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Online Reputation Management

Online Reputation Management for Hedge Funds

Online reputation management is becoming increasingly important for hedge funds and other companies that want to raise capital. Often a single unwarranted negative comment is enough to make a prospective investor pass on what would otherwise be a very compelling investment. As a hedge fund manager or a CEO looking to raise capital, you can either fall victim to unwarranted negative press or you can rise above the negativity by employing an online reputation management service or bringing the online reputation management process in house.

Online reputation management is essentially an offshoot of traditional search engine optimization. The goal of SEO is to get a single listing, for example the url of your website to the top of the search engines like Google, Yahoo or Bing. Online reputation management is similar to SEO but is a lot more involved. The typically scenario is this: a disgruntled investor or a competitor posts an unwarranted negative article on their blog and this story attracts enough attention to rise to the top of the search engines and damage your reputation and turn away potential investors in your hedge fund or business.

You could do nothing as this negative publicity harms your business prospects or you could strike back with online reputation management.

What this would entail is essentially making sure that the search engines rate the positive things that people have to say about you more highly than the negative stories. (Now keep in mind that if people are saying bad things about your hedge fund because they are true, online reputation management would be a losing battle for you. It is only going to be effective if the negative publicity is truly unwarranted.)

Step 1: News Generation

The first step in online reputation management is ensuring that all of the good news about your hedge fund or company gets out. Often there is a lot of good news that simply goes unreported. Your job is going to be getting all of this good news out. When your fund does something newsworthy, issue a press release. When you have a relevant story, contact the top bloggers in your industry. And always utilize your own news outlets, such as blogs and social media. The real key is to tell your story in as many places as possible so that the word gets out.

Step 2: Promotion

Now that there is a lot of raw material in the form of good news about your hedge fund or company out there, the hard work of the second step is about to begin. The second step is promotion of all of the good news and buzz that was generated so that the search engines begin to rank all of the favorable news about your hedge fund or company above that of the unwarranted negative article. This is akin to standard SEO except now the goal is to get ten different urls ranked highly on the first page of the search engines instead of a single url. The reason you need to get ten different urls ranked is that this is the number of results displayed on the first page of the search engines. With online reputation management you will need to ensure that favorable news dominates all of these positions so that the unfavorable news story is pushed off the first page of the search engines where no one will see it.

Now, how all of this promotion of positive news occurs is beyond the scope of this article, but it entails the creation of positive references or links to the good news articles by search engine approved methods of reaching out to influential bloggers and websites and sharing your story to encourage links to these articles that showcase your hedge fund in a favorable light.

What to Expect

So as the online reputation management process starts to take effect. The unwarranted negative news about your hedge fund or firm will be slowly pushed lower and lower in the search engines and replaced my many favorable articles about you and your firm. Remember the negative effect of one unfavorable mention of your fund has at least ten times the effect of a single positive mention. So as the favorable stories start to overwhelm the negative one, you will begin to have a considerably easier time attracting more investors to your hedge fund or your business.

Now don’t expect online reputation management to be either cheap or easy. Traditional SEO is already an intensive and expensive process and online reputation management is roughly an order of magnitude harder, because ten search engine listings must be optimized instead of only one listing. You can try to do this in house, but if you are a hedge fund manager that his worth his salt, you are probably better served by looking for an online reputation management service provided by a well regarded SEO firm, and sticking to what you do best which is extracting alpha from the markets.

Overcoming Fear of Rejection

Overcoming Your Fear of Rejection When Seeking Accredited Investors

Most people, including potential hedge fund managers have an innate fear of rejection. From an evolutionary perspective this fear seems to make a lot of sense. Get rejected by the tribe and you don’t pass on your genes and your lineage is wiped out.

But in the modern world, the fear of rejection can hold you back when starting a hedge fund. Unless you have people tripping over each other to give you their capital, you are going to have to talk to a lot of prospective investors to raise the funds that you need to launch your hedge fund, and the majority of them are going to say no.

You can let your fear of rejection hold you back or you can learn to overcome it by doing the following things.

First, make it your goal to get rejected by a certain number of prospective accredited investors per day. This completely reframes the problem from one of trying to avoid rejection to one of almost seeking rejection and not caring so much about it. When your goal is to avoid rejection you will end up making fewer calls on investors so that the chance of being rejected is lower. But when you are actively seeking rejection, you will be focused on making more calls. And as you get better at pitching your hedge fund you will find that you have to make more and more calls to reach your rejection quota.

Second, start small. Don’t pitch the $20 billion hedge fund that you have been salivating over on the first day. Start by pitching a number of small investors first. Focus on the prospects that you are a little more care free about first. If you land them, great, but if you don’t its no big deal. This way your fear of rejection is lower and you will have time to practice and refine your pitch.

Third, do the thing you fear everyday. If you fear being rejected by potential investors, you have to pitch your hedge fund to new prospects everyday. Your mindset toward selling your fund is like a muscle. The more you exercise it, the stronger it gets, until eventually you almost start to look forward to being rejected, because each rejection is a step closer to more capital for your hedge fund.

Fourth, another important mindset to have is that you can’t lose what you don’t possess. If a potential investor is not interested in investing, it is no loss. You never possessed their investment in the first place. So the way you entered the meeting is the way you left it. You haven’t lost anything, so don’t make their rejection to be a big loss. You’ve lost nothing except for a bit of time and you’ve actually gained something. You’ve gained a little more courage when meeting with investors that you can apply when you are meeting with a large pension fund or university endowment and you’ve learned a little more about things that may or may not work when pitching your fund.

Henry Ford once said:

Failure is the opportunity to begin again more intelligently.

 

Take this to heart. Review your last investment meeting. Evaluate what went right and what went wrong. Learn from each meeting and do more of what went right and less of what went wrong, and eventually you fill find that things start going right more often than they go wrong.

Fifth, learn to exit meetings gracefully. If a prospect has no desire to invest, do your best to learn why. Affirm that you accept their decision then ask them you tell you the reasons why they are not investing. Then listen carefully. Write everything down and use this to refine your pitch. This will take your mind off rejection and focus it on something that is much more constructive and beneficial to your fund raising efforts.

Sixth, replace the fear of rejection with a greater fear. Learn to fear regret more than rejection and your fear of approaching immense institutions will abate. Focus on the consequences of giving into your fear of rejection. Think of the millions of dollars that you will not be managing, the fees that you will not be earning, and the clients you will not be helping if you allow your fear of rejection to overwhelm you. Think of how you will regret not giving it your best in three years when you are forced to go back to work for someone else’s firm if you don’t face your fear of rejection and raise sufficient capital.

Remember, if you don’t learn to overcome your fear of rejection, your hedge fund won’t grow to its full potential. You might be the top hedge fund manager in the world, but people simply won’t know about it and they won’t invest in it. It is absolutely critical to face your fears, look them straight in the eye and overcome them to build a successful fund.

Hedge Fund Manager Salary

A hedge fund manager salary is nothing to sneeze at. It can top four billion dollars. (And you thought doctors were well paid.)

The highest paid manager, David Tepper made $4B. Tepper did this by making a contrarian bet on financial companies.Runner up, George Soros, didn’t do so bad either. He made a mere $3.3B by generating 29% returns through global macro investing.

In fact, the average salary of the top 25 hedge fund managers in the world was $1B. Not a bad salary for a year’s worth of work. To put this in perspective, this is equivalent to 20,000 people making $50K per year.

Take that Tiger Woods!

So the real question is how do you join the club? The answer is simple, you have to mint money by investing. The best fund managers get 20% of the profits that they generate.

How to Make $1B

So if you want to make a $1B salary, you have to make $5B for your investors. Simple, right?

So how exactly do you make $5B?

You start by making great investments. Now I’m not talking about 1X or 2X returns. I’m talking about 10X to 50X returns like those that were made during the implosion of the subprime bubble by hedge fund managers like John Paulson.

Sure you could make 50X betting on some penny stock option. But how much money would you put into that trade?

So the second key is to find a trade where the risk of loss is so small that you can bet big.

What you are looking for is a trade that is massively asymmetric, where you are risking a penny to make a dollar and so your risk of loss is very small relative to the potential payoff.

Back in 2007, Paulson paid a few basis points to buy protection on subprime mortgage backed securities and he made billions when they defaulted.

You might think that these opportunities are long gone, but one hedge fund manager who is responsible for more than $15 billion dollars in assets begs to differ.

He says that “all of the asymmetry in the world lies in [this trade]”.

To find out what this massively asymmetric trade is, enter your email below.

 

 

Keep in mind that this is definitely not investment advice, I am merely sharing information that I found interesting and think that you might find interesting too.

Partner Fund Management

Partner Fund Management was launched by Christopher James in 2004. It is a hedge fund management firm that runs a number of funds focused on healthcare, technology and the broader stock market. It isn’t as big as the Paulson Hedge Fund, but it is definitely as noteworthy. It is located out west in the city of San Francisco and it also employs the talents of Christopher Aristides and Brian Grossman.

Partner Fund History
Prior to starting Partner Fund, James ran Andor Capital Management. Then he launched Partner Fund with the backing of Goldman Sachs. The firm runs close to $2B in its various equity strategies.

Partner Hedge Funds
Partner Fund Management runs the following funds: Partner Fund; Partner Healthcare Fund; Partner Principal Fund; Partner Technology Fund and PFM Meritage. It tends to run a very concentrated portfolio.

Partner Fund Holdings
The firm has a heaving weighting towards Healthcare and Technology as these industries are where it has a great expertise. But it also has a fair allocation to other sectors of the stock market through its more generalized funds. Some of its top holdings include the MSCI Emerging Markets ETF, Google, Wyndham and Salesforce.com.

High Stakes Wagers
When James isn’t making large wagers in the financial markets he can be found making massive wagers in fantasy football. He is a member of a $1M fantasy football league with the likes of Paul Tudor Jones, Stanley Druckenmiller, Michael Novogratz and other hedge fund heavy weights. The dues to enter the league are $100K and membership is capped at 10 members.

But the most interesting thing about this league is that the winner keeps his winnings. Instead everyone plays only for bragging rights. The winnings go to a charity started by Paul Tudor Jones called the Robin Hood Foundation. It supports a number of charitable foundations in NYC. So the real winners are the people who these charitable organizations help.

Trian Fund Management

Trian Fund Management is run by Nelson Peltz, who is known for having earned a high hedge fund manager salary. Trian’s primary focus is value investing in publicly traded stocks.

In 2011, Trian acquired a stake in Family Dollar Stores and announced that it wanted to take it private. But this offer was rejected by management.

Trian Gets Its Start
The seeds of Trian were planted a long time ago, back in 1984. Peltz controlled Triangle Industries and used it to take over National Can. Triangle was much smaller than National, but it received a lot of help (and financing) from junk bond king Michael Milken.

Later another of Peltz’s vehicles Triarc acquired the fast food chain, Wendy’s. It was renamed Wendy’s Arby’s Group and floated on the NYSE.

So based on the names of his companies, one might surmise that Peltz is fascinated with “tri” or perhaps the number three.

Peltz doesn’t just buy and sell stocks, but he is known to get involved with the underlying businesses that he purchases. He isn’t afraid to get his hands dirty and he works hard to make sure that they perform to their full potential.

The Best Advice Peltz Received
Peltz says that the best advice he ever received was from his father, who told him to work on increasing sales, while keeping expenses under control. This advice of course makes a lot of sense, but the real difficulty is not in understanding it, but in implementing it. Everyone, well almost every business, is trying to do this but not every business is succeeding at this task. But when they do succeed, shareholders and investors do very well.

After buying Snapple in 1997, Peltz had it focus on delis and pizza joints and this singular focus reignited growth in sales. As sales rose, Peltz made sure that expenses were tightly contained. This caused margins to grow and the value of his investment in Snapple to increase.

His shrewd investing and business acumen has allowed Peltz to generate a net worth that is in excess of $5B, which is quite a tidy sum of money. Peltz has homes in New York, Paris and Palm Beach. His Palm Beach house is reputed to be one of the most expensive houses in the United States. All this is not bad for Peltz, who like Bill Gates, was a college drop out. He started college at Wharton, but never finished. Perhaps getting a degree wasn’t as important as getting started on building his fortune.

Hedge Fund Strategies

Similar to the joke about economists, though there are more than ten thousand hedge funds, there are eleven thousand hedge fund strategies. Well, not really, but for every hedge fund there is a different strategy or at least a different spin on a strategy. Otherwise, if they all did the same thing, how would they expect to outperform.

Risk Levels
Hedge funds are not homogenous. They take varying amounts of risk. Some may exhibit less risk than treasuries, while others may exhibit risk levels that are several times the most volatile of markets. It simply depends on the strategy that is being pursued and the amount of leverage that is being employed. Some say that the fund Long Term Capital Management was levered two hundred fifty to one. Now that is extreme and it nearly brought down the financial system back in 1998.

Hedging
Many, but not all, hedge funds hedge or attempt to reduce the risk in their underlying positions by shorting or through buying protection in the form of puts or other derivatives. The point of hedging is to reduce risk, while still generating market beating returns. However, hedges are often imperfect, which means that they don’t always zig when other investments zag. If they don’t track the inverse of the underlying closely enough, even a firm that is hedged can experience severe losses. Sometimes the losses will be so severe that they exceed what would have occurred if the firm was unhedged.

Types of Strategies
Global macro is the strategy that is the most well known. Early practitioners like Soros, Druckenmiller and Tudor Jones have made huge sums of money and equally huge wagers on global events and distortions caused by central banks. Soros and Druckenmiller are famous for betting against the Bank of England and winning, making more than $1 billion in a single day.

Market neutral strategies aim to generate absolute returns in excess of the risk free rate without fluctuations due to market risk. They do this by doing arbitrage or equity long/short where they buy a stock that is expected to go up and short a stock that is expected to fall. Buy neutralizing their market exposure they hope to avoid the fluctuations caused by the market while reaping the returns generated by good security selection.

Distressed securities strategies are ones that seek to buy the stocks or bond or other instruments of companies that are in deep trouble. Deep distress leads to equally distressed prices. Firms look to buy securities that still have value even in bankruptcy and hope to profit when the firm emerges from bankruptcy or is able to surmount the economic troubles that it faces. When they are right, they can make returns that are many times that of their initial investments.

Pure short selling strategies are rare because the stock market has historically gone up, so these strategies are akin to swimming upstream. But at the end of massive bull markets these strategies can be highly successful and the only strategies that generate positive returns when all other long based strategies are faltering.

Hedge Fund Due Diligence

Hedge fund due diligence is a complex and highly specialized process that is often delegated to hedge fund consultants. While you can let them do the hedge fund research, you should have a good understanding of the due diligence process and check up on them. After all, they may care about your money, but I’m sure that you care much more about your money than they do and at the end of the day you are responsible for your gains or losses.

Asset Allocation
The very first factor to consider when examining a hedge fund is how it relates to the bigger picture. Asset allocation is responsible for the vast majority of your returns, so if you are already over weight equities, there is little point in taking the time to research yet another equity fund, unless your existing equity fund manager is under performing.

Investment Strategy
Next you have to look at the investment strategy of the fund that you are considering. Many times you’ll see that a fund is really providing disguised beta as opposed to true alpha. They may be exposed to a hidden risk factor that is the true source of its returns as opposed to generating alpha from skillful trading. Are they highly concentrated in illiquid names and currently benefiting from the illiquidity premium in an era of excess liquidity? If they are, this could be a concern when liquidity dries up.

What Is the Edge?
Every firm should be able to explain their edge, or what it is that allows them to generate excess returns without taking more risk. Do they have an advanced HFT algo and co-location on the exchange floor that allows them to react faster than others? Do they have a stellar reputation that results in block traders coming to them first with their largest orders? Do they have a process that results in consistently good trades or do they rely on a single genius manager calling the shots? What is their edge and how likely will they be able to keep exploiting it is a very important question.

Proper Operating Structure
Ideally you would like to see segregated accounts at reputable custodians with full transparency. You want your investment kept separate from other people in case things go wrong. This way you retain full control over your money, while the hedge fund manager directs the trades in your own account. This also gives you good insight into what the manager is doing so that you can watch for style drift.

You also want the fund to have a highly trusted independent auditor. A small, no name auditor with no reputation is a big red flag. For all you know, this type of auditor could be the fund manager’s brother in law. You want an independent auditor with a national reputation to confirm that the hedge fund’s accounts are in order and that they money is where they say it is. Anything less and you better watch out.

Intuition
Trust your gut instinct. A fund may pass all of the tests, but something may not feel right. Don’t ignore this feeling. Fraudsters will often do everything in their power to make sure they look like a firm with the highest credibility. They know exactly how to say all of the right things and make sure that all of the boxes are checked, but sometimes your intuition can be your best guide.

Hedge Fund Research

There are more than 10,000 hedge funds, so what is the best way to perform hedge fund research to find the top hedge fund managers? The truth is: there is no best way to perform hedge fund research. You can probably start with one of the many hedge fund databases, but from there you will have to do a lot of leg work and due diligence. Hedge funds in general are very secretive and getting data and intelligence on them is difficult. But they are much more willing to give you information if you have something that they want.

Informational Leverage
Unless they have so much assets under management that they are turning away investors, hedge funds want your money. They want your money to increase the size of their assets under management so that they can have a bigger pay day in the future, when they generate big returns on their AUM.

Until they collect your investment, this is a significant source and probably only source of leverage that you have over them to get the information you need to make an informed investment decision. Once you sign on the dotted line, they have much less incentive to cooperate with your requests for information.

If a fund has a long lock up period or side car provisions, they can be even less forthcoming than a fund with no lock up period, so be especially careful with these types of funds. The longer you lock in the less concern the fund has about you withdrawing your money, so you have less leverage.

Integrity is the Word
When performing research on a fund the most important thing to understand is the people that run it. The most important quality above all others is integrity. They will be managing a significant portion of your wealth so they had better be the most trustworthy people you can find.

Do Your Own Homework
You have to do your own due diligence on this. You can’t rely on the impressions and presence of others whom you feel are good investors who have done their homework. At times, people invest in funds because other well known investors have invested in them. They assume that the presence of these well known investors means that all of the due diligence has been done and that the fund is legitimate. However, this is not always the case. Just look at the example of Madoff.

Madoff was a fund with tens of billions of dollars from many prominent investors. It was a Ponzi scheme that was a bag of hot air, but somehow many highly regarded investors were suckered into it. Everyone assumed that everyone else had done the required research and they did not bother to do their own research and just look at what happened.

So do not make the same mistake. Make sure that you meet all of the principals of the firm and make sure that your gut instinct says that they are trustworthy. Would you trust them with your wallet? If not, pass on investing in them.

Hedge Funds NYC

NYC and Manhattan in particular are often seen as the center of the financial universe and there are many hedge funds in NYC. These are some of the biggest and the best hedge funds and hedge fund managers that NYC has to offer.

Cerebus Capital
Stephen Feinberg runs Cerebus Capital from NYC. Cerebus is a $19B fund that specializes in distressed investments such as companies on the verge of bankruptcy. He worked at Drexel in its heyday when Milken was a master of the universe and making hundreds of millions when centi-millions actually were a lot of money.

D.E. Shaw
David Shaw runs D.E. Shaw & Co. It too is headquartered in Manhattan. Shaw was one of the first big quantitative investors who relied on computer models to trade financial assets and he was one of the most successful, right up there with James Simmons at Renaissance. His firm took a massive beating in 1998 during the whole crisis caused by the Russian default and Long Term Capital blowup. But his firm has bounced back and is still in business. He used to be a computer science professor, but as a hedge fund manager is worth more than $1B. Not bad for a rocket scientist.

Fortress Investment Group
Michael Novogratz runs FIG, which is a NYC based firm. It has more than $4B in assets under management and Novogratz is personally worth more than $2B. He got his start with Goldman and runs the firm with the assistance of Briger and Edens. He used to fly helicopters in the army and so he probably has nerves of steel, which is helpful in this volatile investment climate.

Goldman Sachs Asset Management
This is an internal division of G.S. It is also located in Manhattan and is responsible for more than $32 billion dollars. It has had a number of up and down years, but always seems to find a way to come out on top.

Millennium Management
Millennium is controlled by Israel Englander, who has a very interesting name that incorporates two countries in it: Israel and England. Englander donates tidy sums of money to Jewish causes, so it appears that he skews towards Israel. He is an outstanding trader, who unfortunately got caught up in the mutual fund market timing scandal. He got off fairly easy, paying $30M out of his own pocket and of course no jail time.

Third Point
Daniel Loeb runs NYC based firm, Third Point. He is an excellent stock picker who is known for writing caustic letters to under performing management teams. He is known for regularly going activist to get poorly performing companies to perform better after he makes large investments at fire sale prices.

Hedge Fund Definition

A hedge fund is a scheme designed to help hedge fund managers obtain billion dollar paydays through the use of leverage to make speculative bets on all manner of assets. It is an instance of heads I win and tails I don’t lose. If the wager succeeds the fund manager retains 20% of the profits. If the wager fails, the manager walks away and the investors are left with 100% of the losses.

Hopefully, you realize that I am being a little sarcastic here. The vast majority of hedge funds are run by outstanding people who are helping pension funds and institutions to generate good returns for the investments of their beneficiaries. It is true that there are and will continue to be a few bad apples, but the vast majority are providing a very useful service to ensure good returns for the retirement plans of their investors.

This is a more conventional hedge fund definition:

A private partnership of investors that utilize leverage to generate high returns

And here are a few other hedge fund definitions:

A highly flexible investment partnership consisting of a few wealthy investors that are allowed to employ speculative techniques, which are not allowed to other investors, to generate high returns

An investment fund that is only open to accredited (i.e. wealthy) investors which focuses on alternative strategies, which are dependant on alpha generation, rather than beta, and pay a performance based fee to its manager

An exclusive partnership, which is only open to institutions and high net worth individuals that focuses on generating higher returns with lower risk through strategies unavailable to retail investors

Sparsely regulated investments which trade stocks, bonds, currencies, commodities and many other non traditional asset classes in an attempt to generate returns that are not correlated to traditional financial markets

A fund that is designed to hedge away market risk by taking hedging or short positions against long positions in an attempt to generate alpha or excess return without market risk

A pooled investment structure which aims to achieve absolute returns rather than relative returns by making shrewd investment decisions

A term that is used for all many of private investment partnerships where the manager is compensated based on performance rather than size of assets under management, which tends to align the interests of the manager and investors better, reducing the principal/agent problem

Paulson & Co Hedge Fund

The Pauson & Co Hedge Fund is one of the largest and best performing funds in the world. After steadily outperforming in the field of risk arbitrage, Paulson predicted the subprime debacle and successfully bet against it using credit default swaps. This successful wager was what put his fund and his fund company on the map and earned Paulson the highest hedge fund manager salary in the business.

Paulson followed up by successfully catching the rebound in financials by switching from short to long in 2009 and generated even better returns for investors and a multi-billion dollar payday for himself and his firm. Recently, however, the Paulson Hedge Fund suffered a significant drawdown due to a decline in financials and a particularly ill timed investment in Sino Forest, which some believe to have issued bad financial data.

Is this the end of a good run? Or is this a minor speed bump in the road to ongoing out performance? Only time will tell.

Background & History

The Paulson & Co Hedge Fund primarily serves large financial institutions and pension funds and it is located in New York. The fund company that runs the fund is primarily owned by John Paulson and the employees of his firm.

In 2007, the firm began betting against collateralized debt obligations. These CDOs consisted of subprime mortgages that were packaged together into tranches. Though the individual mortgages were below investment grade, the top tranches were sold as high quality, low risk debt instruments with a higher yield. Many investors snapped these CDOs up because they thought that they were getting higher yields at a lower risk, but Paulson was selling them because his firm knew that they would eventually go bad. Paolo Pellegrini was instrumental in convincing Paulson to put on this trade in a huge size.

Paulson’s fund has been involved in a number of high profile corporate events, due to its roots in risk arbitrage. In 2008, it purchased a significant chunk of Yahoo in an effort to support Carl Icahn’s campaign to oust the board of Yahoo.

Also in 2008 the fund bet against a number of UK financial institutions like Barclays, RBoS and Lloyds. It made a killing when the share prices of these firms collapsed as they were caught up in the global financial crisis.

In 2009, Paulson & Co started a gold focused fund. Their thesis was that most of the world’s central banks would have to begin devaluing their currencies because their debts were so high. So Paulson began buying bullion and gold mining stocks and even denominated a class of his fund’s shares in gold. So far this decision looks prescient as gold has continued rising dramatically.

Top Hedge Fund Managers

Who are the top hedge fund managers in the world? Names like Soros, Simons, Druckenmiller, Paulson, Tepper, Dalio, Robertson and Kovner top the list. As a group they have probably pulled in excess of a hundred billion dollars out of the markets.

So where do we begin?

Let’s start with Paulson. In 2010 he received $5 billion in total compensation. Which the WSJ says is the biggest one year haul ever.

Paulson runs the Advantage Plus and a number of other funds through his hedge fund firm. He started out in risk arbitrage and corporate event investing. Then he branched out into other areas, including his now famous move in the subprime area.

Soros
George Soros is probably the most famous hedge fund manager of all time. He has made billions of dollars and probably has one of the best and longest track records of all the managers out there. In its first two decades, Soros and partner Rogers generated returns in excess of 30% annually, which absolutely destroyed the performance of the S&P 500. Soros also hired Druckenmiller, who eventually turned out to be a great hedge fund manager in his own right.

Druckenmiller
I’ve heard some one say that Druckenmiller combined the analytical abilities of Rogers, the trading skill of Soros and the stomach of a riverboat gambler. Druckenmiller generated amazingly good returns but recently shut down his fund after making so much money that he decided that the pursuit was not longer worth the impact on his quality of life.

Simons
James Simons is probably the idol of math geeks everywhere. He was formerly a math professor, who used his mathematical abilities to start Renaissance Technologies and build trading models that are extremely profitable. His trading was so profitable that he ended up returning all outside investor money and so that he could only trade the money of his firm.

Tepper
David Tepper is known for focusing on distressed securities. He buys stocks and bonds when everyone wants to sell them because they look like they are in horrible shape. A recent example of this is when he bought a large chunk of BofA when it seemed that the world was headed to a financial abyss.

Dalio
Ray Dalio runs the largest fund in the world, the Bridgewater Hedge Fund. It is focused on global macro. Dalio says that his funds performance is driven by a deep, intrinsic understanding of economics. His firm was prescient for anticipating the economic collapse of 2008.

A Top Hedge Fund Manager’s New Trade of the Century

You might think that if you missed shorting the sub-prime bubble, you missed out on the trade of the century. Granted, it was a spectacular trade that cost very little to put on because almost everyone thought that the bonds where triple A, and it paid off huge.

But one top hedge fund manager thinks that there is another trade that rivals shorting sub-prime.

And why should we listen to him?

Well, he is one of the fund managers who predicted the sub-prime debacle and profited mightily from its collapse.

In fact, he says that “all of the asymmetry in the world lies in [this trade].”

To find out what this massively convex trade is, enter your email in the form below.

 

 

Two Sigma Hedge Fund

The Two Sigma Hedge Fund was started by John Overdeck a former managing director from well known quant shop D.E. Shaw. They are a quantitative firm with several billion dollars under management, which was started back in 2001. They are a very mathematical and technologically driven firm. They aim to build and utilize advance technologies to profit by capturing market inefficiencies.

Unlike many firms that choose to situate themselves in Greenwich, they are located in SoHo, which is a little less laid back.

What is Sigma?

Sigma is standard deviation. Two sigma is two standard deviations, which encompasses 95% of the results in a normal distribution. So what does the name of the firm mean? I haven’t the foggiest idea. Does it mean that their goal is to beat 95% of the other funds out there? If that’s the case, why not go for three sigma and be better than 99% of the other hedge funds.


How Does the Two Sigma Hedge Fund Generate Returns?

I’m not sure. There is very little information about them. My best guess is that they are using a similar process to D.E. Shaw which is where the founder of Two Sigma originally worked at.

D.E. Shaw was founded by hedge fund manager David Shaw who used to be a computer science professor at Columbia. Shaw made money by writing complex computer programs to identify market inefficiencies. Shaw is more of a scientist than a financier and set his firm up to resemble a high end academic institution than a financial firm.

With the help of a lot of smart people Shaw was able to build a trading powerhouse. And Two Sigma probably shares a lot of the DNA of Shaw. How much is hard to say, but there is probably a fair amount that is shared.

What are the three most interesting stocks in Two Sigma’s Portfolio?

  • This tech company has been ravaged by Apple and left for dead. It trades at a PE ratio of 3.4 and has a number of valuable patents that are almost being given away for free at the current stock price.
  • This utility pays an 3.9% dividend and is highly levered to one of the most valuable commodities on the planet. Without it, the U.S. economy would probably shutdown.
  • This foreign company was a former high flyer during the internet bubble and now it is selling for less than one eighth of its former high price. It has struck a deal with a tech behemoth and may be ready to strike back.

Like Sub-Prime on Steroids

While the manner in which Two Sigma generates returns is a black box, one hedge fund manager who is responsible for more than $15 billion, has a trade idea that is simple to understand but obscure enough to be overlooked by the rest of the world.

The idea is like sub-prime on steroids. Yes, it is that big (in reality it is actually much bigger than sub-prime) and just as obvious as the whole sub-prime bubble was in hindsight.

Enter your email below, if you would like to discover what this massively asymmetric trade is.

 

 

Hedge Fund Manager

What is a hedge fund manager? It is someone who gets paid an obscene amount of money for making other people obscene amounts of money.

All joking aside, the goal of hedge fund managers is to make as much money as possible for their investors with as little risk as possible. Their investors may be wealthy individuals, but they may also be pension funds and institutions that administer the retirement plans of everyday workers like teachers, firefighters and police officers.

Types of Hedge Fund Managers
There are many different types of hedge fund managers. Some make investment decisions based on fundamental analysis of companies or commodities. Others make decisions based on technical analysis or other quantitative models. Some engage in high frequency trading, while others hold investments for decades.

The only common thread is their compensation mechanism. Virtually all hedge fund managers charge fees based on the amount of profits that they generate for their investors. If they make their investor money, they get paid. If they don’t make money for their investors they do not get paid. This tends to align their interests a little closer to the interests of their investors.

Famous Hedge Fund Managers
George Soros is the manager who is perhaps best known for breaking the bank of england. He made a famous wager against the pound which was being supported by the BOE and the eventually the BOE ended up backing down. On the day that this happened, Soros ended up making a billion dollars. This was the biggest daily profit ever at that point in time.

John Paulson is another famous manager who made billions betting against subprime debt. He realized that the subprime debt was being traded for much more than it was worth, so he shorted it and made a killing.

David Tepper is best known for making $7B for his investors when coming out the 2008 credit crisis. He bought financial institutions when everyone else was selling them in a panic. Almost everyone thought that they were going bust, but Tepper disagreed and he was proven right. He made enormous profits when their stock prices turned around.

Top Hedge Fund Manager Pay
The pay of the best hedge fund manager runs into the billions. David Tepper made four billion dollars. This is such a staggering sum that it boggles the mind. Other top earners include George Soros, John Paulson and Jim Simmons. All of them also received billion dollar paydays. Soros made $3.3 billion, Simmons made $2.5 billion and Paulson made $2.4 billion. Not bad sums for a year’s work.

Hedge Fund Internships: How to Land a Hedge Fund Internship

Hedge fund internships are not easy to come by. If you want to land a great hedge fund internship you will need to set yourself apart from the crowd, because the best hedge funds receive hundreds of applications per week for a few coveted internship positions. Landing an internship at one of these top hedge funds can make your whole investing career and set you on the path to running your own hedge fund and making millions or even billions of dollars per year. So don’t take the process of landing a hedge fund internship lightly. Put all your effort into landing a great hedge fund internship and your efforts will be well rewarded in the future.

With all of that said, what are the secrets to securing a great hedge fund internship?

Determine if you really want to work for a hedge fund

The first thing you need to do is determine if you really want to work for a hedge fund or run a hedge fund in the future. Landing a hedge fund internship is very difficult. It makes no sense to expend the massive effort required to get an internship if you have no desire to work in the hedge fund industry or run a hedge fund in the future. Running a hedge fund is a competitive, cutthroat business and it isn’t for someone who is in it purely for the money. You have to have a burning desire to succeed in this industry and you have to really want it. If you don’t have this level of desire, it makes little sense to pursue a hedge fund internship because it would end up being a Pyrrhic victory if you do indeed land an internship without having this burning passion for the industry.

Determine if you have what it takes to succeed

Aside from passion, which is a given, there are a number of other important qualities you will need to succeed in the hedge fund industry. If you lack these qualities, it is unlikely that you will land a hedge fund internship.

You need to have exceptional quantitative and qualitative skills. You must have a strong understanding of business and economics and you need to have the quantitative skills required to back up your understanding of economics. If you are pursuing a position in a statistical arbitrage fund or a high frequency trading firm you must have a strong grasp on high level mathematics. Often a master’s is not enough. Many firms will only consider PhDs or post-docs for internships.

But aside from the quantitative skills you will also need exceptional soft skills to work with fellow members of your team and to eventually work with clients if you end up running your own fund. To manage vast sums of money, you obviously have to be technically proficient, but also, you must carry yourself well in front of investors. Even if you are the most skilled traders in the world you still need to have the people skills to convince investors to entrust you will millions or even billions of dollars.

Find a mentor

There is little chance that you will be able to spot all of your weaknesses and blind spots. It is important to find a mentor in the hedge fund industry to help you obtain a hedge fund internship. You mentor can help you determine what skills you need to enhance and he can also help direct you to firms that may have internships available. Your mentor can review your resume and point out ways to improve it and they may even be able to help you by asking you mock interview questions.

Provide more value than you take

Whether you are interacting with your mentor or a firm that may potentially offer you an internship, you need to provide more value than you are asking for in return. Really think hard about what you can offer to your mentor or to the prospective fund. Hedge fund managers are exceptionally busy people and don’t have time to answer a lot of questions. So when you ask questions make sure they count. And in return provide your best ideas to the people that you are interacting with. A hedge fund manager is always looking for the next great idea and the more great investment ideas you provide the higher your value to them.

Send your best ideas to hedge fund managers

When you are interning at a hedge fund, your sole purpose is to generate great investment ideas. So if you want a hedge fund internship you will improve your chances if you can demonstrate that you are capable of producing great ideas. Network with hedge fund managers at campus job fairs and also reach out to alumni that are working at hedge funds. Try to come up with one great idea per month and email this idea to your network of contacts. If your ideas are exceptional, you will dramatically improve your chances of getting a hedge fund internship as you are providing valuable ideas for free and once the quality of your ideas are recognized, one of the hedge fund managers will want to grab your ideas exclusively for himself and his firm by granting you an internship at his hedge fund.

A Hedge Fund Internship: Running with the Big Boys

If you want to run with the big boys, you’ll have to pay your dues. You will need to start at the ground floor by landing a hedge fund internship and work your way all the way up to becoming a hedge fund manager. Then you’ll be on your way to making a massive hedge fund salary like George Soros, John Paulson or Jim Simmons.

Landing a hedge fund internship can get you started on your journey to becoming a hedge fund manager. But getting an internship isn’t easy. Lots of other people have similar aspirations and hedge funds get so many inquiries about internships that they ignore a huge percentage of them. Here are a few things you can do to improve your odds of landing an internship.

Come Up With Great Investment Ideas
If you want to intern at a hedge fund, you will end up doing a lot of investment analysis, but the key is coming up with great ideas to invest in. Every hedge fund manager is constantly looking for the very best investments possible. Their sole aim is to generate the highest risk adjusted returns possible for their investors. If you come up with great ideas that help them to reach this goal, you will be the one that is sought after.

So how do you come up with great ideas? Do a lot of work. Warren Buffett is said to spend ten hours a day reading company reports and SEC filings. In his younger days he read the entire set of company reports published by moodys. He started with the letter A and kept on reading until he reached Z.

How do your efforts stack up to Buffett? Are you putting in the time and effort required to generate good ideas?

Use Your Network
There is supposedly six degrees of separation between you and every one on the entire planet. Reach out to your network and see if anyone knows a fund manager. Remember hedge funds get hundreds of inquiries from people like you every day. Without a personal connection it is very unlikely that they will respond to you.

Once you have made a connection with a fund, learn everything you can about them and what they are looking for in an intern. Make sure that you are well prepared for an interview with them and understand the needs and culture of their firm thoroughly. And be extremely well versed on your investment idea. Chances are that they will have at least a passing familiarity with it if they are a good firm. Your goal is to know far more about it than they do and to be able to defend your views about it with air tight facts.

Appaloosa Hedge Fund

The Appaloosa Hedge Fund is run by David Tepper who made $7 billion for his investors back in 2009 by buying financial stocks when it looked like the financial system was on the verge of Armageddon. He was buying stocks like Bank of America at $3 per share when everyone thought that it was going to zero. Well it didn’t go to zero, and instead he ended up making a ton of money for his investors and around $2.5 billion for himself on BofA another other stocks.

To invest with Tepper, you have to have a strong stomach. Sure he has generated double and triple digit returns in a number of years. But these enormous returns have also been coupled with large draw downs. Investors that can’t handle the volatility of his investment style may end up selling at the bottom of a draw down rather than at the peak of his hedge fund’s high water mark.

I always find it to be a great shame when investors manage to turn a great investment into a bad one by simply having bad timing. But we can’t all have good timing as Tepper or we would all be billionaires like him, I suppose. And if we were all billionaires, being a billionaire wouldn’t be so special anymore.

Appaloosa’s Investment Strategy
Tepper focuses on investing in distressed companies. This is a field where a skilled investor can have a disproportionate impact. If you can identify the companies that are going for going out of business prices, that are not going out of business, you can make a financial killing buying them for pennies on the dollar and then waiting until they recovery and sell for full price. And this is what Tepper seems to be so skilled at doing and this has made him a billionaire.

Tepper’s Path To Billions
Tepper went to school at Carnegie Mellon. After graduation he worked at Republic Steel and then he went to work for Keystone Mutual Funds where he refined his investing skills. He did a good job and Goldman Sachs came knocking at his door. Six months after joining Goldman his skill at investing was recognized and he was made head of the high yield trading desk. Eventually he left Goldman to form his Appaloosa Hedge Fund. After raising capital and making quite a number of bold, shrewd investments he grew the fund and his own personal wealth to ten figures. Not bad for a kid from Pittsburgh.

Bridgewater Hedge Fund

The Bridgewater Hedge Fund was started by Ray Dalio back in 1975. It has $94 billion in assets and is purported to be the largest hedge fund in the world. Rather than catering to wealthy private investors, it primarily manages money for large institutions and pension funds.

Investment Strategy
Like most of the biggest hedge funds, it is located in Connecticut. It manages its All Weather Hedge Fund using a risk parity approach. What this means is that it varies its asset allocation based on the expected risk of an asset class. A less risky asset gets a higher allocation, while a riskier asset gets a lower allocation and leverage may be employed to equilibrate the levels of risk and return.

Bold Predictions
The Bridgewater Hedge Fund gets a lot of credit for being early in predicting the subprime crisis and the global economic panic that later ensued. Dalio created the term D-process to describe the deflationary process of deleveraging brought on by the collapse of the global debt bubble.

Is Bridgewater a Cult?
Dalio is a bit of a controversial figure and some accuse him of running his hedge fund like a cult. But his proponents disagree, saying that the culture of his firm is the key to his investing success. He has written a book of principles that every employee is expected to read. And his firm holds 360 degree review sessions where nothing is held back. He believes that this process helps bring individual weaknesses to light so that they may be corrected.

Obviously, it is difficult to have all of your flaws pointed out to you in front of a large group of people and these sessions can get emotional at times, but it’s hard to argue with the performance that this generates for his hedge fund.

High Turnover
Bridgewater reportedly has an employee turnover rate of 30% per year. This is unusually high for a large hedge fund. Many former employees say that it is a very difficult place to work at and it can be a demoralizing place, because nothing is held back. No one is allowed to talk behind the back of another person. But the firm defends its practices, saying that when you interview former employees you are more likely to hear the bad than the good things about the firm.

How Does Bridgewater Generate Its Returns
According to Dalio, it generates its impressive returns by understanding the economy better than anyone else. By understanding economic history his firm is able to predict how future economic trends will play out and he is then able to position his hedge fund accordingly. And so far his firm has done quite well by capitalizing on this knowledge.

Li Lu Talk

Here is a brief summary of a Li Lu Talk at Bruce Greenwald’s value investing class. Li Lu is a hedge fund manager at Himalaya Capital.

While introducing Li Lu, Greenwald says that there are only three people that he would like to have manage his money when he retires: Seth Klarman, Greg Alexander and Li Lu who already manages all of Charlie Munger’s fortune.

The three most important things Li Lu learned was from Warren Buffett:

  1. A stock is a piece of a business, not a piece of paper
  2. Always seek a margin of safety
  3. Ignore short term volatility

 

To learn how to invest, he spent two years studying everything ever written by Buffett.

Look at what you can lose before you look at what you can make. There are many ways to fail and few ways to succeed. Find something you are good at, that you enjoy, analyze all the ways you can fail and make sure that you don’t do them. If you have an intrinsic passion you will be light years ahead of your competition.

Investing is not about the past, but all of the cash that will be generated in the future.

You must know more about the business that you are buying than other investors. But there will always be things that you do not know, so buy the business with a sufficient margin of safety to make up for the uncertainty.

You must not rely on the ideas of others. If you do you won’t know what to do when the stock you are holding declines. Do you hold or do you sell? Without your own original analysis, you won’t know what to do.

To gain the kind of insight required to invest in this manner you need to understand the underlying business extremely well. Imagine that you inherited the business and needed to learn all about it, as it is the sole source of your wealth. Study it and think about how you would run it, and think about how you would improve it to maximize its value. Then you will get a feel for what it is worth.

All you need are 10 great ideas over the course of 40 years to become wealthy beyond your wildest dreams.

Be prepared to experience a “once in a century” disaster every few years. Berkshire declined 50% on three separate occasions, so you should not expect any gentler treatment than the world’s best investor. A keen understanding of the underlying businesses you own will enable you to hold on during these inevitable draw downs.

Learn continuously because if you are holding the wrong companies, these 50% draw downs can turn into 100% wipe outs.
Look at the trend in the return on capital in the business and in the industry. Watch out when it starts declining across the board.

You can get a full transcript of this Li Lu talk at http://streetcapitalist.com/2010/06/24/li-lus-2010-lecture-at-columbia/.

John Thomas Hedge Fund

John Thomas Hedge Fund was founded back in 1990. Thomas was the first hedge fund manager focused on Japan. In 1999 he sold his fund and worked on managing his own investments. In 2007, John Thomas launched a new hedge fund and research outfit branded as the Mad Hedge Fund Trader.

Thomas’ newest venture focuses on making large macro calls in the financial markets. He is willing to trade almost every instrument under the sun from the Yen to the grains.

Thomas has quite an interesting history. He studies Biochemistry and Mathematics at U.C.L.A. back in 1974. Later he studied Japanese and worked for a Japanese money management firm. In 1977, he became a correspondent for The Economist. From there he had a series of stints in financial firms and then made complete u-turn as a pilot for the Marines. After that, it was back to the financial world.

What Are Hedge Funds?

Hedge funds are private investment partnerships that specialize in strategies that aim to make money in any market environment. The aim of a hedge fund is to generate returns no matter what the market does. If the market goes up, a good hedge fund would seek to match the market’s rate of return. If the market goes down, likewise the fund would aim to generate a positive return in excess of the risk free rate.

How Do Hedge Funds Make Money?
Hedge funds make money by buying under valued assets and selling over valued assets. When these assets return to their fair value the fund will generate a positive return. If the hedge fund in market neutral, this means that the assets that the fund has bought are matched by the assets that the fund has sold. If the hedge fund manager choose these assets wisely, this means that the combined portfolio should be unaffected by market movements and that it would generate a return greater than a risk free asset with no risk.

How Do Hedge Fund Managers Earn Their Money?
Hedge fund managers are typically paid 2% of assets and 20% of profits. This means that apart from the 2% asset based fee, they only make money if their investors make money. Most investors are willing to pay these fees because they expect the hedge fund manager to generate excess returns that will more than make up for their fees.

How Do You Invest In A Hedge Fund?
First you have to have a lot of money. The financial regulators require that hedge fund investors be accredited. The rules change frequently, but this typically means having close to a million dollars in liquid assets or a very high income. The assumption is that if you have a lot of money, you will be smart enough to choose a good hedge fund manager. Hedge funds are much more loosely regulated than mutual funds, which are open to all investors. This loose regulation is why regulators require hedge fund investors to be accredited.

How Are Hedge Funds Structured?
Most hedge funds are structured as limited liability partnerships. The investors are limited partners, while the fund manager is the general partner. To further reduce their liability the general partner is often a limited liability corporation that is owned by the hedge fund manager. Often hedge funds are setup off shore to take advantage of even lower regulation and higher levels of financial privacy.