When Alfred Jones created the first hedge fund in 1949, little did he know what he was setting in motion. Hedge funds have been somewhat controversial throughout their history, but these funds represent (for good or ill) a high-water mark in market investing. Supporters see them as the epitome of intelligent investment, with highly skilled managers scouring different markets for exceptional returns. By restricting investment to institutional investors or HWNIs, hedge funds have historically been largely unencumbered by "obstructive" legislation.
Detractors see the very freedom that has enabled the different strategies as potentially dangerous to the overall health of the financial system. As major funds leverage their views, they become powerful players in the financial markets − so much so that critics argue that their influence is excessive.
The actions of hedge funds have been blamed for excessive volatility in price levels and subsequent market dislocations. The 1998 demise of LTCM − the most documented hedge fund failure − generated fears of significant disruption to the global financial system, and forced the US Federal Reserve to intervene. While hedge fund failures are commonplace, it's the potential systemic risk arising from the demise of a large fund such as LTCM that strikes fear into the hearts of regulators. Recent regulations such as the Dodd-Frank Act in the US and the AIFM Directive in Europe aim to ensure that hedge funds (and PE firms) cannot threaten the global financial system.
