This is something that I have been thinking about since the beginning of the current election cycle. It all started when I was listening to Bernie Sanders talk about how they had to close some of the loopholes that hedge fund people take advantage of. It got me thinking about hedge funds. As a person that never really spent any time thinking about finance or what they do in their market, it really started to blow my mind when I began to get an idea of what they actually do.
Hedge funds are essentially investment firms that protect a principle amount by ‘hedging out’ money into assets to ensure there isn’t a loss on the principle. If this is done correctly it protects against market fluctuations and will provide a modest return. I’ll give an example with one asset that some of you may or may not be familiar with, Bitcoin.
Say that you bought 10 Bitcoins that you want to hold but are concerned about volatility in the market and want to protect your original invested amount. If you wanted to hedge out your Bitcoins you would open up a margin trading account on a trading platform. You would take out a short position (margin sell) of 5 bitcoins so that you would make money if the price dropped. Then you would take out a long position (margin buy) for the other 5 bitcoins if the price were to rise. Doing this will ensure that if that price falls the difference that you loose on the long position will be made up by the short and vise-versa.
If that doesn’t make since you might watch this video.
So if you can visualize what they are doing it’s essentially a balancing act. It’s zero sum game for the most part. But when it gets interesting is when they are able to tip the scales in their favor and win say 52 percent of the time and only loose 48. This equals monies. And if you are moving around large sums of money it will equal lots of monies.
Thinking about what is going on when a person hedges out an asset might not make much sense at first when applying this same idea to your life. You might think that you don’t have any money so why would you ever need to know about how a hedge works. Although you might not have the capital to put in a hedge everyone has one of the most important asset that can be hedged available to them for free. Time.
You might hear people talk about how they work all the time and are never able to get ahead. There could be many reasons why this happens, it might be because they work all day and come home and not do anything else. Where I am from it’s not uncommon for a person to come home from work and plop their feet up, start drinking a beer, and watching T.V until they go to sleep until they do it all over again the next day. They spend their time working paying for the stuff that they “own” and are never able to get ahead because they are bringing on just as much debt as they make cash. Whereas if they were to hedge out their time and spend their free time doing things that would give them that extra 1 or 2 percent edge that they need to get ahead their fortune might begin to change. So instead of drinking a beer they might work out, or learn new things, or just in general be more productive with their “free time”
Risk management and time management are basically the same thing when you start to think about your life as a hedge fund.