Hedge Fund Story

Hedge Fund was part of Finance and has very short history. It appeared in 1950 and now just 70 years old. In the late of 1960s, there were around 5000 Hedge Funds and then many of it abruptly disappeared by Nixon shock. And then Hedge Fund had got its importance and more portion among Finance sector by some of major talents in Hedge Fund history. Now Hedge Fund has become the core of Finance. The number of Hedge Fund is over 11,000 in U.S. as of 1st half of 2020 and shows annual profit ratio over 30% in top 20% Hedge Fund. Top 10 Hedge Funds earn more profit than America’s top 10 banks and its coverage is wider than normal bank or investment bank.

It seems to be easier to get into Hedge Fund recently with many number of Hedge Funds. But still it is difficult to open an account in Hedge Fund even having enough wealth. No easy sector to entry for normal investors. We cannot avoid the fact that this Hedge Fund is the center of the imbalance of wealth.

Hedge Fund Account Baseline

• Minimum amount to open account: USD 1M
• Total fees=20% of Profits + 2% on total assets Jame Simons who found Renaissance Technologies Hedge Fund got very high fees of 5% on total assets and 44% of profits. This legacy comes from Alfred Jones who started Hedge Fund for the fist time.

The Beginning of Hedge Fund

Hedge Fund started from 1940s by Alfred Jones and then it became popular in 1950s. There were a variety of Hedge Fund in 1960s. Alfred Jones who is an origin of Hedge Fund had very interesting background. He was knows as a socialist, who graduated from English Literature Department, Harvard university and then studied at a Marxist school in Berlin. He was a sailor and diplomat in a moment and married with the woman who was a member of secret communist club. On returning to U.S., He got a doctorate in sociology from Columbia university He got the inquiry from the Fortune magazine to publish regular writing about stock market. It was the motivation for him to study if there were any stock market trend. He declared that there were no trend on stock market and then started to study finding out how to earn money without pursuing trend. The fruit of his study was a Long-Short Strategy. It is an arbitrage that make an profit from price difference.

Long-Short Strategy

The long-short strategy of Alfred Jones is an arbitrage that sell high valued one and buy low-valued one after comparing 2 similar pattern stock items. Later, Alfred did this strategy on the price difference between future and spot stock markets. The start of Hedge Fund was what make no-risk profit in any condition. The accumulated profit ratio of Alfred jones is known as 5,000%

The inverse concept and Block Trade

Michael Steinhardt is known as the first inverse concept investor and started block deal first. He invested in a way that consider the spot market situation inversely

Spread of Hedge Fund

In 1969, Commodities Cooporation was founded that is knows as Hedge Fund academy. Paul Samuelson who was one of co-founder and professor having wide reputation passionately recommended the establishment or investment of Hedge Fund to his students. Later, it was acquired by Goldman Sachs.

Claude Shannon and Shannon’s Demon

Claude Shannon introduced first scientific method on investment. He recorded all information with 0 and i and introduced the concept of Information Content. One of most famous investment theory that he induced was Shannon’s Semon that has been known as “the method that normal investors could earn profit” It is what investment balance should be kept with the balance between invest goods and cash.

In purely technical point of view, Hedge Fund may mean that investment is done based on scientific analysis and value.

Source: Ikhue Hong, The Dollar Story/ Hedge Fund Investopedia