Chapter 2
Who Invests in Hedge Funds and Why?
Hedge fund investing commenced initially in the 1960s. The first hedge fund was launched by Alfred Winslow Jones and was unique at the time because of its use of leverage and short selling to generate returns.
The industry did not experience any significant growth until the late 1980s and early 1990s. Some of the interest in hedge funds at that time was due to the media coverage of the enormous profits made by an up-and-coming hedge fund manager named Paul Tudor Jones. The Tudor funds were able to profit from the 1987 stock market crash and as a result got the attention of both individual investors and, later, institutional investors. Today, Tudor is one of the largest hedge fund groups with AUM in excess of $10 billion and a long track record of success. In the early 1990s, manager George Soros also drew a lot of attention as a result of his outsize returns from betting against the British pound and trading other currencies during a period of volatile market conditions. Today, the Soros funds are closed to the public and mainly manage money for the Soros family and philanthropic activities.
Investors are attracted to hedge funds for many reasons, including the ability to generate higher-quality risk-adjusted returns, the information content of hedge fund strategies, and the alignment of interest between managers who co-invest in their funds and the objectives of investors.
