 Hey guys, it's MJ the students actually and in this video I want to talk quickly about hedge funds a lot of people think that they're these weird Complicated funds, but I'm going to show you that they're actually quite simple to understand But in order to do that we need to look at a very quick example so what I've got over here is Let's pretend that we have a Market okay, and in this market there are only two shares There's the big blue share and there's the small green share and the big share accounts for 75 percent of market cap and the Small green share accounts for 25 percent of the market cap Now what you would find is a passive fund would come along and they would invest along the same lines as the index So they would invest 75 percent in the big share and 25 percent in the smaller share Then what you also have are active funds and these are managers who feel like they can beat the benchmark set by the index And they might feel that the big share is overpriced and the small share is underpriced So they would then come into the market and they would invest as follows that invests 70 percent in the big share and 30 percent in the small share and What we say is that they've deviated from the market by 5% and they're trying to seek some sort of alpha Now that's normally what you have as your two main choices as an actually consulting Pension funds when it comes to equities. Do we go with passive funds or do we go with active funds? But then there's also something known as a hedge fund and let me just take these guys out So we have some space a hedge fund as you can see has got I have to make this a little bit smaller so I can fit in a hedge fund as you can see is A lot more crazy what they've done here is this Hedge fund manager also believes that the small green share is undervalued and that the blue big share is Overvalued so what they go and do is they go and they borrow blue shares They borrow the big blue shares and they sell them on the market This means they will make money if the shape goes down think I borrow something at 10 Rand And then the price goes down to 9 Rand I give it back to you and I've made one Rand profit by the price going down And this is something known as a short selling But what is very interesting is when you borrow a share from somebody and you sell it to somebody else What you get is you get cash and then what hedge funds do is they go use that cash to buy a share Which they feel is going to over perform in this case the green small share and By using borrowed money to increase your position on a share. This is something known as leverage now hedge funds have the ability to do the short selling and To use leverage and this allows them to magnify their returns and it allows them to Actually create their own sort of risk profile They can hedge out market risk hence why they called hedge funds and use that to only pursue alpha Which is the skill known as you know stock picking and selecting the right shares and that's basically it There's nothing more complicated than that Yes, various hedge funds use different strategies and they get all you know complicated and they use funding formulas and all that But at the end of the day a hedge fund is a fund that invests in equities That is allowed to engage in short selling and uses leverage to magnify their positions and that's it Thanks guys so much for watching and I'll see you next time for another video. Cheers