Hedge Funds Explained in 2 Minutes in Basic English

what is going on people welcome back to the channel today is tuesday and that can only mean one thing two minute tuesdays hedge funds where to start okay let's break it up to hedge is to protect money and a fund is a pool of money so a hedge fund in essence is meant to protect money and so that's it that's what hedge funds mean that's this week's two minute tuesday hope you enjoyed that peace i'm playing and playing and playing that in essence is what it is so next time you hear hedge funds think hedge protect funds money protect money that's what they were meant to do back in the day when they first got created but as time went on hedge funds got more and more risky they started taking bets in both directions of the market they started betting on companies to fail people started losing a lot of money because they were taking outrageous risks and so hedge funds started getting a bad name and so that protecting of money kind of went out the window so hedge funds take money from their clients wealthy individuals companies corporate pension funds whatever it might be they take money from clients and they invest that in the financial markets but what's important to know about hedge funds is that they take a high level of risk so that can mean big returns so big profits or it can mean huge losses so that's the risk you take when you're investing with hedge funds so one thing to know is the reason that they can take all these high levels of risk is because they're not as regulated as other parts of the financial markets and so the average person isn't allowed or can't invest as much with hedge funds you have to be a certified investment professional so you have to be considered officially an investor to invest with hedge funds because you need a certain level of understanding to know what you're getting yourself into a very important part of hedge funds that you need to be aware of is they use a lot of leverage what is leverage leverage is basically multiplying or magnifying your trades by taking on debt so you're borrowing money that isn't yours and you're using that to invest in the market in order to get more returns an example would be let's say a hedge fund takes 100 pounds from its clients and then it can invest that 100 pounds in the markets and if everything works out it might make 500 pounds or a thousand pounds right however what hedge funds do is they take on leverage they take on debt so they borrow a thousand pounds and they get their clients hundred pounds so they get one thousand one hundred pounds and then they invest that money into the financial markets and so that increases the potential return to five thousand pounds or ten thousand pounds instead of one thousand pounds so they borrow money in order to increase or magnify the potential of their returns so let's say they make a huge profit they give back the money that they borrowed plus interest and then they keep the rest of it right for them and their clients they make huge amounts of profit they make big returns however if their trades and investment ideas don't go as planned that's a lot of leverage that is gonna play against them so they are gonna be suffering massive losses and this is why hedge funds have a bad name they take huge amounts of leverage they take huge bets in the markets when they work out great when they don't it's enough to wipe the hedge fund out it's enough to close firms previously we've touched on the concept of asset classes in the financial markets these are the different flavors of the financial markets that you can invest in some hedge funds might invest in fixed income markets some might just focus on equity markets some might focus on real estate so if you're ever considering to break in or apply to hedge funds it's important to know why you're applying to a given hedge fund and which area you're interested in specifically and why because hedge funds take a lot of risk they need to be compensated accordingly as a result they charge pretty high fees compared to the rest of the market typically hedge funds fee structure is two and twenty what that means is two percent management fee clients invest money two percent gold to the hedge fund for managing their money investing at all of that and then the 20 comes in if they reach a certain level of return or percentage of profit from their investments so the client might say okay if you reach this percentage return after a year or two years then you get 20 of the profits above that level so it incentivizes the hedge fund to kind of knock the lights out or hit the ball out of the park and that's why that further increases the incentive to take bigger risk to kind of get bigger returns to get a larger cut from the overall return as a 20 fee for performance now you know what a hedge fund is what if i asked you do you know what asset management is if you don't make sure you check out this video if you made it this far in the video i've got two jobs for you one is to smash that like button if you do that you're basically telling youtube that this video is worth people seeing and two leave an emoji in the comments so i know that you made it this far anyways make sure you tune in next week to learn another financial term concept or idea in basic english peace

Channel: Afzal Hussein

Views: 480,533

Keywords: Students, student, uk, university, entrepreneur, internship, intern, insight week, goldman sachs, jp morgan, investment banking, investment, banking, finance, careers, interviews, investment banking pay, investment banking salary, investment banking bonuses, a day in the life, bonuses and salaries, money, afzal hussein, afzal, hedge fund, hedge funds, hedge fund explained, hedge funds explained, afzal hussein hedge fund, what is a hedge fund?, hedge fund explainer, what are hedge funds?

Id: EF_K2ZepV1E

Length: 4min 41sec (281 seconds)

Published: Tue Dec 15 2020