2.1 Definition of hedge fund

A hedge fund pools investors’ money and invest them in finance derivatives. It charge a performance fee as it provides some professional service. Hedge fund typically opens to only a limited range of investors (e.g. Accredited investor in US). It always seeks to yield in all kinds of markets by pursuing leveraging and other speculative investment practices that may make risk increases.

2.2 History of hedge fund

The history of hedge fund is really short. Back to 1949, the first official hedge fund[1] was founded by Alfred Winslow Jones. He hedged market risk by selling short some stocks when buying others. Although many other funds had the same strategy long before, Jones is widely regarded as the father of the modern hedge fund industry. He combined short selling, leverage, limited investors, structure to avoid regulation and a 20% of the return as the performance fee. This all can be seen as a foundation of modern hedge fund.

Jones’ fund had outperformed all the mutual funds of its time apparently, even after accounting for a hefty 20% incentive fee. The rate of return was much higher on the hedge fund than all other mutual funds. This truth shocked the whole investment area when an introduction article published in Fortune magazine.