Hedge funds?

maxie014

Can anyone explain to me the basics of how these work and what they do?
I read a bit in todays paper about them,from what i could gather they borrow shares off people,and bet against them losing value? Or is that too simplistic.

londoninvestor

Wikipedia is a good start: https://en.wikipedia.org/wiki/Hedge_fund

The strategy you mention - shorting shares which the fund manager believes to be overvalued - is one of many things that hedge funds can do.

I'd say the main general characteristics of a hedge fund are:
- limited liquidity, i.e. investors can cash out, but probably not with say a day's notice
- the aim to produce returns that are not strongly correlated to the main equity markets
- large minimum investments from each investor: so appealing to institutions and very wealthy individuals rather than the general investing public

Within that, there's a wide range of approaches that can be and are adopted.

Prism

The shorting part you mention. They borrow the shares then sell them. Then 'when' the shares drop in price they buy them back and return them to the original lender. It can go very wrong if the shares go up in price.

dividendhero

I remember reading "Money Mavericks - Confessions of a hedge fund manager" by Lars Kroijer.

It provided a very clear insider view of how a hedge fund works, but the most memorable part was that he advised his own family and friends to avoid hedge funds and just invest in a global equity tracker!

EdGasketTheSecond

It's where a few people club together to buy a hedge; a bit like a mutual society.

AnotherJoe

Yep, I read that Steve Eisman (sp?) ) who was one of the people in the Big Short film, has just started a new hedge e fund betting that Brexit will be bad. Could go very well, could go very bad.

Alexland

The below 1.5 hour interview with Stanley Drukenmiler who like Lars Kroijer also closed his large hedge fund as he was unable to sustain superior results is worth watching:

https://m.youtube.com/watch?v=G-MlrpoMig0

Alex

John_G_Jones

maxie014 wrote: »

Can anyone explain to me the basics of how these work and what they do?
I read a bit in todays paper about them,from what i could gather they borrow shares off people,and bet against them losing value? Or is that too simplistic.

They do all manner of different things, but basically they believe that they can consistently beat the markets and people invest money with them as they believe it too.

They charge whopping great fees, and it’s not at all clear overall that they are worth it, as we only tend to hear about the winners, not the many losers who sink without a trace.

HappyHarry

John_G_Jones wrote: »

They do all manner of different things, but basically they believe that they can consistently beat the markets and people invest money with them as they believe it too.

They charge whopping great fees, and it’s not at all clear overall that they are worth it, as we only tend to hear about the winners, not the many losers who sink without a trace.

It's always worth remembering the times they lose, as hedge funds can be wiped out. The Porsche/Volkswagon debacle years ago wiped out some hedge funds: https://www.telegraph.co.uk/finance/newsbysector/transport/3281537/Porsche-and-VW-share-row-how-Germany-got-revenge-on-the-hedge-fund-locusts.html

Malthusian

As with all active management, there is no evidence that any hedge fund manager can consistently beat the market or that anyone can consistently predict which hedge fund managers will be the ones to do it in the near future.

Whereas with conventional funds underperformance means you get a few % less than if you'd invested in the index, the nature of hedge funds is that underperformance can mean anything up to total loss.

They are a status symbol and a means to relieve rich people of excess wealth if they don't like people enough for philanthropy. Not an asset class that retail investors need to worry about.

Just over a year ago Warren Buffet won the easiest 1 million dollars he's ever made after betting that a basket of hedge funds would fail to outperform the S&P 500 over a ten year period. Bear in mind that this bet started in the middle of the 2007-2009 crash, so the hedge funds should have had an outstanding head start, given that hedge funds are supposed to be able to make money by shorting shares whereas a long-only bet on the S&P 500 can only go down in those conditions.

maxie014

Thanks for the replies i was just interested as they are often mentioned on the money pages.
Sounds like its a rich mans game.