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Six Lessons I Learned From Working with Billionaire Hedge FundsOctober 6, 2021
by Kerry Lutz
Financial Survival Network
Throughout my career I’ve had occasion to work for and with major hedge funds. If you’ve ever wondered how so many of them consistently outperform the market averages, you’re not alone. Here’s 6 of the many lessons that I’ve learned during the past 20 years.
Risk Management They are allergic to losses. They will study an investment opportunity 8 ways to Sunday before they commit. They’ll bring in lawyers, accountants, subject-matter experts, anyone necessary to properly evaluate an investment proposition. They’re always looking for a reason not to invest. And if they find one, they will drop it like a hot potato. They have no time for losers.
Persistence As long as they are still confident in the reasons why they made a particular investment decision, they will ride it out until the end. When billion-dollar hedge funds place a bet, they are fully committed to their decision. They act with confidence and are unlikely to bolt and run when the going gets tough. Understand, they will always have a deadline for an investment to pay-off, however, that date is always subordinate to the reality on the ground.
Constant Re-evaluation While a hedge will move aggressively into a new position or investment, they are constantly reassessing the risk and validity of their underlying assumptions and decision. If circumstances have changed, they won’t hesitate to hit the exit door and never look back.
Re-Investing Profits Once a fund finds a system that works and it becomes a money-making machine, they won’t hesitate to continually reinvest profits and leverage their returns. This happened to their detriment during the sub-prime mortgage debacle. For over a decade they had levered-up on mortgage back securities, holding huge positions and making huge profits. Then one day, it all changed. And their profits went up in smoke. But, a funny thing happened, after the dramatic implosion of this market, other hedge funds saw the opportunity that was left in the smoldering ruins and made huge bets that have paid off staggering returns during the past decade.
Open-Mindedness Besides hedge funds dedicated to specific assets or investment strategies, these billionaires will often look at any situation or opportunity to turn a profit. Sometimes their greed will outrun their common-sense and they’ll wind up in less than savory enterprises. However, it is their willingness to look at any potential profitable situation that allows them to see opportunities where others only see risk and the potential for loss.
Unforgiving The world of hedge funds is a predatory and carnivorous global theme park. Funds are always on the lookout for new ways to make money. However, they do not suffer fools or losses lightly. One minute you’re making money for them, and you’re the golden child. The next, if you start losing money, you better have a good reason or they will cut their losses and run for the hills. Sometimes this mindset will work to their disadvantage, causing them to jettison assets and business partners prematurely. However, this strategy often allows them to avoid very costly losses, so they’re not about to abandon it any time soon. When you’re working with billion-dollar hedge funds, you’re only as good as your last (profitable) deal.
How does any of this help you? While there are many things hedge funds can do that individual investor cannot, there are numerous ways you can learn from the big boys. From my own personal experience and those of my close family and friends, I have come to realize that individual investors are often poor risk managers. They get sucked into bad situations by their emotions, become fearful and wind up staying too long. They miss taking profits and hang on hoping for a turnaround. Often times when an individual investor finds a great stock or investment, they’ll take profits too early and never bother to reinvest their existing profits. Individuals often are far too forgiving of sub-par performance and will let their losses roll. And finally, individuals will often not take the time to learn about new opportunities and thereby miss the next Tesla or Bitcoin. (I should know, I was very familiar with both situations and never invested in either).
Adapting even some of these traits will help you avoid losses and maximize your profits. That’s what investing is all about.