Quick quiz: Who created the first hedge fund?

If you said Alfred Winslow Jones, you are correct, and maybe even a hedge fund manager yourself.

Mr. Jones introduced the first hedge fund in 1949, as “hedged funds.” One of his innovations was the introduction of the 20% performance fee.

“The logic of the idea was very clear,” Mr. Jones said in the Institutional Investor Journal in 1968.  “It was a hedge against the vagaries of the market. You can buy more good stocks without taking as much risk as someone who merely buys.”

“As the first money manager to combine short selling, the use of leverage, shared risk through a partnership with other investors and a compensation system based on investment performance, Jones earned his place in investing history as the father of the hedge fund, said James E. McWhinney in Investopedia.

Hedge funds have grown from those somewhat humble beginnings. As of December 31, 2014, the total reported assets under management of hedge funds (and hedge fund of funds) was $3 trillion…not  billion, but $3 trillion, with a capital T.

Hedge Fund By Strategy

According to Pertrac, the most popular hedge fund strategies as of 2014 were:

Long/short equity                 29%
CTA/Managed Futures         15
Emerging Markets                12
Global Macro                         10
Event Driven                            6
Event Driven                            6
Relative Value                         6
Multi-Strategy                         4
Other                                      12

Hedge Funds By Assets

While the majority of hedge funds are domiciled and sold in the United States, billions are invested overseas, too. Assets under management by the top five locations:

United States………………… $1124
United Kingdom……………..$403
Switzerland…………………….$127
Luxembourg……………………$89
Brazil……………………………….$88

Hedge Funds by Domicile

How many hedge funds are there, and where are they domiciled? Not surprisingly, a majority of the more than 12,000 total funds as of December 31, 2014 were in the United States, or about half, with 6,178 funds. European-based funds came in a somewhat distant second, with 4,092 funds, followed by South America (1,267), Asia (637), and Australia, with 165 funds.

Hedge Funds By Performance By Asset Size

Not surprisingly, big funds have accounted for the tiger’s share of assets, but smaller funds have tended to outperform… and have been more volatile.

Larger funds, those with more than $500 million in assets, produced a total return of on average of 318% for the 15 years ended 2014.

Mid-size funds ($100 million to 500 million in size grew 370% during the same 15-year time period.

Smaller, presumably more nimble and concentrated funds, by contrast, generated an average total return of 577%, or xx% per year.

But investors who sought less volatility of returns have been rewarded with less volatility, as measured by standard deviation, during the last 15 years.

Trends for Start Up Managers

Investors listed better returns and negotiable fees as two of the primary reasons they look to emerging managers when considering hedge fund allocations. These managers are more likely than their larger counterparts to negotiate fees with investors. 91% of investors feel that small and emerging managers have met and/or exceeded performance expectations in 2014. In fact, 68% of emerging managers have less than $250M in AUM, indicating that manager supply in smaller funds is available to match this growing demand.