Hedge Fund Ltcm Case

1. Introduction - “To Hedge – To secure against loss”

Hedge funds have been in existence for almost 50 years. However, their recent growth has increased their prominence in the financial markets and the business press. Since the late 1980s, the number of hedge funds has risen by more than 25 percent per year. The rate of growth in hedge fund assets has been even more rapid. In 1997, there were more than 1200 hedge funds managing a total of more than $200 billion. Though the number and size of hedge funds are small relative to mutual funds, their growth reflects the importance of this alternative investment vehicle for institutional investors and wealthy individual investors.

2. What is a Hedge Fund?

Various definitions have been given throughout the years. Anson defines them as privately organized vehicles that manage a concentrated portfolio of public and private securities and derivative instruments that can invest both long and short and can apply leverage. Fund and Hsieh define them as private investment vehicles for wealthy individuals or institutional investors. As the name implies, hedge funds began as investment partnerships that could take long and short positions. They have evolved into a multifaceted organizational structure that defies simple definition. There are, however, a number of features that characterize hedge funds. These features include a largely unregulated organizational structure, flexible investment strategies, relatively sophisticated investors, substantial managerial investment, and strong managerial incentives. Hedge funds may therefore yield insights into the impact of regulation, alternative investment practices, and incentive alignment on performance.

Domestic hedge funds are largely unregulated because they are typically limited partnerships with fewer than 100 investors, which exempts them from the Investment Company Act of 1940. This limited regulation allows hedge funds to be extremely...