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Today I have a unique guest post for you, written by Andrew May. Andrew gives us another perspective on some investing lessons we can learn from these hedge fund managers. I prefer value investing, index funds and other buy-and-hold methods, but it’s always nice to get another perspective and these managers are obviously good at what they do. You can read more about Andrew at the end of the post! Write for us.
When you’re trying to get good at something, always learn from the best.
Whether you’re just getting started with investing your money or are already a well-seasoned and sophisticated investor, you could always do with a few lessons taught by some of the best of the best in the financial world.
When most people start investing, their journey often begins with reading up about Warren Buffett. Buffett’s compounded annual return of about 20% over the course of his 50-year career, as Berkshire Hathaway’s chairman, is the stuff of legends.
But he isn’t the only one on the rich list who has made his fortune solely off the back of investments made over the years.
There’s a growing number of hedge fund managers whose talents have not only made them enormously wealthy, but also landed them on the prestigious Forbes Rich List. Many of these managers are billionaires and their investment styles vary greatly from the long-term value investing mantra of Buffett.
Here’s a list of the top 5 richest hedge fund managers and the lessons you could learn from them…
1. Steve Cohen ($10.3 Billion)
The billionaire hedge fund titan is notoriously secretive. But the details of his investing methods have managed to leak over the past few years. Cohen started off as an options arbitrage trader in 1977. 25 years later Cohen would leave and start a hedge fund with a few of his former colleagues and $20 million of his own money. The fund was a phenomenal success and made consistent gains till December 1994 when the fund lost 0.02%.
Cohen noticed that his managers were not taking enough risks because their own money was invested in the funds, and he expressed his disappointment with their conservatism. The fund wouldn’t lose money again until 2008. Cohen is a self-taught “tape reader” and his ability to predict stock moves based on price and volume fluctuations is said to be the key to his success. That and his enormous appetite for risk could be why he’s the 106th richest person on the planet.
2. James Simons ($12.5 billion)
When James Simons started his Renaissance Technologies fund in 1982 he wanted to approach money management in a very novel way. His background in advanced mathematics had helped him devise mathematical models that would recognize patterns in the markets’ seemingly random fluctuations.
The models worked and the results were spectacular. The company’s Medallion fund has returned an average of 35% after fees since 1989. Today a vast majority of the employees at the hedge fund are astrophysicists and mathematicians, and it goes to show how approaching a problem in an innovative way can sometimes lead to spectacular success.
3. John Paulson ($13.7 Billion)
John Paulson made the bulk of his fortune during the financial meltdown of 2008. He made $4 billion personally by shorting the mortgage backed securities that would eventually collapse with the bursting of the housing bubble. The two biggest reasons Paulson has enjoyed success are contrarian thinking and attention to details.
Paulson isn’t afraid to go against conventional wisdom when it comes to making large bets that he’s sure he will gain from. He’s equally adept at understanding the finer details of events such as mergers and acquisitions, which is how he’s managed to make money in most of his other trades.
4. Ray Dalio ($15.2 Billion)
Ray Dalio started his hedge fund, Bridgewater Associates, in 1975 and today, it’s the single largest hedge fund in the world. Fortunately, he’s been very generous with his knowledge and has published a number of books and articles detailing his style of investing.
Dalio takes a top-down approach to investing and believes that the traditional portfolio is too exposed to equity, which implies that subnormal growth is a given. He encourages investors to maintain a flexible portfolio that can adapt to changing business environments, which means holding bonds during dis-inflationary recessions, cash when money is tight and stocks during growth phases in the economy.
5. George Soros ($24 Billion)
Hungarian-born George Soros is not only the richest hedge fund manager in the world, he’s also the only one to start off on his journey to wealth with absolute zero in his pockets. The investment guru says his method is largely scientific, and he tests the way the market is reacting to asset prices by making small initial bets to test his theory. If the test results are positive enough, he goes ahead with much larger bets, which have a tendency to pay off quite nicely.
Soros also admits to going with his gut when making decisions, often abandoning trades when his head or back aches since he believes this to be a clear sign from his body that he’s wrong. Knowing when you’re wrong and when to step away from an investment is the key to success in this field according to him.
Photo Credit: World Economic Forum