Key Takeaways
- • Hedge funds manage roughly $2 trillion across about ten thousand funds, with about a fifth based in London and two fifths in the US, according to the author's estimate, noting that funds do not disclose their finances.
- • Hedge funds are typically domiciled offshore, often in the Cayman Islands, while their managers operate from premium locations such as Mayfair and Greenwich, Connecticut, and London managers must register with the Financial Services Authority.
- • The standard fee structure is a 2 per cent management fee plus a 20 per cent performance fee subject to a high-water mark, while Renaissance Technologies' Medallion Fund is reported to charge 5 and 44 per cent, a figure the author could not confirm.
- • Alpha's 2007 earnings list was led by John Paulson ($3.7 billion), George Soros ($2.9 billion) and James Simons ($2.8 billion), illustrating the scale of rewards available to top managers.
- • Funds of funds supply about a third of hedge fund capital, while direct investment by the wealthy and family offices has fallen from more than half in the 1990s to just under a third.
Summary
Hedge funds cannot advertise, and their offices in Mayfair signal seriousness rather than scale. According to the article, a modest Mayfair office can cost £150,000 a year, yet many funds operate with fewer than twenty staff, and some with only four or five people. Despite this small footprint, the industry controls an estimated $2 trillion in capital across roughly ten thousand funds, a figure the author notes is unverifiable because funds are not required to disclose their finances. London-based funds account for about a fifth of this capital and US-based funds for about two fifths, concentrated in New York and Greenwich, Connecticut.
The article explains that the industry's legal structure stems from post-1929 regulation in the United States, including the 1933 Securities Act, the 1934 Securities Exchange Act and the 1940 Investment Company Act, which restricted leverage and short selling for public investment companies. Funds avoided these limits by restricting themselves to accredited investors, defined by the SEC as those with at least $1 million in net assets or $200,000 in annual income, thresholds unchanged since 1982. Minimum investments range from around $250,000 for new funds to $1 million or $10 million for established managers. Although the author argues hedge funds are not wholly unregulated, UK managers must register with the Financial Services Authority and face lighter oversight than conventional asset managers.
Fee economics distinguish hedge funds from mainstream managers. Management fees typically run at 2 per cent, with performance fees of around 20 per cent subject to a high-water mark. The article cites reports that Renaissance Technologies charges its Medallion Fund 5 and 44 per cent, though the author could not verify these figures. Alpha magazine's 2007 list placed John Paulson of Paulson & Co. first at $3.7 billion, followed by George Soros at $2.9 billion and James Simons at $2.8 billion.
Capital sourcing has shifted over time. Funds of funds, which charge an additional layer of fees, typically 1 per cent and 10 per cent, now provide a third of hedge fund capital, according to International Financial Services London research cited by the author. Direct investment by wealthy individuals and family offices has declined from over half of capital in the 1990s to just under a third. Institutional investors such as pension funds and endowments are attracted by returns uncorrelated with equity markets. The article also outlines core strategies, including equity long/short, pioneered by A.W. Jones & Co. in 1949, and the currency carry trade, which carries amplified risk when exchange rates move adversely.
The article explains that the industry's legal structure stems from post-1929 regulation in the United States, including the 1933 Securities Act, the 1934 Securities Exchange Act and the 1940 Investment Company Act, which restricted leverage and short selling for public investment companies. Funds avoided these limits by restricting themselves to accredited investors, defined by the SEC as those with at least $1 million in net assets or $200,000 in annual income, thresholds unchanged since 1982. Minimum investments range from around $250,000 for new funds to $1 million or $10 million for established managers. Although the author argues hedge funds are not wholly unregulated, UK managers must register with the Financial Services Authority and face lighter oversight than conventional asset managers.
Fee economics distinguish hedge funds from mainstream managers. Management fees typically run at 2 per cent, with performance fees of around 20 per cent subject to a high-water mark. The article cites reports that Renaissance Technologies charges its Medallion Fund 5 and 44 per cent, though the author could not verify these figures. Alpha magazine's 2007 list placed John Paulson of Paulson & Co. first at $3.7 billion, followed by George Soros at $2.9 billion and James Simons at $2.8 billion.
Capital sourcing has shifted over time. Funds of funds, which charge an additional layer of fees, typically 1 per cent and 10 per cent, now provide a third of hedge fund capital, according to International Financial Services London research cited by the author. Direct investment by wealthy individuals and family offices has declined from over half of capital in the 1990s to just under a third. Institutional investors such as pension funds and endowments are attracted by returns uncorrelated with equity markets. The article also outlines core strategies, including equity long/short, pioneered by A.W. Jones & Co. in 1949, and the currency carry trade, which carries amplified risk when exchange rates move adversely.
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