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What is a hedge fund?

You’ve probably heard a lot about hedge funds if you pay much attention to the business news, but the chances are that you’re not entirely sure what a hedge fund actually is, and you haven’t got round to looking it up because it sounds like it might be complicated. Don’t worry, it’s actually quite simple… In an ordinary investment fund (a ‘mutual fund’ to US readers), the fund manager usually takes all of the money given to him by the investors and uses it to buy shares in companies that are expected to deliver the best returns. With us so far? Good. The difference with a hedge fund is that the fund manager doesn’t just use the investor’s...

posted on: Mar 2, 2008 | author: Lance

What is money?

It sounds like a daft question, doesn’t it? Money is the notes and coins in your pocket, the numbers on your bank statement, the limit on your credit card. You use it to buy things. Simple as that. However, as with many seemingly daft questions, this one is worth scrutinising more carefully. For instance, why are those particular notes and coins ‘worth’ something? Why can’t we make our own? Why do we need money in the first place? How do the electronic numbers in bank accounts become the ‘real’ notes and coins in our hands? All of these questions and more spring up when we ask what money is. Not all the questions can be answered in one...

posted on: Feb 24, 2008 | author: Alex

Trading: the long and the short of it

If you can keep your head while all around you are losing theirs, you’d probably make a good investor. Times of turbulence on stock markets can be times of opportunity for the savvy investor. Picture the scene last week. City traders losing X billion pounds a day and having to cancel the order for that third gold-plated Porsche. Pension fund managers taking one look at their huge losses and… shrugging because it’s not their money. Uninformed media sources proclaiming the end of the world. Meanwhile, you could have been quietly sitting at your computer, raking in the cash. Most people are aware that to be successful at investing you should buy low and sell high. What fewer people...

posted on: Jan 25, 2008 | author: Alex

Irrational exuberance and the madness of crowds...

The title of this article combines comments by Alan Greenspan about the stock market boom of the 1990s (”irrational exuberance”) and the title of a book by Charles Mackay. The book, “Extraordinary Popular Delusions and the Madness of Crowds”, is a short but interesting one, covering those aspects of human psychology, sociology and politics that lead to what are known as bubbles. A bubble is loosely defined as what happens when the price of a particular class of item breaks away from fundamentals and, in effect, goes up because everyone expects it to go up. We’ll rewind a bit here and take a look at the way markets usually work; all markets, not just financial ones. Company A...

posted on: Nov 25, 2007 | author: Alex

Investor emotions part 3: Remorse

As I’ve discussed in previous articles, the two most significant negative emotions for investors are greed and fear. Either one on its own can lead to people losing money, but more often than not they are combined in an elegant double-whammy that hits some amateur investors so hard that they leave the market with their tails between their legs and never come back. Greed leads them to invest more than they can afford to lose, while fear encourages them to change their strategy on the hoof, without rationally considering the circumstances and the consequences of their decisions, thereby increasing the chances that they will lose. The result is remorse, an emotion that can be either negative or positive:...

posted on: Nov 5, 2007 | author: Alex

Investor emotions part 2: Fear

Fear. We’ve all felt it at some point. The ominous sound of footsteps padding along behind you as you walk back from the pub in a provincial town at 2am on a Saturday night. The realisation that your evil mother-in-law is coming to dinner and you’ve forgotten the steak (not to mention the garlic and holy water). The awareness, halfway through a trans-Atlantic flight, that you’ve left the gas on. The soft ‘click’ as you wake up from your sleep-walk and realize that you’re standing naked in the hotel corridor and the door to your room has just locked itself. Fear. It’s that stomach-dropping, bowel-loosening moment when you realise that you’re about to suffer a deeply unpleasant experience...

posted on: Oct 30, 2007 | author: Alex

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