The idea of using dynamic and complex trading strategies to minimize risk is said to have been started in 1949 by Alfred Winslow Jones, who began selling short some stocks while buying others, enabling him to hedge some of the market risk. Following the market crash of 2000, hedge funds proved to be a superior asset management vehicle. As many investors went through years of negative returns, hedge funds continued to produce, which led to massive amounts of money being invested from institutions. As the industry grew, many of the financial world's most talented and gifted individuals traveled over to hedge funds due to their flexibility and eye-catching compensation structure (5, preface). Almost 60 years after Mr. Jones began minimizing his risk by offsetting his investments; the hedge fund industry has around 9,000 firms and about $1.225 trillion in assets under management with an annualized growth rate of about 15 percent claims the research firm TowerGroup (1).
In 2004, D.E. Shaw & Co., Tudor Investment Corp. and Citadel Investment Group LLC managed less than $10 billion. Today these firms manage between $13 billion and $31 billion each, respectfully. Big firms are trying to transform themselves into organizations that can compete with Wall Street's investment banks by hiring employees from smaller firms. In 2003, the top 100 funds managed 49%of the assets in the market, leaving 51% to smaller firms. In 2006, the top 100 controlled 67% of the assets under management (8).
It's becoming harder for smaller funds to attract investors because bigger funds create advantages such as lower trading fees and financing costs and better risk management, and have essentially become ...