Free Stock Market Course Part 16: Hedge Funds

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Chapters:
00:00 Hedge Funds
02:47 Hedge Fund Goals
07:01 A Brief History of Hedge Funds
12:37 Characteristics of Hedge Funds
16:26 Why is it Called a Hedge Fund?
17:28 Hedge Fund Risks
20:13 Hedge Fund Manager Pay Structure
22:12 Taxes on Hedge Fund Profits
24:07 The Future of Hedge Funds
25:55 Comparing Hedge Funds with Mutual Funds
28:21 Thoughts on Hedge Funds
Module 3 Section 8
Hedge Funds
Hedge funds are alternative investments that use pooled funds to implement numerous strategies to earn attractive returns for their investors.
Hedge funds may be: Aggressively managed, use derivatives, leverage, and futures contracts.
Active in domestic and international markets.
Hedge funds are generally only accessible to “accredited” investors since they require less SEC regulations than mutual funds.
Hedge Funds Goals
Hedge funds are designed to take advantage of certain market opportunities.
Going long, short, or both.
Hedge funds use different investment strategies and are often classified according to an investment method.
This can be set by the Hedge Fund Manager in which Investors are buying a “name.”
Diversity in risk and investing methods.
Conservative to aggressive.
Limited partnerships open to a limited number of investors and require a large initial minimum investment.
Illiquid Withdrawals quarterly or bi-annually.
A Brief History of Hedge Funds
Today, hedge funds manage more than $3.2 trillion.
2,000 hedge funds in 2002 and over 10,000 by 2015.
Since 2016, declining
Characteristics of Hedge Funds
Accredited investors:
Annual income over $200,000 for the past two years or,
A net worth over $1 million (not including primary residence).
These investors are deemed suitable to handle the potential risks.
Mandate vs prospectus
Fee structure: 2% asset management fee and a 20% cut of gains.
Why is it called a Hedge Fund?
The name “Hedge Fund” is mostly traditional and does not accurately describe what most hedge funds do.
Hedge funds use dozens of different strategies and may not even implement hedging.
Hedge Fund Risks
Certain investment strategies expose hedge funds to potentially huge losses.
Typically require investors to invest money for a period of years.
Leverage can lead to significant losses.
Effective methods change
Illegal activities: insider trading.
Hedge Fund Manager Pay Structure
Taxes on Hedge Fund Profits
Domestic US hedge fund profits are subject to capital gains taxes.
Short-term capital gains (investments held less than one year) are taxed differently than gains on investments held for more than one year. The tax rate is the personal tax rate.
Long term capital gains are usually 15% - 20%.
Taxes apply to both US and foreign investors.
Offshore hedge funds are established outside of the United States.
Investors do not incur US tax liabilities on the distributed profits.
The Future of Hedge Funds
Hedge Fund Controversies have included:
Insider trading
Tax avoidance
Management overpayment
A lack of regulation
This has led the SEC and the US Congress to consider:
New Regulations for Hedge Funds
Hedge Fund advertising rules
Some changes have been slow because many hedge funds have lots of money, power, and influence.
Comparing Hedge Funds with Mutual Funds
Similarities: Managed portfolios, Diversification
Differences: aggressive, speculation of derivatives: options, currencies, and futures.
Hedge funds can short sell stocks. Mutual funds cannot.
Hedge funds can use leverage. Most mutual funds cannot.
Mutual funds are considered typically be safer.
Availability:
Limited
Mutual funds are very easy to purchase with a minimal amount of money.
Thoughts on Hedge Funds
For most individuals involved in the SPX Investing Program, only having a working knowledge of hedge funds is necessary.
Hedge funds can be very large, with billions of dollars under management.
Hedge fund action can often appear as “Smart Money” as positions are initiated or closed.
Hedge funds may be “Big Money,” but they are usually not considered to be “Smart Money.”
The goal, and challenge, of The SPX Investing Program, is to differentiate “Big Money” from “Smart Money.”
Our goal is to follow the “Smart Money” as much as possible and then do what they do since they ultimately have the most influence market conditions.