This post is for 4 people, who I’ve recently chatted with regarding investment strategies. Hedge funds are the best representation of “ways to make money by trading stuff”. If you trade anything, I mean any asset class, for yourself or others – you’re running a hedge fund. I mean, in the broadest sense. For those who don’t know, a hedge fund is just a pool of money, with the goal to earn a positive, consistent, absolute yield. Sometimes very conservative yields, and sometimes very large yields.
Now, take a look at this, taken from http://www.aima-canada.org/doc_bin/AIMA_Primer.pdf
Now notice…
-Buying Calls on stuff you hope will go up, is not a strategy. Sooner or later, the capital you trade with, will go to zero. Promise.
-Holding stocks forever is not a strategy to earn absolute returns. Nor a way, to “beat the market”. Nor a way to run an entire portfolio. A lifestyle maybe, but not a way to generate positive returns on an absolute basis. And its absolutely certain, that you will not post returns, above the market you’re investing in. Unless YOU are Warren Buffett. And even Warren himself, could be called a hedge fund manager specializing in distressed securities.
- Notice the top segment breakdowns. Lets assume the ones assigned more capital, are more certain to generate positive returns. Now, think about the strategies that are feasable to operate by retail investors, working a 9-5.
Relative Value Arbitrage – No way.
Event Driven – Good Luck.
Equity Hedge & Global Macro – Now these, are doable. Notice the word HEDGE in the descriptor. That means balancing a few long ideas with a short idea. Selling some of the upside, to protect on the downside. I could go on…but… Its worth pointing out, that in 1990, Global Macro funds, made up 71% of the Hedge Fund Market.
Now perhaps its these two strategies, that retail should lean towards, after getting torn apart in 2008.
And look at that, my above assumptions about where the money is, is proven true! Its almost like I know what I’m talking about. 
Take a look below…
