Corey Ribotsky – NIR Group

Hedge Funds 101 January 17, 2010

Hedge funds have certainly been in the news a lot lately. Corey Ribotsky’s investment firm, the NIR Group, based in Roslyn, New York, is one of the top hedge fund investors in the United States, so perhaps it would be wise to discuss a bit what exactly hedge funds are.

Let’s start with a bit of history to get perspective and context. Surprisingly it was not an investor in the usual sense that is credited with creating the first hedge fund. In 1949 Alfred W. Jones, a writer, sociologist and financial journalist made some observations that gave him an idea which has since changed the way we invest today. Jones surmised that the price fluctuations of individual assets could be separated into two distinct components; one part due to the activity of the overall market, and the other part due to the performance of the investment itself. He therefore devised a way to cancel out the effect of the overall market performance. Jones achieved this by creating a balanced portfolio. Some of the assets he purchased he believed would outperform the general market, while others he sold short, expecting these to perform weaker than the overall market. In this way Jones would have an investment in which market fluctuations in the price of the investments would be neutralized. If the overall market rose, the loss on shorted assets would be evened out by the extra gain on the purchased assets. The same effect would apply if the market as a whole fell in value.

The term ‘hedge fund’ was used because the effect of this style of investing is to ‘hedge’ the part of the risk which is due to the general movements of the market. Like the expression “hedging your bets.”