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Introduction
Introduction

Introduction

CHAPTER
1
Introduction
T
he first known hedge fund was created by Alfred Winslow Jones in 1949.
His fund should look familiar to today's hedge fund participants. The
fund was organized as a limited partnership and used private placement
rules to avoid registration. It invested primarily in common stocks and used
moderate leverage to carry long and short positions modestly larger than
the fund capital.
The number of hedge funds has grown significantly, and there are
many different types of hedge funds. But this first hedge fund bears a
close resemblance to the most common hedge fund strategy today, called
long/short equity.
DEFINITION OF HEDGE FUND
Definitions of hedge funds run into problems because it is exceedingly diffi-
cult to describe what a hedge fund is without running into trouble with
funds that don't fit into the rules. There are investment pools that closely
resemble hedge funds but are generally regarded as a different type of in-
vestment. Still other types of investments may contain characteristics that
are generally associated with hedge funds.
As a starting point, begin with a rather typical definition of a hedge
fund:
A hedge fund is a loosely regulated investment company that charges
incentive fees and usually seeks to generate returns that are not highly
correlated to returns on stocks and bonds.
Many traits of hedge funds aren't useful in defining what is and what is not
a hedge fund.
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