Home > Descriptions of Hedge Funds and Why Not All Are Bad?

Descriptions of Hedge Funds and Why Not All Are Bad?

Last week the GameStop saga revealed to the investing world that a new bread of traders exists – traders that buy and sell in unison, acting as a huge hedge fund. The dramatic increase in the price of GameStop, a video game company, caused much pain to the hedge fund industry. Many of them, having exposure on the short side on GameStop and other companies, were forced to take heavy losses that led to a decline in over 50% of their net asset values in less than a couple of weeks. 

The battle was presented by financial media as David vs. Goliath – the greedy Wall Street firms against the poor retail trader that has little or no influence on the market. Yet, for once, it had – but to what extent?

The move fizzled spectacularly. Yesterday at the market’s closing, the names propped up by WallStreetBets and other retailers registered massive declines – GameStop ($GME) -60%, Blockbuster ($BLIAQ) -61%, AMC ($AMC) -41%, Silver (-8%), and so on. Who won, who lost? Both parties –  hedge funds and retailers alike. If we are to place a bet as to what party has the bigger chances of survival in the long run, that is not made of retail traders.

Not All Hedge Funds Sell Short – Not That Is Anything Wrong with Short Selling

Various hedge fund strategies exist that define the strategy of the hedge fund. In other words, as an investor in a hedge fund, you may pick the one that better suits your beliefs and investment perspective.

Besides the long/short value, long/short growth, or short funds, other funds exist as well. Funds that pursue an activist strategy, for example, with the intent of gaining a seat on the board and to be able to influence the direction of the company. Or, funds that focus merely on distressed businesses. The list may be extended to commodity funds, currency funds, thematic/diversified funds, fixed income, or even volatility funds. Even more – a mix of the above. In other words, there is always a strategy out there for everyone to pick a suitable one.

Last week, the financial media painted a negative picture of hedge funds selling short the shares of some companies. That may be true to some extent, but we should not forget the positive role hedge funds focused on the short-selling side have on disclosing management frauds. Allied Financial, exposed by Greenlight some years ago, is the perfect example, and many other ones exist.

All in all, hedge funds are an integrated part of the markets. And for a good reason.

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