Absolute Returns

The Risk and Opportunities of Hedge Fund Investing

Wiley, 2002

15 min read

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Only embark on hedge fund investing if you fully understand the risks (read here!). If you don’t understand, don’t play.

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Hedge funds burst into the headlines in the early 1990s, when George Soros became a household name - at least in Europe, where many people blamed him and his hedge fund for wrecking the European exchange rate mechanism. Similarly, a U.S. hedge fund called Long Term Capital Management (LTCM) began with an aura of investing invincibility, only to fail dramatically. Hedge fund investing is sometimes, but not always, high risk and high return. Once limited to a privileged elite group of investors, hedge funds are now opening their rosters to less sophisticated, less wealthy speculators. But hedge funds are not just like any other funds, and anyone contemplating an investment needs a solid, comprehensive guide, such as this book. Author Alexander M. Ineichen, neither a salesman nor an alarmist, pulls no punches when discussing the risks of hedge funds. He is quite straightforward about the sometimes astonishing success of some hedge fund managers, but careful to point out the common misconceptions about them. Without hedging our bets, getAbstract.com finds this book a valuable addition to every investor’s library.

Summary

A Half Century of Hedge Fund History

The first hedge fund made its debut in 1949, when sociologist Alfred Winslow Jones started a general partnership, later changed to a limited partnership, to trade equities. In his stock trades, Jones sometimes went long and sometimes sold short. Short sellers borrow a stock and sell it, expecting to buy it back at a lower price and then return it to the lender. Traders who "go long" expect the price to go up; those who sell short expect the price to fall. Jones’s ability to profit both ways was extraordinary. Other hedge funds followed.

In 1956, Warren Buffett established a partnership which resembled a hedge fund in most ways; the difference was that Buffett did not sell short. From 1956 to 1969, his returns were 29.5% compounded. Buffett’s compensation depended on the fund’s performance. His investors received a 6% return plus 75% of any profits above a 6% "hurdle rate." Buffett himself received 25% of profits above the 6% rate. Buffett was a contrarian, and specialized in finding and buying stocks that he thought were undervalued. When the market soared in the late 1960s, he couldn’t find enough undervalued stocks to practice...

About the Author

Alexander M. Ineichen, CFA, is Managing Director and Head of Equity Derivatives Research at UBS Warburg in London.

Alexander M. Ineichen

Absolute Returns

The Risk and Opportunities of Hedge Fund Investing

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A Half Century of Hedge Fund History

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