Hedge Funds are a true conglomerate that has ruled Wall St. for many decades. These firms work on the principles of only one thing that is to churn out profits and gains from their investment. They are unregulated so they put their investment wherever they think it will be a good investment, it can be the stock market, bonds, commodities, forex, or anything.
And yes, you can’t put your money with the Hedge Funds because you need to be at a certain level in financial terms to be able to give your money to these Hedge Funds.
For many Hedge Funds, you need to have assets of at least $1 or $2 million and a steady income of $1 million annually.
5 Biggest Hedge Funds with the Highest AUM (Assets Under Management)
1. Bridgewater Associates ($98.9B)
2. Renaissance Technologies ($70B)
3. Man Group ($62.3B)
4. Millennium Management ($43.9B)
5. Elliott Management ($42B)
It is said that Hedge Funds are manipulating stock markets for decades to earn profits in the billions and they have been successful quite often but when it came to the average guy making huge sums of money from the GameStop thing there was numerous speculation as to how this whole drama should have never happened in the first place. Many big investors are happy that the GameStop situation occurred but on the other hand, some want this to get banned. Legendary investors like Big Short’s Michael Burry spoke against it whereas big-time investor Mark Cuban was in support of the whole situation.
How Mutual Funds and Hedge Funds are different?
1.Mutual Funds are for the regular not-so-rich people whereas Hedge Funds are for the wealthy. It's a completely sensible thing to deliver your money to someone who knows better how to multiply it by taking a fee of some sort.
2.Mutual Funds are regulated by the government and need to answer to the authorities if something goes wrong, but Hedge Funds on the other hand don’t need to answer anything to anyone, they are left free to manipulate the market in any way, shape, or form.
3.Mutual Funds have a very narrow strategy on where they can invest the money, it's usually stocks and gold. But Hedge Funds literally invest in anything where they see an opportunity to make money. Because of this, they are easily able to manipulate the market without the knowledge of the average investor.
4.Hedge Funds are not allowed to directly advertise themselves as they form a way that opens to how the rich operates which the government doesn’t want us to know whereas Mutual Funda is for the regular people so they openly advertise. Indirectly Hedge Funds also advertise.
GAMESTOP STONKS: A TRUE HYPOCRISY
It has never happened before in the history of Wall St. but no one can say with certainty that it won’t happen again as it was the average guy winning and the ginormous firms losing. It kind of speculated a public outrage in the market. The question that arises here is that the big firms are accused of manipulating the market but when the everyday average guy does it, it suddenly becomes a problem.
It all started from a Reddit post that suggested its followers buying GameStop stocks. The person who made the post somehow found out that there is a huge quantity of “short selling” that is being done on the GameStop stock. Contrary to popular belief, miraculously people followed and as a result made the big Hedge Funds squeal like a little rabbit. They started a phenomenon called a short squeeze.
You may ask what is short squeeze? Here is a simple explanation:-
What is a short squeeze?
A short squeeze is a phenomenon in which it forces the person holding a large number of shares to buy the stocks instead of selling them in a short sell position. As a result, stocks surge up exponentially instead of surging down.
The guy who started it all, made $48 million from an initial investment of just $47,000, which is unimaginable but as the guy who made it all happen, he was the one who also suggested to his followers not to sell their position in order to grab quick profit and hence as a consequence he didn’t sell and made not so much when the stocks came crashing down 2 or 3 days later.
Basically, what happened is that many individual investors collectively bought GameStop stock which led to the price of the stock rise and as a result, the short-sellers started to suffer losses gradually. After a while, the time came when the losses piled up to $10 billion for the Hedge Fund. So to avoid the losses and to get out of the situation they had to buy back the stocks (because of the short sell position, they had to buy it not sell their position) which ultimately skyrocketed the share prices giving the individual investors unimaginable gains.
As a consequence in the days of this drama, Robinhood banned the buying of GameStop stocks because they were funded by these kinds of Hedge Funds and they tried to protect themselves and their funding by banning retail investors.
Any good investor or broker would suggest you stay away from this whole situation as this is a situation of gaining quick and huge profits and from history, we know that where there is big profit there is a big risk, here the whole situation was a game of revenge.
You may have noticed many big legendary investors didn't see this as an investment opportunity from the drama, you should also not see it as an investment opportunity.
FYI GameStop is a company that was started as a way to sell offline games but it soon came crashing down as the market of video games went online from offline, and they failed to catch onto it. So big Hedge Funds noticed this and put huge bets on the stock falling in the form of short selling.
See part 2 to know more about the strategy of legendary Hedge Fund managers and how they got insanely rich.