Hedge Fund Strategies: how to trade like a hedge fund manager

Hedge Fund Strategies - 4 Hints You Must Follow

We have to admit this: when growing up, We was not fascinated about famous artists like Jay Z and Diddy like our peers did. Rather than, We was not interested in musicians or movie star at all!

We was interested in famous hedge fund managers like Carl Icahn, William Ackman, John Poulson, and Steven Cohen among others. We loved how these people made their money by buying companies and advocating for change, and We loved how ‘easily’ they made their money.

In fact, our most memorable day was when We had a chance to have a conversation with Ackman (he is great gentleman he is). In this article, We will describe four key hedge fund strategies you can do to trade your account in the same way the hedgies do.

Hedge Fund – 5 Steps to Start & Manage It

#1 - Define your Hedge Fund Strategy

The hedge fund industry is really broad. All successful hedge fund managers have different hedge fund strategies.

For instance, William Ackman is an activist investor; this means that he buys stakes in companies and then advocates for change in the way the companies are run.

Ken Griffin on the other hand is a multi-asset multi-strategy investor. This means that he trades in different assets such as bonds, commodities, and equities using different strategies such as arbitrage and quantitative techniques.

James Simmons on the other hand is a quant trader. This means that he uses algorithms to make investment decisions.

As a trader, you need to define the strategy you will use to make entry and exit decisions. Your strategy should also include the risk management strategies you will use.

Other items to consider in this are:

  •  The asset class to trade
  • Analysis method to use
  • Duration of holding a position
  • Markets to trade

#2 - Source of Funds

Your source of funds is another important thing you must think about when trading like a hedge fund manager.

Most hedge fund managers you know trade using other people’s funds. For instance, Ackman has more than $12 billion in assets under management but Forbes values his estate to be worth about $1.2 billion.

Only a few managers invest their own funds (kie George Soros and Steve Cohen). The benefit of trading your own funds is that you will have peace of mind no matter the losses you make. When trading other people’s funds, you will always fear their next actions such as withdrawals and redemptions.

We prefer you trade with your own $10,000 than with a million dollars of other people’s funds.

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#3 - Test your Strategy

Testing your hedge fund strategies is the best thing you should do. Backtesting will help you avoid making serious mistakes which people make on a daily basis. If this is your first time trading, you should spend about 6 months testing the strategy you will use with real funds. On the other hand, if this is not your first time trading, you need to ensure that your strategy is solid.

Doing this will help you have an ease of mind when trading.

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#4 - Reflect

Finally, after you start trading, you should now reflect on your trading decisions. Hedge fund managers report to their investors on a quarterly basis. As an independent hedge fund manager, you should go the extra step to report to yourself on a daily basis.

This will involve having a trading journal where you will list all the trades you make. A trading journal should simply include a few items such as:

  • the reason for entering a trade
  • the profit/loss made
  • the reason for exit

This should be done on every trade that you make. It will help you avoid repeating the same mistake on a daily basis.

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