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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.

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 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

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.

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.

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.

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.

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.

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.



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.

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.

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.