some hedge fund managers make more than a billion dollars a year while managing more money than the entire GDP of some European nations they're also constantly in the media for illegal Scandal insider trading Market manipulation and of course Ponzi schemes and even our good friend Jeffrey Epstein supposedly had hedge funds are some of the most powerful financial institutions on the planet they control trillions of dollars influence asset prices with their trades and shape Global Finance in ways most people don't even realize so what actually are hedge funds how do they work how do you join one and how do they manage to make money even when they lose what by the end of the video you'll understand exactly how hedge funds work and more let's go in a sentence a hedge fund takes money from rich people in institutions and invests it in a wide array of assets pretty simple except these guys are meant to be the market Wizards unlike traditional funds these guys are pretty much expected to make money and maximize their returns in any Market condition markets on a tear they better be beating it markets [ __ ] the bed they better have predicted it and set themselves up to make money in advance in fact the number one Unwritten rule of hedge funds is never lose money now there's also some other key characteristics that make hedge funds special one they're only for the wealth unlike mutual funds hedge funds are not open to the public in fact they can only take on accredited investors which typically means having a net worth of at least a million or an income of $200,000 a year two they're lightly regulated and far more secretive they're the Cowboys of Finance they operate under far fewer rules compared to traditional investment funds and they don't have to disclose their trades until they file their their 13 F reports once a quarter three aggressive and highrisk strategy unlike mutual funds that mainly buy stocks and bonds hedge funds are able to use Short Selling leverage derivatives and algorithmic trading to help maximize profits a few quick definitions because these are important to understand to understand Short Selling I'm going to use a simplified example let's say you think Apple stock is going to go down in the future so you call your broker and ask to go short one share of Apple they take a share of Apple from someone else's portfolio sell it give you the cash now you have $100 cash but you owe your broker share of Apple tomorrow Apple stock tanks goes down to $80 you now decide to cover your short buying back the share of Apple at the new market price of $80 and return it to your broker congrats you've made a profit of $20 Leverage is simply using debt to make your positions even larger and therefore your trades even more profitable now if your trade goes wrong you'll obviously lose even more money than you actually have I like Buffett and munga's attitude towards leverage if you're smart you don't need it and if you're dumb you shouldn't use it derivatives are Financial products whose value is based on an underlying asset you might have heard of these before the common ones include Futures options forwards and swaps four fees because of their promise to never lose money and make outlandish Returns the typical fee structure of a hedge fund is known as 2 and 20 as in a 2% management fee and 20% of profits and this is how hedge funds always make money even when they lose they take 2% whether or not they made a single profitable trade that year take Citadel for example they manag around 65 billion ion in capital the 2% fee they charge brings them in $1.3 billion a year let's now move on to hedge fund trading strategies this is the OG hedge fund strategy bet on the winning stocks and short the losers it's the OG strategy because the original idea for hedge funds was an investment fund that hedged their bets so how does it work let's say a hedge fund thinks that Microsoft is undervalued and Tesla is overval they buy Microsoft stock and short Tesla stock at the same time now if they're wrong in either of these specific cases they'd still lose money on their positions but what they're trying to hedge against is Market risk the risk that the entire Market crashes CU if the market crashes while their Microsoft position goes to [ __ ] their Tesla position would make it killing Global macro hedge funds trade based on Big Picture economic Trends things like inflation interest rates Wars geopolitics and even election they'll use stocks bonds currencies and commodities to profit in shifts in global markets here's a pretty crazy example for you so basically the UK had an agreement with Europe to keep the British pound within a fixed exchange rate banned against the German Deutsch mark But High inflation and interest rates in the UK made it difficult to maintain soros's hedge fund Quantum fund borrowed billions of pounds and immediately sold them for Deutch marks expecting the pound's value to fall this put tremendous pressure on the pound and on black Wednesday in 1992 the UK was forced to break their agreement and the pound plummeted in value how much did Soros make from this trade $1 billion Quant hedge funds use AI algorithms and machine learning to sometimes make millions of Trades per day These funds try to find tiny inefficiencies in the market and exploit them faster than any human ever could ever heard of Jim Simons well you probably should have because his average annual returns are almost triple that of Warren buffets he was a freakish mathematician that worked for the NSA as a Cod cracker during the Cold War before starting his hedge fund called Renaissance Technologies his Flagship Medallion fund earned an average annual return of 66% and is the most profitable hedge fund in history if you invested $1,000 in his fund back in 1988 today it would be worth around $140 million event-driven hedge funds bet on corporate events mergers bankruptcies lawsuits earning reports Etc they try to predict how markets will react to Major news and position themselves accordingly for instance when Elon announced he was buying Twitter bunch of hedge funds shorted Twitter stock betting the deal would fall apart others went long buying as much stock as possible which made Millions when the deal eventually closed at 44 bill now this was by no means an exhaustive list these are just some of the main strategies the majority of hedge funds will employ here's a more extensive list if you guys wanted to pause the video and have a quick read otherwise I think it's time to move on and dive into the big dogs if there's one name that dominates modern hedge funds it's Ken Griffin placing his first ever trade as a Harvard freshman and using a satellite dish outside his window in order to get livestock data he started trading at 19 years old with $256,000 from friends and family family by the time he graduated he had amassed a couple million and started his hedge fund Citadel which now manages over $65 billion and Kenny boy isn't just good at making money he's good at keeping it for instance in 2022 while the markets were bearish due to inflation Rising interest rates and geopolitical instability citadel's Flagship fund gained around 38% earning $16 billion the largest single year gain for any hedge fund ever he also spent a cheeky little $500 million for a couple of paintings in 2015 you've probably heard of Ray dier perhaps from podcasts YouTube videos or even his books which I've L he's the founder of Bridgewater Associates the largest hedge fund in the world managing over $125 billion he created what's known as the all weather portfolio an investing strategy designed to perform well in any economic condition he's also famous for his culture of radical transparency where even the lowest of employees at Bridgewater are expected to call out their bosses in meetings every single conversation at work is recorded and analyzed so everyone can be on the same page he genuinely believes the best results come from a culture of brutal honesty if you've ever watched billions you've basically already met Steve Cohen because Bobby Axel Rod was Loosely based around this guy Cohen is one of the most aggressive risk-taking hedge fund managers of all time his former firm SAC Capital made billions in the '90s and 2000s the only issue they were doing it illegally in 2013 sa will finded $1.8 billion for insider trading one of the biggest Financial scandals in history The Firm was shut down Traders were arrested but Cohen himself never personally convicted instead of Disappearing Cohen did what billionaires do he paid his fines rebranded and started another hedge fund 72 and guess what it's now managing over $30 billion and growing oh and he also bought the New York Mets because when you have that much money why not Bill Amman runs persing Square Capital an activist hedge fund that doesn't just invest it forces companies to change you might have heard of his most famous public battle with other hedge fund billionaire KL iicon in 2012 Amman shorted a billion dollars worth of herbal lifestock claiming the company was a pyramid skin and then being an activist investor not only did he short it but he went to TV lobbied regulators and gave hours long presentations trying to destroy herbal and that's when iicon stepped in ion bet against Amman buying up Herbal Life stock and publicly ridiculing him the result Amman lost hundreds of millions of dollars on his short position and eventually backed out of the fight while I made about a billy to his credit amman's made some legendary trades too in 2020 he turned $27 million into 2.6 billion by betting the markets would crash due to co there's a bunch of other notable examples too Jim Simons and George Soros who we briefly touched on earlier Stanley dren Miller who worked with Soros to break the bank of England and one of my personal favorites Paul singer who forced Argentina yes the country to hand over a naval vessel when they wouldn't pay up on the debt they owed him now for every hedge fund success story there's a fun that collapses so badly they leave Wall Street with their tals tucked and reputations shattered let's dive into the dark side of hedge funds in the '90s long-term Capital management or ltcm was the hedge fund founded by this guy John Merryweather a former Solomon Brothers Trader and staffed with supposedly some of the most brilliant Financial Minds on the planet we're talking Nobel prize winning economists these guys thought they had cracked the market their approach use complex mathematical models to make tiny Ultra safe profits on trades they believed could never failed and at first it actually worked from ' 94 to '97 they were delivering huge returns and Wall Street couldn't throw money at them fast enough remember what we said about leverage before though these guys were Levering up their trades 30 to1 so for every dollar they had which was around 100 billion they borrowed 30 more to trade with and then in 1988 it all went catastrophically wrong Russia defaulted on its government debts they had never predicted possible and their trading models began bleeding billions the scary part is that because they became so big they were interconnected with all the major Banks and so their losses and eventual collapse threatened to destroy the entire Financial system the Federal Reserve had no choice but to bail them out for $3.6 billion long-term capital morons anyway I didn't want to spend too long focusing on Wall Street morons but if you like this kind of story leave a comment below and I'll make more videos focused on this stuff otherwise it's time to move on to how to join a hedge fund so unfortunately for most of us peasants it's starts with going to one of these universities basically ivy league or don't bother so what do you study there's a traditional route of Finance economics or accounting or there's the newer route which has been popularized due to the rise in algorithmic trading at Quant funds which is maths computer science physics or statistics typically hedge funds won't hire people straight out of Union they'd much rather candidates with some experience the most common path being something like get hired at a top investment Bank Goldman Morgan Stanley or JP Morgan work in Investment Banking or sales and trading for 2 to 3 years and then Network aggressively and move into a hedge fund as an analyst this is known as the Wall Street pipeline it's like hedge funds we used in Investment Banking is the boot camp before you get to earn the real money if you want to know how hard that boot camp is go check out my video on investment banking honestly there's two main skill sets for hedgies these days you're either a gun investor or you're a freakish mathematician and engineer so pick one if you're going down the investing route you need to be a master at Financial modeling valuation and Industry research this means knowing how to read balance sheets analyze companies and industries and have the balls to predict which stocks will rise and fall ideally you've got a bit of a track record trading your own and or and families money to prove your skill set if you're going down the nerdy route you're going to need PhD level math skills coupled with the ability to turn your statistical models into automated trading algorithms that make money again something you should probably try and build on your own to prove your skill set this one's arguably one of the most difficult but the fact of the matter is hedge funds don't post job listings on LinkedIn if you want to work at one you need connections some hedge funds quite literally only hire analysts based on referrals that's how secretive and exclusive the the industries hedge fund interviews are notoriously brutal let's say you're going for a fundamental role as an analyst expect some questions along these lines if I give you $100 million to invest right now what's your first trade they want to see if you have conviction and can justify a high stakes decision they might follow up with what are the risks and what would make you change your mind a company stock drops 30% overnight what's your thought process before making a trade hedgies love reaction-based questions they want to see if you can quickly assess risk you should immediately ask what calls the drop earning smiss Market Panic fraud allegations is it an overreaction or Justified you're tracking two companies in the same industry one is a PE ratio of 10 and the other 20 which one do you invest in trick question you need more information and what about Quant style questions you have a coin that flips heads 51% of the time and Tails 49% would you bet on it how would you structure your bets this is a probability based trading question they want to see if you understand expected value and bet sizing smart answer yes but you should bet small and consistently to maximize returns and minimize variance you notice a certain stock trades higher on Fridays how do you determine if this pattern is real they want you to think like a Quant steps gather historical data maybe 10 plus years of price movement test statistical significance is this actually a patent or just noise control for external factors earnings options expirations Etc check for profitability can you profit from it after transaction cost and finally a stock has a 20% chance of going up 50% a 50% chance of staying flat and a 30% chance of dropping 40% do you invest again expected value 2 * 50% +5 * 0% +3 * 40% = 10% expected value we take away the average Market return of 12% because we only care about alpha or beating the market and we get an adjusted EV of minus 2% so no we don't invest overall if you're in a hedge fund interview they expect zero fluff they don't care about your hobbies they don't care about your passion for finance and might care about who your dad is but really all they care about is can you make them money so what' you guys think was there anything about hedge funds I didn't answer that you'd like answered leave a comment below and if there's enough interest I'll consider making a second video on hedge funds otherwise I was thinking of delving into the lives of lawyers for my next video please remember to like comment and subscribe let me know what you liked and what you didn't I'm always trying to improve thanks for sticking around and watching the video see you next time