Hedge Fund Hocus Pocus

The Broward Times › October 19, 2009

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Summary

A 1949 trader, Alfred Winslow Jones, pioneered hedging. He sold stocks "short" (betting prices would fall), against stocks owned "long" (betting pnces would rise). Jones sought "market neutral" footing, security against loss, whatever the market's direction. [Hedge] funds mimic this stance, but go farther afield, seeking opportunities in market disparities.

Some institutions are using hedge funds as counter to their own strategies, placing faith in superstar managers. To confirm that the "best and brightest" are not omniscient, read only one book, When Genius Failed, by Roger Lowenstein. This is the saga of Long Term Capital Management, a hedge fund populated by Nobel Prize-winning mathematicians. Long Term (later dubbed "Wrong Turn") raised $140 billion to make trades worth $1 trillion.

Hedge funds can't be publicly sold or advertised, and are privately offered. To maintain exemption from regulation, they must have "accredited" investors with $1 million in investment assets, or a minimum annual income of $200,000. However, those with as little as $1,000 can buy "funds of hedge funds" through brokers. Banks and pension funds have joined the party, too, and invest their clients' money in hedge funds.

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Hedge Fund Hocus Pocus

Unclear about hedge funds? You're in lofty company. The nation's investment regulator, the Securities and Exchange Commission (SEC), can't fathom these murky investment pools, either.

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