Whenever we experience dips in the market, or feel the effects of a recession and hiked inflation, analysts and wealth managers remind us that the general trend over the last hundred years is a positive one – with the resounding message being that it’s about time in the markets, not the timing of the markets.
But, if we look back 100 years, what did the investment landscape look like? During the US bull market of the 1920s, numerous private investment vehicles were available to wealthy investors.
Of that period, the best known today is the Graham-Newman Partnership, founded by Benjamin Graham and his long-time business partner Jerry Newman. This was cited by Warren Buffett in a 2006 letter to the Museum of American Finance as an early hedge fund, and based on other comments from Buffett, Janet Tavakoli deems Graham’s investment firm the first hedge fund.
Around 20 years later, the sociologist Alfred Winslow Jones coined the phrase “hedged fund” and created the first hedge fund structure in 1949. Jones referred to his fund as “hedged”, a term commonly used on Wall Street to describe the management of investment risk due to changes in the financial markets. Several challenging periods spanning the next 20 years saw the rise and collapse of many early hedge fund models.
During the 1990s, the number of hedge funds increased significantly with the 1990s stock market rise, common financial interests, and the promise of above-average returns as likely causes. Over the next decade, hedge fund strategies expanded to include credit arbitrage, distressed debt, fixed income, quantitative, and multi-strategy. In America, institutional investors, such as pension and endowment funds, began allocating more significant portions of their portfolios to hedge funds. (An aside: within regulation 28 of the current South African pensions fund Act, you are allowed 10% allocation to hedge funds within your retirement annuity.)
From 2000, hedge funds gained global popularity, and, by 2008, the worldwide hedge fund industry held an estimated US$1.93 trillion in assets under management (AUM). After the market crash of 2008, hedge funds rebounded in 2011 to a new record high of about US$2 trillion AUM, with 61% of worldwide investment in hedge funds coming from institutional sources.
In July 2017, hedge funds recorded their eighth consecutive monthly gain in returns, with assets under management rising to a record $3.1 trillion.
At Victus Group, we believe in offering you strategies that are tried and tested, bolstered by a maturing investment landscape. As we said in our last blog, hedge funds are not a sure thing, but they have a valuable role to play in many financial portfolios. If you’d like to know more, please reach out to our team.