- A hedge fund is basically an investment partnership. It’s the marriage of a professional fund manager, who can often be known as the general partner, and the investors, sometimes known as the limited partners, who pool their money together into the fund.
- A limited partner is a part-owner of a company whose liability for the firm’s debts cannot exceed the amount that individual invested in the company. They cannot owe more towards the outstanding debt than what they had invested.
- “Hedging” is actually the practice of attempting to reduce risk, however, the name is mostly historical as the first hedge fund tried to hedge against the downside risk (estimation of decline in value) of a bear market by shorting the market.
- “A bear market is a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.”
- “A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price.”
The goal of most hedge funds now is to maximize return on investment, and this in large involved the funds manager to make speculative investments, resulting in higher risk than with other investment vehicles in the overall market.
Alfred Winslow Jones, a sociologist and journalist, invented the hedge fund in 1949 in the US. He launched it through his company, A.W. Jones & Co. committing $40,000 of his own money and raising an additional $60,000 ($100,000 in 1949, when adjusted for inflation, is worth approximately $1,040,000 in 2019). He then began investing in stocks for long term holding while, at the same time, short selling other stocks. He was inspired to try his hand at managing money while writing an article about current investment trends for Fortune magazine in 1948.
Here is a photograph of Alfred Winslow Jones:
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- https://www.investopedia.com/articles/investing/102113/what-are- hedge-funds.asp
- https://www.investopedia.com/terms/h/hedgefund.asp, pages 4 and 7.