FPC Blog


Facts About Hedge Funds That Will Blow Your Mind

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Sure, hedge fund groups are seemingly wonderful. I mean, isn’t it great to have investors pool their money to help businesses grow and thrive. While this is very true, hedge funds have done some awesome things for the business industry and investors, it’s important to remember one thing. Everything that glitters isn’t gold and I’m here to tell you just as there are many good things about hedge funds, there is also a bit of a dark side to the game. There are a lot of things that happen behind the scenes that you would never know unless you’re thrown in the midst of it. And of course, unless you are a successful, accredited investor, you wouldn’t even have the chance to hop in. But take it from someone who has been an investor for decades, there are things that go on that will truly shock you. Check out these 4 surprising facts that you didn’t know about hedge funds:

  1. Hedge funds struggle to make money for their investors: While any investment comes with risk, they usually yield high rewards at the end. Well hedge fund investors can’t always say the same. Compared against the US Investor Index, hedge funds are clearly underperforming. Not to mention, once all of the fees are taken out, investors are left with little to no returns. This leads hedge funds to look into creative ways to supplement struggling returns. For instance, several hedge funds literally invest in the life insurance claims of others, hoping they’ll die early so they can collect or they may specialize in purchasing the claims of bankrupt companies or private partnerships so that they can collect as the trustee located more money for the victims.
  2. Hedge funds use their money and resources to fight political battles: It’s not uncommon for hedge funds to get involved in foreign politics. For instance, some of the largest hedge funds in the world (including Och-Ziff, Blackrock, and GLG) financed Zimbabwean despot, Robert Mugabe’s, violent election coup in exchange for mining rights back in the early 2000’s. Also, Elliot management and several other funds have fought relentlessly with the government of Argentina over the Argentine debt default of 2001. They even went as far as forcing an Argentine Naval vessel to be detained in a port in Ghana until debts were repaid.
  3. Hedge funds fraud activism: Believe it or not, a lot of hedge funds have been activists in cleaning up the business industry’s fraud. There have been several who specialize in finding and exposing fraudulent companies. A few funds made names for themselves by exposing and shorting dozens of fraudulent Chinese securities over the past decade. But perhaps the most shocking turn of events was when the “World’s Largest Hedge Fund” was exposed for its own fraud. Harry Markopolos, an executive at a major Boston options-trading firm tried to blow the whistle on Bernie Madoff and his hedge fund numerous times yet no one would listen. Years later, after incurring over 65 billion dollars in fraudulent transactions, Madoff’s fraud blew up because he couldn’t meet redemption requests, not because of regulatory action.
  4. Hedge funds have become very invested in gambling: Hedge fund sport-betting has become more of a common practice. Why has this become so attractive to hedge funds? Two reasons, (a) there is a positive expectancy and (b) it is completely uncorrelated to the market. Your pocket aces don’t care whether China slashed GDP forecasts.Now you know….
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