PER 2015
Hedge fund is a general term for an alternative investment vehicle that pools investor capital to speculate in the stock market as well as in other securities. They differ from so called mutual funds as hedge funds are typically less accessible to the general public, only taking capital from experienced investors. Consequently hedge funds are able to operate above certain regulation, often taking positions in stock at large leverage.
Arguably the first hedge fund was created and managed by Alfred Jones, a Harvard graduate and US diplomat in the 1930s. After serving at the American embassy in Berlin, Jones returned to America and studied for a PhD in sociology at Colombia University in New York. After graduating, Jones joined Fortune magazine and was responsible for covering investment trends. While in this position, Jones managed his own money as well as that of his associates and friends. With a relatively small portfolio of $100,000, he generated ‘alpha’ (risk adjusted performance) and impressive returns. In order to minimise risk, Jones held a relatively balanced portfolio- holding long term positions in stocks while simultaneously shorting other stocks. This way Jones and his investors would be protected against unexpected changes in the direction of the market. Following the impressive performance of A.W. Jones & Co,
numerous new hedge funds sprung up to try and emulate his success. Hedge fund managers have come up with numerous new trading ideas since then: strategies such as Global Macro, Distressed Investing, Arbitrage and Equity Hedging. Recent estimations have put a figure of one trillion dollars on the industry, with six of its leading managers earning over $1 billion in 2014.
Global Macro Global Macro is a high risk/ high reward strategy where hedge fund managers trade based on forecasted geopolitical developments such as changing interest rates, diplomatic relationships between countries, and domestic government policy. George Soros, billionaire Hungarian fund manager and philanthropist, famously profited from Global Macro trading on Black Wednesday, 16 September 1992. On this day, the British Government was forced to remove the sterling from the European Exchange Rate Mechanism (a system designed to reduce the volatility of exchange rates). Soros’ Quantum Fund began short selling the pound and locked in a profit of over £1 billion in a single day as the sterling plummeted against other European currencies.
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