Hedge funds are pooled investments that use a variety of strategies in an effort to generate outsized profits for their investors. The hedge fund manager decides what to buy and sell, and there are few restrictions on their choices. Assets held in the fund can include stocks, bonds, derivatives, commodities, and currencies, among other choices. A fund can be long-only 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. Managers of the largest funds earn millions of dollars per year and, in some cases, billions.
More than 15,000 hedge funds operate worldwide with roughly $4.5 trillion in combined assets under management (AUM) as of mid-2022. North America is home to 70% of the world's funds, with half in New York, California, and Texas.
Here are the five biggest hedge funds in 2022 according to ADV Ratings.
- Hedge funds use a variety of long and short strategies across many financial markets.
- These funds charge higher fees than mutual funds and ETFs because of their potential for higher returns.
- Managers are paid a percentage of the fund's profits with compensation reaching millions—or even billions—per year.
Bridgewater, the Connecticut-based fund of Ray Dalio, remains the largest fund in the world in terms of assets. Founded in 1975, it had $126 billion in assets under management for the entire company as of June 2020. Bridgewater's clients include institutional investors, charitable foundations, university endowments, and pension funds. The company employs roughly 1,700 people.
Dalio proves that the largest funds can still be highly profitable. According to Forbes, his net worth was about $18.7 billion as of March 2020. The hedge fund manager raked in over $1 billion in compensation in 2018 alone.
Headquartered in London, Man Group is the third-largest hedge fund operator with more than $97 billion of assets under management in March 2022. It provides a range of funds to institutional and private investors. The company has offices around the world including in Hong Kong, New York, Tokyo, and Sydney.
James Man founded the company in 1783 as a sugar cooperative and brokerage firm. With shares listed on the London Stock Exchange (LSE), it is the largest publicly-traded hedge fund in the world. Luke Ellis is Man Group's chief executive officer (CEO).
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 is headquartered in New York and has roughly $130 billion in AUM. It serves corporations, trusts, individual investors, and financial institutions.
Renaissance is currently run by Peter Brown while Simons remains a board member. Simons had a net worth of $21.6 billion as of March 2020, according to Forbes.
Hedge funds typically set a high minimum investment in order to attract only high-net-worth individuals.
Founded in 1989, Millennium Management LLC now has about 3,700 employees in New York, Asia, and Europe. In June 2022, the firm had $55 billion in assets under management.
Its founder, Israel Englander, remains its chief executive officer. Known as Izzy, Forbes estimates his net worth at $11.3 billion as of late 2022. The Bloomberg Billionaires Index estimates his net worth at $29.3 billion, making him 156th on its list of the world's 500 richest people.
Headquartered in Chicago, Citadel LLC has offices in Asia and Europe. It had $53 billion in assets under management in June 2022. Founded in 1990, founder Kenneth C. Griffin remains the firm's chief executive officer.
The Bloomberg Billionaires Index estimates his net worth at $29.3 billion, making him 42nd on its list of the world's 500 richest people.
Frequently Asked Questions
What Is a Hedge Fund?
A hedge fund is a limited partnership of private investors. Like a mutual fund, it is a pool of money contributed by a number of investors and managed by professional fund managers.
Unlike the managers of mutual funds, hedge fund managers have wide latitude in the investments they choose.
They tend to take risks, including using leverage, meaning borrowed money, to boost their investment returns. They also may put money in non-traditional investments, which could mean anything from cryptocurrency to gold.
The goal is to beat the returns from more cautious investments.
Hedge funds are illiquid. That is, the investor may have to commit to keeping money in the fund for a year or more. Most impose high minimum investment levels.
How Does a Hedge Fund Make Money?
Hedge funds charge investors a percentage of the profits they earn. They also charge higher fees than traditional investment vehicles. Their fees are based on their assets under management, so the more money they bring in from investors the more they earn.
The standard fee structure is called "2 and 20." That is 2% of the fund's assets under management plus 20% of the profits on their investments that exceed a set benchmark level.
How Much Do You Need to Start a Hedge Fund
About $5 million of your own money and/or other people's money could be enough to get started. You'd need to grow to at least $20 million in assets under management to get any notice from investors. Institutional investors like pension funds rarely get involved in hedge funds that have less than $100 million in assets under management.
The Bottom Line
The world's most successful hedge funds have a long track record of success and are headed by people who have earned a reputation for producing outsized results for their investors.
Still, hedge funds are considered an alternative investment. That's not entirely a euphemism for risk, but the risk is definitely there. Their managers attract clients by having a track record of successful investing. That is, as the fine print always says, no guarantee of future performance.