REVENUE STRATEGY – HEDGE FUNDS

Hedge funds are potential cradles of “Billion Dollar Babies”:

Renaissance Technologies’ Jim Simons made $1.7 billion in 2006.
Citadel's Ken Griffin made $1.4 billion
ESL Investments' Ed Lampert made $1.3 billion.

There are many ways to make - or lose – money at hedge funds.
1. Long-short funds bet that particular stocks will go down as well as up. The combination of bets to both the long and short side of a stock's performance reduces a portfolio's overall risk, while boosting returns.
2. Some hedge funds specialize in betting on mergers-and-acquisitions and corporate events like stock buybacks and dividend increases. The strategy overlaps with long-short equity, because M&A and special events are primary drivers of equity prices.
3. Mergers & Acquisitions funds can play both sides of the market: They can buy the shares of companies they expect to be taken over and sell short shares of companies that are likely to buy them. Shares of acquiring companies often fall because deals can boost debt and expenses.
4. Distressed-debt investors can take a passive tack, buying bonds in hopes that they will benefit from a turnaround or restructuring. One popular approach is to invest in credit default swaps, or insurance policies that protect bond investors from a drop in the value of their investment.
5. Hedge funds are taking more active roles in restructuring too. That active approach is best applied to large bankruptcies, where the potential payoffs can justify the labor-intensive approach.
6. Sophisticated hedge funds are buying enough debt in distressed companies to give them a seat on a bankruptcy-restructuring committee, where they have access to special information supplied by the company
7. Sowing discord in a bankruptcy case is another profitable approach. A capital-structure arbitrage is a bet on which creditors will make out best in bankruptcy reorganization.

Statutory Warning:
This is a zero-sum game. There have to be losers.
An estimated 83 U.S. hedge funds went under in 2006, eliminating $35 billion in assets.

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