Hedge Fund Question of the Week – Summer Edition – No. 10

When did the modern hedge fund era begin?

Answer:  1995

Hedge funds weren’t invented in the 1990s.  Some trace the idea back to Alfred Winslow Jones and 1949, others trace it back further.  But the hedge fund era experienced a renaissance sometime in the mid-1990s.  

Two significant events occurred in 1995.  First, Congress began considering legislation to amend the Investment Company Act by adding Section 3(c)(7).  This provision allowed hedge funds to have an unlimited number of investors who were sophisticated or “qualified purchasers,” rather than just 100 investors under the existing exemption.  Section 3(c)(7) helped pave the way for an increased ability to attract investors and raise assets.  (And note that the SEC included a recommendation to add Section 3(c)(7) in its 1992 Investment Company Act study, while Congress ultimately proposed and enacted the provision in 1996.)  

Second, the equity markets embarked on a five-year run of outstanding performance with the S&P 500 posting average annual gains of just over 28%.  Long/short equity managers experienced tremendous tailwinds on the long side of their portfolios helping to propel returns and further heighten investor interest.