The hedge fund industry has grown at a ferocious pace in the last decade, from as few as 300 funds in 1990 to more than 10,000 funds today. These funds have become highly visible in markets and the press, and are estimated to manage over $1.4 trillion in assets, both through onshore and offshore funds.
The very first hedge fund was started by Alfred W. Jones in 1949. By using leverage and short selling, he effectively "hedged" risk in the marketplace. Though his hedge fund greatly outperformed mutual funds of that time, hedge funds really didn't feign much interest until the 60's. Big names like Warren Buffet and George Soros took an interest in Jone's strategy, and over the next th years, 130 hedge funds were born.
Hedge funds, like other alternative investments such as real estate and private equity, are thought to provide returns that are uncorrelated with traditional investments. This attracted an increasing number of individual and institutional investors. However, while Alfred Jones' strategy employed short selling and leverage, there are a multitude of different strategies used by hedge fund managers today, and the term "hedge" doesn't always apply, since many of these funds are not hedged at all. In fact, many hedge funds attempt to capture absolute returns and take positions that are often highly speculative.
In 2008, the hedge fund industry faced one of its worse years in history as markets across the globe crumbled. Many of the best and brightest managers and investors faced losses of 30 percent or more, and assets under management decreased as investors opted into treasury bills and cash investments. Still, many of the strategies utilized by hedge fund managers capture greater returns in a volatile market, and some of the hedge funds found ways to make investors money despite the financial crisis.
In the first half of 2009, the industry as a whole has bounced back in dramatic fashion and seen its popularity rise among many investors. What does the future hold for this often misunderstood investment class? Only time will tell.