The next big short.
Why the top-5 hedge funds are not taking risks, and who is.
Heads of the top 5 hedge funds earned more than $12 billion in fees for a year when they did not do much more than copy the market — their funds were buying stocks like Facebook, Microsoft and Alphabet — the same stocks that took the entire market up. This makes sense: if that is where the money is, they should be in.
Or should they?
Hedge fund’s goal is to earn income no matter where markets go. The most basic strategy of a hedge fund is long/short: buying (going long) stocks that it expects to rise and offsetting the cost by borrowing and selling (going short) stocks that it expects to decline in value. Regardless of whether markets go up or fall, long/short should earn the hedge fund money.
It makes a lot of sense that the first hedge fund — A.W. Jones & Co. — was created by a sociologist and writer. Hedge funds seek to benefit from market inefficiencies and gaps. They bet on human error and take positions that are contrarian to the wider market and the investor sentiment. Who better to do that than a sociologist?
The problem is that betting on the idea that the wider market is wrong can take a lot of time and money. Michael Burry, the hero of The Big Short lost a lot of his investors’ money…
