<p>I'm going to take a stab and assume that tetrishead's theory is similar to mine. </p>
<p>If you haven't notice the American economy has been slowing down tremendously. In fact, the dollar has been on a steady decline. In order for hedge funds to be successful, the economy has to be thriving. After all, you can only make as much as the hedge fund grows, and it sure as hell wont grow, if at all, if the economy continues on its downward trend.</p>
<p>It's not really an issue of the dollar, and success doesn't only come in an up market. Many of the most famous investors are value investors, and the best time to be a value investor is when the market is at whatever may be considered its "bottom," which is to say during a pretty massive correction (which is something we're starting to see with the major financials).</p>
<p>The issue is investor confidence, and most venture capital only flows freely when people are bullish. Now, starting a hedge fund and getting capital from private, accredited individual investors is a lot different than trying to get a loan from Wells Fargo or something, but many of the same factors apply. The debt markets are insane (in a bad way) right now, and while the recent news of an unexpected increase in US housing (even if it was .4%) may very well lead to us not having the massive market correction some people have feared, stagflation is still a concern and that minor boost isn't going to get the capital flowing freely again. This trickles down to individual investors, including the wealthy ones, who will find it increasingly difficult to borrow despite their status.</p>
<p>When you're starting something that requires capital, no matter what it is, and you're unproven, the time when it's easiest to get that capital is when the market is up. The market is not up, and even if it were the institutions that are going to have the closest association to money lending are going to be recovering for a few years yet.</p>
<p>serise, not necessarily, because HFs can capitalize from downad economy from short selling a stock/ shorting futures/ buying put options, etc etc</p>
<p>but yeah teris, raising capital is basically the business, but granted i believe you can have up to 35 non-accredited investors, but thats usually reserved for employees of the HF. most people garner capital from friends/family, grow that money and then look to outside investors. you can resort to a Fund of Funds, but i've read stories where its like they're not lending you money, but more like owning equity in your fund in that they dictate a lot of what you do, so probably not a good idea.</p>
<p>I know there have been people who've gotten rich off of a economy thats at it's lowest. </p>
<p>However, can you explain to me how hedge funds can capitalize from a downward economy in a more detailed sense? </p>
<p>Sorry if some of my assumptions are correct, I just recently decided I was interested in business (and I'm still in HS).</p>
<p>well all shorting works the same (in one vague sense) i'll explain to you short selling a stock:</p>
<p>When you short a stock (there is an option when you place an order to short sell) what you are basically doing is borrowing the stock (from either a bank or someone who is long the stock, in the case of the latter, the person recieves some retribution for allowing this) and selling it to the open market. So keeping in mind you must buy the stock back, you would want it to decrease in value so that you can buy it back at a cheaper price. </p>
<p>For example, lets say I short XYZ stock at $50 per share for 100 shares. right now i have sold 100 shares i do not own and must buy them back in the future, so the only way to profit would be if i buy them back under 50. Through shorting them for 50, i have added $5000 to my margin acc which must be put aside until i buy the stock back. if the stock drops to 48 and i buy it back, i enjoy a $200 profit b/c i am paying $4800 of the original 5000 that i brought in through shorting the stock and keeping the residual $200. But if the stock rose to $52, i would lose 200 in buying it back b/c i would have to pay 5200, an additional 200 from my money to the original 5000
The option for buying back a shorted stock is called "buy to cover," there is an illegal act called naked short selling in which the party (usually market makers) avoid the need to cover their shorts through some electronic blips, i honestly don't know much about it. </p>
<p>Shorting stocks does have some "special" aspects not present in other shorts:
1) If you are short a stock and the dividend-date has past while you are short, YOU must pay the dividend to the party from which you borrowed
2) After an unspecified while, you may be forced to cover, either b/c the party wants their shares or your broker feels you have lost enough on the position.</p>
<p>Mainly b/c of #1, i do not short the common, usually i do options, but in brief, that is what shorting is and that is how you capitalize from downard moves</p>
<p>As w/ most shorting, this type needs a margin account and there is unlimited risk, so you hould know what you're doing before hand</p>
<p>(btw im in HS too; im 16)</p>
<p>Unfortunately, short selling stocks is the only one I've had experience with. Have you ever played the Stock Market game in JHS or HS? I'm not sure if it was pure luck on my part, but I was amazing at it. I grasp the concept of short selling and what not, it was the other ones that I'm not too sure on. Thanks though. (:</p>
<p>16 and you've already decided on what you're going to concentrate on? At 16 I wanted to be a politician! Or was it a doctor...or lawyer. The point is at 16 I was still "finding" myself. Of course at 17, I'm still pretty iffy about my major. In all honesty, I choose business because I'm great with numbers (although I hate it) and I've been stacking up on statistical courses and what not, but all in all, it was for the money.</p>
<p>well all shorting works the same essentially, you can either sell something bullish, or buy something bearish</p>
<p>i wanted to be a hedge fund manager at 15, in October 2006 after reading an article in the WSJ about David Tepper. i was amazed that i have never heard of this man and yet he was worth $1 billion +, so then and there i decided i wanted to be a billionaire and a hedge fund manager. i knew nothing about the stock market, hedge funds, money or anyting until late June of 07 when a guy was kind enough to teach me a small aspect of technical analysis, that got me interested and i began reading about something dealing w/ the market everyday since then.</p>
<p>Malice, you don't understand what Tetris is trying to tell you, he is saying that you will encounter problems with investor confidence, not with whether or not you can actually turn a profit. The fact is you can short the market all you want but it will be extremely difficult to succeed if nobody is willing to give you cash.</p>
<p>i realize what he's saying. i know raising capital is the most difficult part of the job; it essentially is the job</p>
<p>
[quote]
know there have been people who've gotten rich off of a economy thats at it's lowest.</p>
<p>However, can you explain to me how hedge funds can capitalize from a downward economy in a more detailed sense?</p>
<p>Sorry if some of my assumptions are correct, I just recently decided I was interested in business (and I'm still in HS).
[/quote]
This is an issue with regulation, and the fact that while hedge funds are largely unregulated that will change. Theoretically a hedge fund could either branch off into private equity or actively involve itself in private equity, though in most cases I'd imagine they'd have to change the contracts governing the fund. Hedge funds already operate heavily in the distressed debt market, and that's still applicable if not more so during a downward economy. While Malice talks about short selling the reality is that it's difficult to get the securities needed to short sell a 'sure bet' on a massive scale, even though GS was somewhat able to do it. Derivatives are still useful in a downward economy.</p>
<p>Really, there's not a tremendous difference between a down market and an up market for private investors (and a hedge fund is essentially a partnership or private investors), it's just that in an up market everyone makes money and thinks they're a genius and in a down market the majority of those people are filtered out.</p>