The way people talk about hedge funds makes them appear incredibly mysterious. The media talks about them as if they are a kind of secret cult that keeps billionaires wealthy.
But it turns out that most hedge funds are a lot more mundane than that. For the most part, they’re just regular old mutual funds, going by a different name.
The term “hedge fund” usually just denotes a club of wealthy investors, led by some maverick genius who thinks he can beat the market. And, for that reason, the owners of such funds tend to do well financially.
Here are some of the reasons you might want to set one up:
Let’s say that you run a hedge fund and charge customers for managing their money. For the most part, the deal makes sense. Investors send you their money because they think you can beat the market. And you charge a fee for the privilege.
But here’s the genius of hedge funds: you get paid no matter what happens to the rest of the market. Even if it goes down, you can still take your 1 percent commission – even if it does mean writing an apologetic letter to your clients.
The level of profitability you can achieve is extreme. Let’s say, for instance, that you manage to bring $100 million under management and you charge a 1 percent fee per year – quite low as far as hedge funds go. That implies that you could make $1 million per year.
Naturally, you’ll need to keep returns high to ensure that investors stick with you. But if you can string it out for a few years, you can make massive returns. Even if investors lose all their money, you still get to keep your fees. And there’s nothing they can do about it.
Did you know that hedge fund managers don’t have to spend hours trudging through reports anymore? They can leave the donkey work to other people. Instead, all they require are tactics that allow them to match or beat the market.
One common strategy at the moment is automated trading software. Rather than placing trades manually, this software automates many of your sales, depending on the parameters you give it. So, for instance, if you want to sell a stock once it reaches a certain level, this software will allow you to do it with relative ease.
If you plan to invest long-term, you can also try to beat the market by weighting your portfolio in favor of factors with proven higher returns. So, for example, putting money into small cap stocks is a great way to take advantage of their growth potential.
Because hedge funds don’t have to declare what they are doing, you can use these techniques to automate your returns, without having to do any of the hard work yourself. So once investors think you’re good, they will come to you and offer even more money. And that way, you can make a fortune, without actually having to work super hard for it. You won’t make 20 percent-plus returns consistently, but you might make 12 percent – and that’s good enough to beat the market.
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