What do Hedge Funds ACTUALLY Do? Investing Strategies REVEALED - YouTube

from seizing military ships and buying airplanes  to predicting weather patterns hedge fund  

strategies stretch far and wide so here's five of  the most common hedge fund investing strategies  

and thank you to daily upside a free business  and finance newsletter for partnering for this  

video first off we have short only hedge funds and  these funds bet that the price of an asset will  

go down and they profit off that this strategy  usually involves a ton of investigative research  

to uncover overvalued companies or even sometimes  straight up corporate fraud among the most famous  

short sellers is jim kanos founder of kinecos  associates he first rose to fame back in the  

early 2000s when everyone was very bullish  on this company called enron eventually he  

decided to short it while he was trading at  around 90 dollars per share after a great deal  

of waiting the share price eventually hit zero  and the company had to file for bankruptcy more  

recently though he was short on wirecard a german  payment processing company soon enough he was  

proven right as the company filed for insolvency  and his share price plummeted to practically zero  

as allegations of fraud started emerging and even  some senior management from wirecard eventually  

fled the country in this short trade his fund  made about a hundred million dollars now those  

are examples of shorts going well but jim kanos  has been short tesla for quite a few years now  

and that investment obviously hasn't gone well  tesla stock has done nothing but continue going  

up until it's passed to 1 trillion market cup  short only funds do come with some controversy  

on the one hand there's people that believe that  you shouldn't be able to bet on the downfall of  

a company or of a particular person while on the  other hand some people believe that it helps keep  

the markets in check by uncovering some harsh but  important truths and if you're curious to see what  

a short position's investment thesis looks like  here's bilakman's hedge fund pershing square's  

short thesis on herbalife it's 334 pages long  and it basically walks through their findings  

and why they thought herbalife was a pyramid  scheme and decided to bet on its downfall now  

this happened over five years ago and bilakpan's  hedge fund actually ended up exiting that position  

unsuccessfully as herbalife is still around and  is doing reasonably well and by the way pershing  

square isn't a short-only fund they employ many  other strategies as well next up we have activist  

investing and simply put activist hedge funds  try to look for companies with unrealized value  

and then try to unlock that value by actively  pushing for the management team to make changes  

it's also what's earned hedge fund managers  headlines like why the world ceos fear paul singer  

now as a hedge fund you do need significant money  to make this happen see if i bought a share of  

samsung and tried to demand for changes they would  just laugh at me because i only want one share  

and that means nothing to them on the other hand  if a hedge fund comes in and buys five percent  

of the company then all of a sudden they do have  the power and their influence to ask for changes  

among the most famous activist hedge funds in the  world is eliot management founded by paul singer  

and here's their presentation proposal urging  samsung electronics to make a set of changes  

back in 2016. as you can see they like to call  it a unique opportunity the samsung electronics  

value enhancement proposals i guess it's just a  fancy way of saying that they want some changes  

firstly as you can see they explain why they  think there's unrealized value in the company  

through some financial metrics like the price  to earnings versus that of the main competitors  

or the price to book value as well and then they  propose a set of changes among some of the changes  

that they propose are reorganizing the group's  structure as it's just too complex at the moment  

changing the dividend policy or also adding  independent directors and if you're interested  

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the video the next hedge fund strategy we'll look  at is global macro and overall with global macro  

they're not necessarily tied to any specific  asset class meaning that they might invest in  

currencies they might invest in fixed income  commodities or even just plain old stocks as well  

and generally this is a top-down approach  meaning that they look at macro things the  

economy the regions things like that industry  trends instead of actually getting into specific  

details of how one company is performing one  of the most renowned hedge fund managers in  

global macro is george soros and in particular  one specific trade that gave him the nickname  

of the man who broke the bank of england this was  back in the 1990s when england decided to join an  

agreement to not let their currency fluctuate  more than a set limit relative to the deutsche  

mark which was german's germany's currency at  the time that was known as a semi-peg but george  

soros actually figured out that it wouldn't be  sustainable for england to stay in this agreement  

and so they would eventually have to exit it in  order for their economy to continue prospering  

he was so confident about this he decided to place  a massive trade worth 10 billion dollars back then  

to short the british pound so expecting it  to drop in value if they exited the agreement  

that did indeed happen and george soros  made one billion dollars of that trade  

essentially giving him international notoriety  other well-known global macro players include  

bridgewater associates founded by ray dalio as  well as brevin howard founded by alan howard  

the fourth strategy we'll look at is event  driven and this involves getting in and out  

of positions when there's big corporate  events and why corporate events i don't  

mean like corporate parties instead it's things  like m a deals restructurings or spin-offs when  

this type of major event happens there's often  mispriced securities mainly because they're  

very complex transactions and so it takes  time for investors to fully understand them  

and incorporate that changes into the price as  you can imagine for the hedge fund side this is  

quite a short term position meaning that they're  in and out relatively quickly maybe in a few weeks  

per month within event driven hedge funds there's  actually multiple different strategies and among  

the most common ones which we'll look at is merger  arbitrage now if you don't know what arbitrage  

means it's just taking advantage of the difference  in prices between say two or more markets  

to give you a simplified example if a stock of a  company trades in two different markets which is  

a real thing by the way like say the new york  stock exchange and the tokyo stock exchange  

it's trading in new york at ten dollars per share  and trading in tokyo at twelve dollars per share  

you could buy the shares in new york and sell the  shares in tokyo for what's basically a 2 risk-free  

profit that's arbitraging action now if you do  this enough times eventually that discrepancy is  

going to balance out primarily because of supply  and demand now let's look at an example to do  

with a merger arbitrage let's say that company a  announces that it wants to acquire company b now  

for that to go through company is going to have to  pay more than the current share price or else why  

would people in company b decide to sell right so  suppose company a places a bid to acquire company  

b for a hundred dollars a share but company b  is still trading at ninety dollars per share  

so actually below the announced acquisition price  and that discrepancy is mainly because there's  

some uncertainty with the deal for example the  regulators could step in and say no to it there  

could be some tax issues some contract issues and  so on in that kind of scenario a hedge fund would  

buy shares in company b and ninety dollars per  share essentially locking any ten dollar profit  

if that deal actually does go through now how do  i know that the deal will close the short answer  

is that there is no guarantee so they don't really  know but they do conduct intense research and try  

to figure out the probabilities and because  they're more knowledgeable than the average  

investor they tend to be a bit more right than  them that said this is a very simplified example  

it does get a lot more complex in real life and  the last strategy we'll look at is long short  

equity which is probably the most common hedge  fund strategy out there as the name implies this  

involves going long so betting the position  goes up while at the same time going short of  

position so hoping that it goes down now these two  typically are quite related so in similar fields  

for example let's look at something in the  sportswear industry take nike and under armour  

if hedge fund feels that nike is undervalued while  under armour is overvalued then they'll go long on  

one and go short on the other by doing so they  eliminate the risk of the sportswear industry  

on the whole for example say if there was another  lockdown and so people stopped doing sports they  

had to stay at home the whole time that would mean  that the share prices in the sportswear industry  

would typically go down but because they have a  long and short position they're able to mitigate  

their risk so their returns would purely be from  nike outperforming under armour and not from the  

industry's overall performance as for how they  identify nike as undervalued or under armour  

as overvalued that has to do with qualitative  research so things like what the industry is  

looking like what kind of management team there is  as well as more quantitative stuff like financial  

modeling looking at future cash flows and things  like that it is quite a complex mix though and  

these are just five of the common hedge fund  investing strategies out there let me know in  

the comments if you want a part two where i can go  over some of the other big strategies like quants  

distress companies or fans of funds as  well and here's some additional resources  

that i've read throughout the years and i  found quite useful to do with hedge funds  

more general resources include the economist  guide on hedge funds which is very informational  

but that said it is more of a guide rather than a  story the second one is hedge fund market wizards  

which is a great read to get into the minds of  some of the top hedge fund managers out there  

if you want something a bit more specific  so looking at specific hedge fund managers  

there's three main books i recommend the first one  is confidence game which goes over bill akhman's  

very early beginnings and how he was successful  throughout the financial crisis the second one is  

the man who beat the market which basically goes  over jim simons's quan fund called renaissance  

capital which arguably has the best performance  in the world lastly i'd recommend fooling some  

of the people all of the time by david einhorn  as he shares how he went about shorting lehman  

brothers which eventually went bankrupt in 2008.  that's all for this video i hope you found it  

useful hit that like hit the subscribe if you  enjoyed it and i'll catch you in the next one