Hey Deidre, I first tried to answer this question on Google. Didn't get much in the way of non-technical answers. What niche do hedge funds serve? I get that these funds are private/not-registered but what is it that they do that's unique relative to more conventional investment strategies? Is it mostly because they're managed by people who are exceptionally talented at gaming market risk?
It is partly gaming risk. In theory, a hedge fund should be able to beat the stock market. They use a much wider bunch of alternative investments that are out of reach for most of us and play them against each other. Some of it is finding unique places to park money like investing in emerging nations. There's also a lot of shorting. Being able to decide when common market opinion is wrong can be very profitable (like John Paulson’s investment in credit default swaps against mortgage backed securities during the 2008 recession). So many different ways to get it right or wrong but the main idea is that the hedge fund has some sort of theory or knowledge that allows it to make rich people even richer often in a way that provides tax benefits.
I’m trying to build a small circle of actual friends here on Substack this year, not just followers. If you're open to occasional casual texts me directly and let me know if you’re on WhatsApp!
Hey Deidre, I first tried to answer this question on Google. Didn't get much in the way of non-technical answers. What niche do hedge funds serve? I get that these funds are private/not-registered but what is it that they do that's unique relative to more conventional investment strategies? Is it mostly because they're managed by people who are exceptionally talented at gaming market risk?
It is partly gaming risk. In theory, a hedge fund should be able to beat the stock market. They use a much wider bunch of alternative investments that are out of reach for most of us and play them against each other. Some of it is finding unique places to park money like investing in emerging nations. There's also a lot of shorting. Being able to decide when common market opinion is wrong can be very profitable (like John Paulson’s investment in credit default swaps against mortgage backed securities during the 2008 recession). So many different ways to get it right or wrong but the main idea is that the hedge fund has some sort of theory or knowledge that allows it to make rich people even richer often in a way that provides tax benefits.
Thanks Deidre!
I’m trying to build a small circle of actual friends here on Substack this year, not just followers. If you're open to occasional casual texts me directly and let me know if you’re on WhatsApp!