13 - What is a hedge fund?

A hedge fund is defined as more flexible than most common funds, which are usually benchmarked to an index like the CAC40 and try to outperform it. A hedge fund aims to achieve a stable performance of 10% every year by investing in currencies, bonds and other assets to avoid a loss.

[Man 1] Are you getting off at Lille as well? 
[Man 2] Well, yes. It's the last stop on the direct express train…
[Man 1] Of course! Silly me. So, you play on the stock market much? You're a trader, right?
[Man 2] No, I manage a hedge fund. And trust me, it's not a game.
[Man 1] A hedge fund? What's that?
[Man 2] It’s complicated. Do you really want to know?
[Man 1] Sure. I do a bit of investing myself on the markets through funds.
[Man 2] Ha! Well, a hedge fund is a kind of fund, but more flexible. Your everyday funds are usually benchmarked to an index like the CAC40 and try to outperform it. A hedge fund aims to achieve a stable performance of 10% every year, even if the market is down by 25%.
[Man 1] Even if the CAC40 is down by 25%? How is that even possible?
[Man 2] We can choose according to our investment mandate, whereas standard funds remain very close to the composition of the index, like the CAC40. If it looks like there's going to be a downturn on the equity markets, a hedge fund can invest in currencies, bonds and other assets and avoid a loss.
[Man 1] Okay, so basically, there's more freedom in managing the funds, which means you can generate a positive performance every year. And you manage to do that?
[Man 2] So far, so good. But, you know, you really have to play it cool. You can make huge mistakes by being overly confident.
[Man 1] All right, but surely that must make them extremely risky?
[Man 2] Some of them, yes. Not all of them. And that's precisely why they're only for the most experienced clients, bearing in mind that the greedier you get, the harder you fall. Right, I've got it! I'll invest with you, and as soon as you get overly confident, I’m out of here. Ok?
[Man 1] Well firstly, you need to be eligible, and secondly, if you think I am getting overconfident, you just need to say: “Watch out, Joe, you're getting a big head”.
[Man 1] Watch out, you're getting a big head! 
[Man 2] … I think we've arrived.
[Man 1] Where? Of course, Lille!