29. Hedge Funds 1: What is a Hedge Fund?

[Charles2337]

I have no idea what he just said.

[mrmr110]

SO! Let me get this! Yets say..... They borrow $1000,000 worth of shares and sell it short. then borrow $1000,000 and keep them long......If the shares go either way they can't loose, If the traders get paid a bonus of 20% on a win on 50% of the trade and nothing on the other. They still make $200,000 on the whole deal with no risk to them, I can now see why we are bust in the UK. What a bunch of crooks!

[savingandinvesting]

@mrmr110 They could borrow $100,000 of shares and sell short to receive $100,000 in proceeds. If shares went down - would make money if they bought them back lower. They would then return shares, pay borrowing and other transaction costs. If shares went up, and had to buy back higher, would lose money. If were long and short in same same stock, positions would cancel one another - gain on one side, lose on other and have to pay borrow and transaction fees. Hope that helps.

[mrmr110]

@savingandinvesting Thanks for the reply, What I was trying to say was..... If you were trading as a dealer for investors and it was not your money, you get commission of say 20% for a win, you cancelled out both trades with no risk, as long as the market moves either way you would make commission on a win with no risk, but you still get paid commission 50% of the trade overall, one investor looses money and one investor makes money, and the trader always wins? Is this correct?

[savingandinvesting]

@mrmr110 In a hedge fund, all investors in fund share class have same performance and in effect same exposures/positions (in varying sizes) - Am not aware of firm that works in way you described and would go against all codes of conduct and ethics (and it would not be a fund). For starters, it would be unethical to favour certain clients and make it impossible to show performance track record etc. Usually HFs also have high watermark where perf fees only paid over previous high in value.

[HedgeFundGroup]

Wow, this video has really become popular over the last 6 months or so. Nice work, congratulations!  Lets keep in touch and let me know if I could post some of my own hedge fund videos as video responses to your great video content.

Take care.

- Richard Wilson

Hedge Fund Group

[FreeSTOCKnolossROBOT]

thanks Mike!

[junior1984able]

isnt leverage measured in the ratio between interest with liablilities

[savingandinvesting]

@junior1984able Leverage is mainly about the ratio of how much own capital (equity) is used versus how much external borrowed (debt) capital is used. The higher the debt, the higher the leverage and the higher the % move in the equity as the price of the asset purchased (with equity and debt) moves. See video on what is leverage pls for an clarification that I can not fit in this space pls.

[jericomovie]

I understand the basic money-making mechanism behind a hedge fund, but I can't seem to wrap my head around the idea of "selling" something you don't even own. Could you explain that?

Moreover, after the investor gets his return, he then has a position in a presumably dwindling stock/investment, does he not? Is this normally sold immediately to avoid losses?

[savingandinvesting]

@jericomovie Fund could borrow a stock for ex. from other holder via bank, sell (short-sell) it for ex. at $10 - and after some time buy it back, for ex. at $8 and return it to owner from whom was borrowed and pay any borrowing & transaction costs. Profit in this ex. is $2 less costs. After buying back security, short-seller does not have a position any more in it. If stock rose then would buy back higher and lose money (and still return stock) - see also short-selling videos. Hope that helps.

[youngmogul86]

@savingandinvesting -- I always seem to get this question from people who are just starting in their investing venture, and I manage to teach two lessons in one... Short selling creates liquidity, You dont have a position in the equity when you "cover" what you had previously sold, because you didnt own it to begin with. It came from the market bank of "shares outstanding"---And your broker manages finding these shares to "borrow" automatically. Borrow from the market, sell, cover and repay. :)

[renouncedaZfk]

This is a badly conveyed description of what a hedge fund is, I haven't read the book and don't know if it has substance, but certainly this video ...

His explanation is loaded with words that people who DON'T know what a hedge fund is wouldn't know what context these things are used in.

This is almost a mix and mash of internet definitions...

[heightboosting]

i prefer a safer investment with real estate

[lukem118]

What is the averge yeild from a hedge fund

[savingandinvesting]

@lukem118 It is difficult to speak about an average yield since there are so many different strategies and there is also 'survivorship bias' which relates to the fact that funds that do not do well, blow up or close, also will stop reporting. The most commonly looked at index is the Dow Jones Credit Suisse Index which was known as the CS Tremont index - if you google the former you will find a lot of info on this - I hope that helps - best regards, Michael.

[BJ219]

Can someone get me a dictionary of all these money terms? I desperately want to learn, but I haven't gotten used to the jargon yet.

[ezcondition]

@BJ219 the motley, search it and it should come up. it's theme is the motley fool

[21RegimentSAS]

I dont understand a few things, who do you place the bets with and is it short term bets or can you do long term bets to?

[savingandinvesting]

@21RegimentSAS Thank you for your interest - typically you would take a view by buying or selling a security (such as a stock or bond) through a broker with a view to making money if security price moves in the right direction (and then selling the security if it bought or buying if had been sold). This can be done for short periods of time or position can be put on for long period of time as well. I hope that helps - some of the other videos on funds might help as well - best regards, Michael.

[clickokDOTorg]

The problem is you are not understanding that speech is one of the least effective methods of communication. You need visuals - the easiest would be to create some sort of board and draw boxes and arrows etc. Also, get rid of the background - doesn't look credible at all.

[clickokDOTorg]

The problem is you are not understanding that speech is one of the least effective methods of communication. You need visuals - the easiest would be to create some sort of board and draw boxes and arrows etc. Also, get rid of the background - doesn't look credible at all.

[vivacubayfidel]

Wow! You must have made alot of $ in hedge funds, thus your large, echoey house!!!

[aviomaster]

socratic1968 -- ARe you the only American with brains.

"Hedge funds annihilate the wealth of the middle class." - That is real definition of what Hedge fund is. 

[doctorw2]

this is criminal things like this should outlawed, no wonder there is an economic crisis!

[afaronaccentgordon]

Thanks for this info helped alot im just starting investing in shares and stocks etc... so this helps alot

[FreeFOREXautoROBOT]

i got one 100% free EA if anybody looking for..Great results

[TheCreatorofdreams]

I want to understand this WTF do hedge fund trade stock i dont get explain

[keyequityhedge]

Good information, well done.

[mbabist01]

@407buddy Never was in ETFs to begin with. Thanks to Harry Browne's "You Can Profit From the Coming Monetary Crisis," which I bought and read after high school, I've been a HUGE proponent of precious metals. Yes, I have gold, it's wealth storage. I also have both the silver rounds from the mint, as well as pre-1965 silver coins. True, the investment here is diluted by the alloy, but they are a great hedge against a monetary collapse.

[mbabist01]

@407buddy I know, that's why I've got 'em. Silver halves, quarters, dimes as well (in case of hyperinflation, thank you Harry Browne!). You are right on GLD, I STILL don't trust it, even though others say I should buy (I'll take the real thing, thank you).

[mbabist01]

@407buddy Amen! During the Depression, my Mother's Godmother did not trust specie, she preferred to use silver and gold, although the latter was banned, it was still used as a medium of exchange. Also, read up. The Founders considered gold ownership a RIGHT. Congress under FDR changed it to a PRIVILEGE, at Congress' PLEASURE. Don't be fooled, this is unconstitutional. DEMAND the return of hard money.

[mbabist01]

@407buddy Amen to that. The only shares I own are mines. Anything else, including GLD: sorry, I want the real thing. However, I DO object to silver bullion. I cut my financial teeth on Harry Browne, I prefer to own silver coins. Yes, they are not "pure," but when the dollar finally croaks, silver coins will again be a medium of exchange.

[junevi2000]

@407buddy, the whole of United States of America is a fraud. Stay away from it

[86rishabh]

EZDIA is a place where you can Get Experts Advise . And Make Your Own Knowledge bucket Online

[ThePaleWriter]

Karmabanque is a good site, but at this point I don't fully understand it. That's kinda why I came here, but eh...I dunno. There's still things I need to know.

[DJFredReilly92]

great video, thanks!

[Gbwm]

Hedge funds actually do not "hedge." Hedge funds like Long Term Capital or D.E. Shaw try to make money by identifying market inefficiencies, or price arbitrage opportunities. In an efficient market, market efficiencies are hard to find. Hedge funds look for minor price discrepencies, but exploit it in such mass scale that it can make huge sums of money. The risk is that if the price swings the other way, you can lose a lot of money very quickly, just like Long Term Capital.

[Edmund18021988]

Thank you for posting these videos. You don't introduce too many new concepts without explaining them. Very digestible.

[Uzibit]

Hedge Funds are the most beautful thing we have ever invented....thank god there is one form of dignity in our economic system

[TheJimfredrickson]

Has anyone tried this yet? originalturtletrader [dot] com

[DaAfterburner]

Hey michael fischer, nice videos man.

simple, concise and easily understood.

way to go man, hope you keep on posting these videos.

[sarp1028]

Awesome Channel Thanks man

[ohkeepa2009]

search the OBAMA DECEPTION

stop the globalist bankers

know the truth!!!

[socratic1968]

Have you read the Rolling Stones article on Goldman Sachs?

IT IS EXCELLENT.

The bankers own this country.

[qiranwang]

what's the simplest definition of hedge fund please and thank you

[DavianLetter]

a limited partnership that is managed by a general partner. This is how my fund is set up or it can be an llc of limited interests managed by another llc. The partnerships assets are managed by that general partner, mainly in stocks, forex, etc. to provide those limited partners a return. The general partner gets a percentage of that return for its services. Hope that helps

[user786]

Great videos, Michael! I find that your videos have the material that will enable people to get familiar with financial world, congrats on a great job!

[MrBoShingles]

hi im actually doing a group project on hedge funds, my topic is organization of a hedge fund. Would you have any information on the organization of hedge funds or any website i can go to research?

thanks

[savingandinvesting]

The best information in my opinion is available from the prime brokers and perhaps one of them can send something to you based on project. Typically there is an offshore fund (i.e. Cayman or other) and an investment manager that is typically onshore (i.e. US or UK) but can also be offshore. Had a look around on web and Wikipedia has a fairly good overview. I hope that helps a bit - best regards, Michael.

[Pramniana]

Thank you so much for this laundry list of videos! It gives me greater respect for you as a book writer - most people who write books won't post so much information that can be found in the book for fear of reducing sales. I'm in a finance class and had to write a paper on Madoff - your videos have been an incalculable asset.

[Dayonetheone]

So how can a Young person invest when they have little money to invest in a hedge fund? lets say like $500 to $1,000 dollars for investing or even $300 at the minimum?

[savingandinvesting]

Not in hedge funds typ. as you imply: a) because of minimums and b) risk. Does not mean cannot invest - would give answer here but longer answer: pls see all of other videos and book re: stocks, bond, funds, diversification, impact of time, tax considerations etc. Also hedge funds recently had very difficult period and some very significant fraud issues, including Madoff - not investing in hedge funds does not mean options limited to no investments. Hope it helps - best regards, Michael.

[socratic1968]

Don't invest it because the insiders will steal it, eventually.

Save up, buy a house that you can afford and pay it off.

Don't live too much for tomorrow.

Whatever you want to do in this life, do it now.

[samiabusaad]

Thank you for your comment, it touched me and I couldn't agree more with you:

"Don't live too much for tomorrow.

Whatever you want to do in this life, do it now."

[socratic1968]

You're welcome.

It just seems that society tells us to live for one of two far off prospects, either our retirement or the afterlife.

The older I get the more I have come to see, like Joseph Campbell said, that "this is the golden lotus world of perfection and if we don't see it, its not the world's fault.

What's your next breath worth? billions trillions? - more than you can save in a 401k that's for sure.

Time is the real currency of life.

[anger42]

then why are you looking at investing clips on youtube

[socratic1968]

Why does a bank need to act like a business?

Why should Goldman Sachs be allowed to act just like a public utility, or United Airlines who have legitimate reasons to hedge against the future cost of fuel.

Maybe we should have hedge funds that allow investment banks to act like hospitals and drive the price of your grandparent's heart mediation through the roof?

How does this sort of behavior serve the common good?

I suggest you read the Rolling Stones article on Goldman Sachs.

[anger42]

No I mean...if you believe what you are saying "Don't invest it because the insiders will steal it eventually. Don't live too much for tomorrow." If you believe these things...then why are you watching a clip on hedge funds???

[socratic1968]

@anger42

Hedge funds annihilate the wealth of the middle class.

Ferrari?! seriously?

I am so beyond "ownership" of machines. Usery is usery. Jews own 40% of american wealth yet comprise less than a tenth of a percent of the Marine Corp.

Why do you think that is?

[garDre]

You seem to be a little contradicory.... How can you save up and do what you want at the same time (let's say buy a ferrari for instance) ?

[savingandinvesting]

Thanks for the comment - the fund of funds would give the average (or specifically the weighted average) of the single funds in it. So if all 10 were up 43%, then the fund of fund would be up 43% (assuming no leverage at fund of fund level). If some are up and some are down, then the performance is the average performance, weighted by the size of the investments in each single hedge fund. Hope it helps.

[afurrypanda]

I am quite young and naive but isn't this how it could happen. Say for example a hedge fund makes 43% returns and a fund of hedge funds have 10 funds which make 43%, 430%, and then a fund of fund of hedge fund has ten of those so that is 4300% is that stupid or is that possible. of course the management fees will cut there teeth in but uno is dis possible

[aarondkeogh]

can you tell me how i can start tradeing from home

[savingandinvesting]

There are quite a few Internet based trading firms like Schwab or TD Ameritrade. Markets are fairly efficient - see other notes and competing against professionals - a lot of day-traders lose a lot of money during corrections and a new wave arrives during the following bull market. Please see book and videos on market efficiency, dollar cost averaging, index funds, impact of time - consider an automated investment program that offers diversification as detailed in book and videos, Best, MF.

[redmoden]

Whats the minimum amount of money needed to be able to invest in a hedge fund? and who are some of the corporations that offer open to the public hedge funds?

[savingandinvesting]

It depends on the hedge fund manager, where the fund is domiciled (for example Cayman Islands) and where the investor is tax resident. Typical minimums are $100,000 - $250,000 and often there are other net worth or income criteria. This is a product targeted at sophisticated investors/high net worth investors who should be in a better position to assess investment and take what is deemed a much higher risk. Some big funds: DE Shaw, Paulson, Farallon. Hope it helps - best regards, MF.

[PeterCPohl]

So the manager of the hedge fund has to understand the plays they're making in international markets? The whole concept of managing a hedge fund seems like it should assigned to a team rather than just one person.

[beatitudes79]

Hedge funds sound similar to ETFs. What are the differences?

[savingandinvesting]

They are both investment alternatives although typically targeted at different buyers.

Quick list of difs:

ETFs: traded on exchange, easy to get in and out (trade like stocks), can be very low fee, often passively managed to benchmark/index.

Hedge Funds: typically very illiquid (can take years to get out), actively managed, no index as benchmark, high fee product (skills of manager), high minimum investment/need to be qualified investor.

Hope it helps - more in ETF video and book. Best, Michael.

[nevous8]

Plus, the manager(s) can invest in anything.... anything... honestly anything.

[robrown1]

Google UNIFIEDMARKETS

[banziracer]

Excellent. Thanks for your precise,crystal clear, explanation.

[rgarg99]

very good stuff.. I learned also from Hedge Fund Trading Secrets REvealed book

[TENNISCHAMP98]

brilliant guy

[doctorofghetto]

I see that this hedge fund can be taken advantage of very easily, in sutble ways.

[karamnofal]

Thank you ..its really usefull

[Sputores]

well done

[Steven2480]

THANK YOU!

[Sahasrakirana]

Very simplified explaination on mutual funds V/S hedge funds, and the benfits of hedge funds well explained

[alienmoonbase]

Yea, i am the ONLY one who thinks its a mistake to subsidize food to keep the prices low and stable only to turn them over to scalpers who then run the price up.

You sound sound like a fucking leach. Probably never earned an honest living - speculate 'til you drop. Hopefully you'll drop sooner than later.

[shekhar0079]

thanks

[alienmoonbase]

the hedge funds have been used by companies like Goldman Sachs to run the price up for FOOD and energy.

These companies basically scalp people's food. At the same time we are subsidizing food. so why do we allow commodities markets to run the price up?

I don't get it. Is it just the free market at work? What are the limits then?

Should we allow Goldman Sachs to hedge grandma's heard medicine? scalp pills for the elderly?

You know they would do it since they ran food prices up.

[RIVERDONKEY1]

jk........

[RIVERDONKEY1]

i wana become a hedge fund manager like my grampa he makes the cash

[alienmoonbase]

he's a scalper. get a clue.

You'd be better off working for a living instead of stealing it from the working class

[poltrefug]

To make money on Wallstreet you must be an insider. Crooked game; I don't care what anyone says. Greenwich CT has at least 4 guys from Wallstreet who make 500+ million dollars a year sallary. That money comes out of "the little guys wallet". The rich just get richer and we all get a little poorer.

[lengthy86]

learn how to spell.

[bradleefrance]

I have been given an opportunity to manage large sums of money without a lot of experience. I have been in the real estate industry for 3 years and have a common idea of what to do. However I really want to move into a Real Estate Hedge fund style of company. Is there anyone who can help or offer advice?

[Gavrillo]

To manage other people's money, you generally need a license to do so - this varies from country to country.

If you do a quick google search you should be able to find the answers you need.

[ubornthick]

Hedge funds are the best way to look after investors money until their is absolutely nothing left to lookafter, it all having been convirted into bonuses no market panic ,no market. lol

[azdazian]

how does an ' Msc/MA in Economic History' (advocated by the London School of Economics) - articulate the financial development of societies over time - that is the ability to maneuver assets in the innovative way done in modern tertiary focused economies - or is finance an area less focused in such an academic masters course.

[ubornthick]

azdozian .... what!its called highway robbery in anyones articulation To obfuscate three card tricks to themasses,

hedge funds use people with msc/ma's .

Nothing like educated fools to keep the derivelatives on the road ....to nowhere or highway to robbery

Everyone realises that they lost at the same time ...no market panic..because no market lol

[azdazian]

what legal benefits does a mutual fund have over a hedge fund, of course it argues that a hedge fund reacts more to the market - why does a hedge fund therefore present a more reliable investment in that hedge fund managers appear less constrained?

[jpg915]

Nice work.

[noraklagrangian]

Does a hedge fund have anything to do with the concept of financial hedging?

[amitd1986]

No, the name "hedge fund" does not imply that all hedge funds 'hedge' their risks. Infact, many hedge funds don't hedge their investments at all.

[kmj2318]

Yes and no. Hedge funds get there name from being able to have access to hedging techniques like shorting and options. These techniques can be used to provide downside protection on stock positions. However, they can also be use in a very risky way, especially options, like not owning the underlying stock itself (being naked).

[tropomolion]

Explains how a hedge fund works. Important for the understanding of global currency speculations , that e.g brought down the Thai Baht in 1997 and led to the Asia crisis