What is a Hedge Fund?

what is going on YouTube welcome back to the channel for those of you that are new here my name is Asahi's saying you can find out a bit more about me through the social media links below or you can check out my website which is www.hyken.com times a lot of students hear about this term and they don't really know what exactly it is and so when you google search it you get a whole array of different definitions and terms and in this video I just want to give it to you plain and simple and explain what it is in essence a hedge-fund is basically a pooled investment vehicle now you're probably wondering what on earth is a pooled investment vehicle so let's actually just break down the term hedge fund you've got hedge which in financial terms simply means to protect yourself in times of uncertainty and then you've got fund which is basically a pool investment vehicle which is collating different sums of money from different individuals putting them into something called a fund and using that to invest in the financial markets if you've seen some of my other videos you might have heard me mention the term asset classes so asset classes are areas in the financial markets which you can invest in so there's fixed income there's equities there's multi a say there's quant and there's alternatives when we talk about hedge funds they fall into the alternative investment bucket a few very common hedge funds that exist out there include soros octave Bridgewater Associates Citadel and you know if you want to find out a bit more about them I would highly encourage you to go and search them on Google check out their websites to see the different strategies that they use to invest see what they're about find out a bit more about their history and that will help you kind of find out a bit more about those individual companies in the hedge fund space historically the reason why hedge funds have become very notoriously known for taking risky bets in the financial markets is because hedge funds can take investment positions or bet in both directions so they can go long or they can go short mutual funds so more safe or less risky investment funds as opposed to hedge funds can only invest long the mutual funds tend to be regulated and so that means they are limited in the way that they can invest and hedge funds this is one of the main features of them they aren't really regulated by the financial conduct authority the FCA which is the financial markets regulator and so hedge funds are allowed to take positive bets on companies or financial securities or instruments and they can also take negative bit so what that means is if they think a company is going to be performing very badly they can negatively invest in that company so they can great bets that assume that that company is gonna perform very poorly over the next few months or years and so they can invest sure and invest long as a result that gives a lot of opportunity for investors to kind of hedge themselves so remember we mentioned the word hedge it means to protect yourself so if investors are facing a very rough market environment they might use hedge funds as investment vehicles to protect themselves from going both long and short having said this it's important to note that some hedge funds are specifically long only hedge funds so they might only focus on long strategies or positive growth strategies in the equity markets some hedge funds might specialize in real estate investments some hedge funds might specialize in the debt markets a hedge fund broadly speaking doesn't do a bit of everything it might have a specialty and so it's always good to know that different hedge funds focus on different things another reason why hedge funds are often considered to be risky is because they take on a lot of leverage now what that means is in order to maximize their returns they invest with borrowed money so let's say I'm a hedge fund and I only have 100 million pounds to invest if I believe that the opportunity is going to give me a two percent return or a five percent return on my 100 million I might get one hundred and two million or one hundred and five million but if I borrow money and use that debt to invest so if I borrow another hundred million and then I use that two hundred total to invest and I get five percent return that makes two hundred and ten million pounds now then I give back the initial 100 million and some profit from that but because I borrowed that money invested it and made a stronger return I get more money simply by borrowing that money from various clients now having done this it provides a bigger risk because if the market went the opposite way to buy for it would the loss would have been bigger so when you lever up or when you take leverage when you try and maximize your returns by borrowing money the upside is bigger but the potential risk is that there is a bigger downside and hedge funds tend to do this a lot and so that's why they are considered very very risky a lot of investors like hedge funds because in times of low returns in the financial markets when the different asset classes are giving you 1 or 2 percent you can go to a headphone who will tell you they are seeking 5 to 10 11 12 13 % returns and if you're willing to take that risk then you know if it suits your risk appetite you can pursue those higher returns at the risk of potentially losing as much one of the reasons why hedge funds are regulated is because they can only take money from accredited investors who are meant to know what they're doing or where they're investing their money and so the regulator's don't need to worry about what the headphone is doing because it's taking money from people who know what they're doing accredited investors or people who can invest in hedge funds usually have a net worth of over 1 million pounds and each investment size is usually a minimum of 200 thousand pounds so if you're wondering if you and I can invest in hedge funds the answer is probably no because individuals who invest in them have networks of over a million pounds and each investment size is over 200 thousand pounds on average in addition to that it's usually large institutions who are investing alongside them many of you probably be wondering how do you hedge funds make their money so they follow this rule for the most part which you might hear called two-and-twenty what that means is they receive a 2% management fee and a 20% performance fee so let's say I'm a hedge fund and I ask lots of investors and clients to give me 100 million pounds and that 100 million pounds I'm gonna charge two percent on per EUR so that's the management fee in order to manage that money and invest that money I'm going to charge them two percent now the twenty percent fee the performance fee comes in when let's say I am promising a five percent return if we hit five percent anything above five percent I get to charge them twenty percent on so it gives me incentive as the hedge fund manager to try and outperform or try and get the best returns possible because up to five percent I'm only getting two percent management fees any returns above five percent will get me a 20 percent management fee so it's in my interest and the clients interest to abide by a two and twenty management fee and performance fee structure is you know not uncommon for love investors to want to be involved with hedge funds and a lot of hedge funds to want to be involved with investors because the returns are you know very lucrative and can be very very large if the bets are played or invested correctly and that's a basic overview of what a hedge fund is how it operates while the fee structures and the clients that it serves if you found that video useful at all it would mean a lot to me if you can give this video a thumbs up let's try and smash 500 likes on this video and if you haven't already make sure you subscribe to the channel I do a weekly video every Wednesday and if you are subscribed please turn on post notifications so you never miss an upload if you've got any video suggestions or comments leave them down below and I will see you in the next video peace you

Channel: Afzal Hussein

Views: 128,898

Keywords: Students, student, university, entrepreneur, internship, intern, insight week, goldman sachs, jp morgan, investment banking, investment, banking, finance, careers, corporate ladder, interviews, interview, questions, guidance, linkedin, youtube, viral, London, how much do investment bankers earn, investment banking pay, investment banking salary, investment banking bonuses, investment banking internship, a day in the life, bonuses and salaries, money, hedge fund, hedge funds, private equity

Id: xmKDGFT3j8w

Length: 8min 26sec (506 seconds)

Published: Wed Sep 04 2019