Making a Toy Hedge Fund.

Learn about Hedge Funds by making one !

Hedge what ?

Before we start we need some background on what a hedge fund conceptually is, let’s say you are a Dragon sitting on a pile of gold, are you rich ? Well, yes and no, what if the price of gold crashes ? You’d be a poor dragon. What if you are worried about inflation eroding your dragon worth ? And well you want to grow your pile of gold no ?

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A hedge fund* is a financial invention that basically says: Look you are a busy dragon and you don’t have time to worry about the market swings, so we will invest your gold in things that will do well ( maybe even great) no matter what the market is doing, it goes up your returns go up, it goes down your returns don’t go down as much, at all or they even go up !

* Surprisingly a journalist (Alfred Winslow Jones) invented Hedge Funds back in 1949, if you want to read more about them I recommend:
Investment Strategies of Hedge Funds by Filippo Stefanini

How ?

As a shrewd dragon you might be wondering what sorcery is this ? There are quite a few strategies that a hedge fund uses to deliver returns that do well no matter what (or returns that are not correlated with the market in finance speak). For our Hedge Fund we will focus on the traditional strategy of long/short equity* with a target of 2/3rds of upside market return in bull cycles (when the market goes up) and 1/3rd loss in bear cycles (when the markets go down).

* If you are new to the world of trading, going long a certain stock (or equity/in the equities market) just means you bought certain stock (let's say at $10) because you think it will do well and intend on selling it when it reaches certain target (let's say $30) for a $20 profit. Going short or shorting a stock means you think the company/stock/market will not do well, so you would borrow the stock for a fee of $2, immediately sell…