Many funds ceased trading during the Recession of 1969–70 and the 1973–1974 stock market crash due to heavy losses. In 1968 there were almost 200 hedge funds, and the first fund of funds that utilized hedge funds was created in 1969 in Geneva. A 1966 Fortune magazine article reported that Jones’ fund had outperformed the best mutual funds despite his 20% performance fee. This type of portfolio became known as a hedge fund. Jones referred to his fund as being "hedged", a term then commonly used on Wall Street, to describe how the fund managed risk exposure from overall market movement. To neutralize the effect of overall market movement, Jones, utilizing trading strategies of his predecessors' such as Benjamin Graham, balanced his portfolio by buying assets whose price he expected to increase, and selling short assets whose price he expected to decrease. Jones is credited with coining the phrase " hedged fund", in contrast to prior nomenclatures, and is often erroneously credited with creating the first hedge fund structure in 1949. Sociologist, author, and financial journalist Alfred W.
Warren Buffett, in a 2006 letter to the magazine publication of the Museum of American Finance asserted that the Graham-Newman partnership of the 1920s was the first hedge fund he was aware of, but suggested others may have preceded it. Baruch also operated such pools before removing his investors and was later known as the "lone wolf on Wall Street", as he managed his own fortune. Preceding Livermore, future statesman Bernard M. The fictional exploits of Jesse Livermore as chronicled in Reminiscences of a Stock Operator (1923) also describe speculative vehicles dubbed "pools" that are similar, if not the same, in form and function as what would later be called "hedge funds". Of that period, the best known today owing to the legacies of one of its founders was the Graham-Newman Partnership founded by Benjamin Graham and Jerry Newman. During the US bull market of the 1920s, there were numerous such vehicles offered privately to wealthy investors. The origin of the first hedge fund is uncertain.
The estimated size of the global hedge fund industry is US$1.9 trillion. As of 2009, hedge funds represented 1.1% of the total funds and assets held by financial institutions. Some hedge funds have a net asset value of several billion dollars. A hedge fund typically pays its investment manager a management fee, which is a percentage of the assets of the fund, and a performance fee if the fund's net asset value increases during the year. Hedge fund managers typically invest their own money in the fund they manage, which serves to align their interests with investors in the fund. Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling. The value of an investment in a hedge fund is calculated as a share of the fund's net asset value, meaning that increases and decreases in the value of the fund's assets (and fund expenses) are directly reflected in the amount an investor can later withdraw. Hedge funds are typically open-ended, meaning that investors can invest and withdraw money at regular, specified intervals. They also employ a wide variety of investment strategies, and make use of techniques such as short selling and leverage. As a class, hedge funds invest in a diverse range of assets, but they most commonly trade liquid securities on public markets. These investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals. A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators.