With media attention yet focused on the latest failure of some hedge funds, there has been an ever-increasing move towards their regulation. In 2004, the Securities and Exchange Commission adopted changes that necessitate hedge fund managers and sponsors to register as investment advisors under the Investment Advisor's Act of 1940. This to a great extent increases the number of requirements placed on hedge funds, together with keeping up-to-date performance records, hiring a compliance officer and creating a code of ethics. All hedge funds that come under the new SEC rules must be registered by Feb 1, 2006. This is seen as a most important move in protecting investors.
In spite troubles in the previous few years, the hedge fund industry continues to flourish. The development of the "fund of funds", which is simplistically defined as a mutual fund that invests in multiple hedge funds, provided larger diversification for investors' portfolios and reduced the minimum investment requirement to as low as $25,000. The beginning of the fund of funds not only took some of the risk out of hedge fund investing, but also made the product more easily reached to the average investor.
Hedge funds have evolved considerably since 1949. Modern hedge funds offer a variety of approaches, together with many that do not involve conventional hedging techniques. The industry has also quickly grown, with recent estimations pegging its size at $1 trillion - quite the jump from the $100,000 used to start the first fund half a century ago.
With an attractive past that has twice seen media-fostered publicity push the industry to stratospheric highs and run down it when it fell from grace, it seems highly possible that the cycle will show again itself at some point in the future. Even as it is easy to get sucked in by the excitement or repelled by the negative press, it's always worthwhile to take a step back and conduct some due diligence, just as you would preceding to making any investment.
Before you invest your hard-earned money at risk, you have to make certain you are choosing the right investment for the right reason. Don't blindly chase performance, and always keep in mind that past performance is not a meter of future performance.
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