Hedge Funds: Past, Present, and Future

Hedge Funds: Past, Present, and Future

Journal of Economic Perspectives—Volume 21, Number 2—Spring 2007
René M. Stulz

Hedge funds often make headlines because of spectacular losses or spectaculargains. In September 2006, a large hedge fund, Amaranth, reportedlosses of more than $6 billion apparently incurred in only onemonth, representing a negative return over that month of roughly 66 percent.Earlier in the year, newspapers focused on the $1.4 billion compensation in 2005of hedge fund manager Boone Pickens and the 650 percent return that year of hisBP Capital Commodity Fund (Anderson, 2006b). The importance of hedge fundsin the daily life of financial markets does not make the same headlines, but hedgefunds now account for close to half the trading on the New York and London stockexchanges (Anderson, 2006a).Chances are that you personally cannot invest in a hedge fund. Most U.S.investors cannot. Hedge funds are mostly unregulated. These funds can only issuesecurities privately. Their investors have to be individuals or institutions who meetrequirements set out by the Securities and Exchange Commission, ensuring thatthe investors are knowledgeable and can bear a significant loss. Most likely, however,you personally can invest in mutual funds, which are heavily regulated in howthey can invest their funds, how their managers can be paid, how they are governed,how they can charge investors for their services, and so on. ... " Hedge Funds: Past, Present, and Future