Friday, March 21, 2014


Have you ever wanted to know what hedge funds are all about? You wouldn't be alone. For many "hedge fund" sounds mysterious and complex. While they may be mysterious - the language surrounding the industry is unnecessarily jargon-filled and ridiculously opaque - hedge funds really aren't that complex.

To help clarify Barry Ritholtz offers us what's supposed to be a simple synopsis of what a hedge fund is and does. Take a look ...

Here's the problem. If you're not clued into hedge funds or the market speak used in the industry this explanation isn't very helpful.

So let's start over.

First and foremost don't let the language hedge fund managers use fool you. Hedge fund managers really do little more than follow the old farmers advice of not putting all your eggs in one basket. All that "offsetting long equities positions" with "short positions" to "manage risk" is the linguistic smoke & mirrors hedge fund managers need to charge you 20 percent. But keep in mind they are doing what you would do if you just followed the farmers advice.

Seriously, in most cases a monkey with darts could do what many hedge fund managers claim to do.

So, you might ask, how do hedge funds actually work? Good question.

As a thought exercise let's imagine that you have all your money in the beef industry. One day people decide they want to start eating more chicken instead of beef. Those who have their money invested only in the beef industry will see a sudden drop in the value of what they own. The solution? Find new places to invest your money so you won't be hurt as much by such sudden market turns. In this case you look toward investing in poultry farms. If you're really thinking ahead you might also want to put some of your money in the fishing industry.

What you're actually doing is hedging your market bets by purchasing investment products that will help you off-set losses in one industry by making you money in another parallel industry.

At the end of the day, hedge funds are not as sophisticated as you might think. The goal, now, is for you to get your hedge fund guy to stop using ridiculously confusing terms, or save some money and go with the monkey & darts strategy.

- Mark

P.S. For my money the comments posted on The Big Picture's (Barry Ritholtz) blog help to sum up the reality behind the hedge fund industry. Specifically:

"For most hedge funds the scam artist in charge is the only person who benefit. Investors are taking a high risk bet that they more often than not end up losing."
"It is called making money from money and is the bane of our present existence."
"What is a hedge fund? It is a great financial device for separating fools from their money in huge 2/20 buckets."
"Hard to believe that 10,000 of them are going to do much better than average."

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