Origin and development
The term hedged fund dates small Drayton Finch back to a fund founded by Alfred Winslow Jones in 1949. Jones's fund advisor, A.W. Jones was to sell short some stocks while buying others, thus some of the market risk was hedged. The term "hedge fund" (as opposed to "hedged fund") has today become the accepted vernacular though most such funds are not actually hedged in the literal sense. Before these terms gained wide financial acceptance, they were referred to as "investment pools", "investment syndicates", "investment partnerships" or "opportunity funds".
While Jones is often credited with founding the first hedge fund, it is noted that many investment operations that would in his time and today be considered hedge funds were in operation long before Jones. Such well known prior hedge fund operators included Jesse Livermore aka "Boy Plunger", who recounts his hedge fund experiences in his 1923 book Reminiscences of a Stock Operator and Bernard M. Baruch and Benjamin Graham, who both operated syndicates or investment partnerships throughout the 1920s.
While most of today's hedge funds still trade stocks both long and short, many do not trade stocks at all.[citations needed]
For U.S.-based managers and investors, hedge funds are simply structured as limited partnerships or limited liability companies. The hedge fund manager is the general partner or manager and the investors are the limited partners or members respectively. The funds are pooled together in the partnership or company and the general partner or manager makes all the investment decisions based on the strategy it outlined in the offering documents.
In return for managing the investors' funds, the hedge fund manager will receive a management fee and a performance or incentive fee. The management fee is computed as a percentage of assets under management, and the incentive fee is computed as a percentage of the fund's profits.
A "high water mark" may be specified, under which the manager does not receive incentive fees unless the value of the fund exceeds the highest value it has achieved. The "high water mark" is intended to encourage fund managers to recoup losses, but is viewed by critics as encouraging laggard funds to close, to the detriment of investors.[citations needed]
Funds may also specify a 'hurdle', which signifies that the fund will not charge a performance fee until its annualized performance exceeds a benchmark rate, such as USD 90-day T-bills or a fixed percentage. Rules as to what period should be considered for the hurdle vary from fund to fund, but it most commonly covers the current fiscal year.
The fee structures of hedge funds vary, but fees are typically 20% of the profits of the fund plus 2% of assets under management. Certain highly regarded managers demand higher fees. In particular, Steven Cohen's SAC Capital Partners charges a 50% incentive fee (but no management fee) and Jim Simons' Renaissance Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund before returning all investors' capital and running solely on its employees' money.[citations needed]
Mature hedge fund management firms structure their funds to include both a domestic -- often U.S.-domiciled -- hedge fund and an offshore hedge fund. This allows hedge fund managers to attract capital from all over the world. Managers generally structure these funds in a Master-feeder relationship, with positions made 'Pari passu'.
Hedge funds that have filed for IPOs have done so outside the United States. On November 8, 2006, the $9.4 billion hedge fund unit of $26 billion private equity firm Fortress Investment Group became the first hedge fund to file for an IPO in the United States