Essays on hedge fund risk, return and incentives

Abstract

There is no legal or regulatory of what constitutes a hedge fund, though the generally accepted definition is that they are unregulated pools that invest in any asset class as well as derivative securities and use long and short positions, as well as leverage where the manager is compensated with a proportion of the returns. Hedge funds are not new, Alfred Winslow Jones in generally credited with the formation of the first hedge fund in 1949, however the industry remained small and relatively unnoticed for many years. In 1990, there were just 610 hedge funds managing approximately $39bn of capital, however by the end of 2007 the industry had grown to over 10,000 funds managing almost$2trn of capital. The credit crisis of 2008 which has caused hedge funds to suffer both investment losses and investor redemption means that as of the end of 2008 the industry has contracted with over 1,000 funds closing and the capital being reduced to $1.5btrn