What is a Hedge Fund?

“A hedge fund is an investment fund that pools capital from high net worth individuals or institutional investors and invests in a variety of assets, often with complicated portfolio-construction and risk management techniques.” – Wikipedia

The term Hedge Fund was coined by sociologist Alfred W. Jones in 1949. The “hedge” part was derived from the commonly applied term for investment risk management – hedging. This basic investment principle remains present within all strategies associated with the modern Hedge Fund industry. Undoubtedly, the Hedge Funder existed long before the term became synonymous with the practice, but over the last 30 years the industry has grown in to a 3 trillion-dollar gorilla sitting on the shoulders of the financial industry.

Foundations

The aura of the mythical hedge fund manager often provides a veil over the reality of what the industry actually is. At its essence, a hedge fund is an investment vehicle that is managed by an investment boutique firm. These ‘boutiques’ can be huge, such as Bridgewater and Point 72, but most of the tens of thousands of investment management firms applying their craft, are small, entrepreneurial businesses. As such, to start a hedge fund, you must first build an investment management firm.

Building Blocks

“Genius is one percent inspiration and ninety-nine percent perspiration.” – Thomas Edison

Like any commercial enterprise, the ‘product’ is the cornerstone of the business, and for the investment management firm this is the ‘investment strategy’, be it Long/Short, Macro, Relative, Distressed or CTA. But there are other, equally important, building blocks that go in to forming an investment management firm. These can be simplified as:

  • Market Access and Execution
  • Business Development and Asset Raising
  • Operational Infrastructure
  • Regulatory Oversight
  • Technology

 

Key to Success

In the middle ages the stone mason held the secrets to engineering monolithic structures. From this knowledge they gathered great personal wealth, but it was not the knowledge of the ‘keystone’ that provided them success, but an apprenticeship that lasted decades. As with the stone mason, the entrance to the hedge fund industry requires a knowledge which is forged from experience.

Quay Partners has distilled the knowledge and experience of founding, building and leading investment management firms into a single point solution. Our team is made up of industry veterans, from across the spectrum of building blocks, who have done it for themselves and are now available to share that formula with you.

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To learn how Quay Partners can guide your business to success, contact us for more information.

Quay Partners Group delivers bespoke investment management solutions to independent hedge fund managers and family offices.

Thomas Underwood, the Founder, has over 20 years’ experience in managing and operating hedge funds.