Dear Alice,

Hedge funds seem to feature in the press every day and half my friends have gone to work for one.  During the recent credit crisis, people say that it was the actions of hedge funds that made matters worse.

It is also said that hedge funds are causing the prices of oil and food to rocket.  How so?

Who are these hedge funds and what do they do?

There is very little literature about them and their websites don’t give away much.

Regards,

Isabella, Bristol University

Hello Isabella,

If I had a dollar for every time I was asked this question and spent all the money on make-up, high heels and cocktails I would be able to fund my own ‘Sex in the City’ movie production.  Hang on a minute - that’s the story of my life anyway.  I digress.

It’s true that the world of hedge fund is opaque.  It is analogous to the hotel suite of the rock band du jour .  We are all desperate to be there but no-one seems to know how they can blag their way in.

And nobody except the idolised rock band and their already accepted entourage really knows what goes on once the doors are closed.  

And much like the rock star world, which has seen the Bay City Rollers (don’t ask - you are far too young) replaced by Oasis, and Oasis disappear into the shadows of the Arctic Monkeys, the nature, style and outlook of the hedge fund have changed again and again since their inception.

A year ago, nearly every investment banker wanted to get knee-deep in leverage at a private equity house and buy-out all the corporates they could get their borrowed money into.

These days, most of the investment bankers I speak to are, like the clichéd mid-life crisis Dad buying The Pigeon Detective’s new album in an attempt to get down with the kids, coveting a move to a hedge fund.

But how many of them are just following the trend, and how many actually know what it means to be working in a hedge fund?

Certainly, the opaque nature of the hedge fund world does not lend itself to thorough research.  It is hard to understand  what differentiates a GLG from a Thames River Capital or even to find these names in the first place.

Much like the ostentatious websites of luxury brands like Rolex (my watch) or Bulgari (my necklace), most hedge fund websites offer an expensive-looking front page to the hoi polloi, but if you want to know more about their strategies, their history, their position in the market place, you have to have the backstage pass – a log in and password.  And to get hold of these golden tickets, you are probably going to need a Daddy with a big pay cheque.

This desire on the part of hedge funds to remain discreet, mysterious and desirable has a downside – candidates coming to interview find it hard to articulate why they would rather work at hedge fund X than Y or Z.

As such, the hedge funds, who pride themselves on intimate collegiate atmospheres and an idiosyncratic culture, struggle to find people who can articulate why they want to ‘join their gang’.

So, how to combat this?  In this article I have rolled up my sleeves to answer two key questions: (1) what precisely is a hedge fund and how do they differ from traditional mutual funds, and (2) what strategies do hedge funds follow to make money.

I hope all this answers your question, dear Isabella...I will make sure you have my private number if you need personal tuition.