How do hedge funds make money? How hedge funds work

Typical hedging often uses bank credit to expand investment funds several times or even dozens of times on the basis of its original amount with extremely high leverage, so as to achieve the purpose of maximizing returns. The high liquidity of the hedged asset makes it easy for the hedge to take advantage of the asset. A hedge** with a capital of only $100 million can lend up to billions of dollars by repeatedly pledging its ** assets.

The existence of this lever effect makes the net profit after deducting the loan interest after a transaction far greater than the potential gain from operating with only $100 million of capital. Similarly, it is precisely because of the leverage effect that hedging** often faces a huge risk of excess losses when it is not properly operated.

Invest in financial derivatives. The main hedges are quantum and tiger.

Hedging profit model:

In one of the most basic hedging operations. After buying a **, the manager also buys a put option with a price and an expiration date. The utility of a put option is that when the price falls below the option limit, the holder of the put option can sell the price limit of the option, so that the risk of price decline can be hedged.

In another type of hedging operation, the manager first selects a certain type of bullish industry, buys several high-quality stocks that are optimistic about the industry, and sells several inferior stocks in the industry at a certain ratio. The result of this combination is that if the industry is expected to perform well, the high-quality stocks will rise more than other peers, and the gains of the high-quality stocks will be greater than the losses caused by short-selling the low-quality stocks; If the expectation is wrong, and the industry does not rise but falls, then the decline of the poorer companies will be greater than that of the high-quality stocks. The profit from the short sale must be higher than the loss caused by the **quality stock**.

Because of this means of operation, early hedging can be said to be a form of management based on a conservative investment strategy based on hedging and hedging.

Hedge fund is also known as arbitrage or hedging. The term hedge originally meant the speculative method of using two sides of the bet in gambling to prevent losses, so the speculation of buying and selling in the financial market was called hedging.

People are familiar with hedging mainly because of the several financial crises in the international financial system in the 20s and 90s, as well as the bankruptcy crisis of the long-term capital management foundation in 1998. In fact, these are just the tip of the iceberg of the huge hedging industry, more hedging is very different from these global hedging, and they are not as well-known as them, and the vast majority of hedging are just doing their work in obscurity.

1. Market trend strategy. For example, the macro strategy is mainly the manager who strives for the change of the macro environment and looks for opportunities accordingly. If a country's macroeconomic instability is expected to cause its currency to depreciate, hedging** will typically short sell that country's currency to profit from an actual currency depreciation in the future.

This is how Tiger ** profited in 1985 in anticipation of a fall in the dollar.

2. Major event-driven strategy. Take advantage of major events, such as mergers and acquisitions, bankruptcy, etc., to invest, long ** merged company, while short sell merged company, etc.

3. Arbitrage strategy. For example, the market neutral strategy, holding both short and long positions, the bears hedge the systemic risk of the longs by adjusting the beta coefficient, so that the risk exposure of the entire portfolio to the overall market movement is very limited, and then profit through the choice of **.

Due to the flexible operation method of hedging**, which can use a large number of derivatives in the market, it can effectively reduce risk. At the same time, the correlation between hedges** and between hedges** and other traditional asset classes is lower than that of the floating state, so it can help the portfolio effectively diversify risks when allocating assets to the source of the company.