By Ilana Polyak
Hedge funds are pools of money assembled from groups of investors that meet qualifications set by the SEC. Meeting investor qualifications currently exempt hedge funds from SEC regulation. The qualifications primarily focus on net worth and investor knowledge/suitability. The strategies, styles and risk profiles of funds vary remarkably. There is no requirement that hedge fund managers employ hedging strategies and many funds simply invest on the long side. Also, some avoid use of leverage; others employ high levels of leverage—often to profit from relatively minor pricing disparities.
In short, there is no legal or specific operational definition. In fact, the term is subject to considerable interpretation. There are numerous classifications of strategies, including; convertible arbitrage, distressed securities, equity long or short bias, market neutral, event driven, merger arbitrage, fixed-income arbitrage, global macro, sector/geographic specialties, multi strategy and fund of funds.
Hedge funds invest in a wide range of instruments including public equity, debt, futures, options, and, in some cases, less liquid, direct investments. Some strategies deliver lower returns but have correspondingly lower volatility. Other strategies take on greater risk in an effort to deliver higher returns. Either way, the primary goal is to maximize risk-adjusted returns. Generally, managers seek to deliver absolute returns (rather than relative returns) that are uncorrelated with the overall investment market.
There are an estimated 6,000 to 7,000 hedge funds operating in the U.S. today with assets totaling more than $800 billion based on data from Hedge Fund Research and Mercer Consulting. Tremont's Tass Research estimates that last year, a record $72.2 billion of new assets flowed into the market—with the fourth quarter's $26.8 billion topping the $24.6 billion of flows for all of 2002. In large measure, this is a result of increased institutional investment in hedged strategies. Growth has also occurred outside of the U.S.
