The Boring Invstr - Your Simple, Digestible Weekly Investing & Finance Newsletter

Welcome Back to The Eighth Edition of The Boring Invstr!

How You Should Understand What Large Investment Firms and Hedge Funds Do

Let me preface this first, large investment firms and hedge funds have the resources, capital, and abilities to do what they do. They pay millions if not billions of dollars per year to do what they do for their clients and investors.

You should not try to invest and obtain returns like investment firms and hedge funds.

Although you should not try to replicate investment firms and hedge funds, understanding what they are and how they work is worth a look. You can earn valuable insights into risk management, how to evaluate companies and portfolio diversification.

What are Investment Firms?

Investment firms primarily focus on asset management, investment research, and financial planning and they typically charge a fee for these services. Investment firms are public and tailor investments to the risk tolerance of their client. Since they tailor to an investor's risk tolerance they deal with both equities (stocks) and debt assets (bonds).

Like someone developing their investment strategy, investment firms assess their client's financial goals, create a plan or what they would call strategies, and monitor their investments.

Popular investment firms include BlackRock, Vanguard, and JP Morgan Chase.

What are Hedge Funds?

Hedge funds fall under the alternative investment category. They pool money from private investors to invest.

Hedge funds are like investment firms in the sense that they want to maximize returns. The key difference between a hedge fund and an investment firm is their ideas about risk. Instead of a hedge fund tailoring risk to their client's needs, a hedge fund wants to eliminate all possible risks, hence the term “hedge.”

Although their goal is to mitigate risk as much as possible, hedge funds tend to use riskier strategies to generate returns when the market is either up or down. This means they utilize tools like derivatives, leverage, and shorting.

Retail or beginner investors should carefully consider their investment goals, risk tolerance, and financial situation before investing in an investment firm or hedge fund. They should also do their research to understand the fees and investment strategies of the firm or fund before investing.

Popular hedge funds include Renaissance Technologies, Citadel, and Bridgewater Associates.

What This Means For You:

Unless you have millions in capital, you should not put your money into a hedge fund or investment firm or try to trade like one.

Although, it would be worth observing strategies these firms use including rules of investing, risk management strategies, and how they allocate their money. You can often find parts of a firm's strategy utilizing their education resources page on their websites or by reading studies firms release through pdf documents.

Note that you won’t find their exact investment strategy. You don’t see Jim Simmons releasing his 60% return quant strategy from his quant firm Renaissance Technologies. If everyone knew the strategy, it would be worthless. There is no point in trying to identically copy popular trading strategies. You will lose your edge.

This is why 95% of investors should invest in ETFs and play the long-term game. Most people make more money the less they trade. Most people including myself can’t grasp this concept because it is out of our control. Play the long game, you’ll than yourself later.

That’s all for this week and I hope you enjoyed reading it! I am always open to feedback whether through Twitter messages, the comment section below, or email at [email protected].

If you found value and would like to help others simply with their investing and finances, then feel free to share the newsletter.

Over the next five weeks, I am going to cover five different types of investing strategies and what you can learn and implement from each.