What Is A Hedge Fund? Soros Made His Millions In Them

[KittyWampus]

and I'm hoping a savvy DU'er can explain them to an economics layperson such as myself. :)

[Gothmog]

1. hedge fund

Hedge fund is a private investment partnership that trades in stocks and other investments. They are normally organized to be exempted from the Investment Company Act of 1940 which means that there is a limit to the number of investors. Soros is famous for currency speculation and international investments.

The operator of the hedge fund receives a fee based on the profits of the fund. Sometimes, the investors only pay a fee based on a return of their money plus an interest factor.

[Megawatt]

8. Can I ask a question -

Can you reccomend any good books that explain why currencies change in value to one another? Any good books on how the mechanics of international trade are handled as far as how importers pay suppliers in what currency etc?

[rockymountaindem]

9. I can't recommend a book, but I can give you a basic understanding...

from a second-year international relations student with a brief economics background (3 semesters of this kind of thing).

Here's the skinny; currency comes in limited supply. There are only so many dollars, pounds, yen and euros out there. The problem is, of course, that everyone wants them. This is especially true because one must pay for goods and services in the local currency (Japanese buy our coal in USD, while we buy their televisions and autos with Yen). This means that for a foreigner to purchase our goods, they must first purchase our currency using their own.

In this sense, there is an old fashioned supply and demand situation for individual currencies. This being said, many things can impact the value of a currency. For example:

1) If tomorrow people wanted to buy all their goods from the USA, then they would need to get their hands on US dollars. However, the supply of our dollars would remain relatively unchanged. Though supply remains constant, demand rises, therefore driving up the value of our dollar. On the other hand, if people start boycotting American goods, they won't need much of our money, demand will fall as will the value of the greenback. One specific thing to keep in mind is that OPEC will only accept payment for oil in US dollars. This means that every country in the world needs to keep some of our money in reserve in order to purchase oil. Since a certain portion of our money is therefore tied up in foreign vaults and accounts, this restricts the supply of dollars, driving the value of our currency higher. If OPEC decided tomorrow to allow purchase to be made with all currencies, other nations would have less need to stockpile our money and its value would fall.

2) Interest rates rise. This makes it harder for people to borrow money, and from banks to get money from the Federal Reserve (though I don't know the details of how the Fed works, this is true for any country's national bank). This restricts the supply of money, meaning that if demand stays constant, the value will increase. Lowering the interest rate has the opposite effect.

3) The government prints money and sells bonds. This increases the supply of money as well. If the government printed 100,000 tons of $100 bills by tomorrow morning, the value of the US dollar would fall, since demand for it won't change very much over time. So, since supply is so much higher but demand is not, the value will fall.

This of course is a partial list, and I won't make any guarantees as to its accuracy. However, I did get an A- in economics last year, which is really respectable :)

[Megawatt]

13. Wow , thanks for that great explanation

:)

[sweetheart]

15. Oh boy, a challenge

Currencies are equated based on the balance of trade. This means that
all nations must settle their payments with each other, and obviously,
it wouldn't be trade if the 2 sides of the agreement were not equal.

No add in modern financial markets, with currency forward agreements
forex futures and options and it gets more complex. If you can change
money in to another currency, and earn 50% interest, and then change
it back to dollars 3 months later, surely all investors will do so.
Then, naturally, interest rate markets, the world over are as well
connected to the foreign exchange markets as liquidity seeks the best
rates of return across the planet. This causes the nations with high
interest rates to be at currency parity, and often you'll find that
high interest rates coincide with currency devaluation, and they are
kept high to keep investment on-shore. This is why, as the dollar
slips, the interest rates will increasingly rise, so that the dollar
investments keep up with the rest of the world.

Rather than some books, i would recommend searching around and reading
starting with "http://wizardsofmoney.net". Then search around on topics
like "interest rate arbitrage", "foreign exchange options", "money
supply", "keynsian economics", "monetarist economics" and surely you'll
have a lot to read.... wizards of money is the most intelligent
educational series i've ever seen on this subject, on the web... its
a long read, and really brilliant. "smithy" who designed it is a
smart south african woman who i can only respect. It is really
a brilliant series.

[pk_du]

2. High stakes gambling on futures in the market

http://www.hedgeco.net/hedge-funds.htm

Most of Soros's money was from currency hedging I think.

[Nite Owl]

3. Fairly good explanation

here:

http://mutualfunds.about.com/cs/hedgefunds/l/blhedgefunds.htm

basically they are not public, you must have a net worth over one million and the manager can sell often and short the market.

[KittyWampus]

5. Thanks, And This Does Seem Like Higher Risk Gambling.

[pinto]

4. as far as I know it's a gambling game run out of Wall Street....nt

[librechik]

6. you have to be REALLY RICH to buy in in the first place

it's to protect your millions from inflation and deflation.

[indigobusiness]

7. I think it has something to do with Al Hedges,

but I can't figure out it made Soros so rich.

[theboss]

14. I view Soros the same way I view Joe Kennedy

Neither made their fortunes in the most honorable of ways, but the money was eventually directed to good use.

[indigobusiness]

18. Smuggling decent whiskey into America is not honorable?

I don't follow.

[Blue Wally]

10. You really don't want to know how Soros made his money

Enjoy the fact that he is supporting our cause financially, but place him in the same category as when the Mafia was supporting the big city Democratic machines. Enjoy the income to the party and how we can use the income to support the cause, but don't ask too much how he got it. If Soros was supporting Bush, we would be demanding an immediate jail sentence (or execution) for his benefit. Just be like Father Bennedetto when Don Capo dropped a few thou in the offering plate. Use it for the Lord's work and don't ask questions..

[K-W]

11. By ransacking the economies of entire nations?

Though, to his credit, the damage ws exacerbated a great deal by goons who mirrored his moves without thinking.

[indigobusiness]

19. Dirty money, blood money, bad money...doesn't matter

to machiavellians.

When karma no longer matters to Dems, and they become as machievellian as the Right, that is when everyone loses...and the ballgame's over.

[K-W]

12. The problem with speculating in currency,

is that your actions control the value of the currency, thus you gain a great deal of economic control over any country whos currency you significantly invest in.

[knight_of_the_star]

16. Only 8 currencies are traded on the market

Those are:

US Dollar
British Pound
Euro
Japanese Yen
Swiss Frank
Canadian Dollar
Australian Dollar
New Zealand Dollar

Other currencies are traded, but the bulk of currency trading in the Western markets is done in those 8 currencies in a set of 17 pairs.

Even when you are trading on a 200:1 margin, the ONLY way you can have serious impact on currency rates and gain serious economic control is if you have several billion dollars in the market, and most people DON'T, and even then bigger factors like unemployement, budgets, trade balance, international relations, and interest rates have a MUCH larger impact than say Warren Buffet dropping something like a billion USD into the market and trading it. The US Dollar dropped substantially in value against the Euro NOT because it was massively shorted by Buffet, which he did in September of '04, but because of the international reaction to the election in November. Several trillion dollars in terms of value are moved every DAY on the market worldwide, it takes a LOT of leverage to really impact a country's economy by trading currency.

[sweetheart]

17. the word "hedge" comes from "hedging your bets"

Similarly, the hedge funds emerged in the 90's as a secondary investment
to insure a primary investment. As the primary investment vehicle was
regulated intensively, the secondary one was not, and as such, the
market evolved that these investment funds grew largely because they
were free to take on obligations that "legitimate" financial institutions
(with retail customers) could not take on. These investments included
credit derivatives and other complex financial contracts where valuation
is more of an art than a science.

In 1998, one of those hedge funds called "Long Term Capital" almost
destroyed the entire US economy, and the federal reserve bank acted to
stop this from happening by bailing out a buncha rich guys who were
playing with dynamite... without a single criminal charge being filed,
john merriweather, the ringleader is still at it today.

In finance, the big money is always won in the area where there are the
least knowns and the least price discovery. This means in finance, that
grocery stores selling bog standard things make slim margins, but ones
selling exotic things that few people have seen can get much larger
margins. Thus, as regulators codify the law regarding financial markets
in one area, the get-rich-cowboys (read: hedgefunds) move on to the
next area to scam the market. Into the early 2000's the hot area was
"credit derivatives" which are basically complex insurance contracts
insuring bankruptcy and the right to recover the assets of a bankrupt
institution. There's a lot more, i simply can't put in to common
english... credit derivatives are complex legal contracts often
across several legal jurisdictions where pricing is voodoo at best.

Hedge funds have been loving these babies, as their regulatory
structure has been letting them play. Well, even the regular supermarkets
have wanted to play the high stakes races, and that is how enron got
burned and now fannymae who was playing similarly to make big bucks
off the books in derivatives.

Well, the game is sorta up in that area, so the new thing is getting
around the public regulator by getting rid of any public finances and
going towards "private equity"... meaning... you can do whatever you
want in finance if you don't have any public customers.... and
"the carlysle group" is a private equity outfit to give you an idea.

So "hedge funds" are sorta yesterday... and private wealth management
is the new oxymoron for the finance cowboys looking for the biggest
profit to be screwed out of the markets... like drilling for oil,
these boys never give up, just shifting to where the regulators are
not looking... really like criminals, but with white collars.