insearchofalphaoctober2000.doc

In Search of Alpha October 2000 Hedge Funds  The Basics Revisited Defining Hedge Funds During the French Revolution such speculators were known as agitateurs, and they were beheaded. Michel Sapin There are nearly as many definitions of hedge funds as there are hedge funds. We think the following is the best description: Definition Hedge funds are private partnerships wherein the manager or general partner has a significant personal stake in the fund and is free to operate in a variety of markets and to utilise investments and strategies with variable long/short exposures and degrees of leverage. 2 Beyond the basic characteristics embodied in this definition, hedge funds commonly share a variety of other structural traits. They are typically organised as limited partnerships or limited liability companies. They are often domiciled off shore, for tax and regulatory reasons. And, unlike traditional funds, they are not burdened by regulation. Alternative Investment AIS comprise an asset class that seeks to generate absolute positive returns by Strategies (AIS) exploiting market inefficiencies while minimising exposure and correlation to traditional stock and bond investments. Normally, private equity as well as hedge fund investing are referred to as AIS. Skillbased strategies As we elaborate later in this report, the reputation of hedge funds is not particularly versus strategies capturing good. The term hedge fund suffers from a similar fate as derivatives due to a an asset class mixture of myth, misrepresentation, negative press and highprofile casualties. Hedge fund strategies are occasionally also referred to as skillbased strategies or absolute return strategies which, from a marketing perspective, avoids the negative bias attached to the misleading term hedge fund. Skillbased strategies differ from traditional strategies. The former yields a particular return associated to the skill of a manager whereas the latter primarily capture