Biggest Hedge Funds in the World and How They Make Their Money

The concept of hedge funds has not been introduced in Nepal. While writing this, Nepal's capital market has 20 closed-end mutual funds and 2 open-ended mutual funds. The difference is that mutual funds are closely regulated investment products offered to the public. Mutual funds have units just like companies have shares under their name and they can be traded in NEPSE. However, hedge funds are private investments that take investment capital from a handful of investors, sometimes among a close group of people who know each other very well. Hedge funds have the freedom to use higher-risk investment strategies to achieve higher returns. 

Hedge funds lie at the heart of capitalism in the international investment world. Hedge funds and the profits they generate attract the best academicians and doctorates, and the world of fund management is so glamorous that it has been a subject of renowned books and movies. Unlike mutual funds that are known for giving mediocre returns in Nepal's context, hedge funds can take higher risks and there is virtually no limit to the returns they can generate. 

This article is an introduction to the biggest hedge funds in the world and the investment strategies that they use to generate market-beating returns to their investors. 

1) Bridgewater Associates

Bridgewater Associates is an American investment management firm founded by Ray Dalio in 1975. The firm serves institutional clients including pension funds, endowments, foundations, foreign governments, and central banks. Ray Dalio is an American billionaire investor and hedge fund manager well-known among the devotees of finance worldwide. 

Ray Dalio, a mediocre student who found school repetitive and monotonous, and saw no practical applications for the skills he was learning, founded the firm in 1975 from his two-bedroom New York apartment. 

Bridgewater Associates became the world's largest hedge fund in 2005. As of March 2021, the fund had $140 billion under management. Bridgewater Associates' average return over the last 28 years has been 11.5% per year. This is nearly double the average yearly return of the S&P 500, which is about 7%. From 1991 to 2005 it lost money in only three calendar years, and never more than 4%.

Investment Strategy: 

Bridgewater Associates is a global macro firm. The fund invests around economic trends like exchange rates, inflation, and G.D.P. growth.

2) Renaissance Technologies 

There is more than one way to greatness, at least in the stock market.  Renaissance Technologies is a stark contradiction to the investing style of Bridgewater Associates. 

The founder, Jim Simons, also known as the Mathematician who solved the stock market, has close ties to Nepal. His fund uses mathematical models and algorithms to make money in the securities market.

By 1978, Jim Simons had conquered mathematics, figured out code-breaking, and built a world-class university department at Stony Brook University. He founded Renaissance Technologies in 1982. Simons then filled the fund with programmers, mathematicians, physicists, and cryptographers.

Long story short, his group of Ph.D.'s. mathematicians and programmers helped him create the most successful fund in the history of investing. Today, Renaissance Technologies is so successful that investors have held the fund tight despite the fund charging higher fees than the industry average. Furthermore, the fund is now closed for outside investors. Only Jim Simons and his intimate group of investors reap the benefits of Jim's extraordinary profits.

Investment Strategy: 

The fund specializes in systematic trading using quantitative models derived from mathematical and statistical analysis. The firm is regarded as the "most successful" hedge fund in the world in terms of percentage returns and consistency of profits. 

3) Man Group

Man Group is the world's largest publicly traded hedge fund company. The company was founded by James Man in 1783 as a sugar cooperage and brokerage. 

Man Group’s assets under management grew 2.8% in the first quarter of 2021 to $127 billion, bolstered by positive investment performance and net inflows.

Investment Strategy: 

The Company's principal operating subsidiaries include Man Investments Limited, Man Investments AG, Man Investments (USA) LLC, Man Investments (CH) AG, Man Group UK Limited, E D & F Man Limited, Man Investments Holdings Limited, Man Group Holdings Limited, Man Ultraviolet Limited and Man Investments Finance Limited.

There is a reason behind this diversity. With its diverse group of subsidiaries, Man Group can employ all strategies to work. Some subsidiaries focus on momentum investing and quantitative trading while others follow discretionary, long-only strategies. Some also invest in private markets like real estate. 

4) Millennium Management

Millennium Management is another investment management firm with a multistrategy hedge fund offering. The firm operates in America, Europe, and Asia. While writing this, the firm has over $49.7 billion in assets under management and 30+ years of track record. 

The firm is known for its entrepreneurial support to fund managers and broad, diverse trading strategies. Millennium Management is a significant participant in virtually all major liquid markets around the world and is continuously evaluating new strategies that fit their risk and return characteristics.

Investment Strategy: 

a) RV Fundamental Equity

b) Equity Arbitrage

c) Fixed Income Strategies

d) Quantitative Strategies

5) Elliott Management Corporation

Elliott Management Corporation is an American investment management firm. It is the largest activist fund in the world. An activist shareholder is a shareholder that uses an equity stake in a corporation to put pressure on its management. The intent can be financial (an increase of shareholder value through changes in corporate policy, financing structure, cost-cutting, etc.) or non-financial (disinvestment from particular countries, adoption of environmentally friendly policies, etc.) 

The Elliot Corporation was founded by Paul Singer. Singer left law to create his own investment company with US$1.3 million in seed capital from various friends and family members. Singer defends the firm's investment model as a fight against charlatans who refuse to play by the market's rules. 

As of January 1, 2021, Elliott manages approximately $41.8 billion in assets.

Investment Strategy: 

The firm employs a multi-strategy trading approach that encompasses a broad range of strategies, including, without limitation: distressed securities, equity-oriented, hedge/arbitrage, commodities trading, other debt, portfolio volatility protection, private equity and private credit, and real-estate-related securities.