Not All Hedge Funds are Losers

When hedge funds stop hedging they become just like every other pool of money looking for a hot return. That is, they cease positioning themselves to take advantage of mob sentiment and the errors of the masses. Instead, they begin to make the same errors themselves. Instead of profiting from crowd psychology, in other words, they have come to reflect it.

But are all hedge funds losers? Not at all. Some use very detailed, very smart methods to beat the crowd.

One of the original hedgers, for example, figured out that he could make a better guess about cocoa crop yields than most investors were getting. He studied the meteorological data…and sent his own agents out into the cocoa fields to gather data. The result – he had a better idea of how good the crop would be earlier than most other investors. His fund did well.

We know of another hedger who realized that the crowds do not respond very quickly to company ‘earning surprises.’ The new data eventually works its way into the price…but not immediately. Analysts need to study it. And then it is presented to investment committees. The whole process can take a few weeks…or months. So, this hedge fund merely reacts to earnings’ adjustments more quickly than the great mass of investors. 

There are many other hedge funds that have found little niches like these to exploit. Result: better performance.

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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