In the words of Bloomberg, “It’s basically a way your broker makes money off your cash. They will pay you a commission for making more money on them than they would making you on your own, provided you make money on them.”
So, where do you find the money? A study from the Center for Responsive Politics found that hedge funds have a whopping $5.2 billion in cash and cash equivalents, which means the vast majority of all of America’s money is being funneled by hedge funds through one single giant market. Here’s a screenshot of that data from the data-mining site OpenSecrets.com, showing where the money actually is (if you were wondering).
It’s easy to see that for every $1 of investment that goes into the American stock market, it brings $4,300 in fees to Wall Street. Not too shabby for your personal savings account, I guess.
Hedge funds are often marketed to people with little or no exposure to stocks and bonds.
So what are they actually doing?
Like all hedge funds and other big financial services firms, hedge funds are very heavily invested in commodities. They invest in commodities such as corn, cotton, wheat, soybeans, etc. These commodities are very volatile, often fluctuating by as much as 15 percent a day. This makes them very attractive to hedge funds. If you have the right technical analysis, you can turn a commodity like agricultural commodities into an insurance product like a hedge fund; you can pick up the same hedged commodity at the same price year in and year out and make extremely fast capital gains off of it.
In 2006, Bloomberg Businessweek found the following information regarding how the vast majority of these funds operate:
“The money managers at the big hedge funds make roughly $2 billion a month on investment income from commodities. Hedge funds pay an initial fee for every product traded against futures contracts, and the fees can be as high as a quarter of a percent, according to a study by the Wall Street Journal. Many financial analysts who write contracts for the hedge funds say they receive a percentage of the fees from clients, and traders make a profit by borrowing contracts from money managers and selling them on the open market.”
And here’s an article on how they make money from hedge funds written by the Chicago Journal-Sentinel:
“Many hedge funds, including one run by Donald Trump, invest in corn, wheat, steel, oil, and other
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