Chincarini, Ludwig --- "Hedge Funds – An Introduction" [2012] ELECD 236; in Athanassiou, Phoebus (ed), "Research Handbook on Hedge Funds, Private Equity and Alternative Investments" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Hedge Funds, Private Equity and Alternative Investments

Editor(s): Athanassiou, Phoebus

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849802789

Section: Chapter 1

Section Title: Hedge Funds – An Introduction

Author(s): Chincarini, Ludwig

Number of pages: 50

Extract:

1. Hedge funds ­ an introduction
Ludwig Chincarini*


INTRODUCTION

Alternative investment vehicles are vastly misunderstood and, amongst
them, hedge funds are perhaps the most grossly misunderstood. While
many are those who understand what the S&P 500 or a mutual fund is,
few know what `hedge funds' are, apart from believing them to be evil
(Braithwaite (2009)). This is ironic, considering that the first hedge fund
­ started in 1949 by Alfred Winslow Jones ­ sought to help investors. Its
founder was good at selecting stocks that would perform well, but rather
less skilled at predicting the direction of the market. At the time, most
equity portfolios were offered as mutual funds regulated by the Securities
and Exchange Commission (SEC). Most of them were prohibited from
shorting stocks and, therefore, had a long exposure to the overall equity
market. Thus, even if their portfolio manager was exceptional at selecting
stocks, a drop in the overall market would inevitably result in a simulta-
neous drop in the value of its portfolio. If instead the portfolio manager
could simultaneously invest in `good' stocks and short-sell `bad' stocks,
its portfolio would be less vulnerable to overall market risk.1 Even the
most sceptical investor could not deny the logic of the practice of selling
stocks both short and long, which is where hedge funds derive their name



* CFA, PhD, Member of the Academic Council of IndexIQ. I would like
to especially thank Erin Toothaker and Coady Smith as well as Jason Blauvelt,
Anthony Gonzales, Andrew ...