Established a little more than a half century ago by a man named A.W. Jones, hedge funds now control an estimated $2.8 trillion in assets. That equates to an average annual increase of 301% since 1990.
While all hedge funds share commonalities, they aren't all alike. Specifically, hedge funds are separated into four different categories:
- Event-driven funds seek to exploit pricing inefficiencies that arise from corporate events, such as quarterly earnings, acquisitions, or mergers.
- Relative value funds seek to exploit the difference in price between the same or similar securities, currencies, or commodities.
- Macro funds seek to exploit macroeconomic changes that occur around the world.
- Equity or long-short funds use a variety of techniques to exploit opportunities in the stock market.
With the exception of macro funds, the industry's assets are split pretty evenly among these strategies:
Some years are better than others for hedge funds. This is reflected not only in the industry's annual performance statistics, but also in the number of funds launched and/or liquidated each year.
At the height of the housing boom in 2005, a record 2,073 hedge funds set up shop. This was followed three years later by the depths of the financial crisis, during which 1,471 shuttered their operations.
Given the upheaval of the last few years, it was only this past year that the total number of hedge funds in the industry once again exceeded its 2007 peak. There were an estimated 10,096 funds in operation in the final year before the financial crisis. Following five years of recovery, the number is now 10,102.
All in all, despite intermittent setbacks, the hedge fund industry has been on an incredible run over the past few decades. Is this bound to slow down soon? That remains to be seen, but my guess is that it's still just getting started.
John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.