 There is a part of the market that only the rich are allowed to invest in, only open to those millionaire investors. In this video, I'll show you that private world of hedge fund investing, how hedge funds work, and how they make the rich even richer. Then I'll reveal three hedge fund strategies you can use in your own portfolio for market busting returns. We're talking hedge funds explained today on Let's Talk Money. Hey bowtie nation, Joseph Holger with the Let's Talk Money channel. I want to send a special shout out to everyone out there in the nation. Thank you for spending a part of your day to be here. If you're not part of that community yet, just click that little red subscribe button. It's free and you'll never miss an episode. Nation of regular investors, main street investors see just a fraction of the stock market when they go to invest. You flip on your favorite investing channel or website and you might think that investing is all about buying stocks or bonds, maybe even options. But there is a whole other world of investments and the tragedy is, you're not allowed to invest in it. Due to a law that goes all the way back to 1933, the Securities Act, only certain investors, accredited investors are allowed to put their money to work in certain types of investments. Investments like hedge funds, venture capital, and private equity. Now accredited investors are those with over a million dollars net worth or incomes above 200,000 a year. So yeah, rich people. You are being locked out of some of the best investment opportunities out there just because you weren't born with a silver spoon up your a**. Nation, I spent a good portion of my professional career as a venture capital analyst. Helping this group of investors get five and even ten times their money on pre-IPO deals, these are the types of investments you need in your portfolio. So in this video, I'm going to show you how to create your own hedge fund investment, how to take advantage of this private world of finance without being that accredited investor. We'll start by looking at what is a hedge fund and how do they work. I'll then show you a few hedge fund examples and then I'm going to reveal those three hedge fund strategies that you can use in your portfolio. It's all part of a special investing education series that I'm starting here on the channel showing you what it really means to analyze stocks and invest your money. I'll be using content straight out of the curriculum for the chartered financial analyst designation, the gold standard for stock analysts working on Wall Street. The designation involves three years of exams and thousands of pages of curriculum but I'm going to be laying it all out for you in these videos. I'm going to be putting this one and all those videos into a playlist called how to invest in stocks right here on the channel. Make sure you tap that subscribe button so you don't miss any of these because I've got some great in-depth videos coming from options trading strategies to technical analysis and how to beat those investor behaviors that are going to lose your money. Now, hedge funds are actively managed funds so by comparison to those index funds and the passively managed funds that invest in a set group of stocks, hedge fund managers can buy or sell stocks, futures, options, really anything in their investing mandate to create excess returns. And the other thing that makes hedge funds unique is the manager is trying to do more than just create higher returns. They're trying to create those hedged returns. But now the definition of hedge funds has been perverted a little bit over the last decade to really include just about any kind of actively managed fund but in the past these funds would actually take long and short positions so for all the long positions investing in a stock or a bond the fund manager would also take a short position in something else maybe selling against another investment and this is why it's called a hedge fund that investment is hedged against market risk so the manager is really focusing their bet on that one specific stock or investment. Here an example will help me get clear. Let's say that a hedge fund manager thinks inflation is going to jump soon and thinks the price of gold will be the biggest beneficiary. He then decides to invest in gold miners to get that leveraged return and decides Newmont, ticker and NEM is the best in the industry. But now if that bet on gold prices doesn't work out the manager wants to hedge his exposure on this to place another investment that's going to work if the thesis is wrong. He looks for a weaker company and decides Barrick gold ticker GOLD is heavily leveraged and doesn't have those same margins in Newmont and that shares could crash if the price of gold doesn't pick up soon. So he's going to short shares of Barrick here against that long position that he has in Newmont. So here if gold prices do take off the manager believes that the shares of Newmont are going to rise faster than those of Barrick. That long position is going to make more money than the short position loses. If on the other hand the price of gold does nothing the belief here is that the short position in Barrick is going to make more money than that long position loses. And this is just one example of how hedge funds can work. I'll detail those three hedge fund strategies in a minute, three strategies and how to use them in your portfolio. But generally these funds are focusing their investment in one idea or one thesis and then shorting something else to take all those other factors out. But then a hedge fund can also take this kind of targeted investment in other ways. The example we looked at is called a long short strategy where you buy one investment and then sell another against it. The manager might also buy a group of stocks and then sell futures against the index, something called a market neutral strategy that we'll look at later that effectively takes all the market risk out of the portfolio and just bets on those best companies. Another strategy a manager might also just be long on a group of investments. So all buying and no shorting but one group of stocks they buy might work if an idea goes one way and the other stocks will work if the idea goes the other way. So then hedge funds use those complex strategies to reduce their risk while still maintaining those higher level of returns through carefully investing in or against different stocks, futures, options or other investment types. And hedge funds are big money. The hedge fund industry manages over $3.1 trillion globally and investors typically pay what's called a 2 and 20 fee structure. Now this means the fund charges 2% of assets as an annual fee and then it's also going to take 20% of the profits off as an additional compensation. A couple of hedge fund examples here, Bridgewater Associates is one of the largest funds in the world and founded by Ray Dalio in 1975. The company runs four main funds with total assets under management of $138 billion and an annualized 11.5% return over the last three decades. Renaissance Technologies was founded by mathematician Jim Simons in 1982 to use statistical models that drive automated strategies. The fund has $166 billion under management and it's flagship fund. The medallion returned 9.9% in March of last year when the overall stock market plunged 35%. Now I'm going to reveal those three hedge fund strategies to use in your portfolio, but first I want to personally invite you to get the daily bow time, my daily market newsletter with all the important news, stock market trends and what to watch, all delivered straight to your inbox at the night before so you have time to plan. It's your opportunity to be a smarter investor in less than 5 minutes a day. This is something completely new for this year and I love being able to share those daily market updates and the trends with you out there in the community. It's completely free so look for that link in the video description below so you don't miss out. Now there are actually two ways main street investors can get in on these types of hedge fund investments. One is to invest in exchange traded funds set up using these hedge fund strategies like the R par risk parity ETF that's ticker RPAR or the IG merger arbitrage fund ticker M&A. Both have beaten the market return over the last year and more importantly though they did it with less volatility, less risk compared to the market. Now the other way though and the way I like better because it puts you in control of your investments is just to mimic these hedge fund strategies themselves. So let's look at the ways that hedge funds invest, three strategies that you can use in your portfolio, event driven strategies, relative value strategies and market neutral. Our first hedge fund strategy here is called relative value and it's going to be the easiest to understand for most investors. It's also the most popular type of hedge fund accounting for about a third of all global hedge fund assets. This relative value approach is a long short strategy based on fundamental research and valuation. The analyst is first going to research an industry or a sector of stocks that should do well against the broader economic background. Then they're going to pick two stocks, one that's priced cheaply and another one that's relatively more expensive. They buy the cheap stock and then sell the more expensive one. Of course there's a little more that goes into that than just the definition here. First it is important to look at that broader economic picture so you're picking stocks from an industry or a sector that's going to do well in any case. Because in truth most hedge funds don't perfectly hedge their longs with their shorts. Most are going to do something like a 30% hedge. For example if they buy $100 in that long stock position they're only going to sell short $30 of the other stock. Now this is because since the market rises over time you want to be net long or more in your long position and if you're picking an industry that's going to benefit broadly from the economy then all the stocks in that industry should do well. And there are other ways that you can create these pair trades. You can pick stocks from different sectors, industries. I've even seen people pick stocks from different geographies. So for example if you thought the economic growth in the United States was going to beat Latin America maybe you would go long a US stock while shorting an ADR from a company based in Chile or Brazil. Again the idea here is that you want to win in any situation. If the both stocks go up the better company with a cheaper valuation should do better. If both stocks go down though the stronger stock the one that's already cheap and has good financials it shouldn't go down as much as the riskier, more expensive stock. Our next hedge fund strategy is called event driven because you're focused on a specific corporate or geopolitical event. This is where you're going to build a narrative, a story around a specific event that might come up whether it's a potential bankruptcy, acquisition announcement, or an earnings report, anything with the potential to really move a stock. And the most common event driven strategy is called merger arbitrage where the investor is taking a long and short position after an acquisition deal has been announced. Now most of the time the investor is going long or buying those shares of the target company and then selling short shares of the acquiring company. And this strategy normally works because the market doesn't price the deal fully into the shares even after that announcement. So if the analyst thinks that the target company will be acquired they can benefit as those shares reach that target price. Another event driven strategy is buying the debt of companies that have either filed bankruptcy already or are being knocked down significantly in their debt ratings. Now because a lot of institutional bond investors, those big money players have to dump bonds under a certain rating, the price falls hard on any kind of a downgrade especially if the rating falls into that non-investment grade status. Now if the hedge fund thinks the company will ultimately be able to pull out of this bad finances, the debt can be extremely cheap to buy and a solid return. The third hedge fund strategy and one of my favorites is called market neutral. The goal of the market neutral strategy is to produce returns regardless of market direction and you make money whether the market goes up or down. And there are primarily two ways you can do this with that traditional long short strategy that we talked about where you're buying one stock and then selling another from the same industry or a group of stocks. Whereas in that first strategy maybe we didn't fully hedge the position. We went $100 long and only sold short on $30 in that other stock. In the market neutral strategy you would completely cover your longs with those shorts by dollar amount to remove all the risk. Another strategy here is using options for a short position on the market itself. So maybe you buy those individual stocks but then you buy put options on the S&P 500 fund, that ticker SPY. Now this way you benefit on those individual stocks but you're hedged to make money on the puts if the overall market falls. Click on the video to the right for the five options trading strategies every investor needs to know, how to use options to beat even these hedge fund returns. 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