Investor's vocabulary: Hedge funds

The term "hedge fund" comes from the English word "hedge" that means a barrier or protection. The first person to introduce this concept in the financial market was a doctor of sociology from the United States. In 1949, Alfred Jones opened the world's first hedge fund and named it after himself: A. W. Jones 3333 Co. The fund exists at the present time.

Jones invented a new business model for his time: he used other people's funds to buy shares, attracting funding for projects. At the same time, he did not predict the growth or fall of securities, but completed the portfolio with both strong and weak shares to maintain the balance. He invested strong assets in long-term deals, and weak assets - in short-term ones.

Jones was the first to set a 20 % fee rate for the trader services. The Alfred Jones investment fund began to gain popularity in the late 1950s. Within five years, the method invented by the American innovator brought investors more than 300 % in annual interest and sparked off imitators. In the second half of the 1960s, other business people, including G. Soros and R. Dalio also founded their own funds using a similar scenario. Currently, the amount of capital managed by hedge funds exceeds $4 trillion.

Hedge funds are different from venture funds:

- Investors can freely enter or exit the fund by selling or purchasing securities. But venture fund investors do not have the right to withdraw or reduce their package of securities until the project is completed.

- Hedge funds tend to invest in profitable securities or undervalued stocks that will soon take off in value. Venture funds usually buy illiquid assets, such as shares of small companies or startups to encourage their development in the long run. Therefore, hedge funds can sell part of their assets at any time without losses, which is not true for venture funds.

Hedge funds receive a commission fee for their work. Two types of remuneration are popular on the market:

- management fee - payment for managing funds. Usually the remuneration is 2 % of AUM (Assets Under Management. This term refers to the total value of securities managed by a trader on behalf of customers).
å performance fee - payment based on the work results. The remuneration can amount to 20 % of the fund's profit for the investment management period.

If you want to better understand how hedge funds work, watch the TV series "Billions".