Definition and History of the U.S. Hedge Fund Market

January. 06,2021
Definition and History of the U.S. Hedge Fund Market

Hedge funds originated in the U.S., grew in the U.S. and eventually went global, according to Haiyin Wealth Analysis. To this day, the U.S. still holds the "multiple mosts" in the hedge fund industry: the largest hedge fund firm location, the most assets under management, the most number of hedge funds, and so on.

As a result, whenever hedge funds are mentioned, they are inevitably associated with the United States. Today, we will give a brief introduction to the hedge fund situation in the United States.

I. Definition

According to Haiyin Wealth's analysis, the name of hedge fund was initially created because it mostly uses financial derivatives for risk hedging. But today, as more and more strategies are created, hedging has long ceased to be the only feature of hedge funds. According to the SEC, a hedge fund is an investment management tool that is organized privately to gather investors' money with the aim of earning positive returns. Compared with mutual funds, hedge funds have more flexible investment methods, broader investment markets, and more diversified investment strategies.

II. History of development

1. The budding period and rapid growth period (1949-1970): In 1949, Alfred Jones, who worked for Fortune magazine, founded the world's first hedge fund, which was a brand new fund product at that time and had some basic characteristics of today's hedge funds: adopting a long/short trading strategy, incentivizing management fees, and the founder invested their own assets to run it. A few years later, Jones implemented a partnership with other managers, as analyzed by Seabank Wealth. After 17 years of successful operation, another reporter from Fortune magazine reported on it, and with its demonstration, U.S. hedge funds began to grow rapidly, Haiyin Wealth Analysis. According to SEC statistics, 140 of the 215 investment partnerships formed in 1968 were hedge fund firms, according to Haiyin Wealth Analysis. By 1969, due to the rapid growth of the number of hedge funds and the huge amount of assets they managed, the SEC began to supervise the hedge fund industry.

2. A period of slow growth (1970-1985): Although hedge funds grew rapidly since their birth, as a new investment vehicle, they were inevitably subject to the investment cycle. Haiyin Wealth analysis, the mid to late 60s coincided with the U.S. stock market bull market, many hedge fund companies began to abandon the initial long/short trading strategy for hedging cost considerations, and began to enlarge long positions. Haiyin Wealth analysis, into the early 70s, with the end of the bull market, these blindly long hedge funds were hit hard. Faced with setbacks, hedge funds showed great adaptability and began to develop new investment strategies. Haiyin Wealth Analysis, in this period, macro hedging strategies began to emerge and gradually show competitiveness, of which the representative funds are George Soros (George Soros)'s Quantum Fund, Julian Robertson (Julian Robertson)'s Tiger Fund and Rey Dario's Bridgewater Fund.

3. High-speed development period (1985-2007): During this period, not only macro hedging strategies had their golden period, but also other new hedging strategies emerged and led the way in different periods. In the early 1990s, with the development of financial globalization, the global financial derivatives market started to be established and grew rapidly, which provided hedge funds with a large number of instruments for trading. Haiyin Wealth analyzed that the instability of the global financial system was also increasing due to the imbalance of economic development, thus providing a stage for macro hedging strategies to perform. The success of Quantum Fund and Tiger Fund in attacking the British pound and the lira in the 1990s made macro hedging strategies a new favorite of a wide range of investors in the 1990s. And into the late 90s, some new strategies, such as event-driven strategy funds, long-short funds, and relative value funds, began to appear and come into prominence. Although several representative macro hedge funds suffered losses to varying degrees during this period, thanks to the continuous emergence of new strategies, the assets of the entire hedge fund industry still maintained high growth.

4. Setback and recovery period (2008-present): The financial crisis in 2008 hit the financial industry hard, and hedge funds were not spared either. While a few strategies such as global macro strategies and CTA strategies (Commodity Trader Advisor) performed well in 2008, most hedge fund strategies suffered significant losses. At the same time, the asset size of the hedge fund industry as a whole also decreased due to investors' panic redemption of assets. Haiyin Wealth analysis, after 2008, with the rapid action of the U.S. government, the order of the financial market was restored relatively quickly, and the hedge fund industry also quickly came out of the doldrums. Haiyin Wealth analyzes that during this period, quantitative trading technology also became increasingly mature and became an important force driving the development of the industry. As of 2Q 2016, the total assets under management of U.S. hedge funds reached US$2.23 trillion, exceeding the highest level before the crisis.