Preliminary estimates from show that in November, hedge funds topped the $2 trillion mark in assets for the first time this year. The steady rise in money coming in shows a return of investors trying to chase higher returns using alternative investing strategies. However, the total assets held in hedge funds are still $900 billion below the peak in 2008. (Learn more about hedge funds in Hedge Funds Hunt For Upside, Regardless Of The Market.)

Hedge Fund Basics
From Long Term Capital Management's blow up in the late 1990s, one that required a Federal Reserve organized bailout to save the financial system, to the more recent debacle of Bernie Madoff's hedge fund Ponzi scheme, hedge funds often make more news for blowing up rather than their performance. (For more, check out Hedge Funds: Higher Returns Or Just High Fees?)

Another reason most people don't hear about hedge funds is that they can't invest in them. The Securities Act of 1933 requires companies that offer or sell securities to register with the SEC or find an exception. Hedge funds use sections of Regulation D to sell to what's known as "accredited investors." So, to invest in a hedge fund, a person needs to have $1 million net worth or have earned $200,000 in income in each of the last two years. This makes them an accredited investor, and makes hedge funds out of the reach of average investors.

Hedge funds employ a variety of strategies in trying to generate returns for their clients. Often complicated in execution, and sometimes fraught with risk, let's see how hedge funds did over the first 11 months of 2009 as reported by


  • Sector funds focus on a specific area or market. The regional/country-specific fund indexes in Russia and Brazil did well with 60.82% and 52.85% gains respectively. The lowest performing country sector fund index was Middle East/North Africa region with a 23% gain. The sector funds focused on energy and healthcare didn't do as well, but still had gains of 36.25% and 26.03% respectively.

  • Distressed debt funds specialize in buying low-priced corporate fixed income securities from firms that are in, or about to be in bankruptcy, with the potential of gaining from reorganization of the firm or liquidation of the equity if there is enough assets to pay off the debt. Through November the index has gained 26.54%.

  • Fixed income arbitrage funds use various techniques, such as interest rate swaps, to exploit small inefficiencies in various markets. Because this is typically high leverage, some have called this picking up nickels in front of a steam roller. Nevertheless, this strategy shows a gain of 17.81% YTD.

  • It wasn't long ago that mortgage-backed securities were the peril of the entire economic system, but mortgage-focused hedge funds have done well this year so far and are up 50.62% YTD.

  • The long/short equity funds did OK with a 19.84% gain. This strategy both buys some stocks and sells (shorts) other stocks at the same time. The idea is that big market swings should be muted and just the stock picking of the manager should show through.

  • The market neutral equity strategy tries to make money in any market condition. This is supposed to be a low risk strategy which may account for the low return of only 4.48% YTD.

  • A more aggressive strategy is a short bias strategy that tries to find stocks that are going to go down in value and sell them short hoping to buy them back at a lower price in the future. This year so far it's taking a hit this year as the market up quite a bit, but it's down 16.65% YTD.

  • Commodity and foreign exchange (FX) related strategies haven't done nearly as well as the other strategies this year. Commodity focused funds use managed futures to trade commodities and they have only gained 4.87% so far this year. Foreign exchange focused funds are only up 1.93% YTD and financial futures focused funds are only up 3.11% YTD.

The Bottom Line
So were the accredited investors fortunate to be able to get into these investments? Some have done pretty well, others weren't stellar at all. The more typical investor could have used index funds to gain about 20% from the Dow and S&P, even better from the NASDAQ. Far better than last year's calamity, but still nowhere close to back to even for most people, even accredited investors. (For more, check out Can You Invest Like A Hedge Fund?)

Related Articles
  1. Professionals

    Top 5 Highest Paid Hedge Fund Managers

    Understand what a hedge fund is and why hedge fund managers make so much money. Learn about the top 5 highest paid hedge fund managers.
  2. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  3. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  4. Professionals

    How Brokers are Candy-Coating Alternatives

    Alternatives have become a sexy choice for many advisors. But they also come with additional risks that are not always clearly spelled out to clients.
  5. Investing

    What is Carried Interest?

    Carried interest is the percentage of a private equity or a hedge fund’s profits that its general partners receive as compensation.
  6. Investing

    Costs New Investors in Real Estate Do Not Consider

    As lucrative as real estate investment can be, there are a multitude of costs that new real estate investors must consider.
  7. Investing

    A Look at 6 Leading Female Value Investors

    In an industry still largely predominated by men, we look at 6 leading female value investors working today.
  8. Fundamental Analysis

    What's eBay Without PayPal?

    In July 2015, eBay completed its spinoff of PayPal and sold its Enterprise segment. We take a look at eBay's remaining lines of business.
  9. Stock Analysis

    This Is What George Soros' Portfolio Looks Like

    Learn about what George Soros is holding in his portfolio, including his large options position in the S&P 500 and what popular Internet stock he liquidated.
  10. Stock Analysis

    3 Reasons Why Applied Materials, Inc. is Poised for Growth

    Read why Applied Materials may be poised for growth after shares lost substantial value in the wake of a failed merger with a Japanese competitor.
  1. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  2. What do hedge fund analysts do?

    A hedge fund analyst primarily provides support to a portfolio manager on how to best structure the hedge fund's investment ... Read Full Answer >>
  3. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  4. Where do penny stocks trade?

    Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
  5. Where can I buy penny stocks?

    Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
  6. How are American Depository Receipts (ADRs) priced?

    The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  2. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  3. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  4. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  5. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  6. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!