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For whatever reason *COUGH* GameStop *COUGH* I'm getting a lot of questions these days about what actually is a hedge fund. So I figured I'd just provide a quick primer for folks that are curious.
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The hedge fund is actually an older concept by modern market standards. It was created by A.W. Jones & Co. in 1949 when they created a strategy of protecting long-term stock positions by short selling.
These short positions "hedged" against downturns in long positions.
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These short positions "hedged" against downturns in long positions.
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Short selling is essentially betting that a stock or ETF will decline in the future. A person does this by borrowing shares that they believe will decline by a set future date. They then sells these shares to some buyers willing to pay the market price.
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Usually to take this position a person must "borrow" the shares from their broker. Essentially what is happening is a person is betting that a price will continue to decline and they can purchase them at a lower cost.
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Eagle-eyed viewers will notice that the risk here is technically infinite Since theoretically the price of any asset can climb to infinity.
So don't wander into short selling lightly. You might have fun initially, but the costs can be quite extreme in certain situations.
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So don't wander into short selling lightly. You might have fun initially, but the costs can be quite extreme in certain situations.
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Back to hedge funds. Wealthy individuals started to use these funds to protect their other investment positions right up until the 1960s when an article in Fortune pointed out how hedge funds had outperformed every mutual fund on the market by double-digit in the past year.
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So suddenly hedge funds explode in popularity and over the next few decades the structure of a hedge fund changes radically.
Today hedge funds describe a class of usually risk-seeking aggressive funds that use leverage (borrowed money) to garner larger returns.
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Today hedge funds describe a class of usually risk-seeking aggressive funds that use leverage (borrowed money) to garner larger returns.
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The popularity of hedge funds have ebbed and flowed over the years, usually spiking whenever a large story is printed about the massive returns of some obscure fund.
(and then flow back when index funds or other investment options outperform these high cost funds)
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(and then flow back when index funds or other investment options outperform these high cost funds)
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Hedge funds typically have larger fees than other investment options. The general structure has an active manager raise money from wealthy investors, where the active manager is paid both a management fee and a performance fee--usually a 2% fee + a 20% cut of gains.
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Historically, since these have been obscure funds that cater almost exclusively to the wealthy and have a relatively small share of total market assets, hedge funds have been regulated much lighter than other investment vehicles.
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However, with public scandals and more scrutiny of consumer financial products in general, modern policymakers have raised the question about more transparency and regulation into the hedge fund industry.
Not all policymakers agree though...Mick
11/12 https://www.nbcnews.com/business/business-news/mick-mulvaney-starting-hedge-fund-ethics-experts-have-questions-n1238977
Not all policymakers agree though...Mick
11/12 https://www.nbcnews.com/business/business-news/mick-mulvaney-starting-hedge-fund-ethics-experts-have-questions-n1238977
Anyway, that a very short primer on what a hedge fund actually is and where they come from! Hope that helps!
#TheMoreYouKnow
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#TheMoreYouKnow
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