For some people investing can be quite confusing, especially because there are so many products which are offered. In this article, we are going to know hedge fund better and how to invest like a hedge fund. Take a look for deeper understanding about it.
Cash Flow is King
There are many shapes and sizes of Hedge Funds; you can find it in a heavy emphasis on arbitrage situations (like buyouts or stock offerings) and many special situations. Others still may aim to be market neutral and profit in any environment, or employ complicated dual long/short investment strategies. While many investors track metrics such as earnings per share (EPS), many hedge funds also tend to keep a very close eye on another key metric: cash flow.
Cash flow is important because bottom-line EPS can be manipulated or altered by one-time events, such as charges or tax benefits. Moreover, cash flow can also describe on how a company manage their money, where it has generated a large sum from investments, or if it has taken in money from third parties as well as how it’s performing operationally, since there are three parts of the detail and the breakup of the cash flow statement, they are operations, investing and financing which is considered as a very valuable tool.
Run Trades through Multiple Brokers or Conduct Arbitrage
Buying stocks is usually simple and straightforward, since a buyer tends to buy through one preferred broker. However, hedge funds is not that simple in their effort to squeeze out every possible gain since hedge funds will require multiple brokers to do other services to assist the hedge fund.
If it means a slightly larger gain, funds may also purchase a security on one exchange and sell it on another if it means a slightly larger gain. Due to their larger size, many funds go the extra mile and may be able to pick up a couple of extra percentage points each year in returns by capitalizing on minute differences in price.
Hedge funds may also look for and try to seize upon mispricing within the market. For example, if a security’s price on the New York Stock Exchange is trading out of Sync with its corresponding futures contract on Chicago’s exchange, a trader could simultaneously sell (short) the more expensive of the two and buy the other, thus profiting on the difference.
Unique Knowledge from Good Sources
Brokerage firms and/or their own research sources usually give information to rely on to many mutual funds. The downside to mutual funds, however, is that a fund may maintain many positions, so their intimate knowledge of any one particular company may be somewhat limited.
While particularly, hedge funds only manage concentrated portfolios which provide the ability to get to know a company very well. Besides, they can give more information and cultivate relationships with top management.
Mutual funds cultivate somewhat similar relationships and do extensive due diligence for their portfolios as well. But hedge funds aren’t held back by benchmark limitations or diversification rules. Therefore, at least theoretically, they may be able to spend more time per position; and again, the way hedge fund managers get paid is a strong motivator, which can align their interests directly with those of investors.