Hedge funds make up a $1 trillion industry that has assisted in economic growth. There is no necessity for them to be regulated by the SEC, and to do so would be a restraint of trade. There is much controversy over the issue of hedge fund regulation, and there are valid arguments supporting either opinion. To understand and appreciate these arguments, we must first understand the origin of the hedge fund, its history, and its design.
The first hedge fund was created in 1949 by Alfred Winslow Jones. Although the term today is generally associated with a high-risk form of investment, its original meaning was quite to the contrary. It was termed "hedge fund" because of its strategy to hedge market risk by assuming a short position in some stocks while remaining long in others. Jones formed this fund using a limited partnership structure, with the goal of pooling the money of many investors into an unregulated fund that would deliver a higher return than mutual funds. Indeed his investors enjoyed a return that outperformed every mutual fund. In the 1960s, hedge fund managers began to change their activities due to the growing demand. Instead of hedging the risk of the portfolio, they began leveraging it, increasing the risk of the investors' positions. The downturn in the market in the mid-1960s to 1970s humbled the hedge fund managers and investors when they were hurt more than the general investor population. (SIA)
The hedge fund again became popular in the 1980s. By then, there were offering a wider array of products, and more sophisticated strategies. A significant cause for this change was the growing popularity of derivatives such as futures and options. Ordin ...