What the heck is a Hedge Fund? Seriously.

can someone explain it to me, I am such an ignoramus about this stuff. You can use big words as long as the concept is simple enough for me to explain to others in my very red rural area. Thanks, god I am a simpleton.:D :D :D :D

or something like that ;)

and i and the rest of the little people will never get anywhere close to the hedges.

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

Investopedia Says... For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

http://www.investopedia.com/terms/h/hedgefund.asp

Maybe a little easier definition: http://en.wikipedia.org/wiki/Hedge_fund

:kick:

:hi:

but i really appreciate it.

Well worth the watch.
http://www.youtube.com/watch?v=l3kaK2_CrEw

Or should I say they are the second market that controls the sham that is now the first market.

many shady mortgages were bundled together and sold off in parcels. The value of these mortgages was very difficult to determine as the regulations overseeing the loans were relaxed to the extent that no one knew how risky each mortgage was. Therefore, these SIVs (structured investment vehicles) were sold and resold while inflating in (perceived) value, making great sums of money for each successive seller until the whole sham became too risky.

It is a replay of the savings and loan scandal multiplied by 10.

http://nymag.com/news/features/2007/hedgefunds/30341/

Lesson one: Just what is a hedge fund?

It’s only a vehicle for investing, albeit one that happens to be less constrained than most. Your run-of-the-mill mutual fund, for example, buys stocks and bonds, and that’s pretty much it. Most are not even allowed to employ short selling, a way of betting that the price of a security will fall. Hedge funds can employ whatever investing tools they want, including leverage, the use of derivatives like options and futures, and short sales. The New York Times decided years ago to incessantly refer to hedge funds’ use of these instruments as “exotic and risky,” thereby adding to their aura of mystery. The funny thing: Practically all financial institutions use these “exotic” instruments.

There’s a much simpler way of putting it, offered by one of the industry’s luminaries. According to Cliff Asness of AQR Capital, “Hedge funds are investment pools that are relatively unconstrained in what they do. They are relatively unregulated (for now), charge very high fees, will not necessarily give you your money back when you want it, and will generally not tell you what they do. They are supposed to make money all the time, and when they fail at this, their investors redeem and go to someone else who has recently been making money. Every three or four years, they deliver a one-in-a-hundred-year flood.”

Although the origin of hedge funds dates back to Alfred Winslow Jones and the fifties, it wasn’t until the late sixties that the category became a recognizable seedling of its current state: a group of highly skilled traders catering to a very wealthy clientele willing to gamble to get humongous returns. The first true stars of the hedge-fund universe—people like Soros, Michael Steinhardt, and Bruce Kovner—were experts in commodities and currencies and figured out how to exploit inefficiencies in those markets. Because they raised money privately—largely from friends and business associates—they avoided most of the disclosure requirements of U.S. securities laws. That meant they didn’t have to explain to anybody how much money they had or what exactly they did with it. The deal, in effect, was this: Rich guys could gather up money from other rich guys without oversight, so long as they agreed not to utter a word to the general public that could be construed as “solicitation,” including “communication published in any newspaper, magazine, or similar media.” Not that there was any point in soliciting the public anyway. To get into a fund, you had to invest $2.5 million. Managers were expected to have their own money in the fund, an informal check against reckless risk-taking

Thanks for posting.

Seriously, hedge funds are for a*holes with so much money they got tired of betting on companies to succeed (made em Soooo much richer, and that is a wholes set of new problems, like what do you do with all that money?) so they started finding things they could bet on to fail, in a sense betting against the folks who are buying stocks in the business, betting on the business to succeed, see? They the hedgers figured out ways to make money off the losses too(tax loopholes)Soon enough there was enough of this sort of business to make it institutional, so they bundle the losers into various blue chip loser funds, hedging their bets as it were.

They argued that there was no need for further scrutiny into hedge fund activities and that deregulation was fine because the hedge fund managers could regulate themselves and they should only be subject to "nonbinding principles". I believe that hedge funds do not even have to register with the SEC. And I believe that hedge funds and their shady practices were one of the precipitating causes for the housing bubble crash:

http://www.nytimes.com/2007/02/23/business/23hedge.html?_r=1&oref=slogin

"...WASHINGTON, Feb. 22 — The Bush administration said Thursday that there was no need for greater government oversight of the rapidly growing hedge fund industry and other private investment groups to protect the nation’s financial system.

Instead, the administration, in an agreement it reached with the independent regulatory agencies, announced that investors, hedge fund companies and their lenders could adequately take care of themselves by adhering to a set of nonbinding principles. ..."

http://www.msnbc.msn.com/id/15549672/

She's putting her Philosophy to great use


NEW YORK - Former first daughter Chelsea Clinton has joined Avenue Capital Group, a $12 billion hedge fund manager whose founder has contributed to many Democratic Party campaigns, a person familiar with the matter said Friday.

Clinton, 26, the only child of former President Bill Clinton and U.S. Sen. Hillary Rodham Clinton, has taken a post at the New York-based fund manager in an undisclosed capacity, the source said.

Clinton, who graduated from Stanford University in 2001 and studied philosophy at Oxford University, most recently worked at consultants McKinsey & Co. from 2003.

Sub Prime Keno
Gas Gouging Bingo
Mortgage Meltown Hold 'em
Energy Scam Wheel of Fortune

It's two tables over from Forfeiture Faro.

They take on more risk and therefore their returns are usually higher than regular mutual funds. Hedging is a very common practice that millions of investors and companies do all the time. Hedging is usually a way to lock in profit or reduce risk.

Here is a good example of hedging. Let's say you are betting on a coin flips. You bet that on three consecutive flips, you'll have three heads. The probably of this occuring is:

1/2 * 1/2 * 1/2 = 1/8. Therefore, if you bet $100 on hitting heads 3x in a row, you would expect to win $800. Now, what if two heads were flipped in a row. On the next flip, you have a 50/50 chance of winning $800. However, you can now HEDGE this bet. You can bet $400 on flipping a tail (expecting to win $400 if you are correct). You have now reduced your risk. (if the flip is heads, you win $800 but lose $400 on your tails bet. If the flip is tails you win $400 on your tail bet, but lose $100 on your original head bet - $300). You have now guaranteed yourself of winning a minimum of $300 by "hedging" your final coin flip.

Let's say that a Hedge fund is able to use instruments to be 99% that they are guaranteed to make 10%. They have $1B (billion) in funds to commit. They can use the $1B as collateral to borrow $9b at an interest rate of 8%. Their return on $10B invested is $1B. Their borrowing costs are $9b * 2% = $720MM. Therefore, their gain is $280MM out of $1B invested or 28%!! How does that compare to your stock portfolio?

The problem is that there is a 1% chance they could lose 100% of the money. This is a classic way hedge funds make money. Once again, let me stress that there is nothing morally wrong with making money this way!

High risk but potentially high reward. If you choose well (like the Knight says in the Indiana Jones movie) you can make out very well. Choose poorly and lose your shirt.

Like in Vegas, you pay your money and you take your chances. The market will regulate things quite well.

The "market" is a casino for the very rich.

This is why I neither like nor respect Chelsea Clinton. With all her advantages, why would she choose to do this? Hmm. Speaks volumes.

Most people in this country have such retirement funds - pensions, IRAs, 401Ks, etc.

Hedge funds may be for the rich, but the market isn't.

I'm a little more to the left than most on DU.

;)

For example, if a hedge fund speculating on oil is simultaneously speculating on corporate debt and their oil bet goes bad on them, they may be forced to liquidate their corporate debt positions to cover their oil positions. If this happens on a larger scale, they are not the only ones hurt.

The problem is that they are completely unregulated pools of capital swinging around the financial markets involved in market manipulation. There is no transparency and no oversight.

so to speak. It's basically a fund (think mutual fund in a loose sense) run by very talented money managers. There are very steep "minimums" to get in/qualify and the returns are "supposed" to be way above average. So if you've got a spare few million, there are people out there you can hire (hedge fund managers) that will will promise you returns on your money in excess of the average (so they say). What is "average" ? Well that is another topic. It doesn't always go that way, but generally they preform better than most equities, index's, bonds, etc and are the cause for much of the market volatility you read in the daily rags.

Again, I'm playing this down since you wanted a "simple" explanation.

Hope that helped....

MZr7

As you as an individual or group have more money to invest, the quality of available funds and management goes up. Hedge funds are at the upper end of this spectrum.

The problem is that they are leveraged and speculate quite a bit. With huge amounts of money in play, they can move the market.

Dozens upon dozens fail every year and their returns are not calculated in those averages. Last year Goldman Sachs, a firm that employs probably the best talent in the financial world, had their flagship hedge fund explode and lose 30% in a few months. Few mutual funds end up like that.

and folks are looking down at it from the first floor balcony betting on who will win, and the folks above THEM on the 2nd floor balcony are betting on which of THOSE people on the 1st floor balcony betting on the crap players will win, and the folks on the third floor above THEM ALL are betting on who on the 2nd floor will win.

From believing that charging interest was a sin, to thinking that making millions of dollars from this kind of unproductive manipulation of wealth is morally benign.

To quote "Hair:"

"Facing a dying nation of moving paper fantasy..."

How appropriate that the Clinton's spawn would choose this as her career.

"Clinton's spawn". low class.

(And I'm proud to be low class, thank you very much.)

Even though, I'm supporting an inside-the-system candidate in 2008.

it's a contrarian investment fund or IOW going against the current flow.

to use a gambling analogy: if everyone is betting black, you bet red but you use special kinds of bets that require less money but reap higher returns.

Hedge funds generally pay off when the markets are going down, they suck when markets are going up.