Hedge fund managers’ remuneration is heavily geared towards their performance; they were – for a long time - entitled to keep a whopping 20% of the profits for themselves (this in addition to charging a 1.4% management fee to cover expenses). This reward structure is only applicable to hedge funds and the industry hence attracted the best and boldest asset managers out there and in the wild investment days pre the 2008 Crisis, many hedge fund managers turned into billionaires and were treated like rock stars.
Another, quite important difference between mutual funds, exchange traded funds (ETFs) and hedge funds is that hedge funds can effectively block their investors from redeeming their investment. Many a hedge fund has done so in the past and has forced investors to stay invested in a fund even when losses accumulated. The reason for this is to avoid the fund having to sell assets in a downturn for a discount to repay investors, potentially further increasing losses. Investors in hedge funds should be prepared to stick with their manager through thick and thin, another reason not to put your last chips with a hedge fund.
Hedge funds are rather disliked by the general investment community: by ‘normal’ fund managers first of all because of the big sums hedge fund managers take home and their loud and luxurious lifestyles. But the biggest bean of contention is their shorting strategies and the consequential downfall of companies targeted by their short selling, which was on full display with the 2021 GameStop short selling saga, which was also the first time a hedge fund ‘lost’ and possibly a turning point?
Elon Musk and Tesla have been plagued for years by short selling and Musk famously sent the Tesla ‘shorters’ shorts with the Tesla logo as Christmas gifts. Big (new) short positions against Tesla recently have been taken by Michael Burry – he who was portrayed as the shorter of the US housing market in the film the Big Short – and by Bill Gates, dragging down regular Tesla investors with them in this billionaire food fight, exactly what every normal investor hates and why big hedge funds and shorters are bad news for your own investment portfolio.
But, despite the cynical nature of short selling, it remains a profitable business in the 2022 bear market and many hedge funds are indeed doing well in this environment. Notwithstanding some of the much-deserved criticism, hedge funds are exciting, high velocity and rewarding places to work. You just have to accept some hate coming your way.
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