Hedge funds have long been controversial, especially since the Great Recession, when some made millions betting against the US housing market and economy. A hedge fund is technically a private investment limited partnership that pools capital from investors. Hedge fund investments are illiquid and usually offer a high risk profile. Hedge funds usually use leverage and different investment strategies to profit from capital gains. The first hedge fund was created in 1949 and used both long and short positions to hedge investments, leading to the moniker.
Hedge funds are back in the news thanks to the terrible performance many posted during 2018. A number of funds closed last year due to downturns in the US and China stock markets, as well as some commodities. But hedge fund managers are still earning lots in income. A new article details the 10 highest-paid hedge fund managers, who are also some of the world's wealthiest individuals. The top three are James Simon of Renaissance Technologies, whose fund made $1.6 billion last year, Ray Dalio of Bridgewater Capital, who earned $1.26 billion, and Citadel's Ken Griffin, who made $870 million. Even the last on the list, Izzy Englander of Millennium, earned $340 million. Although the Warren Buffett advice is true and many hedge funds underperform market indices, the best-performing managers earn the most money thanks to performance fees that incentivize greater returns.
In the US, hedge funds are only open to investments from accredited or institutional investors, meaning the general public cannot legally invest in them. An accredited investor is defined in the Securities and Exchange Commission's Regulation D as 8 types of entities, all with high net worth. Traditional financial players are not the only ones offering hedge funds now. Cryptocurrency managers have created hedge funds like Pantera Capital and Grayscale. Crypto hedge funds usually invest directly in liquid coins and provide institutions an easier way to gain exposure to cryptocurrency. Still, hedge fund investors have many risks to consider, including strategy, liquidity, and transparency.
Hedge funds are arguably facing an uncertain 2019. Stock market volatility could crush performance and lead to more fund closures. Many crypto hedge funds are starting to exit and relaunch as venture capital firms in order to better invest in startups. The proliferation of low-cost index funds that can outperform hedge funds means investors have more pressure to switch to passive investing. Finally, progressive presidential candidates emphasize wealth inequality and the power of Wall Street. The next President and Congress could end the carried interest loophole and raise taxes on hedge fund managers. But until that happens, hedge funds are here to stay as a staple of American investing.
- 1. https://www.businessinsider.com/10-best-paid-hedge-fund-managers-in-2018-2019-2
- 2. https://www.coindesk.com/most-crypto-hedge-funds-arent-really-hedge-funds
- 3. https://www.wsj.com/articles/what-to-consider-before-investing-in-a-hedge-fund-11549854001
- 4. https://www.bloomberg.com/opinion/articles/2019-02-19/hedge-funds-lag-so-why-do-they-have-so-much-cash