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

An introductory summary of hedge funds. There is a lot more on this in the book because it is easier to convey in a written format than on tape - also at more info at savingandinvesting.com.

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[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.

[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.

[qiranwang]

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

[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.

[Charles2337]

I have no idea what he just said.

[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!

[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. :)