Let’s look at the “Big Picture” of the “big money” to be made in Hedge Funds – and how these $$$ incredibly wealthy people – whom you have never met – are changing your life every day.

Big money brings more big money, and investments of substantial size and number can change the course of companies, economies, and careers.

Hedge Funds enable “big money impact.”  Understanding how and why will help us understand the how and why of our world. Whether we invest in high-risk or not, being informed is an absolute must. Our impact comes from how we vote, spend, and plan. Do YOU know what questions to ask or even where to begin?

Paying attention to big money is your key to survival.

Let’s look at the “Big Picture” of the “big money” to be made in hedge funds – and how these $$$ incredibly wealthy people – whom you have never met – are changing your life every day.

Why, you ask?

Now THAT is the RIGHT question!

Where do we start?

Let’s start with ourselves. Right here. Right now.

But how can we jump in – and participate – in this high-$, high-stakes world? You ask.

Now that is the next RIGHT question!

We can participate in the world of hedge funds — or not — but like everything else we do, it’s essential to stay ahead of the information curve on things that affect our daily lives.

And make no mistake — you need to pay attention whenever you see a headline that says any group of 20 businesses earned a combined $65.4 Billion last year AFTER FEES.

Big money brings more big money.

Investments of substantial size and number can change the course of companies, economies, and careers.

Investments can – and do – shift power-players. They can – and do – change influence.

Who gets elected? Whose salary is made public? Which execs leave the helm of influential companies? Who replaces them? Why?

Where did the investor’s money come from? Some power players in the investment world are open about where and why they invest. Who invested (any big names you recognize)? Why did they invest? Elon Musk is a familiar name to many, and his holdings/interests in Tesla, Twitter, and cryptocurrencies are well known. Why did Elon invest — or not? Do you care? Well, yes — you do care, actually — and not because you want to mimic his stock market choices. You care because of his “why” (or as close as we can come to an understanding of his – or anyone’s – “why”).

Three Important Questions To Ask:

#1

Why are successful people in the business that they are in? Using Elon Musk as an example again, why did he become a part of Tesla? Was it the electric cars? The batteries for electric cars? The spin-off possibilities of the Tesla research?

So… what business is Elon really in? What are his goals for his investments?

Remember the words of former McDonald’s CFO Harry J. Sonneborn:

“We [McDonalds] are not technically in the food business. We are in the real estate business[1].”

#2

What businesses/business sectors are current politicians in now? – OR – What type of business will they be joining when they step away from their day job in government (or don’t get re-elected)?

#3

How does the Fund choose investments. Which countries does the fund accept investment from? What are the parameters under which it invests (does it invest in companies even if they have documented human rights issues/violations)?

The answers to these questions are not inherently good or bad, although specific answers can, of course, reveal “good” or “bad” realities. In most cases, they are simply answers. Each of us can now use these answers to evaluate what we invest in, who we elect, and which conversations we want to participate in.

We can look at these answers and decide if they are – for us – good, bad, acceptable, ethical – or not.

Why Hedge Funds?

The point of learning about hedge funds isn’t just so you can invest in them.

Maybe you will, maybe you won’t. Investment of some kind is likely to be a part of your life if you live in a country with pension plans, union dues, mutual funds, RRSPs (Registered Retirement Savings Plans), 401Ks and many similar investment vehicles. You may also engage in personal-choice investing through Private Equity, Financial Managers, and do-it-yourself opportunities.

The point of paying attention to big money is this: it affects your life every day. Job, income, employment rates, international trade, and more.

What are hedge funds, exactly?

Understanding what hedge funds are, what they do, why they do it, and what separates truly horrendous hedge fund management from time-tested practices, is important. After all, this can affect the future of many businesses, investors, jobs, supply chains and more.

“ In a world of no-fee exchange-traded funds[2] and index funds and plunging expense ratios, hedge funds often charge clients an annual fee of 2% of assets under management and 20% of gains that reach a certain threshold. In aggregate, these fees don’t seem justified by the accompanying returns, with hedge funds as a whole regularly trailing the returns anyone could get buying an S&P 500 index fund[3] and forgetting about it.

That said, there are some notable exceptions in the field, and the best hedge funds in the world are massive, time-tested, market-beating machines.[4]

Let’s go to Merriam-Webster for a basic definition[5]: “an investing group usually in the form of a limited partnership that employs speculative techniques in the hope of obtaining large capital gains”

And to the SEC for a couple of abbreviated caveats[6]:

  • Hedge Funds have more latitude than mutual funds in terms of how they invest: “Hedge funds typically have more flexible investment strategies than, for example, mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk),, short-selling and other speculative investment practices…”
  • Hedge Funds “do not need to follow any standard methodology when calculating performance, and they may invest in securities that are relatively illiquid and difficult to value.”
  • They come with a built-in ‘buyer beware’, as they “are not subject to some of the regulations that are designed to protect investors.
  • fees are typically higher than the fees charged by a mutual fund”. These fees typically include management, expenses, and performance fees.

So – why are we looking at Hedge Funds in particular??

Hedge Funds have a big impact on the world we live in. The amount of money invested, combined with their complex legal and investing structure, means that everyone feels this impact, whether we participate in a Fund or not.

As per the definition above, Hedge Funds have more latitude than mutual funds in terms of how they invest, as well as different rules about what they must disclose. They can leverage (borrow to invest), short-sell, and more. There are large amounts of money at stake, both in the Fund and in potential income for Management. There is also a hefty built-in “buyer-beware” caveat for investors. All of this together means that effectively researching investment vehicles such as hedge funds requires diligence and deep dives.

Look up basic information about the Fund:

  • What is the fund required to tell you? What must be disclosed vs. what is optional? What have you come to expect in your more conventional investments that may not be fully detailed in Hedge Fund information?
  • Who is getting paid? How much? Are fund managers paid on performance? How is this calculated? When / how are the investors paid? How is investors’ taxable income affected?
  • How much $$$ does the fund make? Is the Fund’s “performance data” based on AUM (Assets Under Management) or an estimated asset increase/decrease value? Does it include the fund’s fees?

After all, the purpose of the hedge fund is to make money, so… follow the money.

Stay updated on changes to laws, requirements, and global trends. We should all be aware, diligent, and proactive.

Note the differences between Hedge Funds and other investment funds: Investment risk, disclosure requirements, fund manager payment structures, reporting, and valuation requirements…

What investment risk, and balance of investment type, do different funds — and their investor pools — aim for?

What about liquidity? Will the fund survive if it hits hard times? How long from the day you submit your liquidation request until the money is in your hands? Who / what will be affected by freezing the fund’s assets? Who / what will be affected by the fund’s unexpected demise during harsh economic times?

These questions should be asked of any fund in which we consider investing. And they are only the first level of questions. It’s a fascinating world with ripple effects that will amaze the newcomer.

And humble the experienced.

Imagine a world…

Imagine a world where everyone with access to this information stays informed.

Imagine a world where everyone who stayed informed started conversations, attended informational meetings, and requested information.

Imagine a world where this level of knowledge is used when we vote, spend our money, volunteer our time, and advocate for causes.

Now imagine a world where questions were asked that required answers. Inquiries from citizens like you and me – not investors, but everyone affected by the fund’s actions. Questions for politicians, financial institutions, lawyers, judicial systems, investment fund managers, companies-who-invest.

Imagine a world where all these people explain their decisions, actions, and choices – or not – and their voice/silence resonates through a vast audience of voters, consumers, advocates, peers, investors, and board members.

Final Takeaway.

The world is more connected and accessible than before 2020 — let’s connect with it. Let’s connect what’s happening in our world – past and present – with the ripple effect we see in our lives.

And ask questions. Ask LOTS of questions. If necessary, be annoying, be loud, and be persistent.

BUT – Remember to be informed before being annoying, loud, and persistent. Truly understand the benefits, drawbacks, practicalities, and implications of the information you are asking for, and then engage in meaningful dialogue that will lead to the depth of knowledge you are looking for.

Accountability. It only works if both sides participate.

Share your thoughts about the world of hedge funds below!

 

 

 

[1] https://www.linkedin.com/pulse/business-real-estate-look-mcdonalds-ali-h-fawaz/

[2] https://money.usnews.com/investing/slideshows/no-fee-etfs-to-maximize-yourreturns

[3] https://money.usnews.com/investing/funds/slideshows/best-low-cost-index-funds

[4] https://money.usnews.com/investing/funds/articles/top-hedge-funds-this-year

[5] https://www.merriam-webster.com/dictionary/hedge%20fund

[6] https://www.sec.gov/investor/alerts/ib_hedgefunds
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