Hedge Funds Explained - Are They Evil or Just Incompetent?

Hedge funds are frequently depicted as the bad boys of investing but is this true? In "Hedge Funds Explained" I look at how hedge funds make money, who can invest in them and what kind of returns they have been generating recently to see if there is any justification for the very high fees they charge.
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00:00 Introduction
00:28 What Is A Hedge Fund?
01:04 Who Can Invest?
01:41 How Much Do They Charge?
02:52 How Do They Invest?
05:38 Hedge Fund Strategies
07:54 What Can Go Wrong?
09:00 How Well Do Hedge Funds Perform?
#HedgeFunds #Investing #PensionCraft

[@Pensioncraft]

If you like my videos & want to help me keep creating new content or would like to have your questions answered on one of my KZbin live Q&As then please sign up and support us on KZbin kzbin.infojoin

[@iah48]

Since we can't invest in the aggregate, choosing a hedge fund seems more comparable to picking a stock rather than an etf. Potential to massively out/underperform

[@user-ly1ks5kc4r]

The graph shows the average hedge funds return were higher since 1999 but this is not the return that investors see. I would be interested to see the hedge fund vs S&P 500 graph after fees have been taken in to account

[@iah48]

Good point. My takeaway from that chart is that in the event of market turmoil, hedge funds are a good place to invest. Which makes sense since they short. Of course properly timing market downside is another thing entirely

[@MagicNash89]

@@iah48 sounds like speculation to me if it depends on timing like that. Id rather invest in businesses that I believe will weather the storm.

[@matteo-cu8uv]

Why do people invest in hedge funds when they have underperformed in the last 15yrs? A big reason is they are very good at marketing and IR. Wealthy investors love to give their money to HF bcos it's exclusive and they feel lucky to be able to invest. Having money in a HF gives you major bragging rights, it means you are very rich, and there is this ( very often mistaken) assumption that you are part of the smart money. Maddoff leveraged this belief to the max

[@Pensioncraft]

Thank you for watching

[@hannahhope3553]

Hedge funds rely on the desire for bragging rights. Aka pride.

[@talbotsunbeamer]

Thanks Ramin. I think a bit concern for retail investors is how hedge funds often look to manipulate and deceive. Take Jim Cramer's infamous interview, in which he openly admits to moving stock prices in pre-trading hours and other dubious strategies. That fuels the 'us against them' viewpoint so it's good to see they're charging the earth whilst under-performing.

[@gdvanc]

I agree it is the (real or perceived) manipulation and deception. While there are people who have a moral problem with short selling in general, what has driven this pitchfork-wielding mob on a crusade is the idea that hedge funds use leverage and weaker regulations (reduced reporting requirements, the ability to hide FTDs...) to short more shares than are available in the market and then use tactics like Cramer has described to drive the stock into the ground. If they can drive the company out of business, they never have to cover their short positions. It's been a fascinating story to watch unfold from the sidelines.

[@springwater3164]

Three questions: 1. The line chart comparison actually seems to show the hedge fund index is less volatile than the market. So one may argue hedge funds outperformed in risk adjusted returns. 2. The comparison may not be fair as we are comparing returns of different asset types. Hedge fund return could be diluted by fixed income and non-US equities, solely because the clients wanted exposures in those areas. 3. The macro environment in the last 20 years has not changed much. It's a secular growth led by QE, with foreign markets underperforming. Even if the performance are comparable, it only shows the market has performed better in this particular environment. Nevertheless, the fees do look high.

[@Trenacetate43]

I think it is safe to say there's some pretty good hedge funds like the medallion fund ran by james simmons but most are like you'd be better of investing in s&p 500 or have your own portfolio

[@davidromero9481]

@@Trenacetate43 there are really good ones but not everybody is qualified to invest in them

[@blackbaron0]

It's often the case that when things go wrong it's down to incompetence rather than anything deliberate (evil).

[@quark_E]

Yep, Hanlon's razor at it's finest

[@peterbarrett5496]

I consider Larry Fink to actually be evil

[@MikesGlitch]

I always thought the point of hedge funds was to "hedge" against the equity market, not necessarily to beat indexes. So if the equity market were to suffer a big crash and I was invested in a hedge fund I'd expect the hedge fund to give me a better return than the indexes.

[@nachannachle2706]

And you would be wrong. Hedge funds aren't "hedged" against their own stupidity and herd mentality as a collective.

[@CaseyBurnsInvesting]

Hedge Funds are mostly a waste of your money when compared to the indexes.

[@alfinal5787]

Indexes are dumb when you are at a peak of a bubble or on the verge of high inflation.

[@CaseyBurnsInvesting]

@@alfinal5787 everything is dumb in a bubble in hindsight.

[@martinschneider8780]

your videos are simply the best out there. thank you

[@Pensioncraft]

Glad you like them!

[@keithchegwin1222]

My brother-in-law was a hedge fund manager, I asked him if he used to beat the market. He seemed angry that I asked him and changed the topic of the conversation. I'm guessing he didn't lol 🤣

[@MrHotrod79]

Great content as ever, thanks Ramin

[@Pensioncraft]

My pleasure!

[@msizziekay]

Loved this explanation - very insightful! Thanks :)

[@Pensioncraft]

Glad it was helpful!

[@peixeverde6043]

Finally I understand what a Hedge Fund is! Thanks Ramin, great video as always!

[@Pensioncraft]

Happy to help!

[@Ganok]

Thank you for the video! Not sure if its relevant to the topic, but it would be interesting to also do a followup video on how does private equity fit into the "accredited investor" landscape. Do insititutional investors consider hedge funds and private equity as distinct strategies / classes, or is the line between the two blured too much to be distinguished?

[@Pensioncraft]

Thank you for watching and your suggestion

[@kekwirsching]

Thanks Sir. How are they taxed with all the trading and selling they do? Their capital gains taxes must be absurd

[@Matt-gf4gd]

I don't think they're "incompetent" so much as too smart for their own good in an equity environment that stopped making sense a long time ago.

[@donfalcon1495]

Brilliant video yet again! BS free analysis as usual!

[@Pensioncraft]

Much appreciated!

[@nickdoyle-achievefinancial2464]

It would take a REALLY good hedge fund manager to overcome the fee structure and match an index. Unless your goal is something different, it seems foolish to gamble on picking that manager. I agree @ shorting. Nothing wrong with it.

[@Pensioncraft]

True Nick, 2% doesn't sound like much but it's a big hurdle for outperformance over the long term. Thanks, Ramin.

[@TDZPearson]

It's not that WSB and Superstonk consider shorting morally wrong. It's shorting 140% of the float using dark pools thats morally wrong.

[@gyulasoos9865]

I am not uncertain that this is a great video.

[@Pensioncraft]

Glad you enjoyed it!

[@gyulasoos9865]

@@Pensioncraft I loved the video and subscribed to the channel! "I am not uncertain..." was a quote from the TV series "Billions", where it preceded insider trading information at the hedge fund Axe Capital.

[@peterbarrett5496]

For people who trust other people with their money. I also don't know people rich enough to do this

[@apothe6]

How are Hedge funds not market manipulation?

[@stevie3452]

How can I buy the hedge fund index in the UK?

[@talbotsunbeamer]

It's not a fund, it's a chart aggregating their performance.

[@stevie3452]

@@Pensioncraft thanks for the reply Ramin, I love the channel!

[@timwood101]

It all seems to keep pointing to long term investing in s&p 500

[@alfinal5787]

Bubble crash and high inflation will get you

[@feleciawallace8420]

It seems the stock market has become very corrupted and devoid of meaningful accurate honest metrics, devious manipulation is all that guides the direction of stocks. Forget about growth and performance of corporations, these indicators are now useless in this age of meme frenzy trading the market. How can investors trust where their hard earned money is allocated, is it gambling where you place your bets with blindfolds and hold your breath, then pray for the best? It all stinks as we've leaned over the years (high-fees) Mutual Funds to include Hedge Funds are not our friends, we have learned to do the job ourselves if we want to earn profits on equity investments.

[@LeeH1989]

Buy GameStop lol 👀

[@apacheattackhelicopter8185]

Two dislikes are from Bill Huang and Bernie Madoff

[@Pensioncraft]

8-)

[@stlouisix3]

Hedge funds were very effective investment institutions because of the freedom to invest they had⚜👏✔

[@muffemod]

FUCKIN' HEDGIES! 🦔

[@MagicNash89]

I don't think shorting is morally wrong, I just think its not really an INVESTMENT strategy, which should be aimed at some sort of GROWTH from the position you enter your investment. Its more like speculation - high risk, high reward, but the losses are just too massive - and thats why hedge funds got burned with those meme stocks.

[@thenibelung2660]

Hedge fun management.

[@stevo728822]

Hedge funds are all about personal ccontacts. They are former market makers. Using their connections they invite current market makers to expensive meals in London or Zurich. Over dinner and parties they gather the investment mood of current market makers. They then use that information to place their bets. But eventually over time, due to staff churn, their connections breakdown and they have to rely upon guesswork and charts like the rest of us.

[@wolfiestreet6899]

A fool and his money are soon split.

[@bounchofbeaners6627]

hedge funds are out dated.if.just hire your own investors.

[@smileyface49]

Anyone who trys to manipulate the price is evil. Unfair game it is.

[@arch123clipz2]

1st

[@ishmaelsassoon795]

you seem to know a lot about stocks and investing, how come you're not rich ?

[@Pensioncraft]

Because you haven't subscribed Ishmael 8-)

[@ishmaelsassoon795]

@@Pensioncraft I meant rich from stocks.