Hedge funds make a name for themselves by taking calculated risks. Some of the biggest hedge funds of all time are known for gambling on major short positions or investing in early-stage startups that changed the world. Simply put: hedge funds exist to far exceed expectations, and they need to take risks to achieve outsized returns. The best hedge funds are those that win more than they lose, and are able to minimize losses while maximizing gains.
But what does it really mean to be a successful hedge fund? It goes beyond a willingness to take risks. The greatest hedge funds are those that understand the strategy behind prospecting investments and are able to create opportunities where they seemingly don’t exist.
To understand what it means to thrive in this kind of environment, let’s take a look at some of the best hedge funds today and how they maintain their status among the best investment experts in the world.
What is a Hedge Fund?
Hedge funds are institutional investors known for their risky investment style. Also called “capital market companies,” they utilize the funds of high-net-worth individuals and put them to work in leveraged scenarios to magnify results. The term alludes to the metaphor of a hedge that separates wealthy property owners from their less-wealthy neighbors.
They’re special because they operate without many of the restrictions imposed on retail investors. Because these funds specifically seek out risky, aggressive investments, they’re treated differently by the Securities Exchange Commission (SEC), as opposed to other types of managed funds like mutual funds.
Hedge funds differ in their approach; however, most dabble in a variety of leveraged investments, including derivatives. They make money not only through management fees, but also by deducting a percentage of the profits for their clients, as a way to justify the risky positions they take.
All-Time Famous Investors
The concept has evolved over time. Originally, the “hedge” in hedge fund signified safe haven assets that protected wealthy investors from market downturns and volatility. However, in pursuit of greater returns, many funds began to shift away from safe haven investments.
Some of the most prolific hedge fund investors of our time are those who not only pursued big-time opportunities, but those who repeated their successes over and over again. Carl Icahn and Daniel Loeb found massive success as activist investors, buying stock in floundering companies and bringing them back to life. David Tepper and John Paulson made big money after the Great Recession on risky investments that paid out billions. Bill Ackman is a prolific short seller, while Ray Dalio is known for savvy reinvestment of capital gains.
These greats all have their own way of beating the market, all of which demand a tolerance for high-risk, high-reward investing.
The Best Hedge Funds in 2022
Did you know that there’s an annual event to celebrate the success of managers? The Hedge Fund Industry Awards have taken place for 19 years running, showcasing the best and brightest minds among institutional investors. The awards are a benchmark for industry performance, as well as a testament to the creativity and strategy of fund managers as they pursue outsized profits.
In 2022, the best funds are those that’ve been able to weather market turbulence, while still coming away with extensive profits. Here’s a look at the finalists for Institutional Hedge Fund Manager of the Year:
- The D.E. Shaw Group
- Elliott Management Corp.
- Man Group
- Millennium Management
- TCI Fund Management
Crowning the best of 2022 doesn’t just come down to profits, however. The Hedge Fund Industry Awards also recognize a variety of other performance benchmarks. Each illustrates how difficult it is to pursue aggressive profits through risk-oriented strategies. For example, other categories awarded include:
- Emerging Hedge Fund Manager of the Year
- Equity-Focused Hedge Fund Manager of the Year
- Credit-Focused Hedge Fund Manager of the Year
- Multi-Strategy Hedge Fund Manager of the Year
- Macro Hedge Fund Manager of the Year
- Quantitative Hedge Fund Manager of the Year
- Most Innovative Hedge Fund Manager of the Year
Finalists in these categories include names like Madison Avenue Partners, Senvest Management, GoldenTree Asset Management, Silver Point Capital, Pershing Square Capital Management and Starboard Value, among others.
Whether they focus on an esoteric investment strategy or take major risks within well-defined parameters, hedge funds need to operate at a nearly infallible level. Losses on calculated risks need to be offset with gains elsewhere. Moreover, the best managers know how to create those gains where they don’t seem to exist. To succeed takes world-class market mastery.
Ultimately, the entire value proposition of these funds is their ability to turn risk into reward. Funds that can do this consistently and with tremendous profits are those that continue to attract wealthy investors. Most funds stay within a specific channel or focus on a specific strategy. In fact, this gives them an edge when it comes to beating the market at its own game.
Most investors can’t burden the level of risk that fund managers do. However, that shouldn’t stop you from learning the strategies these funds use to outsize their returns. Discover the leading investment newsletters to learn more about how the best hedge funds mitigate risk and maximize returns through strategic investing decisions.