from seizing military ships and buying airplanes to predicting weather patterns hedge fund
strategies stretch far and wide so here's five of the most common hedge fund investing strategies
and thank you to daily upside a free business and finance newsletter for partnering for this
video first off we have short only hedge funds and these funds bet that the price of an asset will
go down and they profit off that this strategy usually involves a ton of investigative research
to uncover overvalued companies or even sometimes straight up corporate fraud among the most famous
short sellers is jim kanos founder of kinecos associates he first rose to fame back in the
early 2000s when everyone was very bullish on this company called enron eventually he
decided to short it while he was trading at around 90 dollars per share after a great deal
of waiting the share price eventually hit zero and the company had to file for bankruptcy more
recently though he was short on wirecard a german payment processing company soon enough he was
proven right as the company filed for insolvency and his share price plummeted to practically zero
as allegations of fraud started emerging and even some senior management from wirecard eventually
fled the country in this short trade his fund made about a hundred million dollars now those
are examples of shorts going well but jim kanos has been short tesla for quite a few years now
and that investment obviously hasn't gone well tesla stock has done nothing but continue going
up until it's passed to 1 trillion market cup short only funds do come with some controversy
on the one hand there's people that believe that you shouldn't be able to bet on the downfall of
a company or of a particular person while on the other hand some people believe that it helps keep
the markets in check by uncovering some harsh but important truths and if you're curious to see what
a short position's investment thesis looks like here's bilakman's hedge fund pershing square's
short thesis on herbalife it's 334 pages long and it basically walks through their findings
and why they thought herbalife was a pyramid scheme and decided to bet on its downfall now
this happened over five years ago and bilakpan's hedge fund actually ended up exiting that position
unsuccessfully as herbalife is still around and is doing reasonably well and by the way pershing
square isn't a short-only fund they employ many other strategies as well next up we have activist
investing and simply put activist hedge funds try to look for companies with unrealized value
and then try to unlock that value by actively pushing for the management team to make changes
it's also what's earned hedge fund managers headlines like why the world ceos fear paul singer
now as a hedge fund you do need significant money to make this happen see if i bought a share of
samsung and tried to demand for changes they would just laugh at me because i only want one share
and that means nothing to them on the other hand if a hedge fund comes in and buys five percent
of the company then all of a sudden they do have the power and their influence to ask for changes
among the most famous activist hedge funds in the world is eliot management founded by paul singer
and here's their presentation proposal urging samsung electronics to make a set of changes
back in 2016. as you can see they like to call it a unique opportunity the samsung electronics
value enhancement proposals i guess it's just a fancy way of saying that they want some changes
firstly as you can see they explain why they think there's unrealized value in the company
through some financial metrics like the price to earnings versus that of the main competitors
or the price to book value as well and then they propose a set of changes among some of the changes
that they propose are reorganizing the group's structure as it's just too complex at the moment
changing the dividend policy or also adding independent directors and if you're interested
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the video the next hedge fund strategy we'll look at is global macro and overall with global macro
they're not necessarily tied to any specific asset class meaning that they might invest in
currencies they might invest in fixed income commodities or even just plain old stocks as well
and generally this is a top-down approach meaning that they look at macro things the
economy the regions things like that industry trends instead of actually getting into specific
details of how one company is performing one of the most renowned hedge fund managers in
global macro is george soros and in particular one specific trade that gave him the nickname
of the man who broke the bank of england this was back in the 1990s when england decided to join an
agreement to not let their currency fluctuate more than a set limit relative to the deutsche
mark which was german's germany's currency at the time that was known as a semi-peg but george
soros actually figured out that it wouldn't be sustainable for england to stay in this agreement
and so they would eventually have to exit it in order for their economy to continue prospering
he was so confident about this he decided to place a massive trade worth 10 billion dollars back then
to short the british pound so expecting it to drop in value if they exited the agreement
that did indeed happen and george soros made one billion dollars of that trade
essentially giving him international notoriety other well-known global macro players include
bridgewater associates founded by ray dalio as well as brevin howard founded by alan howard
the fourth strategy we'll look at is event driven and this involves getting in and out
of positions when there's big corporate events and why corporate events i don't
mean like corporate parties instead it's things like m a deals restructurings or spin-offs when
this type of major event happens there's often mispriced securities mainly because they're
very complex transactions and so it takes time for investors to fully understand them
and incorporate that changes into the price as you can imagine for the hedge fund side this is
quite a short term position meaning that they're in and out relatively quickly maybe in a few weeks
per month within event driven hedge funds there's actually multiple different strategies and among
the most common ones which we'll look at is merger arbitrage now if you don't know what arbitrage
means it's just taking advantage of the difference in prices between say two or more markets
to give you a simplified example if a stock of a company trades in two different markets which is
a real thing by the way like say the new york stock exchange and the tokyo stock exchange
it's trading in new york at ten dollars per share and trading in tokyo at twelve dollars per share
you could buy the shares in new york and sell the shares in tokyo for what's basically a 2 risk-free
profit that's arbitraging action now if you do this enough times eventually that discrepancy is
going to balance out primarily because of supply and demand now let's look at an example to do
with a merger arbitrage let's say that company a announces that it wants to acquire company b now
for that to go through company is going to have to pay more than the current share price or else why
would people in company b decide to sell right so suppose company a places a bid to acquire company
b for a hundred dollars a share but company b is still trading at ninety dollars per share
so actually below the announced acquisition price and that discrepancy is mainly because there's
some uncertainty with the deal for example the regulators could step in and say no to it there
could be some tax issues some contract issues and so on in that kind of scenario a hedge fund would
buy shares in company b and ninety dollars per share essentially locking any ten dollar profit
if that deal actually does go through now how do i know that the deal will close the short answer
is that there is no guarantee so they don't really know but they do conduct intense research and try
to figure out the probabilities and because they're more knowledgeable than the average
investor they tend to be a bit more right than them that said this is a very simplified example
it does get a lot more complex in real life and the last strategy we'll look at is long short
equity which is probably the most common hedge fund strategy out there as the name implies this
involves going long so betting the position goes up while at the same time going short of
position so hoping that it goes down now these two typically are quite related so in similar fields
for example let's look at something in the sportswear industry take nike and under armour
if hedge fund feels that nike is undervalued while under armour is overvalued then they'll go long on
one and go short on the other by doing so they eliminate the risk of the sportswear industry
on the whole for example say if there was another lockdown and so people stopped doing sports they
had to stay at home the whole time that would mean that the share prices in the sportswear industry
would typically go down but because they have a long and short position they're able to mitigate
their risk so their returns would purely be from nike outperforming under armour and not from the
industry's overall performance as for how they identify nike as undervalued or under armour
as overvalued that has to do with qualitative research so things like what the industry is
looking like what kind of management team there is as well as more quantitative stuff like financial
modeling looking at future cash flows and things like that it is quite a complex mix though and
these are just five of the common hedge fund investing strategies out there let me know in
the comments if you want a part two where i can go over some of the other big strategies like quants
distress companies or fans of funds as well and here's some additional resources
that i've read throughout the years and i found quite useful to do with hedge funds
more general resources include the economist guide on hedge funds which is very informational
but that said it is more of a guide rather than a story the second one is hedge fund market wizards
which is a great read to get into the minds of some of the top hedge fund managers out there
if you want something a bit more specific so looking at specific hedge fund managers
there's three main books i recommend the first one is confidence game which goes over bill akhman's
very early beginnings and how he was successful throughout the financial crisis the second one is
the man who beat the market which basically goes over jim simons's quan fund called renaissance
capital which arguably has the best performance in the world lastly i'd recommend fooling some
of the people all of the time by david einhorn as he shares how he went about shorting lehman
brothers which eventually went bankrupt in 2008. that's all for this video i hope you found it
useful hit that like hit the subscribe if you enjoyed it and i'll catch you in the next one