Category Archives: Hedge Fund

Renaissance Technologies

Renaissance Technologies is an odd name for a hedge fund management company. But what it lacks in a name, it makes up in performance. In fact, its Medallion Fund has performed so well that Jim Simons returned all outside investor capital and manages the fund purely for himself and the employees of his firm. It is one of the best performing hedge funds of all time and if Simons had as many years to compound as Warren Buffett, I would wager that he would easily surpass Carlos Slim as the world’s richest man.

Medallion Fund

The Medallion Fund is the flagship hedge fund of Renaissance Technologies; it uses sophisticated quantitative algorithms and the latest in computer hardware to detect fleeting anomalies in the financial markets of the world and profit from them ahead of anyone else. It trades almost every financial asset under the sun and in fact the sun never sets on its portfolio because it is active in almost all of the world’s financial markets.

Simons’ Medallion Hedge Fund uses exceptionally complex mathematical models to predict future price changes in liquid financial instruments. Its computers suck in an enormous quantity of time series data and through complex mathematical transformations these computers filter out the noise and look for non-stochastic price movements that can be predicted in advance.

Now you might think that George Soros’ Quantum Fund was the top dog in the 1990s, but Renaissance Technologies’ Hedge Fund blew him out of the water. For the eleven years ending in 1999 the Medallion Fund returned a staggering 2,478% compared to Soros’ relatively paltry 1,710%.

Renaissance Institutional Equities Fund (RIEF)

The Renaissance Institutional Equities Fund or RIEF as it is also known is another of Renaissance Technologies top performing hedge funds. It utilizes some of the mathematical techniques that made the Medallion Fund so successful and applies them to primarily large cap equities. Its goal is to beat the S&P 500 by four to six percent per year while taking less risk. The RIEF was launched in the middle of 2005 and performed decently until 2008.

In 2008, the RIEF hit a rough patch and lost 16%. This losing trend continued in 2009 when it lost an additional 6%. But in 2010, it bounced back with a 16.5% return.

The Renaissance Institutional Equities Fund is designed for institutional investors and it has a theoretical capacity of $100 billion. This is a staggering number and it boggles the mind to think about managing that much money. Sure, a hedge fund manager can deliver staggering returns when the assets under management are low, but to continue delivering great returns on a fund this size would be quite an accomplishment. But if anyone can do it, I’m sure Jim Simons can.

Renaissance Technologies: A Brief History

Jim Simons started Renaissance Technologies all the way back in 1982. If he had started earlier, say the 1950s like Warren Buffett, there is a good chance that he would be the world’s richest man, because his annualized investment performance beats Buffett hands down. It’s just that Buffett had a few extra decades to compound his money.

Prior to 1982, Simons was primarily an academic. He taught math at MIT and Harvard and he later was appointed the chairman of the mathematics department at Stony Brook.

Simons put his mathematical training to a much more lucrative use when he started Renaissance Technologies in 1982. At Renaissance, Simons became one of the first pioneers to apply advanced mathematical and statistical concepts to the financial markets and this proved to be quite remunerative. In fact, since 1989, the Medallion Fund has returned 35% after fees, which is quite an amazing number that bests both Buffett and Soros. And what is all the more amazing is that Renaissance’s fees were some of the highest in the hedge fund industry, with management fees approaching 5% and performance fees approaching 40%. So the raw return before fees was enormous to say the least.

Jim Simons

Apart from his accomplishment in finance, Jim Simons has made quite a few contributions to academia as well. Perhaps his biggest contribution apart from his multi-million dollar contributions to Stony Brook is the Chern-Simons theory which mere mortals like us may never understand. It has something to do with quantum field theory and involves a level of mathematical abstraction that probably requires a genius IQ to understand.

Simons has also been doing quite a bit of philanthropic work. He started the Paul Simons Foundation to fund educational and health initiatives and he is funding healthcare initiatives in Nepal through the Nick Simons institute. In 2006, he kept the Relativistic Heavy Ion Collider running by donating $13M to the Brookhaven National Laboratory and he also donated $25M to the Stony Brook Foundation.

In 2008, Simmons made the largest single donation to a New York University when he donated $60M to fund a center for physics and geometry at Stony Brook.

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.

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.

MHR Fund Management

MHR Fund Management takes its name from the initials of its founder and manager Mark H. Rachesky. Rachesky hasn’t topped the fund manager salary lists in recent memory, but these takes it takes a billion dollars to do so. MHR is located in New York and advises hedge funds that are focused on primarily on distressed mid-cap stocks. It relies mostly on fundamental analysis and also invests in distressed private equity. The firm was founded all the way back in 1996 and so it has seen and survived a number of market cycles.

Mark Rachesky’s Background
Rachesky is an exceptionally talented and credentialed individual. He holds a B.S. from the University of Pennsylvannia, a M.D. from the Stanford University of Medicine and a M.B.A from Stanford Graduate School of Business. So he has both advanced medical and science training and a very deep business background and contacts from one of the best business schools in the nation.

Rachesky is chairman of Leap Wireless and Loral Space and a director of Emisphere Technologies and Lionsgate Entertainment. All of this in addition to running his own hedge fund.

Back in the 1990’s Rachesky worked for Carl Icahn, who is one of the shrewdest investors around. So he definitely has a lot of experience in activist investing as well.

Going Activist
Rachesky is not afraid of a good fight. In March 2011, MHR went activist on Seahawk Drilling. The debt holders of Seahawk apparently fast tracked a sale of the firm’s assets to Hercules Offshore, but 9.8% equity holder Rachesky was having none of that. He felt that equity holders, including himself, were not given enough time to review the deal which sold virtually all of the firm’s assets and directed nearly of the proceeds to debt holders instead of equity holders.

The Student Faces the Master
In July 2010, Rachesky and MHR Fund Management found itself on the opposite side of the table from his former boss and mentor Carl Icahn over Lions Gate. Icahn launched a new takeover at $6.5 per share which was $0.50 less than his previous offer of $7 per share. Rachesky had previously bought convertible debt of Lions Gate and it was converted at $6.20 to common stock. This action diluted Icahn’s stake in the company and may perhaps have angered his former boss.

Soros Fund Management Careers

Soros Fund Management Careers have just become much harder to obtain. So unless you really have what it takes, you might want to try other funds like: Two Sigma, D.E. Shaw or Citadel. George Soros has closed the Quantum Fund to outside investors and is going to run it purely as a family office. Furthermore, recent market volatility has prompted Soros to build up a 75% cash position in his hedge fund portfolio. This means he has much less need for portfolio managers, traders, analysts and front, mid and back office staff. So if you want to land a job at Soros Fund Management, you’ll have to be that much more exceptional than the already highly exception people that it already has.

The Exceptional Talent At Soros Fund Management
Some extremely remarkable people have passed through the doors of Soros Fund Management. Names like Jim Rogers, Stanley Druckenmiller and Victor Niederhoffer all come to mind. Jim Rogers made a killing back in the 1980s and retired at a very young age after doing quite well at Soros’ Quantum Fund. Druckenmiller left to start his own firm after working with Soros to put on Quantum’s massive wager against the British Pound that gave Soros the title of the man who broke the Bank of England. Finally, Niederhoffer, traded for Soros for a while but eventually quit while he was ahead. Soros says that Niederhoffer was the only fund manager that ever voluntarily left his firm while in the black.

Thus Soros Fund Management Jobs aren’t easy to come by because that is the bar that you are being judged by. Are you a better analyst than Rogers? Are you a better empiricist and trader than Niederhoffer? Are you a better all around portfolio manager than Druckenmiller, (a man who some feel has the analytical capabilities of Rogers, the killer instinct of Soros, the trading abilities of Niederhoffer and the gut instincts of a riverboat gambler all rolled into one well oiled trading cyborg)?

Incredible Talent Won’t Be Ignored
So if you want to work at the firm of the greatest traders of all time you will have to become so exceptional that you can’t be ignored. To do this, the 10,000 hour rule to become an expert is probably just the start. But if you manage to surmount this obstacle, this high standard, you will be able to land a position at Soros Fund Management, assuming that they are still hiring. But even if they aren’t, if you are able to reach this rarefied plateau, you will be able to succeed at any investment management firm or even start and run your own financial firm successfully.

So what are you waiting for? Are you up for the challenge or will you shy away from it?

Hedge Fund Salary

How big is a hedge fund salary? In can be astronomical, some of the top hedge fund managers have been known to pull down several billion dollars in a good year. Hedge fund salaries are based on a number of factors, but the most important are performance and size of assets under management.

In most cases, hedge fund managers are primarily compensated by a performance fee. Usually this performance fee is a set percentage of the total profits generated by the fund. Most of the time, the performance fee is set to 20% of the fund’s profits. So to get a high salary a fund manager has to generate a lot of profits. Higher profits result in higher pay.

The Two Levers

The size of the profits depends on two factors the percentage return on the fund’s assets and the size of the funds assets. A fund manager can generate large absolute profits in by pulling two levers.

The first lever is to generate a high percentage return. If they have $100M in assets and they generate a 100% return, they will generate $100M in profits and they will get to keep 20% of the profits or $20M.

The second lever is to have a high level of assets under management. If the manager has $1B in assets, but only generates a 10% return, they still make $100M in profits and will get to keep 20% of their winnings or $20M. So their salary is the same, but the route they traveled to obtain it differed.

So what is the secret to a billion dollar hedge fund salary?

Well there are two secrets. First, have the highest possible assets under management. Bridgewater is one of the biggest hedge fund and it is approaching $100B under management. Second generate the highest possible percentage returns. In the midst of the subprime bubble Ladhe Capital generated percentage returns approaching 700% annualized.

I know that this is a bit hyperbolic, but put the two factors together $100B in AUM and 700% returns and you get a huge profit of $700B, take 20% of that and you end up with an enormous (and purely unrealistic) payday of $140B.

Is this possible? Probably not, because as the size of assets under management grows it becomes harder and harder to generate high returns. But it is still fun to image that you could be the person to do this.