Hedge Funds

[KrazyHorse]

If C&P both start at 60 then I need equal numbers of shares from each (long on C, short on P). If, after 6 months they both are at 50 then I sell my C to close the short on P and I make no money. I get 50 for each C I own, but have to pay 50 for each P I owe (technically I lose the money associated with the carrying cost of the short, but let's ignore that for now). Same if they're both at 70 after 6 months.

If, however, C goes to 55 while P goes to 50, then for each share I close I get to pocket the price difference of 5$. Or, if I've ****ed up and the opposite happens then I need to pay 5$ out of pocket for each one I close. (C at 50, P at 55)

In any case, I don't care what the overall variability was. What I care about is (Cfinal/Cinitial)*(Pinitial/Pfinal) - 1

That's my return

[Adalbertus]

Sorry, not the absolute value of the index but individual shares. As I intend to integrate over the entire economy the rest of the argument stays the same.

Your example is quite nice, because it makes clear that while you are short on Pepsi, you'll do everything you can to damage Pepsi.

[KrazyHorse]

It's still not equal to the integral of the absolute value of the derivative of any given share.

[KrazyHorse]

But yes, anybody who is short on Pepsi should probably be kept as far from the board of Pepsi as possible...

[Drake Tungsten]

This thread is fascinating, in retrospect...

[DaShi]

Drake, the east coast Slowwhand.

[KrazyHorse]

What I would like to know is what the economic benefit is.

As I see them, hedge funds try to increase wealth of the participants of the fund by performing highly speculative operations. Speculation is a zero-sum game

No, successful speculation informs market observers and participants of the consensus estimate for the future path of prices. This in turn tells them what to put resources into today in order to plan for tomorrow. Better forecasts = more efficiency

[KrazyHorse]

This thread is fascinating, in retrospect...

Indeed...

[Saras]

Indeed...

[MRT144]

Hedge funds have continually lost ground (their advantage relative to the market average has been dropping) since their inception. There's no need to regulate them. When they don't deliver market-beating returns on average people's appetite for them will drop (especially given their generally huge costs).

Personally, I wouldn't trust a hedge fund at all. I'll stick with index funds, thank you.

The trick to a running hedge fund is selling your services as being superior to market returns, not actually being successful at money management. Case in point; Meriwether.