Hedge funds are pooled investments that use a variety of different investment strategies to make profits for their investors. A hedge fund manager dictates what to buy and sell and assets held in the fund can include stocks, bonds, derivatives, commodities, currencies, or all of the above. A fund might be long or short only, or use a combination of long and short strategies.

Hedge funds typically charge higher fees than traditional mutual funds or exchange traded funds, and the justification for the higher fees is that hedge funds can sometimes deliver investors robust returns, even in down markets.

Key Takeaways

  • Hedge funds are pooled investments that can use a variety of different long and short strategies across a number of different financial markets.
  • Hedge funds typically charge higher fees than mutual funds and ETFs because of the potential for higher returns.
  • A hedge fund manager is paid a percentage of the fund's profits and compensation can reach millions, or even billions, per year.
  • Bridgewater Associates, Renaissance Technologies, and AQR are among the biggest U.S. hedge funds.

More than 15,000 hedge funds operate worldwide with roughly $3 trillion in combined assets under management, according to ADV Ratings. 70% of the funds are in North America and half are in the states of New York, California, and Texas. Managers of the largest funds can earn millions of dollars per year and, in some cases, even billions. Here are the five biggest hedge funds as of mid-2019:

1. Bridgewater Associates

Bridgewater, the Connecticut-based fund of Ray Dalio, remains the largest fund in the world in terms of assets. The fund was founded in 1975 and now has $130 billion in assets under management. Dalio seems to have proven that the largest funds can still be highly profitable, and, according to Forbes, the hedge fund manager raked in over $1 billion in compensation in 2018.

2. Renaissance Technologies

James Simons, the co-founder of Renaissance Technologies, propelled his fund to the second spot on the list. Renaissance is one of the oldest and most popular quantitative firms, and its strategy has paid off significantly. The firm has roughly $68 billion under management and Simons had the most earnings of any hedge fund manager in 2018 after making $1.6 billion.

3. Man Group

Headquartered in London, Man Group is the third-largest hedge fund operator with more than $60 billion of assets under management. It provides a range of funds to institutional and private investors. James Man founded the company in 1783 as a sugar cooperative and brokerage firm. With shares listed on the London Stock Exchange, it is the largest publicly traded hedge fund in the world today.

4. AQR Capital Management

Cliff Asness, the co-founder of AQR Capital Management, has seen his firm's assets grow to more than $60 billion since the firm was founded in 1998. AQR is the largest hedge fund representing the quant fund group and offers a number of different funds for high net worth and individual investors. However, the firm announced that it was cutting up to 10% of its workforce in early 2020 after losing substantial assets in 2019.

5. Two Sigma

Rounding out the top five is Two Sigma, another major player in the quant fund world. Thanks to its innovative technology, Two Sigma secured the fifth spot in this list of largest hedge funds by asset, with approximately $43 billion in assets under management. David Siegel, John Overdeck, and Mark Pickard established the firm in 2001.