Hedge Fund Strategies - Long Short 2 | Hedge funds

Investment vehicles, insurance and retirement

Hedge funds

Hedge Funds Intro
Hedge Fund Structure and Fees
Are Hedge Funds Bad?
Hedge Funds, Venture Capital, and Private Equity
Hedge Fund Strategies - Long Short 1
Hedge Fund Strategies - Long Short 2
Hedge Fund Strategies - Merger Arbitrage 1

Hedge Fund Strategies - Long Short 2 Seeing how the long-short portfolio might do in different market conditions (assuming that the underlying thesis is right)

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Hedge Fund Strategies - Long Short 2

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In my attempt to have a portfolio whose performance should depend
only on my ability to identify good companies and to
identify bad companies and not be held sway by whatever the market might do
I have bought a share of company B thinking that it's a pretty good company
that'll do better than expected and I shorted two shares of
company A and I shorted two of them because they're only 5 dollars a share
and I wanted to short the same dollar amount
So now I want to think about, assuming that I was right.
That company B will do better than company A relative to each other
How my investment will do if the stock market moves up or if the stock market moves down?
So let's imagine a situation where the stock market moves up.
And that situation you can imagine both of these stocks will go up.
So let's say company B goes up in percentage terms more than
Company A. So let's say that company B gets to 15 dollars.
So it gets to 15 dollars a share so it is up 50%
And let's say that company A only goes up by 20% so it goes to
6 dollars a share. So company A only goes up by 20%
Up 20%. So it is now up to 6 dollars a share.
So in that situation what happened? I clearly make a lot of money on company B
on my long position when the stock market goes up and
10 dollars became 15 dollars so I made 5 dollars there
And I clearly lost money on my short position.
Because I sold it at 5 and now I'm going to have to buy it back at 6
If I want to cover my short position. So this 10 dollar position
remember I have 2 of shares of them, are now worth 12 dollars
are now worth 12 dollars. 2 times 6 dollars.
And since this is a short postion I will lose 2 dollars
But because the company that I thought would do better
did do better it went up by more; It went up by 50 percent
while this only went up by 20 percent I still make money. I still make a 3 dollar profit.
Now let's think about what happens if the whole stock market
goes down. And I'm going to assume that I'm good at picking the right companies
so I assume that my thesis holds: that B does better relative to A.
So let's say in this negative scenario B goes down by 20 percent
So let's say B goes down by 20% So down by 20 percent
So it gets to 8 dollars a share. It gets to 8 dollars a share
So this is the market up scenario. Now let's imagine the market down scenario
Market down.
So now my position in B goes from 10 dollars
to 8 eight dollars so I lose 2 dollars on my long position
But when the market went down, I was right, A is not that great of a company
so it goes down more. Let's imagine that it goes down by 50 percent.
So A goes down by 50 percent. Down by 50 percent.
All the way to 2.50 per share. So now it's at 2.50 per share.
So my position in A the short position that was 10 dollars
It is now a 5 dollar short position. 2 shares at 2.50 per share.
So this is a short position I sold the stock that I borrowed and sold it at 10
now I can buy it back at 5, I make 5 dollars on the short position when the market goes down.
So even though I lost some money on my long position when the market goes down I more than make up
for it on my short position. So even in the down market, assuming my stock picking
is good, I have still made, I have still made 3 dollars.
And so what we've set up here is the long-short hedge and what's cool about it is
it's only dependent on the investor's hability to differentiate
the companies that are more or less likely to do well
relative to other companies and it's not as dependent on someone's
ability to pick which direction the market itself will be going.
And so when people talk about long-short hedge funds
they're talking about hedge funds that are essentially doing this
They're trying to hedge out the market risk.

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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?

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When naming a variable, it is okay to use most letters, but some are reserved, like 'e', which represents the value 2.7831...

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At 2:33, Sal says "double bonds" but should say "single bonds."

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