HEDGE FUNDS: History in Brief

ABOUT | DAVID EDWARD MARCINKO

BY DR. DAVID E. MARCINKO MBA CMP®

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SPONSOR: http://www.CertifiedMedicalPlanner.org

The investment profession has come a long way since the door-to-door stock salesmen of the 1920s sold a willing public on worthless stock certificates. The stock market crash of 1929 and ensuing Great Depression of the 1930s forever changed the way investment operations are run. A bewildering array of laws and regulations sprung up, all geared to protecting the individual investor from fraud. These laws also set out specific guidelines on what types of investment can be marketed to the general public – and allowed for the creation of a set of investment products specifically not marketed to the general public. These early-mid 20th century lawmakers specifically exempted from the definition of “general public,” for all practical purposes, those investors that meet certain minimum net worth guidelines.

The lawmakers decided that wealth brings the sophistication required to evaluate, either independently or together with wise counsel, investment options that fall outside the mainstream. Not surprisingly, an investment industry catering to such wealthy individuals, such as doctors and healthcare professionals, and qualifying institutions has sprung up.

EARLY DAYS

The original hedge fund was an investment partnership started by A.W. Jones in 1949. A financial writer prior to starting his investment management career, Mr. Jones is widely credited as being the prototypical hedge fund manager. His style of investment in fact gave the hedge fund its name – although Mr. Jones himself called his fund a “hedged fund.” Mr. Jones attempted to “hedge,” or protect, his investment partnership against market swings by selling short overvalued securities while at the same time buying undervalued securities. Leverage was an integral part of the strategy. Other managers followed in Mr. Jones’ footsteps, and the hedge fund industry was born.

In those early days, the hedge fund industry was defined by the types of investment operations undertaken – selling short securities, making liberal use of leverage, engaging in arbitrage and otherwise attempting to limit one’s exposure to market swings. Today, the hedge fund industry is defined more by the structure of the investment fund and the type of manager compensation employed.

The changing definition is largely a sign of the times. In 1949, the United States was in a unique state. With the memory of Great Depression still massively influencing common wisdom on stocks, the post-war euphoria sparked an interest in the securities markets not seen in several decades. Perhaps it is not so surprising that at such a time a particularly reflective financial writer such as A.W. Jones would start an investment operation featuring most prominently the protection against market swings rather than participation in them. 

Citation: https://www.r2library.com/Resource/Title/0826102549

Apart from a few significant hiccups – 1972-73, 1987 and 2006-07 being most prominent – the U.S. stock markets have been on quite a roll for quite a long time now. So today, hedge funds come in all flavors – many not hedged at all. Instead, the concept of a private investment fund structured as a partnership, with performance incentive compensation for the manager, has come to dominate the mindscape when hedge funds are discussed. Hence, we now have a term in “hedge fund” that is not always accurate in its description of the underlying activity. In fact, several recent events have contributed to an even more distorted general understanding of hedge funds.

During 1998, the high profile Long Term Capital Management crisis and the spectacular currency losses experienced by the George Soros organization both contributed to a drastic reversal of fortune in the court of public opinion for hedge funds. Most hedge fund managers, who spend much of their time attempting to limit risk in one way or another, were appalled at the manner with which the press used the highest profile cases to vilify the industry as dangerous risk-takers. At one point during late 1998, hedge funds were even blamed in the lay press for the currency collapses of several developing nations; whether this was even possible got short thrift in the press.

Needless to say, more than a few managers have decided they did not much appreciate being painted with the same “hedge fund” brush. Alternative investment fund, private investment fund, and several other terms have been promoted but inadequately adopted. As the memory of 1998 and 2007 fades, “hedge fund” may once again become a term embraced by all private investment managers.

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ASSESSMENT: Physicians, and all investors, should be aware, however, that several different terms defining the same basic structure might be used. Investors should therefore become familiar with the structure of such funds, independent of the label. The Securities Exchange Commission calls such funds “privately offered investment companies” and the Internal Revenue Service calls them “securities partnerships.”

Your thoughts are appreciated.

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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What is a Social Impact Bond?

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New Financial Product – or Societal Economic Hammer

By Dr. David Edward Marcinko MBA CMP™

At a time when government finances are stretched there is growing interest in finding new ways to fund public services [healthcare, for example] which improve social outcomes [public health]. And, one new funding model currently being tested, in the United Kingdom, is Social Impact Bonds (SIBs).

Definition

A SIB is a form of payment by results (PBR) in which funding is obtained from private investors to pay for interventions to improve social outcomes. If these interventions succeed in improving outcomes, they should result in savings to the Government and provide wider benefits to society. Of course, as part of a SIB, the Government agrees to pay a proportion of these savings back to the investors. If outcomes do not improve, investors do not receive a return on their investment.

Link: http://en.wikipedia.org/wiki/Social_impact_bond

Wall Street’s Securitization

Wall Street can securitize almost any asset for a commission, or to hold it for profit or loss. Remember David Bowie bonds?

“Securitization” is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the repackaged instruments to investors. The process can encompass any type of financial asset and promotes liquidity in the marketplace.

Link: http://thehealthcareblog.com/blog/2012/03/05/could-social-impact-bonds-help-restore-public-budgets/

SIBs

SIBs may be an example of securitization. By combining small debt into one large pool, the issuer can divide the large pool into smaller pieces based on each individual bond’s inherent risk of default, and then sell those smaller pieces to investors. The process creates liquidity by enabling smaller investors to purchase shares in a larger asset pool. Individual retail buyers, like physician-investors and others, are able to purchase portions the bond. Without the securitization, retail investors might not be able to afford to buy into a large pool of bonds.

Read more: http://www.investopedia.com/terms/s/securitization.asp#ixzz1oGtOPTvZ

Assessment

This is the first time we’ve discussed SIBs on this ME-P. But, they should get much more attention from our CPA, investment advisor [IA] and financial advisory [FA] readers now that President Obama has announced his support for this British idea like getting private investors to pay for public services such as housing for the homeless, health care for vulnerable populations; or even education. It could work for anything that can save the Government money in the long run, but costs money up front, as long as we can measure it.

Link: http://www.fastcompany.com/1728321/the-most-exciting-00003-of-obama-s-budget-social-impact-bonds

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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A Real Estate Market Update

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Hot or Not?

The largest real estate social network ActiveRain Corp just surveyed 1,835 real estate agents and real estate brokers in the US and Canada to understand if the real estate market and economy are poised for recovery in 2012, both nationwide and in local markets.

Source: ActiveRain

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

DICTIONARIES: http://www.springerpub.com/Search/marcinko
PHYSICIANS: www.MedicalBusinessAdvisors.com
PRACTICES: www.BusinessofMedicalPractice.com
HOSPITALS: http://www.crcpress.com/product/isbn/9781466558731
CLINICS: http://www.crcpress.com/product/isbn/9781439879900
BLOG: www.MedicalExecutivePost.com
FINANCE: Financial Planning for Physicians and Advisors
INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

Product Details  Product Details

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