Somebody please explain what a hedge fund is to me.

[hang a left]

They sound mysteriously like the junk bonds of the 90's. I know that our federal government is aggressively refusing to regulate or oversee these ventures. Which is a huge red flag to me.

My illiterate guess is they buy up companies at a bargain/negotiated price. Cream off all the assets, and assist like companies in establishing monopolies.

There has to be something very edgy about them, because they are defended boldly by both sides.

[pokerfan]

1. Well, it's about more than just hedges

I applies to investments in all forms of shrubbery.

[lapfog_1]

2. from wikipedia

The term hedge fund dates back to a fund founded by Alfred Winslow Jones in 1949. A.W. Jones was to sell short some stocks while buying others, thus some of the market risk was hedged. Jones is often credited with founding the first hedge fund, but many "investment pools", "investment syndicates", "investment partnerships" or "opportunity funds" that would today be considered hedge funds were in operation long before. Managers included Jesse Livermore, Bernard M. Baruch and Benjamin Graham.

While most of today's hedge funds still trade stocks both long and short, some do not trade stocks at all, instead focusing on other financial instruments including commodity futures, options, and emerging market debt.

---------------------
http://en.wikipedia.org/wiki/Hedge_fund

[Robbien]

3. Hedge funds are bets

You are betting a stock or other asset will be worth either more or less in the future.

You own nothing except a claim to a bet.

In our society, hedge funds are the biggest and most active section of the market.

[hang a left]

5. What I am not understanding is this...

Dont they buy up businesses at prices they think are ripe? They seem to me from the outside as corporate predators.

That has not always been the case has it?? Re:hedge funds are the biggest and most active section of the market.

And I have this feeling that the vociferous rejection to regulate them should be a huge red flag to all of us.

[Robbien]

6. Private Capital Firms such as Carlyle and Blackstone do all that

activity in leveraged buyouts you are talking about.

Hedge funds really do nothing. The are just wagers. They use to be just for the very wealthy, but now investment in hedges are done by pension/annuity plans, thus the huge growth.

[hang a left]

8. So the huge growth, I would imagine is only because they have

the influx of pension and annuity investments. Which has huge alarm bells going off in my head. So there are pension and insurance funds that are placing assets with these funds?? That are not only unregulated but fervently protected from any oversight??? WTF???

What, are they like a roulette wheel or something. Maybe craps??

I am not understanding.

OK. They place a bet on, let's say "red", the ball lands on black; then what??

[Robbien]

9. The real story is not just the bet

The story is that the bets are bundled together and instruments are issued on the bundled bets. Then these instruments are rebundled and resold.

What you end up having for example, as Sgent said below, is about $100 million in instruments on only $10 million of actual capital. This is the bubble people keep talking about.

[hang a left]

10. I know that you don't have to waste your time

But, when it comes to finance, I am an idget.

You have tried to explain to me under the assumption that I know what you are talking about. I still don't get it. Could you possible, if you have a minute; take me from the beginning.

[Robbien]

12. Not sure how to

In order to make it simple so much as been left out already. It is complicated for many because the story starts out with buying nothing but a wager then twists and turns until trillions of dollars are being tossed around.

Perhaps someone else can give it a go

edit: one thing to keep in mind is that the original bet doesn't count after interest in it is established. What counts in hedge funds is the buying and selling of interest in the original bet. The original bet could have been settled for a long time, but the buying and selling of interests in the bet could continue. That is why it is complicated.

[hang a left]

13. Thanks for your efforts Robbien!

I do really appreciate it. I just think I am slow. So it takes me a while to absorb information.

Hey, I have learned bunches. You are part of my edumacation. ;-)

[depakid]

11. They're also largely unregulated

which leads to situations that can potentially crash the market, as we damn near saw with LTCM back in the late 1990's.

http://en.wikipedia.org/wiki/Long-Term_Capital_Management

[Sgent]

4. Hedge funds

There are two issues:

1) They are a legal structure, similar to a mutual fund, that allows individuals / companies to make investments. Since they are only open to qualified investors (generally those with assets more than $5 million), they are not restricted in the type of investments they make like mutual funds are.

2) In general parlance, many take highly speculative investments that may pay off big or cause a loss of everything. Since they are not regulated investment companies (mutual funds), they are allowed to borrow money to make these investments, thus a hedge fund with $10 million in capital may have $100-$200 million in investments. If they were to all fail at once, they would obviously not be able to pay off the lenders.

[hang a left]

7. That is scary.

That means they take money from people with a lot of it and use it to invest in safe and "unsafe" investments.

Seems to me that the investors are not protected. And these must be upper middle class investors, certainly not people of wealth.

Why does this smell like a scam to strip the rich of money and transfer it to the wealthy??

[muriel_volestrangler]

14. No, I think the investors are very wealthy

and they could afford to lose their investment. But the problem is that the hedge funds are also allowed to borrow money; and if their speculations go wrong, and the hedge fund loses all the money, then the banks which leant the money have lost it all too.

There's a general rule in investment - the bigger the average return on a type of investment, the bigger the risk it carries. Hedge funds invest in all kinds of very risky investments, hoping for large average returns, and that the wide spread of investments means that their losses will be more than covered by their gains. This is like being a bookmaker or casino - overall, the odds favour you, but every now and again, everything could go wrong for you at once.

The problem is that banks, which are meant to be a 'safe' place for money (probably the second safest, after government bonds), are lending money for this speculation. While things go as expected, the banks get their money, and the interest, back, while the hedge funds keep the extra profits; but if something big happens that the hedge fund(s) didn't anticipate (typically some international event outside of the normal financial markets), their careful calculations that balanced one risk against another can go very wrong. Suddenly, the 'safe' bank has lost the money, along with the wealthy investors.

[Divernan]

16. In theory, the govt. "protects" us non-millionaires, by keeping us out of hedge funds.

Government regulations require mimimum mimimum investments in hedge funds ranging from 1 million dollars on up. Theoretically this is because the government chooses not to regulate hedge funds, other than to require this high level of investment. This lack of regulation/govt. oversight supposedly makes the hedge funds high risk. However, as you will see by my post below, hedge funds have outperformed the Standard & Poors 500 Index for the past 15 years.

An acquaintance of mine who works for S & P evaluating hedge fund managers' performance tells me that what this million dollar investment requirement does is to reserve this high profit playground for the very rich.

[sandnsea]

22. Another economy built on air

Just like the internet boom and the 20's stock market. And when this one crashes, the people depending on these pensions will be hurt the most too, even though they had nothing to do with the stupidity of getting involved in a scheme built on borrowed money.

Good lord I had no idea. I also had no idea so many people could be lulled into a completely false sense of security.

Why do people not think crashes can happen again? Where do these gargantuan egos come from?!?

[bobthedrummer]

23. "Money trumps peace"...they are total war criminals-truly evil. n/t

[Sgent]

24. Understand that

they almost never invest in stocks directly -- options, short selling, IPO's, commodities contracts, etc. Many hedge funds would be perfectly happy if the market collapsed -- they would make millions or more.

[sandnsea]

26. True enough

I was referring more to the borrowing aspect of it though. I do understand the annoyance with the requirement of needing so much money to invest in certain things - a few internet IPO's and I'd be retired. Still, these people just have no shame and their egotism in just destroying people's lives, I don't know how they stand it. How are average people supposed to reasonably invest with that kind of thing going on.

[hang a left]

18. Thanks a bunch.

I think I understand now. I guess my next question would be, what is the aversion to regulating them?

[Divernan]

15. Hedge funds are playgrounds of the rich - have outperformed S&P 500 for last 15 years.

Requiring MINIMUM investments of $1 million to $5 million dollars, hedge funds have been a major force in making the very wealthy into the vastly wealthy, and concentrating the wealth into a smaller portion of the population. Pension plans also invest in hedge funds. To get some understanding of the history and workings of hedge funds, simply google "Standard & Poors" and "hedge funds".

Here's a recent brief article to get you started:
www.ithaca.edu/news/release.php?id=2119

01/30/2007


Ithaca College Study Shows Hedge Funds Outperformed S&P Over 15 Years

Ithaca NY--An Ithaca College study presented to the Annual Global Business Conference in November 2006 showed that hedge funds outperformed Standard & Poors 500 index during the period 1990 to 2005.

The study, conducted by Assistant Professor of Finance and International Business Vigdis Boasson with undergraduate finance major Andreas Lindblom’07, hypothesized that investment strategies used by hedge funds are based on solid financial theories and hence are likely to outperform the market even on a risk-adjusted basis. The study examined 12 major strategies used in hedge funds and concluded that each of these strategies outperform S&P 500 market index on a risk-adjusted basis.

The study used a sample of 7,809 hedge funds with a total of 483,975 monthly return observations from 1972 to 2005 to compute the historical returns based on each fund strategy. Additionally, the study collected monthly data on hedge fund indices, based on hedge fund strategies for the period 1990 to 2005, yielding 72,000 observations. The benchmarking analysis employed the index data for the period 1990 to 2005.

Lindblom who presented the paper at the conference remains enthusiastic about hedge funds.
“Today hedge funds are a playground for the rich,” said Lindblom “But this is the future of investing and it will hopefully become more available to ordinary investors, as the word “future” and “hedge funds” go hand-in-hand,” he said.

[bobthedrummer]

21. Cerberus, Blackstone, Carlyle fronts with same Board and privatized central banks...

[bobthedrummer]

28. It's simple to do with other people's money and corrupt central banks-kick

[CGowen]

17. Manipulation

http://www.nypost.com/seven/03202007/business/cramer_reveals_a_bit_too_much_business_roddy_boyd.htm
The host of CNBC's daily program "Mad Money" had hedge fund-trading desks buzzing yesterday after he bragged about manipulating stock prices during his days as a trader.

In the video from TheStreet.com's "Wall Street Confidential" Webcast, Cramer boasts about manipulating the price of a high-flying stock down, and even acknowledges that doing so might have been illegal. The video is making the rounds on YouTube.


http://www.thestreet.com/funds/realmoneyradiowrap/10329451.html



JIM CRAMER admits to hedge fund crimes, stock prices are "fictions"
http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=389&topic_id=468778

[frogcycle]

19. explanations above are good

one additional factor: some of the more nefarious have been accused of intentionally destrying companies. They sell a company's stock "short" and make millions off its demise, as others who gambled on the upstart company's success lose their shirts. Some of the funds have been accused of being downright predatory - of course they claim innocence and just say they know how to spot a loser.

[bobthedrummer]

20. Black budget networks and economic warfare conducted by criminals

Consider this probable example from a parent thread that began as a DU collaborative look into the involvement of International American Products, Inc./IAP in the Walter Reed outpatient scandal.

Based on what you now understand, hang a left, consider this cross-post. It takes awhile to load and it takes some time to explore-I'd be interested in responses from anyone that checks it out.

"101. Historically the dark side of investment relations includes black budget relationships" posted 3-13-07 1:05pm
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x360539#402023

[Stephanie]

25. Here you go >

http://nymag.com/news/features/hedgefunds/
Behind the Hedge
Isn’t it time you stopped pretending to understand what a hedge fund is? We tell you all you need to know, in plain English.

[bobthedrummer]

27. Sunday school kick

[gravity]

29. Hedge funds are like mutual funds, but less regulated

You have to be able to have a million dollars to invest, and by an accredited investor to participate in it though. The amount of investors that can be in the fund are limited too.

Since they aren't regulated, they can take riskier stock trading strategies, going both short and long, hedging their bets.

Hedge funds promise excess returns, but this issue debatable, since some of the differences could be caused by statistical variations.

There are also large performance fees that go to the hedge fund managers. This is usually about 1 or 2% of the funds value, plus 20% of all gains in the stock. When someone manages billions of dollars, they make enormous profits from these fees, and they are the real winners. With these fees taken into account, hedge funds on average underperform the markets.

My personal opinion is that these hedge funds are a scams against the rich, so that the managers can make huge profits from the performance fees. They aren't as transparent as other stocks and mutual funds from the lack of regulation, so there is a lot more room for corruption and fraud.