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Somehow the entire alternative investment trading universe, including both investment managers and their different funds, has wound-up being known as 'hedge funds'. Why do we have a name that is so inaccurate, and should we try to do anything about it? How many of us have had to explain to friends or family what a hedge fund is? The first thing we all say is: "First of all, the name hedge fund is completely wrong...." Names are important because the public debate about financial regulation can be over-simplified, and basic words with emotional connotations can drive the results. Most people know what a bank is - they can see the branch on the high street. Most probably don't know what an investment bank is - maybe a big bank with no branches? These views influence how we think when we hear the words 'bank' and 'investment bank', and how politicians and the press describe financial issues. Most people have never seen a hedge fund and, worse, the name is unhelpful and confusing. Private equity funds and venture capital funds have accurate and descriptive names. It is clear and obvious what both these types of investments are about. Even so, 'venture' funds sound somehow good and positive - surely they help new and exciting ventures. But private equity seems possibly mysterious and private. The Alternative Investment Fund Managers Directive (AIFMD) recognises these differences in perception, and gives preferential treatment to 'venture' funds, even though they are certainly as financially motivated as private equity funds. Actual Hedging The discussions about JPMorgan's recent trading losses question whether the trades were just 'hedging' other positions held by the bank, or rather 'directional' or 'expressing a view'. The more sophisticated pieces refer to portfolio hedging, country hedging and hedging individual positions. On the other hand, some say they were running a hedge fund inside the bank. In this case, using the word 'hedge' to mean the opposite of hedging: a pool of money funding a trading operation taking direct risks. Clearly, the general meaning of hedging is understood: transactions or strategies that protect against movements in other holdings. 'Hedging your bets' is an easily understood expression for taking some positions that can pay-off if others don't. The older fashioned diversification reminder was 'don't put all your eggs in one basket' - another way to think about hedging. Confusion 'Hedge fund' would appear to imply a 'hedged' fund. But even that is a vast over-simplification of the myriad strategies employed by different alternative managers in their trading. Hedge funds may not be hedged at all, or if they are, only for specific risks or positions. If any were fully hedged, they wouldn't have any investors. Perhaps alternative investment funds, which take short positions or other positions that are expected to move in the opposite direction of their main investments (negative correlation), should be called hedging funds. This would differentiate them from long-only or non-hedging funds. Or, funds that take steps to hedge their positions should be called hedged funds. At least that is correct English. Also, 'hedged' sounds safer and more protective than 'hedge', which seems more active. To improve our industry's perception and profile, it would be beneficial to get people thinking about the positive aspects of alternative investments. Think of 'creative' or 'balanced' investing' or even 'efficient capital allocation'. All those sound better and are more accurate than hedge fund, and help people better understand. The term hedge fund has taken on a strange and mysterious connotation that hurts the perception of the industry. Maybe its time for something better. Jeffrey Bronheim is Cheyne Capital's general counsel, read the full story here
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