imreallyperplexed
Council Member
I had an interesting conversation with my financial adviser this morning on this topic. I was curious what answers that I might get. Try to keep the answers short and sweet and stick to the essentials.
Mutual funds and hedge funds: What is the difference?
- Thread starter imreallyperplexed
- Start date
worldlymrb
Revenge
I had to google to get the definition.
Hedge funds are unregistered w/the SEC but cannot advertise. It would be like you and me pooling our investment/capital together and then you told a friend who joined. Only diff is, it is pension fund managers, Big endowment/foundations, with their GLOBAL HEDGE FUND managers and the private central banksters who basically rule the world.
Where mutual funds are registered with the SEC and can advertise
Hedge funds are unregistered w/the SEC but cannot advertise. It would be like you and me pooling our investment/capital together and then you told a friend who joined. Only diff is, it is pension fund managers, Big endowment/foundations, with their GLOBAL HEDGE FUND managers and the private central banksters who basically rule the world.
Where mutual funds are registered with the SEC and can advertise
imreallyperplexed
Council Member
MrB,
That is correct. The other difference - and this is what I talked with my financial adviser about - is that mutual funds are regulated by the SEC and are more limited in the sort of risks that they can take. Hedge funds, on the other hand, are totally unregulated and unsupervised. (That is why only certain - "knowledgeable" - buyers are allowed to buy into hedge funds.) In fact, they are difficult to sue for damages. Bernie Madoff ran a hedge fund. Here are a couple of interesting articles related to the subject of Madoff and hedge funds.
Bernie Madoff's $50 billion Ponzi scheme
Hedge fund manager to pay $405 in Madoff settlement
That is correct. The other difference - and this is what I talked with my financial adviser about - is that mutual funds are regulated by the SEC and are more limited in the sort of risks that they can take. Hedge funds, on the other hand, are totally unregulated and unsupervised. (That is why only certain - "knowledgeable" - buyers are allowed to buy into hedge funds.) In fact, they are difficult to sue for damages. Bernie Madoff ran a hedge fund. Here are a couple of interesting articles related to the subject of Madoff and hedge funds.
Bernie Madoff's $50 billion Ponzi scheme
Hedge fund manager to pay $405 in Madoff settlement
worldlymrb
Revenge
Hedge Funds are the biggest players in another unregulated market...DERIVATIVES. Which there are $1.5 QUADRILLION of world wide. (of which, $150 TRILLION is now guaranteed by the FDIC, thanks to president Obama.
worldlymrb
Revenge
Upon researching this further, you will find it was the Federal Reserve dictating to Obama and the FDIC, that this was to be done, proving my point who really is running things,...and it aint "we the people".
imreallyperplexed
Council Member
MrB,
I am going to be going out soon and probably won't be back today (and possibly tomorrow). However, your two links were interesting. However, I think that you are conflating some stuff that needs to be unpacked a little. I will mention two things"
First, the Quadrillion link was a little wierd. It was a splice of two different videos - one was Milton Friedman explaining a monetarist perspective on why Keynes was wrong. That is a complicated debate and I am not going to get into it. However, right in the middle, the tape switched to a discussion of derivatives. That transition didn't really make sense. Nevertheless, the discussion of derivatives and the problems with derivatives was fine. I agree with a lot of what was said. I am not entirely happy with either the Democrats or Republicans in relation to reforming the financial system. From what you have written, I suspect that I don't agree with all your solutions but I think that you point to issues that people should be concerned about.
Second, technically, a bank like J.P. Morgan or Bank of America is not a hedge fund. And derivatives are a complex type of asset that are held in portfolios (including the portfolios of hedge funds). So they are not toally unrelated. The big problem for me is that the repeal of the Glass Steagall Act in 1999 (and yes Bill Clinton signed the law) which took down the wall between investment banks and commercial banks. How all this is related to the FDIC is complicated. And there is reason to be concerned. But again, I don't have time to discuss it in depth. However, someone else might pick up the discussion.
I am going to be going out soon and probably won't be back today (and possibly tomorrow). However, your two links were interesting. However, I think that you are conflating some stuff that needs to be unpacked a little. I will mention two things"
First, the Quadrillion link was a little wierd. It was a splice of two different videos - one was Milton Friedman explaining a monetarist perspective on why Keynes was wrong. That is a complicated debate and I am not going to get into it. However, right in the middle, the tape switched to a discussion of derivatives. That transition didn't really make sense. Nevertheless, the discussion of derivatives and the problems with derivatives was fine. I agree with a lot of what was said. I am not entirely happy with either the Democrats or Republicans in relation to reforming the financial system. From what you have written, I suspect that I don't agree with all your solutions but I think that you point to issues that people should be concerned about.
Second, technically, a bank like J.P. Morgan or Bank of America is not a hedge fund. And derivatives are a complex type of asset that are held in portfolios (including the portfolios of hedge funds). So they are not toally unrelated. The big problem for me is that the repeal of the Glass Steagall Act in 1999 (and yes Bill Clinton signed the law) which took down the wall between investment banks and commercial banks. How all this is related to the FDIC is complicated. And there is reason to be concerned. But again, I don't have time to discuss it in depth. However, someone else might pick up the discussion.
imreallyperplexed
Council Member
I understand that you do not like the Fed. Again, I don't have time to get into a long discussion (and I would probably have to do additional research on my own to feel comfortable.) Someone else may take up the discussion.
degsme
Council Member
As pointed out below, Hedge Funds are essentially unregulated. One of the other things about Mutual Funds vs. Hedge Funds is that in Mutual Funds - how and how much the mangers gets paid has to be disclosed.... no so with Hedge Funds.
Originally Hedge Funds were almost exclusively deriviatives funds. That's how they got their names: IE they were maing investments that were "hedges" against unpredictable events. A sort of Heads I win, Tails you Lose strategy.
For example - an investor "going long" on securities in the London Stock Exchange, would want to "hedge" their risk against currency fluctuations and the British economy in general.
So that investor would take out a "hedge" by buying "put options" on the British National Debt bonds and buying "put options" on the British Pound
That way if the British economy tanks, he can sell his investments, invoke his Debt Put Options and make a profit on that, and the same with the British Pound.
OTOH if his stocks go up, he sells his investments and writes off the cost of the hedges.
Now that's just a simple example. Actual hedges become way more complex, precisely because the economies and economic factors are so interrelated. So hedge funds build large probablistic models to figure out what does and does not hedge what. And then take advantage of "leverage pricing" to maximize profits.
Originally Hedge Funds were almost exclusively deriviatives funds. That's how they got their names: IE they were maing investments that were "hedges" against unpredictable events. A sort of Heads I win, Tails you Lose strategy.
For example - an investor "going long" on securities in the London Stock Exchange, would want to "hedge" their risk against currency fluctuations and the British economy in general.
So that investor would take out a "hedge" by buying "put options" on the British National Debt bonds and buying "put options" on the British Pound
That way if the British economy tanks, he can sell his investments, invoke his Debt Put Options and make a profit on that, and the same with the British Pound.
OTOH if his stocks go up, he sells his investments and writes off the cost of the hedges.
Now that's just a simple example. Actual hedges become way more complex, precisely because the economies and economic factors are so interrelated. So hedge funds build large probablistic models to figure out what does and does not hedge what. And then take advantage of "leverage pricing" to maximize profits.
Woolleybugger
Mayor
You forgot to add that they do this in real time, constantly and across many investments making bets via computers that are essentially bets against other guys doing the same thing.
imreallyperplexed
Council Member
The problem is that a lot of people on Main Street don't quite get this stuff. For all that I disagree with MrB on particulars, I do give him credit for trying to understand this stuff.
Isn't that how all investments work?
imreallyperplexed
Council Member
I think that Burton Malkiel would argue that.
Random Walk Down Wall Street
However, there are potential information problems and some questions whether assets like derivatives are accurately priced in the market (for a variety of reasons.)
Random Walk Down Wall Street
However, there are potential information problems and some questions whether assets like derivatives are accurately priced in the market (for a variety of reasons.)
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