degree of transparency.<ref name=Nelken/>

=== Auditor ===
An auditor is an independent [[accounting]] firm used to perform a complete [[audit]] the fund's [[financial statement]]s. The year-end audit is performed in accordance with the [[standard accounting practices]] enforced within the country in which the fund it established, typically [[Generally Accepted Accounting Principles (United States)|US GAAP]] or the [[International Financial Reporting Standards]] (IFRS).<ref name="StrachmanAudit">{{cite book|last=Strachman|first=Daniel A.|url=https://books.google.com/books?id=4YsogxfEsNQC&pg=PA187|title=The Fundamentals of Hedge Fund Management|publisher=Wiley|year=2012|isbn=978-1-118-15139-6|page=187|access-date=11 March 2016|archive-url=https://web.archive.org/web/20160810014719/https://books.google.com/books?id=4YsogxfEsNQC&pg=PA187|archive-date=10 August 2016|url-status=live|df=dmy-all}}</ref> The auditor may verify the fund's NAV and [[assets under management]] (AUM).<ref name="Agarwal">{{cite book|last=Agarwal|first=Monty|url=https://books.google.com/books?id=IvWcNW4r4PUC&pg=PA66|title=The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry|publisher=Wiley|year=2009|isbn=978-0-470-53744-2|pages=65–66|access-date=11 March 2016|archive-url=https://web.archive.org/web/20160811060405/https://books.google.com/books?id=IvWcNW4r4PUC&pg=PA66|archive-date=11 August 2016|url-status=live|df=dmy-all}}</ref><ref>{{cite book|last=Scharfman|first=Jason A.|url=https://books.google.com/books?id=32cGd1V4A5sC&pg=PT32|title=Hedge Fund Operational Due Diligence: Understanding the Risks|publisher=Wiley|year=2009|isbn=978-0-470-37234-0|access-date=11 March 2016|archive-url=https://web.archive.org/web/20160810032244/https://books.google.com/books?id=32cGd1V4A5sC&pg=PT32|archive-date=10 August 2016|url-status=live|df=dmy-all}}</ref> Some auditors only provide "NAV lite" services, meaning that the valuation is based on prices received from the manager rather than an independent assessment.<ref name="StrachmanHedgeNAV">{{cite book|last=Strachman|first=Daniel A.|url=https://books.google.com/books?id=4YsogxfEsNQC&q=hedge+fund+auditor+all+NAVs&pg=PA187|title=The Fundamentals of Hedge Fund Management|publisher=Wiley|year=2012|isbn=978-1-118-15139-6|page=187}}</ref>

===Distributor===
A distributor is an [[underwriter]], [[broker]], [[Broker-dealer|dealer]], or other person who participates in the distribution of securities.<ref name=FATCA>{{cite web |url=http://www.pwc.com/en_US/us/asset-management/investment-management/publications/assets/pwc-fatca-proposed-regulations.pdf |title=Foreign Account Tax Compliance Act (FATCA) Proposed Treasury Regulations |publisher=PricewaterhouseCoopers LLP |access-date=31 October 2012 |page=153 |archive-url=https://web.archive.org/web/20130608070657/http://www.pwc.com/en_US/us/asset-management/investment-management/publications/assets/pwc-fatca-proposed-regulations.pdf |archive-date=8 June 2013 |url-status=live |df=dmy-all }}</ref> The distributor is also responsible for marketing the fund to potential investors. Many hedge funds do not have distributors, and in such cases, the investment manager will be responsible for the distribution of securities and marketing, though many funds also use [[placement agent]]s and broker-dealers for distribution.<ref>{{cite book |url=https://books.google.com/books?id=mCRSNZ40v6MC&q=placement+agents+hedge+fund&pg=PT158 |title=AARP Getting Started in Hedge Funds: From Launching a Hedge Fund to New Regulation, the Use of Leverage, and Top Manager Profiles |first=Daniel A. |last=Strachman |year=2011 |publisher=Wiley |page=93|isbn=978-1-118-24172-1 }}</ref><ref name=Nelken2>{{cite book |url=https://books.google.com/books?id=Hn_Qg43bKX8C&q=hedge+fund+marketing+investor+broker&pg=PA93 |title=Hedge Fund Investment Management |first=Izzy |last=Nelken |year=2005 |isbn=978-0-7506-6007-5 |publisher=Butterworth-Heinemann |page=51}}</ref>

===Domicile and taxation===
The legal structure of a specific hedge fund, in particular its [[domicile (law)|domicile]] and the type of [[legal person|legal entity]] in use, is usually determined by the tax expectations of the fund's investors. [[#Offshore|Regulatory considerations]] will also play a role. Many hedge funds are established in [[Offshore Financial Centre|offshore financial centers]] to avoid adverse tax consequences for its foreign and tax-exempt investors.<ref name=Fraser-Sampson>{{cite book |url= https://books.google.com/books?id=AA017P5CIssC&q=hedge+fund+legal+structure+offshore&pg=PA112 |first= Guy |last= Fraser-Sampson |title= Alternative Assets: Investments for a Post-Crisis World |year=2010 |isbn= 978-0-470-66137-6 |publisher= Wiley |page=112}}</ref><ref name=Anson2>{{cite book |url= https://books.google.com/books?id=Hqgyll9MgkcC&q=hedge+fund+domicile+legal+structure&pg=PA174 |first=Mark J. P. |last=Anson |title=CAIA Level I: An Introduction to Core Topics in Alternative Investments |year=2009 |isbn=978-0-470-44702-4 |publisher=Wiley |pages=174–175}}</ref> [[Offshore fund]]s that invest in the US typically pay [[withholding tax]]es on certain types of investment income, but not US [[capital gains tax]]. However, the fund's investors are subject to tax in their own jurisdictions on any increase in the value of their investments.<ref name=StrachmanHedge>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&q=Offshore+funds+withholding+taxes+capital+gains&pg=PA88 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |pages=88–89}}</ref><ref name=StrachmanHedge2>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&q=offshore+funds+pension+plan+endowment&pg=PA54 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |pages=52–54}}</ref> This tax treatment promotes cross-border investments by limiting the potential for multiple jurisdictions to layer taxes on investors.<ref name=Muraleedharan>{{cite book |url=https://books.google.com/books?id=RX_dLGtIE3AC&q=Muraleedharan+offshore+funds+cross-border&pg=PA162 |first=D. |last=Muraleedharan |title=Modern Banking: Theory and Practice |year=2009 |isbn=978-81-203-3655-1 |publisher=Wiley |page=162}}</ref>

US tax-exempt investors (such as [[pension|pension plans]] and [[financial endowment|endowments]]) invest primarily in offshore hedge funds to preserve their [[tax exemption|tax exempt]] status and avoid unrelated business [[taxable income]].<ref name=StrachmanHedge2/> The investment manager, usually based in a major financial center, pays tax on its management fees per the tax laws of the state and country where it is located.<ref name=Stowell2>{{cite book |url=https://books.google.com/books?id=5G5pj7SRIwMC&q=offshore+funds+tax+fee+investment+manager&pg=PA267 |first=David |last=Stowell |title=An Introduction to Investment Banks, Hedge Funds, and Private Equity|year=2010 |isbn=978-0-12-374503-3 |publisher=Academic Press |page=267 |quote=For offshore funds, the fund pays management and incentive feeds to the management company (which is taxed as ordinary income.)}}</ref> In 2011, half of the existing hedge funds were registered offshore and half onshore. The [[Cayman Islands]] was the leading location for offshore funds, accounting for 34% of the total number of global hedge funds. The US had 24%, [[Luxembourg]] 10%, [[Ireland]] 7%, the [[British Virgin Islands]] 6%, and [[Bermuda]] had 3%.<ref name="TheCityUk">{{cite web |url=http://www.thecityuk.com/assets/Uploads/Hedge-Funds-2012-F.pdf |archive-url=https://web.archive.org/web/20120615164309/http://www.thecityuk.com/assets/Uploads/Hedge-Funds-2012-F.pdf |url-status=dead |archive-date=15 June 2012 |author=TheCityUK |title=Hedge Funds: March 2012 |year=2012 |publisher=Jersey Finance |page=4 |access-date=12 October 2012 }}</ref>

Hedge funds take advantage of a tax loopole called carried interest to get around paying too much in taxes by fancy legalistic maneouvres on their part.<ref>{{cite web |url=http://www1.realclearmarkets.com/2012/02/01/carried_interest_the_scam_of_all_scams_123053.html |first=Matt |last=O'Brien |title=Carried Interest: The Scam of All Scams |access-date=1 May 2022 |archive-date=5 July 2022 |archive-url=https://web.archive.org/web/20220705114203/http://www1.realclearmarkets.com/2012/02/01/carried_interest_the_scam_of_all_scams_123053.html |url-status=dead }}</ref>

===Basket options===
{{blockquote|source=|Deutsche Bank and Barclays created special options accounts for hedge fund clients in the banks' names and claimed to own the assets, when in fact the hedge fund clients had full control of the assets and reaped the profits. The hedge funds would then execute trades – many of them a few seconds in duration – but wait until just after a year had passed to exercise the options, allowing them to report the profits at a lower long-term capital gains tax rate.| Alexandra Stevenson. July 8, 2015. ''[[The New York Times]]''}}

The US [[Senate Permanent Subcommittee on Investigations]] chaired by [[Carl Levin]] issued a 2014 report that found that from 1998 and 2013, hedge funds avoided billions of dollars in taxes by using basket options. The [[Internal Revenue Service]] began investigating [[Renaissance Technologies]]<ref name="NYT_2015_dec_30">{{cite news | url=https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?emc=edit_na_20151229&nlid=50121183&ref=headline&_r=0 | title=For the Wealthiest, a Private Tax System That Saves Them Billions: The very richest are able to quietly shape tax policy that will allow them to shield billions in income | work=The New York Times | date=29 December 2015 | access-date=31 December 2015 | author1=Scheiber, Noam | author2=Cohendec, Patricia | archive-url=https://web.archive.org/web/20170709065645/https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?emc=edit_na_20151229&nlid=50121183&ref=headline&_r=0 | archive-date=9 July 2017 | url-status=live | df=dmy-all }}</ref> in 2009, and Levin criticized the IRS for taking six years to investigate the company. Using basket options Renaissance avoided "more than $6 billion in taxes over more than a decade".<ref name="NYT_2015_07"/>

{{blockquote|source=|These banks and hedge funds involved in this case used dubious structured financial products in a giant game of 'let's pretend,' costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation.|[[Carl Levin]]. 2015. Senate Permanent Subcommittee on Investigations}}

A dozen other hedge funds along with Renaissance Technologies used [[Deutsche Bank]]'s and [[Barclays]]' basket options.<ref name="NYT_2015_07">{{cite news | url=https://www.nytimes.com/2015/07/09/business/dealbook/irs-cracks-down-on-hedge-fund-tax-strategy.html?action=click&contentCollection=Economy&module=RelatedCoverage&region=Marginalia&pgtype=article | title=I.R.S. Cracks Down on Hedge Fund Tax Strategy | work=The New York Times | date=8 July 2015 | access-date=31 December 2015 | author=Stevenson, Alexandra | archive-url=https://web.archive.org/web/20160103012026/http://www.nytimes.com/2015/07/09/business/dealbook/irs-cracks-down-on-hedge-fund-tax-strategy.html?action=click&contentCollection=Economy&module=RelatedCoverage&region=Marginalia&pgtype=article | archive-date=3 January 2016 | url-status=live | df=dmy-all }}</ref> Renaissance argued that basket options were "extremely important because they gave the hedge fund the ability to increase its returns by borrowing more and to protect against model and programming failures".<ref name="NYT_2015_07"/> In July 2015, the United States Internal Revenue claimed hedge funds used basket options "to bypass taxes on short-term trades". These basket options will now be labeled as listed transactions that must be declared on tax returns, and a failure to do would result in a penalty.<ref name="NYT_2015_07"/>

===Investment manager locations===
In contrast to the funds themselves, investment managers are primarily located [[wikt:onshore|onshore]]. The United States remains the largest center of investment with US-based funds managing around 70% of global assets at the end of 2011.<ref name="TheCityUk"/> As of April 2012, there were approximately 3,990 investment advisers managing one or more private hedge funds registered with the [[Securities and Exchange Commission]].<ref name=SECDoddFrank>{{cite web |url=https://www.sec.gov/divisions/investment/imissues/df-iaregistration.pdf |title=Dodd-Frank Act Changes to Investment Adviser Registration Requirements – Preliminary Results |publisher=Securities and Exchange Commission |year=2012 |access-date=18 October 2012 |archive-url=https://web.archive.org/web/20121114122257/http://www.sec.gov/divisions/investment/imissues/df-iaregistration.pdf |archive-date=14 November 2012 |url-status=live |df=dmy-all }}</ref> New York City and the [[Gold Coast (Connecticut)|Gold Coast]] area of [[Connecticut]] are the leading locations for US hedge fund managers.<ref name=Satyajit>{{cite book |url=https://books.google.com/books?id=P1_mrWcDdxgC&q=hedge+fund+new+york+connecticut&pg=PA80 |title=Extreme Money: Masters of the Universe and the Cult of Risk |first= Satyajit |last= Das |author-link= Satyajit Das |year=2011 |publisher=FT Press |isbn= 978-0-13-279007-9 |pages=79–80}}</ref>

London was Europe's leading center for hedge fund managers, but since the [[Brexit]] referendum some formerly London-based hedge funds have relocated to other European financial centers such as [[Frankfurt]], [[Luxembourg]], [[La Défense|Paris]], and [[Dublin]], while some other hedge funds have moved their European offices back to New York City.<ref>{{cite web|title = Esma tells EU to stay vigilant of hedge fund relocation after Brexit|url = https://www.ft.com/content/6ca79298-8892-357c-ae24-d5e600195457|website = FT (Financial Times)|date = 13 July 2017|access-date = 30 October 2017|archive-url = https://web.archive.org/web/20171107011913/https://www.ft.com/content/6ca79298-8892-357c-ae24-d5e600195457|archive-date = 7 November 2017|url-status = live|df = dmy-all}}</ref><ref>{{cite web|title = Hedge funds and buyout groups look at leaving London|url = https://www.ft.com/content/5d03a36a-436b-11e6-9b66-0712b3873ae1|website = FT (Financial Times)|date = 6 July 2016|access-date = 30 October 2017|archive-url = https://web.archive.org/web/20171010212020/https://www.ft.com/content/5d03a36a-436b-11e6-9b66-0712b3873ae1|archive-date = 10 October 2017|url-status = live|df = dmy-all}}</ref> Before Brexit, according to EuroHedge data, around 800 funds located in the UK had managed 85% of European-based hedge fund assets in 2011.<ref name=TheCityUk/> Interest in hedge funds in Asia has increased significantly since 2003, especially in Japan, Hong Kong, and Singapore.<ref name=Lhabitant5>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=asia+hedge+funds&pg=SA2-PA59 |title=Handbook of Hedge Funds |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> After Brexit, Europe and the US remain the leading locations for the management of Asian hedge fund assets.<ref name=TheCityUk/>

===Legal entity===
Hedge fund legal structures vary depending on location and the investor(s). US hedge funds aimed at US-based, taxable investors are generally structured as [[limited partnership]]s or limited liability companies. Limited partnerships and other [[Flow-through entity|flow-through taxation]] structures assure that investors in hedge funds are not subject to both entity-level and personal-level taxation.<ref name=Lhabitant3/> A hedge fund structured as a limited partnership must have a [[general partner]]. The general partner may be an individual or a corporation. The general partner serves as the manager of the limited partnership, and has [[unlimited liability]].<ref name=Anson3>{{cite book |url=https://books.google.com/books?id=ic75IjNy4mQC&q=limited+partnership+general+partner+manages+assets |first=Mark J. P. |last=Anson |title=CAIA Level I: An Introduction to Core Topics in Alternative Investments |year=2009 |isbn=978-0-470-44702-4 |publisher=Wiley |pages=22–23}}</ref><ref name=Nichols>{{cite book |url=https://books.google.com/books?id=t7RFuEqfipwC&q=entity+level+tax&pg=PA40 |title=Investing in Hedge Funds, Revised and Updated Edition |first= Joseph G. |last= Nicholas |year=2005 |publisher=Bloomberg Press |pages=40–41|isbn=978-1-57660-184-6}}</ref> The limited partners serve as the fund's investors, and have no responsibility for management or investment decisions. Their liability is limited to the amount of money they invest for partnership interests.<ref name=Nichols/><ref name=Lhabitant411>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=limited+liability+entity+hedge+fund+partner&pg=SA2-PA64 |title=Handbook of Hedge Funds |page=4.1.1 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> As an alternative to a limited partnership arrangement, U.S. domestic hedge funds may be structured as [[Limited liability company|limited liability companies]], with members acting as corporate shareholders and enjoying protection from individual liability.<ref name=BusinessKnowledge124>{{cite book |url=https://books.google.com/books?id=uI-cJ0ZAf5sC&q=limited+liability+entity+hedge+fund+partner&pg=PA124 |title=Business Knowledge for IT in Hedge Funds |year=2008 |isbn=978-0-9554124-5-5 |publisher=Essvale Corporation Limited |page=124}}</ref>

By contrast, [[Offshore financial centre|offshore]] corporate funds are usually used for non-US investors, and when they are domiciled in an applicable offshore [[tax haven]], no entity-level tax is imposed.<ref name=Fraser-Sampson/> Many managers of offshore funds permit the participation of tax-exempt US investors, such as [[Pension fund|pensions funds]], [[Endowment fund|institutional endowments]], and [[charitable trust]]s.<ref name=Nichols/> As an alternative legal structure, offshore funds may be formed as an [[open-end fund|open-ended]] [[unit trust]] using an unincorporated [[mutual fund]] structure.<ref name=FundAssociates>{{cite web |url=http://fundassociates.com/pdfs/Offshore_vs_Onshore_Funds_Whitepaper.pdf |title=Offshore Hedge Funds vs. Onshore Hedge Funds |year=2008 |publisher=Fund Associates |access-date=13 February 2013 |archive-url=https://web.archive.org/web/20130424181824/http://fundassociates.com/pdfs/Offshore_vs_Onshore_Funds_Whitepaper.pdf |archive-date=24 April 2013 |url-status=live |df=dmy-all }}</ref> Japanese investors prefer to invest in [[unit trust]]s, such as those available in the Cayman Islands.<ref name=StrachmanHedgeJapan>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&q=hedge+fund+unit+trusts+japanese&pg=PA43 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |page=3 |quote=If you are marketing to Japanese investors; you must have a Cayman-based unit trust. This group of investors rarely, if ever, invests in a hedge fund that is not set up as a unit trust.}}</ref>

The investment manager who organizes the hedge fund may retain an interest in the fund, either as the general partner of a limited partnership or as the holder of "founder shares" in a corporate fund.<ref name=LhabitantInvestor>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=investment+manager+hedge+fund+founder+shares&pg=SA2-PA68 |title=Handbook of Hedge Funds |page=4.2.1 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> For offshore funds structured as corporate entities, the fund may appoint a [[board of directors]]. The board's primary role is to provide a layer of oversight while representing the interests of the shareholders.<ref name=LhabitantBoard>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=investment+manager+hedge+fund+founder+shares&pg=SA2-PA68 |title=Handbook of Hedge Funds |page=4.2.2 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> However, in practice board members may lack sufficient expertise to be effective in performing those duties. The board may include both affiliated directors who are employees of the fund and independent directors whose relationship to the fund is limited.<ref name=LhabitantBoard/>

===Types of funds===
*[[Open-end fund|Open-ended]] hedge funds continue to issue shares to new investors and allow periodic withdrawals at the [[net asset value]] ("NAV") for each share.
*[[closed-end fund|Closed-ended]] hedge funds issue a limited number of tradeable shares at inception.<ref>{{cite web |url=https://www.sec.gov/rules/proposed/ia-2266.htm#P300_115564 |title=Registration Under the Advisers Act of Certain Hedge Fund Advisers: footnote 141 |work=Securities and exchange Commission |access-date=22 April 2011 |archive-url=https://web.archive.org/web/20110309094344/http://www.sec.gov/rules/proposed/ia-2266.htm#P300_115564 |archive-date=9 March 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite journal |last1=Ineichen |first1=Alexander M. |year=2002 |title=Funds of Hedge Funds: Industry Overview |journal=[[Journal of Wealth Management]] |volume=47 |issue=4}}</ref>
*Shares of [[listing (finance)|Listed]] hedges funds are traded on [[stock exchange]]s, such as the [[Irish Stock Exchange]], and may be purchased by non-[[accredited investor]]s.<ref>{{cite news|last=Clarke|first=Geordie|title=Listed hedge funds: Lifting the smokescreen|url=http://www.ftadviser.com/2012/04/18/investments/investment-trusts/listed-hedge-funds-lifting-the-smokescreen-whvwTCj5PEeC10zwQRChvO/article.html|access-date=22 February 2013|newspaper=Financial Times|date=18 April 2012|archive-url=https://web.archive.org/web/20130527073300/http://www.ftadviser.com/2012/04/18/investments/investment-trusts/listed-hedge-funds-lifting-the-smokescreen-whvwTCj5PEeC10zwQRChvO/article.html|archive-date=27 May 2013|url-status=dead|df=dmy-all}}</ref>

===Side pockets===
A side pocket is a mechanism whereby a fund compartmentalizes assets that are relatively [[illiquid]] or difficult to value reliably.<ref name=Travers>{{cite book |url=https://books.google.com/books?id=fOUKPCVl29QC&pg=SA7-PA98 |title=Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks |first=Frank J. |last=Travers |year=2012 |publisher=Wiley |isbn=978-1-118-17546-0}}</ref> When an investment is side-pocketed, its value is calculated separately from the value of the fund's main portfolio.<ref name=StrachmanBook>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&pg=PA63 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |location=Hoboken, New Jersey |pages=63–64}}</ref> Because side pockets are used to hold illiquid investments, investors do not have the standard redemption rights with respect to the side pocket investment that they do with respect to the fund's main portfolio.<ref name=StrachmanBook/> Profits or losses from the investment are allocated on a ''[[pro rata]]'' basis only to those who are investors at the time the investment is placed into the side pocket and are not shared with new investors.<ref name=StrachmanBook/><ref name=Duc>{{cite book |url=https://books.google.com/books?id=jQ_W-2vqw-4C&pg=PA16 |title=Market Risk Management for Hedge Funds: Foundations of the Style and Implicit Value-at-Risk |last1=Duc |first1=Francois |last2=Schorderet |first2=Yann |year=2008 |publisher=Wiley |pages=15–17 |isbn=978-0-470-72299-2}}</ref> Funds typically carry side pocket assets "at cost" for purposes of calculating management fees and reporting net asset values. This allows fund managers to avoid attempting a valuation of the underlying investments, which may not always have a readily available [[market value]].<ref name=Duc/>

Side pockets were widely used by hedge funds during the [[2008 financial crisis]] amidst a flood of withdrawal requests. Side pockets allowed fund managers to lay away illiquid securities until market liquidity improved, a move that could reduce losses. However, as the practice restricts investors' ability to redeem their investments it is often unpopular and many have alleged that it has been abused or applied unfairly.<ref name=SECprobes>{{cite news |url=https://www.reuters.com/article/hedgefunds-sec-idUSN2713105420100428 |title=SEC probes hedge funds' use of side pockets-WSJ |work=Reuters |date=27 April 2010 |access-date=15 April 2013 |first=Joseph A. |last=Giannone |archive-url=https://web.archive.org/web/20131230234050/http://www.reuters.com/article/2010/04/28/hedgefunds-sec-idUSN2713105420100428 |archive-date=30 December 2013 |url-status=live |df=dmy-all }}</ref><ref>{{cite news |url=https://www.wsj.com/articles/SB115465505123626547 |title='Side-Pocket' Accounts Of Hedge Funds Studied |last1=Zuckerman |first1=Gregory |last2=Patterson |first2=Scott |date=4 August 2006 |work=The Wall Street Journal |access-date=18 April 2013 |archive-url=https://web.archive.org/web/20150327070810/http://www.wsj.com/articles/SB115465505123626547 |archive-date=27 March 2015 |url-status=live |df=dmy-all }}</ref> The SEC also has expressed concern about aggressive use of side pockets and has sanctioned certain fund managers for inappropriate use of them.<ref name=Lins>Gerald T. Lins, Thomas P. Lemke, Kathryn L. Hoenig & Patricia Schoor Rube, ''Hedge Funds and Other Private Funds: Regulation and Compliance'' § 5:23 (2013–2014 ed.).</ref>

==Regulation==
Hedge funds must abide by the national, federal, and state regulatory laws in their respective locations. The U.S. regulations and restrictions that apply to hedge funds differ from those that apply to its mutual funds.<ref>{{cite web |url=http://www.ici.org/investor_ed/brochures/faqs_hedge |title=The Differences Between Mutual Funds and Hedge Funds, April 2007 |publisher=ICI |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20111209111944/http://www.ici.org/investor_ed/brochures/faqs_hedge |archive-date=9 December 2011 |url-status=dead |df=dmy-all }}</ref> Mutual funds, unlike hedge funds and other private funds, are subject to the [[Investment Company Act of 1940]], which is a highly detailed and extensive regulatory regime.<ref>Lemke, Lins & Smith, ''Regulation of Investment Companies'' (Matthew Bender, 2014 ed.).</ref> According to a report by the [[International Organization of Securities Commissions]], the most common form of regulation pertains to restrictions on [[financial adviser]]s and hedge fund managers in an effort to minimize client fraud. On the other hand, U.S. hedge funds are exempt from many of the standard registration and reporting requirements because they only accept accredited investors.<ref name="Coggan"/> In 2010, regulations were enacted in the US and European Union which introduced additional hedge fund reporting requirements. These included the U.S.'s [[Dodd–Frank Wall Street Reform and Consumer Protection Act|Dodd-Frank Wall Street Reform Act]]<ref name=Ismail/> and European [[Alternative Investment Fund Managers Directive]].<ref name=Regulators/>

In 2007, in an effort to engage in [[Industry self-regulation|self-regulation]], 14 leading hedge fund managers developed a voluntary set of [[international standards]] in [[best practice]] and known as the ''Hedge Fund Standards'' they were designed to create a "framework of transparency, integrity and good governance" in the hedge fund industry.<ref name="HFSB001">{{cite web |url=http://www.hfsb.org/about-us/mission/ |title=Mission |publisher=Hedge Fund Standards Board |access-date=27 September 2016 |archive-url=https://web.archive.org/web/20161001182744/http://www.hfsb.org/about-us/mission/ |archive-date=1 October 2016 |url-status=live |df=dmy-all }}</ref> The [[Hedge Fund Standards Board]] was set up to prompt and maintain these standards going forward, and by 2016 it had approximately 200 hedge fund managers and institutional investors with a value of US$3tn investment endorsing the standards.<ref name="HFSB002">{{cite web|url=http://www.hfsb.org/about-us/history/|title=History|publisher=Hedge Fund Standards Board|access-date=27 September 2016|archive-url=https://web.archive.org/web/20161001171632/http://www.hfsb.org/about-us/history/|archive-date=1 October 2016|url-status=live|df=dmy-all}}</ref> The [[Managed Funds Association]] is a US-based [[trade association]], while the Alternative Investment Management Association is the primarily European counterpart.<ref>{{Cite web|url=https://www.aima.org/article/how-the-regulatory-landscape-has-changed.html|title=How the regulatory landscape has changed|last=AIMA|website=www.aima.org|access-date=2020-03-18|archive-date=18 March 2020|archive-url=https://web.archive.org/web/20200318223909/https://www.aima.org/article/how-the-regulatory-landscape-has-changed.html|url-status=live}}</ref>

===United States===
Hedge funds within the US are subject to regulatory, reporting, and record-keeping requirements.<ref name=Overview>{{cite web |url=http://www.gao.gov/htext/d09677t.html |title=Hedge Funds: Overview of Regulatory Oversight, Counterparty Risks, and Investment Challenges |first=Orice M. |last=Williams |date=7 May 2009 |publisher=U.S. Government Accountability Office |access-date=14 March 2011 |archive-url=https://web.archive.org/web/20110228131451/http://www.gao.gov/htext/d09677t.html |archive-date=28 February 2011 |url-status=live |df=dmy-all }}</ref> Many hedge funds also fall under the jurisdiction of the [[Commodity Futures Trading Commission]], and are subject to rules and provisions of the 1922 [[Commodity Exchange Act]], which prohibits fraud and manipulation.<ref name=Brown-Hruska>{{cite web |url=http://www.cftc.gov/opa/speeches04/opabrown-hruska-22.htm |title=Securities Industry Association Hedge Funds Conference |first=Sharon |last=Brown-Hruska |date=30 November 2004 |work=Securities Industry Association Hedge Funds Conference Keynote Address |publisher=U.S. Commodity Futures Trading Commission |access-date=16 March 2011 |archive-url=https://web.archive.org/web/20110516104607/http://www.cftc.gov/opa/speeches04/opabrown-hruska-22.htm |archive-date=16 May 2011 |url-status=live |df=dmy-all }}</ref> The [[Securities Act of 1933]] required companies to file a registration statement with the SEC to comply with its [[private placement]] rules before offering their securities to the public,<ref>{{cite web |url=https://www.sec.gov/about/laws.shtml#secact1933 |title=The Laws That Govern the Securities Industry: The Securities Act of 1933 |publisher=Securities and Exchange Commission |access-date=29 March 2011 |archive-url=https://web.archive.org/web/20110514004131/http://www.sec.gov/about/laws.shtml#secact1933 |archive-date=14 May 2011 |url-status=live |df=dmy-all }}</ref> and most traditional hedge funds in the United States are offered effectively as private placement offerings.<ref>{{cite web|last1=Leib|first1=Barclay T.|last2=Kaminski|first2=Kathryn M.|last3=Sherman|first3=Mila G.|title=Hedge Fund Strategies|publisher=CFA Institute|access-date=18 May 2020|url=https://www.cfainstitute.org/-/media/documents/protected/refresher-reading/2020/pdf/hedge-fund-strategies.ashx}}{{Dead link|date=November 2024 |bot=InternetArchiveBot |fix-attempted=yes }}</ref> The [[Securities Exchange Act of 1934]] required a fund with more than 499 investors to register with the SEC.<ref>{{cite book |title=Hedge funds:risk and regulation |last1=Baums |first1=Theodor |last2=Cahn |first2=Andreas |year=2004 |publisher=Walter de Gruyter |isbn=978-3-89949-149-4 |pages=64–65}}</ref><ref name=SEA1934>{{cite web |url=https://www.sec.gov/about/laws.shtml#secexact1934 |title=The Laws That Govern the Securities Industry: The Securities Exchange Act of 1934 |publisher=Securities and Exchange Commission |access-date=29 March 2011 |archive-url=https://web.archive.org/web/20110514004131/http://www.sec.gov/about/laws.shtml#secexact1934 |archive-date=14 May 2011 |url-status=live |df=dmy-all }}</ref><ref name=Skeel2005>Skeel D. (2005). [http://www.legalaffairs.org/issues/November-December-2005/feature_skeel_novdec05.msp Behind the Hedge] {{Webarchive|url=https://web.archive.org/web/20090620002243/http://www.legalaffairs.org/issues/November-December-2005/feature_skeel_novdec05.msp |date=20 June 2009 }}. ''[[Legal Affairs]]''.</ref> The [[Investment Advisers Act of 1940]] contained anti-fraud provisions that regulated hedge fund managers and advisers, created limits for the number and types of investors, and prohibited [[public offering]]s. The Act also exempted hedge funds from mandatory registration with the [[U.S. Securities and Exchange Commission|SEC]]<ref name=Coggan/><ref>{{cite web |publisher=Marx Law Library, University of Cincinnati College of Law |url=http://www.law.uc.edu/CCL/InvCoAct/sec3.html |title=The Investment Company Act of 1940 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100611050710/http://www.law.uc.edu/CCL/InvCoAct/sec3.html |archive-date=11 June 2010 |url-status=dead |df=dmy-all }}</ref><ref>{{cite web |url=http://www.sglawyers.com/hedgefundworld/forming-a-hedgefund/exemption-from-registration.aspx |title=Forming A Hedge Fund |work=SGLawyers.com |access-date=29 March 2011 |archive-url=https://web.archive.org/web/20110315052730/http://www.sglawyers.com/hedgefundworld/forming-a-hedgefund/exemption-from-registration.aspx |archive-date=15 March 2011 |url-status=dead |df=dmy-all }}</ref> when selling to accredited investors with a minimum of US$5&nbsp;million in investment assets. Companies and institutional investors with at least US$25&nbsp;million in investment assets also qualified.<ref>{{cite web |publisher=Marx Law Library, University of Cincinnati College of Law |url=http://www.law.uc.edu/CCL/InvCoAct/sec2.html |title=The Investment Company Act of 1940 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100725083605/http://www.law.uc.edu/CCL/InvCoAct/sec2.html |archive-date=25 July 2010 |url-status=dead |df=dmy-all }}</ref>

In December 2004, the SEC began requiring hedge fund advisers, managing more than US$25&nbsp;million and with more than 14 investors, to register with the SEC under the Investment Advisers Act.<ref>{{cite web|url=https://www.sec.gov/rules/final/ia-2333.htm|title=Registration Under the Advisers Act of Certain Hedge Fund Advisers|date=7 December 2004|work=U.S. Securities and Exchange Commission|access-date=17 March 2011|archive-url=https://web.archive.org/web/20101107115336/http://www.sec.gov/rules/final/ia-2333.htm|archive-date=7 November 2010|url-status=live|df=dmy-all}}</ref> The SEC stated that it was adopting a "risk-based approach" to monitoring hedge funds as part of its evolving regulatory regime for the burgeoning industry.<ref>{{cite web|url=https://www.sec.gov/rules/final/ia-2333.htm#P78_37183|title=Registration Under the Advisers Act of Certain Hedge Fund Advisers: Footnote 42|date=7 December 2004|work=U.S. Securities and Exchange Commission|access-date=17 March 2011|archive-url=https://web.archive.org/web/20101107115336/http://www.sec.gov/rules/final/ia-2333.htm#P78_37183|archive-date=7 November 2010|url-status=live|df=dmy-all}}</ref> The new rule was controversial, with two Commissioners dissenting,<ref>{{cite web |url=http://www.seclaw.com/docs/NewHedgeFundAdvisorRule.htm |title=Registration of Hedge Fund Managers: Bureaucracy Without Benefit |last1=Astarita |first1=Mark J |work=SECLaw.com |access-date=17 March 2011 |archive-url=https://web.archive.org/web/20110610144620/http://www.seclaw.com/docs/NewHedgeFundAdvisorRule.htm |archive-date=10 June 2011 |url-status=dead |df=dmy-all }}</ref> and was later challenged in court by a hedge fund manager. In June 2006, the [[U.S. Court of Appeals for the District of Columbia]] overturned the rule and sent it back to the agency to be reviewed.<ref>{{cite court |litigants=Goldstein vs. SEC |vol=04-1434 |reporter= |opinion= |pinpoint= |court=D.C. App. |date=23 June 2006 |url=http://www.seclaw.com/docs/ref/GoldsteinSEC04-1434.pdf |quote= |archive-url=https://web.archive.org/web/20090919163150/http://www.seclaw.com/docs/ref/GoldsteinSEC04-1434.pdf |url-status=dead }}</ref> In response to the court decision, in 2007 the SEC adopted Rule 206(4)-8, which unlike the earlier-challenged rule, "does not impose additional filing, reporting or disclosure obligations" but does potentially increase "the risk of enforcement action" for negligent or fraudulent activity.<ref>Adelfio NE, Griffin N. (2007). [http://www.mondaq.com/article.asp?articleid=51202 United States: SEC Affirms Its Enforcement Authority With New Anti-Fraud Rule Under the Advisers Act] {{Webarchive|url=https://web.archive.org/web/20090727063231/http://www.mondaq.com/article.asp?articleid=51202 |date=27 July 2009 }}. Mondaq.</ref> Hedge fund managers with at least US$100&nbsp;million in assets under management are required to file publicly quarterly reports disclosing ownership of registered equity securities and are subject to public disclosure if they own more than 5% of the class of any registered equity security.<ref name=SEA1934/> Registered advisers must report their business practices and disciplinary history to the SEC and to their investors. They are required to have written compliance policies, a [[chief compliance officer]], and their records and practices may be examined by the SEC.<ref name="Overview"/>

The U.S.'s [[Dodd–Frank Wall Street Reform and Consumer Protection Act|Dodd-Frank Wall Street Reform Act]] was passed in July 2010<ref name=Ismail/><ref name="Chay"/> and requires SEC registration of advisers who manage private funds with more than US$150 million in assets.<ref name=Chalmers>{{cite web |url=http://www.regulatorycompliance.com/newsletter/2010/April/financial_regulatory_reform.html |title=Financial Regulatory Reform – What Does it Mean for You? |last1=Chalmers |first1=Geoffrey T. |date=April 2010 |work=RegulatoryCompliance.com |publisher=Regulatory Compliance, LLC |access-date=15 March 2011 |archive-url=https://web.archive.org/web/20160303170546/http://www.regulatorycompliance.com/newsletter/2010/April/financial_regulatory_reform.html |archive-date=3 March 2016 |url-status=dead |df=dmy-all }}</ref><ref>{{cite news |title=Hedge funds register, wait for SEC to visit |first1=Svea |last1=Herbst-Bayliss |first2=Katya |last2=Wachtel |url=https://www.reuters.com/article/us-hedgefunds-registration-idUSBRE82R1FH20120328 |work=Reuters |date=28 March 2012 |access-date=2 July 2012 |archive-url=https://web.archive.org/web/20120506043608/http://www.reuters.com/article/2012/03/28/us-hedgefunds-registration-idUSBRE82R1FH20120328 |archive-date=6 May 2012 |url-status=live |df=dmy-all }}</ref> Registered managers must file Form ADV with the SEC, as well as information regarding their assets under management and trading positions.<ref>Lemke & Lins, ''Regulation of Investment Advisers'' (Thomson West, 2014 ed.).</ref> Previously, advisers with fewer than 15 clients were exempt, although many hedge fund advisers voluntarily registered with the SEC to satisfy institutional investors.<ref name="Orol">{{cite web |url=http://articles.marketwatch.com/2010-11-19/economy/30713275_1_fund-managers-hedge-fund-hedge-funds |title=SEC: Hedge funds must open up their books |last1=Orol |first1=Ronald D. |date=19 November 2010 |work=MarketWatch |access-date=13 March 2013 |archive-url=https://web.archive.org/web/20130502111347/http://articles.marketwatch.com/2010-11-19/economy/30713275_1_fund-managers-hedge-fund-hedge-funds |archive-date=2 May 2013 |url-status=dead |df=dmy-all }}</ref> Under Dodd-Frank, investment advisers with less than US$100 million in assets under management became subject to state regulation.<ref name=Chalmers/> This increased the number of hedge funds under state supervision.<ref name=Brief_Summary/> Overseas advisers who managed more than US$25 million were also required to register with the SEC.<ref>{{cite news |url=https://www.bloomberg.com/news/2011-02-23/asia-s-cash-starved-small-hedge-funds-face-tsunami-of-u-s-registration.html |title=Asia's Cash-Poor Small Hedge Funds |first=Netty |last=Ismail |date=23 February 2011 |work=Bloomberg |publisher=Bloomberg L.P. |access-date=8 March 2011 |archive-url=https://web.archive.org/web/20110227070157/http://www.bloomberg.com/news/2011-02-23/asia-s-cash-starved-small-hedge-funds-face-tsunami-of-u-s-registration.html |archive-date=27 February 2011 |url-status=live |df=dmy-all }}</ref> The Act requires hedge funds to provide information about their trades and portfolios to regulators including the newly created [[Financial Stability Oversight Council]].<ref name="Brief_Summary">{{cite web |url=http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf |title=Brief Summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act |work=banking.senate.gov |publisher=United States Senate |access-date=8 March 2008 |archive-url=https://web.archive.org/web/20100710034423/http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_comprehensive_summary_Final.pdf |archive-date=10 July 2010 |url-status=dead |df=dmy-all }}</ref> In this regard, most hedge funds and other private funds, including private-equity funds, must file Form PF with the SEC, which is an extensive reporting form with substantial data on the funds' activities and positions.<ref name=Lins/> Under the "[[Volcker Rule]]", regulators are also required to implement regulations for banks, their affiliates, and [[Holding company|holding companies]] to limit their relationships with hedge funds and to prohibit these organizations from [[proprietary trading]], and to limit their investment in, and sponsorship of, hedge funds.<ref name="Brief_Summary"/><ref>{{cite web |url=https://www.sec.gov/news/press/2011/2011-133.htm |title=SEC Adopts Dodd-Frank Act Amendments to Investment Advisers Act |date=22 June 2011 |work=Securities and Exchange Commission |access-date=2 July 2012 |archive-url=https://web.archive.org/web/20120626093540/http://www.sec.gov/news/press/2011/2011-133.htm |archive-date=26 June 2012 |url-status=live |df=dmy-all }}</ref><ref>{{cite web |author=Marx Law Library, University of Cincinnati College of Law |url=http://www.mmwr.com/home/publications/default.aspx?d=2889 |title=Dodd-Frank Changes to Adviser Regulation |work=Montgomery McCracken |date=18 October 2010 |access-date=29 March 2011 |archive-url=https://web.archive.org/web/20110104054833/http://www.mmwr.com/home/publications/default.aspx?d=2889 |archive-date=4 January 2011 |url-status=dead |df=dmy-all }}</ref>

===Europe===
Within the European Union (EU), hedge funds are primarily regulated through their managers.<ref name=Coggan/> In the United Kingdom, where 80% of Europe's hedge funds are based,<ref>{{cite news |url=https://www.bbc.co.uk/news/business-11577887 |title=EU finance ministers agree new hedge fund curbs |last1=Shore |first1=Ben |date=19 October 2010 |website=BBC News Business |access-date=18 July 2013 |archive-url=https://web.archive.org/web/20110720083738/http://www.bbc.co.uk/news/business-11577887 |archive-date=20 July 2011 |url-status=live |df=dmy-all }}</ref> hedge fund managers are required to be authorised and regulated by the [[Financial Conduct Authority]] (FCA).<ref name=Regulators>{{cite news |url=https://www.reuters.com/article/us-finance-summit-reforms-idUSTRE71O41P20110225?pageNumber=1 |title=Regulators Crack Down on Banks, Markets |date=25 February 2011 |work=Reuters |access-date=8 March 2011 |first=Kevin |last=Drawbaugh |archive-url=https://web.archive.org/web/20120726015418/http://www.reuters.com/article/2011/02/25/us-finance-summit-reforms-idUSTRE71O41P20110225?pageNumber=1 |archive-date=26 July 2012 |url-status=live |df=dmy-all }}</ref> Each country has its own specific restrictions on hedge fund activities, including controls on use of derivatives in Portugal, and limits on leverage in France.<ref name=Coggan/>

In the EU, managers are subject to the [[Alternative Investment Fund Managers Directive|EU's Directive on Alternative Investment Fund Managers]] (AIFMD). According to the EU, the aim of the directive is to provide greater monitoring and control of alternative investment funds.<ref>{{cite web |url=http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/10/572&format=HTML&aged=0&language=EN&guiLanguage=en |title=Directive on Alternative Investment Managers ('AIFMD'): Frequently Asked Questions |date=11 November 2010 |work=Europa |publisher=European Union |access-date=8 March 2008 |archive-url=https://web.archive.org/web/20111129084037/http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO%2F10%2F572&format=HTML&aged=0&language=en&guiLanguage=en |archive-date=29 November 2011 |url-status=live |df=dmy-all }}</ref> AIFMD requires all EU hedge fund managers to register with national regulatory authorities<ref>{{cite news |ssrn=2383445 |title=Varieties of Regulation: How States Pursue and Set International Financial Standards |last1=Prabhakar |first1=Rahul |date=1 June 2013 |publisher=Oxford University GEG }}</ref> and to disclose more information, on a more frequent basis. It also directs hedge fund managers to hold larger amounts of capital. AIFMD also introduced a "passport" for hedge funds authorised in one EU country to operate throughout the EU.<ref name=Chay/><ref name=Regulators/> The scope of AIFMD is broad and encompasses managers located within the EU as well as non-EU managers that market their funds to European investors.<ref name=Chay/> An aspect of AIFMD which challenges established practices in the hedge funds sector is the potential restriction of remuneration through bonus deferrals and [[clawback]] provisions.<ref>{{cite news |url=http://www.ft.com/cms/s/0/a766a03e-e47d-11e1-affe-00144feab49a.html#axzz2466ka3Qi |title=EU hedge funds face pay threat - FT.com |first1=Alex |last1=Barker |first2=Sam |last2=Jones |work=ft.com |year=2012 |access-date=20 August 2012 |archive-url=https://web.archive.org/web/20120815182450/http://www.ft.com/cms/s/0/a766a03e-e47d-11e1-affe-00144feab49a.html#axzz2466ka3Qi |archive-date=15 August 2012 |url-status=live |df=dmy-all }}</ref>

===Offshore===
Some hedge funds are established in [[Offshore Financial Centre|offshore centres]], such as the [[Cayman Islands]], [[Dublin]], [[Luxembourg]], [[Singapore]]<ref>{{cite news|title=Singapore's role in offshore banking|url=https://www.pwc.com/sg/en/publications/assets/role-sg-as-offshore-wealth-mgt-hub-2018.pdf|work=UBS|date=July 2018|access-date=20 Oct 2021|archive-date=23 September 2021|archive-url=https://web.archive.org/web/20210923130655/https://www.pwc.com/sg/en/publications/assets/role-sg-as-offshore-wealth-mgt-hub-2018.pdf|url-status=live}}</ref> the [[British Virgin Islands]], and [[Bermuda]], which have different regulations<ref>{{cite news|title=TalkingPoint: Outlook For Offshore-registered Hedge Funds In 2011|url=http://www.financierworldwide.com/article_printable.php?id=7809|work=Financier Worldwide|date=February 2011|access-date=16 March 2011|archive-url=https://web.archive.org/web/20120322095751/http://www.financierworldwide.com/article_printable.php?id=7809|archive-date=22 March 2012|url-status=dead|df=dmy-all}}</ref> concerning non-accredited investors, client confidentiality, and fund manager independence.<ref name=Ismail/><ref name=Regulators/>

=== South Africa ===
In South Africa, investment fund managers must be approved by, and register with, the Financial Services Board (FSB).<ref>{{cite web |url=http://www.hedgefund-sa.co.za/HF.pdf |title=Hedge Fund SA |work=Industry Overview |publisher=Hedge Fund SA |access-date=15 December 2011 |archive-url=https://web.archive.org/web/20130120065621/http://www.hedgefund-sa.co.za/HF.pdf |archive-date=20 January 2013 |url-status=dead |df=dmy-all }}</ref>

==Performance==
===Measurement===
Performance statistics for individual hedge funds are difficult to obtain, as the funds have historically not been required to report their performance to a central repository, and restrictions against public offerings and advertisement have led many managers to refuse to provide performance information publicly. However, summaries of individual hedge fund performance are occasionally available in industry journals<ref>{{cite web |last=Willoughby |first=Jack |url=http://online.barrons.com/article/SB119101983536943198.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_top |title=High Performance |publisher=Online.barrons.com |date=1 October 2007 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20111127055545/http://online.barrons.com/article/SB119101983536943198.html?mod=b_hps_9_0001_b_this_weeks_magazine_home_top |archive-date=27 November 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite news | url=http://online.wsj.com/public/resources/documents/BA_HedgeFund50_071001.pdf | title=Here They Are – The Hedge Fund 50 | work=The Wall Street Journal | access-date=19 October 2007 | archive-url=https://web.archive.org/web/20071128210917/http://online.wsj.com/public/resources/documents/BA_HedgeFund50_071001.pdf | archive-date=28 November 2007 | url-status=live | df=dmy-all }}</ref> and databases.<ref name=Or>{{cite news |url=http://online.wsj.com/article/BT-CO-20110304-711526.html |title=Hedge Fund Assets Near $2.5 Trillion in 2010 |first=Amy |last=Or |work=The Wall Street Journal |publisher=Dow Jones & Company, Inc. |date=4 March 2011 |access-date=3 April 2011 |archive-url=https://web.archive.org/web/20110307040255/http://online.wsj.com/article/BT-CO-20110304-711526.html |archive-date=7 March 2011 |url-status=live |df=dmy-all }}</ref>

One estimate is that the average hedge fund returned 11.4% per year,<ref name=mallaby/> representing a 6.7% return above overall market performance before fees, based on performance data from 8,400 hedge funds.<ref name="Coggan"/> Another estimate is that between January 2000 and December 2009 hedge funds outperformed other investments and were substantially less volatile, with stocks falling an average of 2.62% per year over the decade and hedge funds rising an average of 6.54% per year; this was an unusually volatile period with both the 2001-2002 [[dot-com bubble]] and a [[Great Recession in the United States|recession beginning mid 2007]].<ref name="Lost Decade">{{cite web |url=http://www.hennesseegroup.com/releases/release20100119.html |title=Hedge Funds Out Perform In The "Lost Decade" |publisher=Hennessee Group LLC |date=19 January 2010 |access-date=3 April 2011 |archive-url=https://web.archive.org/web/20110901154411/http://www.hennesseegroup.com/releases/release20100119.html |archive-date=1 September 2011 |url-status=live |df=dmy-all }}</ref> However, more recent data show that hedge fund performance declined and underperformed the market from about 2009 to 2016.<ref>{{Cite news|url=https://www.bloomberg.com/gadfly/articles/2016-03-24/hedge-funds-have-a-performance-problem|title=Just Look at Those Subpar Returns!|last=Kaissar|first=Nir|date=24 March 2016|work=Bloomberg Gadfly|access-date=14 April 2017|archive-url=https://web.archive.org/web/20170415200703/https://www.bloomberg.com/gadfly/articles/2016-03-24/hedge-funds-have-a-performance-problem|archive-date=15 April 2017|url-status=live|df=dmy-all}}</ref>

Hedge funds performance is measured by comparing their returns to an estimate of their risk.<ref name=Bollen>{{cite journal |last1=Bollen |first1=Nicolas P.B. |last2=Whaley |first2=Robert E. |date=April 2009 |title=Hedge Fund Dynamics: Implications |journal=The Journal of Finance |volume=LXIV |issue=2 |pages=985–1035 |url=http://www.afajof.org/afa/forthcoming/4944.pdf |access-date=3 April 2011 |doi=10.1111/j.1540-6261.2009.01455.x |archive-url=https://web.archive.org/web/20120406181032/http://www.afajof.org/afa/forthcoming/4944.pdf |archive-date=6 April 2012 |url-status=dead |df=dmy-all }}</ref> Common measures are the [[Sharpe ratio]],<ref>{{cite book |title=Evaluating hedge fund performance |last=Tran |first=Vinh Q. |year=2006 |publisher=John Wiley & Sons |isbn=978-0-471-68171-7 |page=181}}</ref> [[Treynor ratio|Treynor measure]] and [[Jensen's alpha]].<ref>{{cite book |title=Hedge fund alpha |last=Longo |first=John M.|year=2009 |publisher=World Scientific Publishing |isbn=978-981-283-465-2 |pages=203–204}}</ref> These measures work best when returns follow [[normal distribution]]s without [[autocorrelation]], and these assumptions are often not met in practice.<ref name=CTA22>{{cite book |title=Commodity Trading Advisors: Risk, Performance Analysis, and Selection |last1=Christopherson |first1=Robert |last2=Gregoriou |first2=Greg N. |year=2004 |publisher=John Wiley & Sons |isbn=978-0-471-68194-6 |pages=377–384}}</ref>

New performance measures have been introduced that attempt to address some of theoretical concerns with traditional indicators, including: modified [[Sharpe ratio]]s;<ref name=CTA22/><ref>{{cite book |title=Encyclopedia of alternative investment |last=Gregoriou |first=Greg N. |year=2008 |publisher=Taylor & Francis Inc. |isbn=978-1-4200-6488-9 |page=303}}</ref> the [[Omega ratio]] introduced by Keating and Shadwick in 2002;<ref>{{cite book |title=Hedge fund alpha |last=Longo |first=John M.|year=2009 |publisher=World Scientific Publishing |isbn=978-981-283-465-2 |page=205}}</ref> Alternative Investments Risk Adjusted Performance (AIRAP) published by Sharma in 2004;<ref>{{cite book |title=Hedge Funds: Insights in Performance Measurement, Risk Analysis, and Portfolio Allocation |last=Sharma |first=Milind |year=2005 |publisher=Wiley, John & Sons Incorporated |isbn=978-0-471-73743-8 |pages=403–434}}</ref> and Kappa developed by Kaplan and Knowles in 2004.<ref>{{cite book |title=High-Frequency Trading |last=Aldridge |first=Irene |year=2009 |publisher=Wiley, John & Sons Incorporated |isbn=978-0-470-56376-2 |page=56}}</ref>

===Sector-size effect===
There is a debate over whether [[Alpha (finance)|alpha]] (the manager's skill element in performance) has been diluted by the expansion of the hedge fund industry. Two reasons are given. First, the increase in traded volume may have been reducing the [[Market anomaly|market anomalies]] that are a source of hedge fund performance. Second, the remuneration model is attracting more managers, which may dilute the talent available in the industry.<ref>{{cite book |last=Lack |first=Simon |title=The Hedge Fund Mirage: The Illusion of Big Money and why it's Too Good to be True |url=https://books.google.com/books?id=VLNomI8ahVQC&q=%22a+small+hedge+fund+industry+has+done+better+than+a+large+one%22&pg=PT18 |access-date=6 March 2013 |year=2012 |publisher=John Wiley & Sons |location=New Jersey|isbn=978-1-118-16431-0 |page=7}}</ref><ref>{{cite journal |title=The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy |last1=Géhin |first1=Walter |last2=Vaissié |first2=Mathieu |url=http://faculty-research.edhec.com/servlet/com.univ.collaboratif.utils.LectureFichiergw?ID_FICHIER=1328885973094 |date=June 2005 |journal=The Journal of Alternative Investments |volume=9 |issue=1 |pages=9–18 |access-date=28 February 2013 |doi=10.3905/jai.2006.640263 |s2cid=154934418 |archive-url=https://web.archive.org/web/20140607002003/http://faculty-research.edhec.com/servlet/com.univ.collaboratif.utils.LectureFichiergw?ID_FICHIER=1328885973094 |archive-date=7 June 2014 |url-status=live |df=dmy-all }}</ref>

===Hedge fund indices===
[[Stock market index|Indices]] play a central and unambiguous role in traditional asset markets, where they are widely accepted as representative of their underlying portfolios. Equity and debt [[index fund]] products provide investable access to most [[developed market]]s in these asset classes.

Hedge fund indices are more problematic. The typical hedge fund is not traded on exchange, will accept investments only at the discretion of the manager, and does not have an obligation to publish returns. Despite these challenges, Non-investable, Investable, and Clone indices have been developed.

====Non-investable indices====
Non-investable indices are indicative in nature and aim to represent the performance of some database of hedge funds using some measure such as mean, median, or weighted mean from a hedge fund database. The databases have diverse selection criteria and methods of construction, and no single database captures all funds. This leads to significant differences in reported performance between different indices.

Although they aim to be representative, non-investable indices suffer from a lengthy and largely unavoidable list of [[Selection bias|biases]]. Funds' participation in a database is voluntary, leading to [[self-selection bias]] because those funds that choose to report may not be typical of funds as a whole. For example, some do not report because of poor results or because they have already reached their target size and do not wish to raise further money.

The short lifetimes of many hedge funds mean that there are many new entrants and many departures each year, which raises the problem of [[Attrition bias|survivorship bias]]. If we examine only funds that have survived to the present, we will overestimate past returns because many of the worst-performing funds have not survived, and the observed association between fund youth and fund performance suggests that this bias may be substantial.

When a fund is added to a database for the first time, all or part of its historical data is recorded ex-post in the database. It is likely that funds only publish their results when they are favorable, so that the average performances displayed by the funds during their incubation period are inflated. This is known as "instant history bias" or "backfill bias".

====Investable indices====
Investable indices are an attempt to reduce these problems by ensuring that the return of the index is available to shareholders. To create an investable index, the index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index. When investors buy these products the index provider makes the investments in the underlying funds, making an investable index similar in some ways to a fund of hedge funds portfolio.

To make the index investable, hedge funds must agree to accept investments on the terms given by the constructor. To make the index liquid, these terms must include provisions for redemptions that some managers may consider too onerous to be acceptable. This means that investable indices do not represent the total universe of hedge funds. Most seriously, they under-represent more successful managers, who typically refuse to accept such investment protocols.

====Hedge fund replication====
The most recent addition to the field approaches the problem in a different manner. Instead of reflecting the performance of actual hedge funds, they take a statistical approach to the analysis of historic hedge fund returns and use this to construct a model of how hedge fund returns respond to the movements of various investable financial assets. This model is then used to construct an investable portfolio of those assets. This makes the index investable, and in principle, they can be as representative as the hedge fund database from which they were constructed. However, these clone indices rely on a statistical modelling process. Such indices have too short a history to state whether this approach will be considered successful.

=== Closures ===
In March 2017, HFR – a hedge fund research data and service provider – reported that there were more hedge-fund closures in 2016 than during the 2009 recession. According to the report, several large public pension funds pulled their investments in hedge funds, because the funds' subpar performance as a group did not merit the high fees they charged.

Despite the hedge fund industry topping $3 trillion for the first time ever in 2016, the number of new hedge funds launched fell short of levels before the [[2008 financial crisis]]. There were 729 hedge fund launches in 2016, fewer than the 784 opened in 2009, and dramatically fewer than the 968 launches in 2015.<ref>{{cite news |url=https://nypost.com/2017/03/17/hedge-funds-close-at-faster-pace-in-2016-than-2009-recession/ |title=Hedge funds close at faster pace in 2016 than 2009 recession|last=English|first=Carleton |date=18 March 2017|website=[[New York Post]] |archive-url=https://web.archive.org/web/20170320225330/http://nypost.com/2017/03/17/hedge-funds-close-at-faster-pace-in-2016-than-2009-recession/|archive-date=20 March 2017|url-status=live|df=dmy-all}}</ref>

==Debates and controversies==
===Systemic risk===
[[Systemic risk]] refers to the risk of instability across the entire [[financial system]], as opposed to within a single company. Such risk may arise following a destabilizing event or events affecting a group of [[financial institution]]s linked through investment activity.<ref name=NBER>{{cite journal |doi=10.3386/w11200 |title=Systemic Risk and Hedge Funds |last1=Chan |first1=Nicholas |last2=Getmansky |first2=Mila |last3=Haas |first3=Shane M |last4=Lo |first4=Andrew W |date = March 2005 |journal=NBER Working Paper No. 11200 |doi-access=free }}</ref> Organizations such as the [[European Central Bank]] have charged that hedge funds pose systemic risks to the financial sector,<ref>{{cite web |url=http://www.ecb.int/pub/pdf/other/financialstabilityreview200606en.pdf |title=Financial Stability Review June 2006 |date=June 2006 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20110629095405/http://www.ecb.int/pub/pdf/other/financialstabilityreview200606en.pdf |archive-date=29 June 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite news|url=http://business.timesonline.co.uk/tol/business/economics/article670960.ece|title=ECB warns on hedge fund risk|first=Gary|last=Duncan|author-link=Gary Duncan|newspaper=The Times|date=2 June 2006|access-date=1 May 2007|location=London|archive-url=https://web.archive.org/web/20110611232029/http://business.timesonline.co.uk/tol/business/economics/article670960.ece|archive-date=11 June 2011|url-status=dead|df=dmy-all}}</ref> and following the failure of hedge fund [[Long-Term Capital Management]] (LTCM) in 1998 there was widespread concern about the potential for systemic risk if a hedge fund failure led to the failure of its counterparties. (As it happens, no financial assistance was provided to LTCM by the [[US Federal Reserve]], so there was no direct cost to US taxpayers,<ref>{{cite magazine |last=Bookstaber |first=Richard |url=http://www.time.com/time/business/article/0,8599,1653556,00.html |title=Blowing up the Lab on Wall Street |magazine=[[Time (magazine)|Time]] |date=16 August 2007 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20101206061830/http://www.time.com/time/business/article/0,8599,1653556,00.html |archive-date=6 December 2010 |url-status=dead |df=dmy-all }}</ref> but a large [[bailout]] had to be mounted by a number of financial institutions.)

However, these claims are widely disputed by the financial industry,<ref>{{cite web |url=http://www.edhec-risk.com/edito/RISKArticleEdito.2006-07-27.4050/attachments/EDHEC%20response%20to%20ECB%20statement%20on%20HFs.pdf |title=A reply to the ECB's statement on hedge funds by the EDHEC Risk and Asset Management Research Centre |work=edhec-risk.com |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20090919163149/http://www.edhec-risk.com/edito/RISKArticleEdito.2006-07-27.4050/attachments/EDHEC%20response%20to%20ECB%20statement%20on%20HFs.pdf |archive-date=19 September 2009 |url-status=dead |df=dmy-all }}</ref> who typically regard hedge funds as "[[Too big to fail|small enough to fail]]", since most are relatively small in terms of the assets they manage and operate with low leverage, thereby limiting the potential harm to the economic system should one of them fail.<ref name=mallaby>{{cite book |title=More Money Than God: Hedge Funds and the Making of a New Elite |last=Mallaby |first=Sebastian |year=2010 |publisher=Penguin Group |isbn=978-1-59420-255-1|title-link=More Money Than God: Hedge Funds and the Making of a New Elite }}</ref><ref>{{cite news |title=No Threats Here, Firms Tell the U.S. |first=Ben |last=Protess |url=https://dealbook.nytimes.com/2010/11/19/no-threats-here-financial-firms-tell-u-s/ |newspaper=The New York Times |date=19 November 2010 |access-date=28 March 2011 |archive-url=https://web.archive.org/web/20101125044716/http://dealbook.nytimes.com/2010/11/19/no-threats-here-financial-firms-tell-u-s/ |archive-date=25 November 2010 |url-status=live |df=dmy-all }}</ref> Formal analysis of hedge fund leverage before and during the [[2008 financial crisis]] suggests that hedge fund leverage is both fairly modest and [[counter-cyclical]] to the market leverage of investment banks and the larger financial sector.<ref name=AngGorovyy>{{cite journal |last1=Ang |first1=Andrew |last2=Gorovyy |first2=Sergiy |last3=van Inwegen |first3=Gregory B. |year=2011 |title=Hedge Fund Leverage |journal=Journal of Financial Economics |volume=102 |issue=1 |pages=102–126 |doi=10.1016/j.jfineco.2011.02.020 |s2cid=15596157 }}</ref> Hedge fund leverage decreased prior to the [[2008 financial crisis]], even while the leverage of other financial intermediaries continued to increase.<ref name=AngGorovyy/> Hedge funds fail regularly, and numerous hedge funds failed during the [[2008 financial crisis]].<ref>{{cite news |title=Hedge fund graveyard: 693 and counting |first=Ben |last=Rooney |url=https://money.cnn.com/2008/12/18/news/economy/hedge_fund_liquidations/?postversion=2008121817 |work=CNNMoney.com |date=18 December 2008 |access-date=5 April 2011 |archive-url=https://web.archive.org/web/20120119043803/http://money.cnn.com/2008/12/18/news/economy/hedge_fund_liquidations/?postversion=2008121817 |archive-date=19 January 2012 |url-status=live |df=dmy-all }}</ref> In testimony to the [[United States House Committee on Financial Services|US House Financial Services Committee]] in 2009, [[Ben Bernanke]], the [[Federal Reserve System|Federal Reserve]] Board Chairman said he "would not think that any hedge fund or private-equity fund would become a systemically critical firm individually".<ref>[http://www.gpo.gov/fdsys/pkg/CHRG-111hhrg55809/pdf/CHRG-111hhrg55809.pdf ''Federal Reserve Perspectives on Financial Regulatory Reform Proposals: Hearing Before the H. Comm. on Financial Services''] {{Webarchive|url=https://web.archive.org/web/20131228040910/http://www.gpo.gov/fdsys/pkg/CHRG-111hhrg55809/pdf/CHRG-111hhrg55809.pdf |date=28 December 2013 }}, 111th Cong. 25 (2009) (testimony of Ben S. Bernanke, Chairman, Board of Governors of the Federal Reserve System).</ref>

This does leave the possibility that hedge funds collectively might contribute to systemic risk if they exhibit [[Herd behavior|herd or self-coordinating behavior]],<ref name="self-coordinating behaviour">{{cite web |last1=Systemic Risk Centre |title=Engineering and the financial system |date=20 July 2015 |url=https://issuu.com/lsesrc/docs/src_final_july_2015?e=17950101/14294828 |access-date=27 November 2021 |archive-date=27 November 2021 |archive-url=https://web.archive.org/web/20211127110413/https://issuu.com/lsesrc/docs/src_final_july_2015?e=17950101/14294828 |url-status=live }}</ref> perhaps because many hedge funds make losses in similar trades. This coupled with the extensive use of leverage could lead to forced liquidations in a crisis.

Hedge funds are also closely connected to their prime brokers, typically investment banks, which could contribute to their instability in a crisis, though this works both ways and failing [[counterparty]] banks can freeze hedge funds assets, as [[Lehman Brothers]] did in 2008.<ref>{{cite book| last=Coggan| first= Philip| title= Guide to Hedge Funds| orig-year= 2008| year= 2010| publisher = The Economist| isbn= 978-1-84668-382-4| pages= 85–89}}</ref>

An August 2012 survey by the [[Financial Services Authority]] concluded that risks were limited and had reduced as a result, ''inter alia'', of larger [[margin (finance)|margin]]s being required by counterparty banks, but might change rapidly according to market conditions. In stressed market conditions, investors might suddenly withdraw large sums, resulting in forced asset sales. This might cause liquidity and pricing problems if it occurred across a number of funds or in one large highly leveraged fund.<ref>
{{cite web|url= http://www.fsa.gov.uk/static/pubs/other/hedge-fund-report-aug2012.pdf|title= Assessing the possible sources of systemic risk from hedge funds|publisher = Financial Services Authority|date= August 2012|access-date= 18 July 2013|archive-url= https://web.archive.org/web/20121110212234/http://www.fsa.gov.uk/static/pubs/other/hedge-fund-report-aug2012.pdf|archive-date = 10 November 2012|url-status = live|df= dmy-all
}}
</ref>

===Transparency===
Hedge funds are structured to avoid most direct [[financial regulation|regulation]] (although their managers may be regulated), and are not required to publicly disclose their investment activities, except to the extent that investors generally are subject to disclosure requirements. This is in contrast to a regulated mutual fund or [[exchange-traded fund]], which will typically have to meet regulatory requirements for disclosure. An investor in a hedge fund usually has direct access to the investment adviser of the fund, and may enjoy more personalized reporting than investors in retail investment funds. This may include detailed discussions of risks assumed and significant positions. However, this high level of disclosure is not available to non-investors, contributing to hedge funds' reputation for secrecy, while some hedge funds have very limited transparency even to investors.<ref>Carrie Johnson, [https://www.washingtonpost.com/wp-dyn/content/article/2006/06/28/AR2006062801909.html "Scrutiny Urged for Hedge Funds"] {{Webarchive|url=https://web.archive.org/web/20170209234404/http://www.washingtonpost.com/wp-dyn/content/article/2006/06/28/AR2006062801909.html |date=9 February 2017 }} ''The Washington Post'' (29 June 2006). Retrieved 1 March 2011</ref>

Funds may choose to report some information in the interest of recruiting additional investors. Much of the data available in consolidated databases is self-reported and unverified.<ref>Cassar, G., & Gerakos, J. (2009). Determinants of Hedge Fund Internal Controls and Fees. Retrieved from [http://www.hbs.edu/units/am/pdf/Gerakos.pdf] {{Webarchive|url=https://web.archive.org/web/20120801223141/http://www.hbs.edu/units/am/pdf/Gerakos.pdf|date=1 August 2012}}</ref> A study was done on two major databases containing hedge fund data. The study noted that 465 common funds had significant differences in reported information (''e.g.'', returns, inception date, net assets value, incentive fee, management fee, investment styles, etc.) and that 5% of return numbers and 5% of NAV numbers were dramatically different.<ref>{{cite journal | last1 = Liang | first1 = B | year = 2000 | title = Hedge Funds: The Living and the Dead | journal = Journal of Financial and Quantitative Analysis | volume = 35 | issue = 3| pages = 309–326 | doi=10.2307/2676206| jstor = 2676206 | s2cid = 154504097 }}</ref> With these limitations, investors have to do their own research, which may cost on the scale of US$50,000 for a fund that is not well-established.<ref>{{cite journal | last1 = Stulz | first1 = R | year = 2007 | title = Hedge Funds Past, Present, and Future | journal = Journal of Economic Perspectives | volume = 21 | issue = 2| pages = 175–194 | doi = 10.1257/jep.21.2.175 | citeseerx = 10.1.1.475.3895 }}</ref>

A lack of verification of financial documents by investors or by independent auditors has, in some cases, assisted in [[fraud]].<ref name=Kochan09>{{cite news |title=Hedge Fund Fraud: Hedge of darkness |first=Nick |last=Kochan |url=http://www.risk.net/operational-risk-and-regulation/feature/1516866/hedge-fund-fraud-hedge-darkness |work=[[Risk (magazine)|Risk]] |date=1 July 2009 |access-date=21 April 2014 |archive-url=https://web.archive.org/web/20140504070752/http://www.risk.net/operational-risk-and-regulation/feature/1516866/hedge-fund-fraud-hedge-darkness |archive-date=4 May 2014 |url-status=live |df=dmy-all }}</ref> In the mid-2000s, Kirk Wright of International Management Associates was accused of [[mail fraud]] and other securities violations<ref name=FieldsWhite06>{{cite news |title=NFL Stars, Charmed by Kirk Wright, Lose Millions in Hedge Fund |first=Monee |last=Fields-White |url=https://www.bloomberg.com/apps/news?pid=newsarchive&sid=asENn6__scdM |work=[[Bloomberg L.P.|Bloomberg]] |date=23 August 2006 |access-date=28 April 2014 |archive-url=https://web.archive.org/web/20140504073001/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asENn6__scdM |archive-date=4 May 2014 |url-status=live |df=dmy-all }}</ref><ref>{{cite web |url=https://www.sec.gov/litigation/litreleases/lr19581.htm |title=SEC v. Kirk S. Wright, International Management Associates, LLC; International Management Associates Advisory Group, LLC; International Management Associates Platinum Group, LLC; International Management Associates Emerald Fund, LLC; International Management Associates Taurus Fund, LLC; International Management Associates Growth & Income Fund, LLC; International Management Associates Sunset Fund, LLC; Platinum II Fund, LP; and Emerald II Fund, LP, Civil Action |publisher=Sec.gov |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20090724113600/http://www.sec.gov/litigation/litreleases/lr19581.htm |archive-date=24 July 2009 |url-status=live |df=dmy-all }}</ref> which allegedly defrauded clients of close to US$180 million.<ref>{{cite news |first=Amanda |last=Cantrell |url=https://money.cnn.com/2006/03/30/markets/wright_charged/index.htm |title=Hedge fund manager faces fraud charges |publisher=Money.cnn.com |date=30 March 2006 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20091003092847/http://money.cnn.com/2006/03/30/markets/wright_charged/index.htm |archive-date=3 October 2009 |url-status=live |df=dmy-all }}</ref> In December 2008, [[Bernard Madoff]] was arrested for running a US$50 billion [[Ponzi scheme]]<ref>{{cite news | url=http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece | work=The Times | location=London | title=Wall Street legend Bernard Madoff arrested over 50 billion Ponzi scheme | date=12 December 2008 | access-date=4 May 2010 | first=Deirdre | last=Hipwell | archive-url=https://web.archive.org/web/20110614213209/http://www.timesonline.co.uk/tol/news/world/us_and_americas/article5331997.ece | archive-date=14 June 2011 | url-status=dead | df=dmy-all }}</ref> that closely resembled a hedge fund and was incorrectly<ref>Daniel A. Strachman, ''The Fundamentals of Hedge Fund Management: How to Successfully Launch and Operate a Hedge Fund'' 168 (2012).</ref> described as one.<ref>{{cite book |last=Henriques |first=Diana |date=2011 |title=Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle |location=Oxford, UK |publisher=Oneworld |pages=36–209 |isbn=978-1-85168-903-3}}</ref><ref>{{cite news |title=Madoff brother to plead guilty |url=http://www.belfasttelegraph.co.uk/news/world-news/madoff-brother-to-plead-guilty-16179138.html |newspaper=Belfast Telegraph |date=29 June 2012 |access-date=28 June 2012 |archive-url=https://web.archive.org/web/20120701015850/http://www.belfasttelegraph.co.uk/news/world-news/madoff-brother-to-plead-guilty-16179138.html |archive-date=1 July 2012 |url-status=live |df=dmy-all }}</ref><ref>{{cite news |title=U.S. Attorneys Recover Again for South American Investors |url=http://www.businesswire.com/news/home/20120626006758/en/U.S.-Attorneys-Recover-South-American-Investors |newspaper=Business Wire |date=26 June 2012 |access-date=28 June 2012 |archive-url=https://web.archive.org/web/20130728223430/http://www.businesswire.com/news/home/20120626006758/en/U.S.-Attorneys-Recover-South-American-Investors |archive-date=28 July 2013 |url-status=live |df=dmy-all }}</ref> Several feeder hedge funds, of which the largest was [[Fairfield Greenwich Group#Fairfield Sentry Fund|Fairfield Sentry]], channeled money to it. Following the Madoff case, the SEC adopted reforms in December 2009 that subjected hedge funds to an audit requirement.<ref>Securities and Exchange Commission, [https://www.sec.gov/rules/final/2009/ia-2968fr.pdf Custody of Funds or Securities of Clients by Investment Advisers, Release No. IA–2968] {{Webarchive|url=https://web.archive.org/web/20170825184547/https://www.sec.gov/rules/final/2009/ia-2968fr.pdf |date=25 August 2017 }} (30 December 2009), 75 Fed. Reg. 1456 (11 January 2010).</ref>

The process of matching hedge funds to investors has traditionally been fairly opaque, with investments often driven by personal connections or recommendations of portfolio managers.<ref>{{cite web|url=http://rfs.oxfordjournals.org/content/early/2013/12/21/rfs.hht079|title=Opaque Trading, Disclosure, and Asset Prices: Implications for Hedge Fund Regulation|work=oxfordjournals.org|access-date=1 May 2015|archive-url=https://web.archive.org/web/20151212004235/http://rfs.oxfordjournals.org/content/early/2013/12/21/rfs.hht079|archive-date=12 December 2015|url-status=dead|df=dmy-all}}</ref> Many funds disclose their holdings, strategy, and historic performance relative to market indices, giving investors some idea of how their money is being allocated, although individual holdings are often not disclosed.<ref>{{cite web |url=http://www.hmc.harvard.edu/docs/Final_Annual_Report_2013.pdf |title=Harvard Management Company Endowment Report |date=September 2013 |publisher=Hmc.harvard.edu |access-date=9 October 2015 |archive-url=https://web.archive.org/web/20150924030739/http://www.hmc.harvard.edu/docs/Final_Annual_Report_2013.pdf |archive-date=24 September 2015 |url-status=dead |df=dmy-all }}</ref> Investors are often drawn to hedge funds by the possibility of realizing significant returns, or hedging against [[volatility (finance)|volatility]] in the market. The complexity and fees associated with hedge funds are causing some to exit the market – [[CalPERS]], the largest pension fund in the US, announced plans to completely divest from hedge funds in 2014.<ref>{{cite news|url=http://www.hedgeweek.com/2015/03/09/219658/will-entrepreneurs-save-hedge-fund-industry|title=Will entrepreneurs save the hedge fund industry|date=9 March 2015|work=Hedgeweek|access-date=1 May 2015|archive-url=https://web.archive.org/web/20150428052518/http://www.hedgeweek.com/2015/03/09/219658/will-entrepreneurs-save-hedge-fund-industry|archive-date=28 April 2015|url-status=live|df=dmy-all}}</ref> Some services are attempting to improve matching between hedge funds and investors: HedgeZ is designed to allow investors to easily search and sort through funds;<ref>{{cite news|url=https://www.bloomberg.com/bw/articles/2013-10-30/a-dating-service-for-those-who-love-hedge-funds|title=A Dating Service for Those Who Love Hedge Funds|first=Kirsten|last=Salyer|work=Businessweek|date=30 October 2013|access-date=7 March 2017|archive-url=https://web.archive.org/web/20160307111405/http://www.bloomberg.com/bw/articles/2013-10-30/a-dating-service-for-those-who-love-hedge-funds|archive-date=7 March 2016|url-status=live|df=dmy-all}}</ref> iMatchative aims to match investors to funds through algorithms that factor in an investor's goals and behavioral profile, in hopes of helping funds and investors understand the how their perceptions and motivations drive investment decisions.<ref>{{cite web|url=http://www.bizjournals.com/sanjose/news/2014/10/28/imatchative-raises-20m-to-help-match-investors.html|title=IMatchative raises $20M to help match investors, hedge funds|date=28 October 2014|work=Silicon Valley Business Journal|access-date=1 May 2015|archive-url=https://web.archive.org/web/20150211222330/http://www.bizjournals.com/sanjose/news/2014/10/28/imatchative-raises-20m-to-help-match-investors.html|archive-date=11 February 2015|url-status=live|df=dmy-all}}</ref>

===Links with analysts===
In June 2006, prompted by a letter from [[Gary J. Aguirre]], the [[U.S. Senate Committee on the Judiciary|U.S. Senate Judiciary Committee]] began an investigation into the links between hedge funds and independent analysts. Aguirre was fired from his job with the SEC when, as lead investigator of [[insider trading]] allegations against [[Pequot Capital Management]], he tried to interview [[John J. Mack|John Mack]], then being considered for [[chief executive officer]] at [[Morgan Stanley]].<ref>{{cite news |url=https://www.washingtonpost.com/wp-dyn/content/article/2006/06/28/AR2006062801909.html |title=Scrutiny Urged for Hedge Funds |work=Washingtonpost.com |date=29 June 2006 |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20121111114108/http://www.washingtonpost.com/wp-dyn/content/article/2006/06/28/AR2006062801909.html |archive-date=11 November 2012 |url-status=live |df=dmy-all }}</ref> The Judiciary Committee and the [[US Senate Finance Committee]] issued a scathing report in 2007, which found that Aguirre had been illegally fired in reprisal<ref>Liz Noyer, [https://blogs.forbes.com/streettalk/2010/05/27/scales-of-justice-look-skewed-for-rajaratnam-samberg/ "Scales Of Justice Look Skewed For Rajaratnam, Samberg"] {{Webarchive|url=https://web.archive.org/web/20110711015900/http://blogs.forbes.com/streettalk/2010/05/27/scales-of-justice-look-skewed-for-rajaratnam-samberg/ |date=11 July 2011 }} ''Forbes'' magazine (27 May 2010). Retrieved 21 February 2011</ref> for his pursuit of Mack, and in 2009 the SEC was forced to re-open its case against Pequot. Pequot settled with the SEC for US$28&nbsp;million, and [[Arthur J. Samberg]], [[chief investment officer]] of Pequot, was barred from working as an investment advisor.<ref>[http://www.whistleblower.org/press/press-release-archive/633-sec-settles-with-aguirre "SEC Settles with Aguirre"] {{Webarchive|url=https://web.archive.org/web/20110417223718/http://www.whistleblower.org/press/press-release-archive/633-sec-settles-with-aguirre |date=17 April 2011 }} [[Government Accountability Project]] (29 June 2010) Retrieved 21 February 2011</ref> Pequot closed its doors under the pressure of investigations.<ref>Larry Edelman and Saijel Kishan, [https://www.bloomberg.com/apps/news?sid=adzQGDVos7OQ&pid=20601087 "Pequot Capital to Shut Amid SEC Insider-Trading Probe"] Bloomberg News. (28 May 2009). Retrieved 19 February 2011</ref>

The systemic practice of hedge funds submitting periodic electronic questionnaires to stock analysts as a part of market research was reported by ''[[The New York Times]]'' in July 2012. According to the report, one motivation for the questionnaires was to obtain subjective information not available to the public and possible early notice of trading recommendations that could produce short-term market movements.<ref name=NYT71512>{{cite news |title=Surveys Give Big Investors an Early View From Analysts |url=https://www.nytimes.com/2012/07/16/business/in-surveys-hedge-funds-see-early-views-of-stock-analysts.html |access-date=16 July 2012 |newspaper=The New York Times |date=15 July 2012 |first=Gretchen |last=Morgenson |quote=The questions are vague but collectively give us a good sense of the analyst’s overall sentiment towards the company," the report concluded. "We find that this sentiment manifests itself in future analyst upgrades |archive-url=https://web.archive.org/web/20120716114550/http://www.nytimes.com/2012/07/16/business/in-surveys-hedge-funds-see-early-views-of-stock-analysts.html |archive-date=16 July 2012 |url-status=live |df=dmy-all }}</ref>

===Value in a mean/variance efficient portfolio===
According to [[modern portfolio theory]], rational investors will seek to hold portfolios that are mean/variance efficient (that is, portfolios that offer the highest level of return per unit of risk). One of the attractive features of hedge funds (in particular [[market neutral]] and similar funds) is that they sometimes have a modest correlation with traditional assets such as equities. This means that hedge funds have a potentially quite valuable role in investment portfolios as diversifiers, reducing overall portfolio risk.<ref name="Roadmap"/>

However, there are at least three reasons why one might not wish to allocate a high proportion of assets into hedge funds. These reasons are:
* Hedge funds are highly individual, making it hard to estimate the likely returns or risks.
* Hedge funds' correlation with other assets tends to rise during stressful market events, making them much less useful for diversification in bad times than they may appear in good times.
* Hedge fund returns are reduced considerably by the high fees that are typically charged.

Several studies have suggested that hedge funds are sufficiently diversifying to merit inclusion in investor portfolios, but this is disputed for example by Mark Kritzman who performed a mean-variance optimization calculation on an opportunity set that consisted of a stock index fund, a bond index fund, and ten hypothetical hedge funds.<ref>''Portfolio Efficiency with Performance Fees'', Economics and Political Strategy (newsletter), February 2007, Peter L. Bernstein Inc.</ref><ref>{{cite news |last=Hulbert |first=Mark |url=https://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |title=Hulbert, Mark ''2 + 20, and Other Hedge Fund Math'', ''New York Times'', 4 March 2007 |newspaper=[[The New York Times]] |date=4 March 2007 |access-date=26 November 2011 |archive-url=https://web.archive.org/web/20111209204544/http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html |archive-date=9 December 2011 |url-status=live |df=dmy-all }}</ref> The optimizer found that a mean-variance efficient portfolio did not contain any allocation to hedge funds, largely because of the impact of performance fees. To demonstrate this, Kritzman repeated the optimization using an assumption that the hedge funds took no performance fees. The result from this second optimization was an allocation of 74% to hedge funds.

Hedge funds tend to perform poorly during equity [[bear market]]s, just when an investor needs part of their portfolio to add value.<ref name="Roadmap"/> For example, in January–September 2008, the Credit Suisse/Tremont Hedge Fund Index returned -9.87%.<ref>{{cite web |url=http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD |title=Credit Suisse/Tremont Hedge Index web page |website=HedgeIndex.com |access-date=14 August 2010 |archive-url=https://web.archive.org/web/20100819170411/http://www.hedgeindex.com/hedgeindex/en/default.aspx?cy=USD |archive-date=19 August 2010 |url-status=live |df=dmy-all }}</ref> According to the same index series, even "dedicated short bias" funds returned −6.08% in September 2008, when [[Lehman Brothers]] collapsed.

==See also==
* [[Activist shareholder]]
* [[Alternative investment]]
* [[Naked Capitalism]]
* [[Corporate governance]]
* [[Fund governance]]
* [[Investment banking]]
* [[List of hedge funds]]
* [[Vulture fund]]

==Notes==
{{Reflist|30em}}

==Further reading==
*Thomas P. Lemke, Gerald T. Lins, Kathryn L. Hoenig & Patricia S. Rube, ''Hedge Funds and Other Private Funds: Regulation and Compliance'' (Thomson West 2014 ed.).
*Thomas P. Lemke & Gerald T. Lins, ''Regulation of Investment Advisers'' (Thomson West 2014 ed.).
*Thomas P. Lemke, Gerald T. Lins & A. Thomas Smith III, ''Regulation of Investment Companies'' (Matthew Bender 2014 ed.).
*{{cite journal |first1=Frank |last1=Partnoy |first2=Randall S. |last2=Thomas |author-link1=Frank Partnoy |title=Gap Filling, Hedge Funds, and Financial Innovation |journal=Brookings-Nomura Papers on Financial Services |date=20 Sep 2006 |ssrn=931254 }}
*Marcel Kahan & Edward B. Rock, 'Hedge Funds in Corporate Governance and Corporate Control' (2007) 155 University of Pennsylvania Law Review 1021
*Makrem Boumlouka, 'Regulation and Transparency in US OTC Derivative Markets', ''Original Thoughts Series #1'', August 2010, Hedge Fund Society [https://web.archive.org/web/20100705112958/http://hedgefundsregulation.com/ Hedge Fund Society]
*{{cite journal | last1 = Boyson | first1 = Nicole M. | last2 = Stahel | first2 = Christof W. | last3 = Stulz | first3 = Rene M. | year = 2010 | title = Hedge Fund Contagion and Liquidity Shocks | journal = The Journal of Finance | volume = 65 | issue = 5| pages = 1789–1816 | doi=10.1111/j.1540-6261.2010.01594.x| s2cid = 17421154 }}
*{{cite book | first=David | last=Stowell | title=An Introduction to Investment Banks, Hedge Funds, and Private Equity: The New Paradigm | publisher=Academic Press | year=2010}}
* {{cite book | first=Daniel A.| last=Strachman| title= The Fundamentals of Hedge Fund Management: How to Successfully Launch and Operate a Hedge Fund, Second Edition| publisher=Wiley| year=2014}}

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[[Category:Products introduced in 1949]]
[[Category:Hedge funds]]
[[Category:Alternative investment management companies]]
[[Category:Institutional investors]]