Expert: Paul Henneman - 10/3/2010

Question
You always hear of hedge funds "adding/cutting positions" and "annual portfolio holdings" etc. These sound like long term investing strategies to me, but I always thought that hedge funds were into aggressive day trading/scalping etc; I just cant find any info on their exact method of making money. So what are the daily routines or day to day operations of a hedge fund specifically?

Answer
Nicolas,
  Thank you for your question!
The most important thing is to realize that hedge fund is a very loose term. Such a fund is not limited to a particular type of investing, but can invest its fund in a staggeringly large number of ways. A hedge fund can be aggressive day traders, long term traders, trade stocks, or forex markets, or commodities.  A hedge fund can trade ETF's, mutual funds, real estate holdings, credit instruments, derivatives, and more.  Hedge funds are also not limited to activities in the US markets, but can trade the above instruments world wide if they choose to do so.  This only scratches the surface, there are a great number more types of investing conducted by hedge funds. The main thing regarding hedge funds is that they are not regulated heavily like a mutual fund is, so they remain mostly hidden from view.
   The answer to  your question is therefore that is no exact way a hedge fund would make money. It is an organization created to trade the funds that have been invested into it, is not regulated much, and is legally able to invest in just about any opportunity that exists.  Because it is not regulated in how a hedge fund invests, one of the only limitations is who can put money into a hedge fund. Typically only high network individuals and/or institutions are allowed to put money into a hedge fund. Average individual investors typically cannot invest in hedge funds.  I imagine this is due to the FCIC worried about the lack of regulation and oversight of hedge funds, and individual investors losing their money in something they do not understand.  In reality, it creates alot of opportunities for wealthy individuals that your average investor does not have.

I hope that this helps, please do not hesitate to follow up with me if I offer anything additional.

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com