Motley Fool – There’s no other business on Earth like the hedge business. In 2005, according to Institutional Investor, the average top-25 hedge fund manager made $363 million. James Simons,head of hyper-quant Renaissance Technologies, made $1.5 billion! Renaissance’s black box speed-trades any public, liquid security, which it can put into its math models. The flagship fund producedremarkable returns (60% before fees) and even more remarkable fees — 5% of assets and 44% of the gain.
Hedge funds come in every flavor, except vanilla. They’re lightly regulated private investment funds for institutions and wealthy individuals. There are 8,000 funds worldwide managing a trillion dollars. For the taxonomic, they use many investment strategies with fancy names: convertible arbitrage, dedicated short-seller, emerging markets, equity market-neutral, event-driven, fixed-income arbitrage, fund of funds, global macro, long/short equity, managed futures, and multistrategy. Charlie Munger of Berkshire Hathaway skeptically boils the styles down to two: (1) funds that make leveraged relative value (long one stock, short another) trades in equities, or (2) funds that make leveraged convergence trades (betting that correlations between securities go back to historical norms) in all kinds of securities and derivatives.
