Hey guys ,
I have this question i wanted to ask regarding hedge funds . Do they day trade and swing trade ? or do they make a portfolio and track the prices lieka mutual fund ? only that they can go short and dont need to hold a positionf ro 6months .
Regards,
HedgeFudge
A hedge fund is a pool of very large sums of money, with the most qualified analysts, investors, and quants in the business.
With that said, it completely depends on the fund’s strategy. A lot of them trade in mostly derivatives due to their high leverage.
^ They don’t usually trade derivatives due to their high leverage, high leverage is usually a result of trading derivatives.
No one here works in a hedge fund or knows anything whatsoever about hedge funds.
PM blackomen, he says he works at one.
These guys definitely swing. But what is the consensus about technicals?
I’m pretty sure they do. High leverage, complexity, liquidity, and hedging are big reasons. Hedge funds are unique in their financial engineering, and their derivative activity is very common, especially with macro and arbitrage funds.
There are several reasons to use derivatives, but one reason is to achieve high leverage that can’t be done via investing the underlying asset.
Other reasons to use derivatives is that you can achive payoff structures that aren’t possible (or easily replicable) by trading the underlying, or to save on transactions costs.
But it’s also true that - except for very small accounts - you can pretty much always reduce leverage by buying less of something and holding cash.
CTAs and global macro hedge funds may swing trade. Event-driven funds do something that is swing-trade-like, but generally driven by different dynamics than pure technical analysis. High frequency quant funds do something that seems at first glance like day trading, but doesn’t really fit the classic day-trading mold.
Bank proprietary traders day trade and perhaps swing trade, but those desks have largely shut down after the financial crisis (I’m not up-to-date on what happened, but they were expected to spin off from banks - not sure if they did so successfully).
I do OPS does this count
We mainly use REPOs for leverage using underlying bonds as collateral. also quite heavy on TRS with underlying company being mortgage company.
Most securities are priced daily either from market or from counterparties. couple of the TRS are priced couple times a month.
woow ! the replies on this thread is much more informative than me googling about hedgefunds from the past 6-8months !!!
Thanks all .
Althoguh i do have a fe questions :
Can you give some insight reagarding this ? what kind of dynamics ? any examples ?
2.@infinitybenzo : can you exaplin a bit more what u mean by all the fancy terms like OPS , TRS , REPOS ? would love to learn about them 
Thanking for the wonderful replies and information shared ,
Hedgefudge
Hedge fund is just a legal structure…it does not describe an investment strategy. There are some who do what you described, and some who do nothing similar.
I’ll jump in because it’s slow this morning:
Ops = operations. They do middle/back office work supporting the front office personel. Ex: The traders buy and sell securities, and ops makes sure everything settles correctly, is given up to the right accounts, etc…
TRS = Total return swap. One party agrees to make set payments to a counterparty in exchange for returns on an underlying asset. (I deal in Interest Rate Swaps, so unforturnately I can’t really elaborate on the ins and outs of these instruments)
A repo is a repurchase agreement. To break it down to it’s simplist form, it is a way to finance the purchase of a security, using the security itself as collateral.
For example: Say I am a hedge fund with $100mm in Assets (cash) under management and I want to buy $100mm of the current US Treasury 5 year Note. I would not just pay 100mm outright to the counterparty and they give me the bond… this would eat up all of my capital.
Instead, I would still buy the bond for 100mm, but before settlement, I would enter into a repurchase (Repo) agreement with another counterparty, where I deliver them the 100mm in bonds, and they give me 100mm in cash (Which I then give to the original counterparty I bought the bonds from). With this repo I agree to buy back the bonds (typically the next day) and pay them a small amount of interest. (The Repo Rate). I still have “ownership” of the bonds, and accrue the interest owed to me on them, but instead of paying 100mm for the bonds, I paid a few basis points. Some dealers will also charge what is known as a “Haircut”. a Haircut is essentially the repo counterparty accounting for your credit risk. So, If the repo dealer is charging a 2% haircut, instead of giving you 100mm for the bonds, they will give you 98mm and I need to come up with the remaingng 2mm to pay for the bonds on my own. (They charge this haircut so in the event you default and cannot pay them back, they have your 100mm in bonds, and they only lost 98mm in cash. Net/Net they make out 2mm).
So…using a repo w/ 2% haircut to buy these bonds, I was able to purchase $100mm of bonds with only $2mm dollars… in this simple scenario I could theoretically buy 5bn in bonds with my 100mm in cash as I only need to put up 2% of the cost with my own money. So with Repos, I can lever myself up to 5bn in exposure, on only 100mm in assets… 50x leverage. Repo’s can be “overnight” (in which you “roll it” each day you want to own the bond (enter into a new repo agreement each day)), “Term” (Instead of an agreement to buy back the bonds the next day, you agree to do it X days from now), or “Open” (Like Term, but there is no set end date)
The repo rates and amount you can borrow are dependent on many factors, including the strenght of your relationship with the counterparty, the supply/demand for the underlying bonds, Balance Sheet requirements of the Repo Desk, and the quality of the bonds.
As for the trading methodologies, the sky is the limit. There are thousands of “Hedge Funds” as all a hedge fund is is a pooled fund investment vehicle limited to accredited investors. If you can convince someone to invest capital in an LLP because you are an expert in trading comic books, then congratulations, you now run a comic book hedge fund.
Well Villnius hit the spot or spots with the above explanantion. Thanks.
This was particularly with respect to event driven funds.
Pure technical analysis or “classical technical analysis” is about looking at past price patterns and using that to divine where price is likely to go. A lot of investors don’t believe in it, and it’s not supposed to work, according to people who believe in efficient markets. However, it is possible that at smaller time scales (like day trading and swing trading) these things have some effect, and even at large time scales, seeing something trendign upwards could very well affect people’s risk aversion, which makes them more likely to buy in, which helps continue the trend - until of course prices defy any rational risk premium and some issue brings that realization to public consciousness.
So when I talk about “pure technical analysis” it’s more about looking at past price history and creating indicators (like moving averages, oscillators, etc) and trading based on the information they provide. I’m not sure why it’s called “technical analysis,” particularly when modern quant funds seem a lot more technical, but I suspect it’s because when these techniques were developed in the late 19th and early 20th century, it was very “technical”, compared to traditional analysis at that time, which was more about analysis in the form of: “US Steel is going to be big, BIG, I tell you! Everyone needs steel, so you can’t lose with US Steel!”
Event driven funds are different. They typically look at some event like a corporate merger, and then bet that the stock prices of the acquirer and the aquiree will converge. They also try to capture the fact that most mergers are driven on overstated synergies and efficiencies, or an inability for the acquirer to grow organically when they need some kind of growth. All of this suggests that acquirers tend to overpay for for companies they acquire, and that you would then short the stock of the acquirer and go long the stock of the acquiree and make money as the two stock prices converge. The time frame for things like this to happen are weeks to a few months, which is similar to the frequency of swing trading, but it is generally not based on things like “teacup handle formation” or “head and shoulders pattern” or “MACD rising” or “sudden drop in volume accompanied by a price breakout,” which is what the traditional technical analysis folks do.
What he said
woow !
like i said before , i reapeat it . the replies on this thread is much more informative than me googling about hedgefunds from the past 6-8months !!!
Man these stratergies are like really amazing . I just hope i can find a really good mentor who can teach me/train me in nvesting in the stocck and commodities market .
Thanking all and looking for a mentor ,
HedgeFudge
What’s that smell? Smells like troll.
How is this trolling? Trolling is stirring up animosities and saying inflamatory things just for this fun of it. I don’t see that here.
Perhaps this guy is fishing for a mentor, but that’s not the same as trolling (though, admittedly, trolling is also a style of genuine fishing).
The OP seems kind of inexperienced and new to the field, but we were all new to the field once, and there’s no shame in that, as long as one doesn’t stay an ingenue forever.
His questions seemed genuine, even if the line of thought they reveal is basically: “I want to make a lot of money. Hedge funds make a lot of money. So I want to do hedge funds. What *are* hedge funds exactly??”