Hedge funds are often regarded as the most interesting and exciting creatures in international finance. These mysterious entities are synonymous with extreme wealth and privilege. But what are they and what do they do? This book lifts the lid on this elite industry.
A quick guide to hedge funds
Australian investor Alfred Winslow Jones is credited with creating the world’s first hedge fund, in 1949. Jones used leverage (through derivatives or borrowed money) to magnify his gains (and losses). He also used short-selling — borrowing shares, selling them, and then buying them back at a lower price — to manage market risk.
Today, there may be more than 10,000 hedge funds worldwide, with total assets exceeding $3.5trn. This market has broadened to include a wide range of active management and risk strategies for alternative assets. With minimum subscriptions often exceeding $1m, hedge funds are seen as an asset class exclusively for the ultra-wealthy. And, thanks to high fees and generous compensation schemes, their managers are among the most highly paid (and high-living) people on earth.
This hedge fund’s not just for the rich
Most hedge funds cater to UHNWIs (ultra-high-net-worth individuals), but a few are open to the public. According to Trustnet, there are 11 hedge funds listed as UK investment trusts. Of these, 10 have been listed for at least five years. The star performer is Pershing Square Holdings (LSE: PSH), whose share price has more than doubled (up 116.7%) since 2016. PSH is also #1 over three years (up a whopping 168.9%) and one year (up 66.8%).
As a UK investor, I can buy into Pershing Square Holdings to share in its future success and performance. For example, I could drip-feed money monthly into this hedge fund. I can even buy its shares inside a tax-free Stocks and Shares ISA or personal pension. But why would I risk betting on a global hedge fund? Because it is managed by American billionaire Bill Ackman, one of the world’s most outspoken and successful investors.
I can invest in PSH with just £25
Personally, I’m a huge fan of Bill Ackman and his investment insight. A year ago, as Covid-19 spread panic worldwide, Ackman publicly warned in February 2020 that “Hell is coming” for investors. He invested $27m into highly geared bets against US company bonds. After credit ratings plunged, he sold this ‘crash insurance’ for a $2.6bn profit. That’s a 100-fold return in a single month. Ackman has built his reputation on such big, bold, ballsy bets.
I call Ackman ‘Wild Bill’ because of his willingness, in his words, “to make a bold call that nobody believes in”. As I write, the PSH share price stands at £25.40, up more than two-thirds in a year. That’s 8.1% below PSH’s 52-week high of £27.65, hit exactly a week ago. This values this hedge fund’s UK trust at almost £3.2bn, which is a discount of 21.8% to its net asset value. If that discount narrows over time, this boosts shareholders’ returns.
Obviously, investing in a listed hedge fund is highly risky. It’s absolutely not for widows and orphans. But Bill Ackman is a way better money manager than most (including me). Thus, I’m going to back this billionaire by buying into his UK-listed hedge fund via one of my personal pensions. Go, Wild Bill!
