How Hedge Funds Make Money | Investment Toolkit

until recently hedge funds were reserved for the rich they've been criticized for being secretive for the money they make and how they make it here's how they differ from normal mutual funds first they can use borrowed money if you've got a surefire 1% gain it's no big deal but if you can borrow 50 times the capital you started with then it becomes a 50% gain but of course you also stand to suffer magnified losses if your investment in fact goes down second they can profit from falls in prices by selling short borrow a stock at $10 and sell it and then buy it back when it falls to $8 and you make $2.00 profit but again you risk infinite losses if the price goes up third hedge funds don't have to pay out money when their investors ask for it they can lock it up and require many months notice before repaying and finally hedge funds don't have to be transparent and reveal their holdings these are all huge advantages but they all carry bigger risks which is why only the wealthy have been allowed to invest now many pension funds invest in hedge funds and financial engineers are trying to offer hedge fund strategies to retail investors and make them more liquid but remember hedge funds most important numbers two-and-twenty traditionally they charge two percent of funds as a management fee plus 20 percent of profits even with all their potential for higher returns it's hard to deliver for clients when you take so much for yourself

Channel: Financial Times

Views: 101,302

Keywords: business, news, finance, analysis, FT, Financial Times, business news, finance news, international news, global news, counterparty, hedge funds, Investment Toolkit, John Authers, short selling, stock lending, hedge fund (industry), trading, hedge funds explained, hedge funds documentary, hedge funds for dummies, hedge funds vs private equity, hedge funds strategies

Id: F9z_3obVjFs

Length: 1min 42sec (102 seconds)

Published: Tue May 26 2015