Do you like to learn about how amazingly successful people accomplish remarkable results? I do, and I hope you share my interest. Let’s take a look at making money through investing, something most people have found to be very difficult to accomplish since 2007.
Long before Greenwich, Connecticut was jammed with mind-boggling palaces custom built by billionaire hedge-fund managers seeking to outdo their neighbors and competitors on sites formerly occupied by more than one torn-down mansion, people who knew a lot about investing wanted to work for hedge funds. Those savvy insiders knew a few secrets:
1. Hedge funds can make lots of money in any market environment.
When prices are rising, they buy securities like anyone else. They can also profit when prices fall by selling short (using borrowed securities and later repaying the loan with securities, bought hopefully at lower prices).
When prices are going sideways, hedge funds frequently buy and sell securities to capture the benefit of any volatility while selling high-risk options on those securities to add some extra profit.
2. Unlike most investment vehicles, hedge funds can borrow lots of money when opportunities look good. If the bargain looks attractive enough, the opportunity to invest can be almost like buying a house with no money down and quickly flipping it in a rising market. A small, quick trading gain can be multiplied by the borrowed money to turn even a small equity stake into a fortune.
3. Investors in hedge funds are willing to pay well for great management results, sharing a rich percentage of the profits with the funds’ managers. If your investors have billions on account with you and you multiply those riches, hedge-fund managers can make billions, too.
4. When hedge funds aren’t doing so well (for whatever reason), investors still pay generous fees. A hedge-fund manager isn’t going to experience any financial set backs unless investors become so disgusted with the results that they take their investments to another manager.
5. Investors like to see hedge-fund managers invest their wealth and new profits along with them. Thus, large earnings for the hedge-fund managers can be quickly multiplied through reinvesting the profits into a successful hedge fund.
As a result of these opportunities, a high-performing hedge-fund manager could conceivably earn hundreds of times as much as a mutual-fund or pension-fund manager handling the same investment amount.
Despite these enormous incentives, until a few years ago the hedge fund industry was relatively small compared to the mutual fund and pension fund industries.
Opportunities expanded greatly as limits on short-selling were reduced in the United States, the number of low-cost sources for borrowing increased, and wealthy investors became more impressed by the huge gains some hedge funds enjoyed. As a result, many more people could become hedge fund managers.
Before having a chance to prove what you can do with a hedge fund, someone has to back you with large sums of money. It helps to have wealthy friends who are interested in what you might be able to do. Many other investors choosing new hedge-fund managers are satisfied clients of the hedge funds where the same managers have been working in senior investment positions.
Once you manage a hedge fund, little counts in determining success except the rate by which investments are multiplied. Let’s look at how competitors typically gain advantages.
Hedge-fund managers who are counted among the best of the best usually understand aspects of the financial markets that their competitors don’t. A good starting point for gaining such an edge is to notice what others are ignoring.
Focus on finding out everything you can about those overlooked areas until you appreciate what’s going on, and you can more frequently zig in a profitable direction while others zag.
Proprietary insights are often obtained by people who are fascinated by markets and productively engage their curiosity. When these investors study in new ways, they often gain unanticipated insights after their investigations open up additional perspectives.
Lessons from a hedge-fund manager’s success can be translated into success in almost any other career that interests you. I encourage you to learn and apply these lessons so that you will be able to locate better opportunities and gain more advantage from them.
Recently, I had the opportunity to interview hedge-fund manager, Michael Berman, Ph.D., whose Global Macro Freestyle REIT (Real Estate Investment Trust) Fund was the best performing hedge fund in 2008 for its investing style and which also led all other Australian hedge funds (regardless of style) that year.
Dr. Berman kindly shared many valuable insights about how he learned to improve his investing results and advanced his career.
Many people believe that those who achieve great prominence must have had an easy path to the top. Dr. Berman’s career suggests the opposite conclusion: Problems are a necessary foundation for outstanding performance because problems are such important sources of opportunities to learn and grow stronger.
So if you feel burdened with problems, you should instead be grateful that you have lots of opportunities.
In understanding the importance of problems, let’s start with developing emotional maturity, a critical element for success in almost any field. Here is how Dr. Berman describes his feelings as a youngster:
“I felt terribly insecure, lonely, and overwhelmed. This feeling of insecurity was never to be a handicap, but rather an inspiration for me.”
Isn’t that interesting? Most of us simply withdraw from circumstances that make us feel insecure, lonely, or overwhelmed. Dr. Berman’s advice is to move towards the apparent cause of those unpleasant feelings, seeking to grow stronger and more capable through mastery of the circumstances.
Having gained competence and confidence while in high school, Dr. Berman incorrectly believed that he had put insecure feelings behind him. Yet during his university studies and early work career, he again felt insecure, lonely, and overwhelmed.
His solution to overcoming those feelings was the same: Move towards the source of those feelings, seeking to grow stronger and more capable by handling the circumstances.
After liquidating his once-promising Internet start-up, Dr. Berman headed in a new career direction by taking a job developing properties in his native South Africa. He did well and search firms kept calling, allowing him to move swiftly into positions of ever greater authority and responsibility.
Realizing that careers in property development and management often rise and fall in tandem with the direction of the financial markets and demand for real estate, Dr. Berman had a better career-improving idea in 2001: start and manage a global macro real-estate hedge fund.
In 2002 he persuaded the organization where he worked to invest with him. Drawing on his deep understanding of property development and management, he did well and posted gains averaging 69 percent per year for the next two years.
Unfortunately, the firm’s leaders got into disagreements that led to its liquidation. As a result, Dr. Berman needed a new investor. Fortunately, he was able to borrow money based on his relatively rare talents at that time.
That was the good news. The bad news was that he started taking outsized risks in currency trading, an area beyond his expertise. Losses piled up, and the fund was liquidated by the lenders. He was left owing a fortune due to having agreed to share losses with his investors. Ouch!
Dr. Berman remained calm and proceeded to seek new investors, knowing that he could again deliver great investment results. He was delighted to find backers for a hedge-fund management company, and he was able to repay his debts from the prior fund’s liquidation.
Gaining hedge-fund investors was slow and difficult this time. To make matters worse, a regulatory technicality required that the new hedge funds be liquidated almost a year after they were launched.
Undaunted, Dr. Berman decided to start again, this time with money from family and friends. All along he managed his investments with intuitive knowledge of behavioral finance (how people act in ways that are contrary to what a totally rational person would do) and how those perspectives applied to global real-estate markets.
Dr. Berman soon enrolled in a Ph.D. program at Rushmore University to develop a deeper understanding and to conduct proprietary research into behavioral finance aspects of the global real-estate markets that were being ignored by other hedge-fund managers.
Dr. Berman reports that earning his doctorate added greatly to his
— understanding of how to earn more money in his style of hedge-fund management
— ability to explain his investment insights and methods
— confidence that he can outperform other hedge-fund managers.
As a result of these advances, Dr. Berman was able to set his world-leading mark in 2008. That’s pretty nice, isn’t it?
Let’s assume that you would like to duplicate his experience. Here’s what you need to do:
— choose the field in which you want to excel
— identify important aspects of that field that others are ignoring, but have proven to be valuable in similar fields (such as by understanding when human behavior is unusual)
— do your homework by studying those unexplored aspects thoroughly
— get some help to be sure that your homework is done properly
— keep learning.
What are you waiting for?
Donald W. Mitchell is a professor at Rushmore University, an online school, where he advises many doctoral candidates seeking to make career breakthroughs. For more information about ways to engage in fruitful lifelong learning at Rushmore
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