Advanced Hedge Fund Strategies To Build Serious Wealth

What Exactly Is a Hedge Fund?

Let’s break this down in the simplest way possible.

A hedge fund is a type of investment fund where a group of people (the investors) pool their money together.

This money is then managed by a professional (the fund manager) who uses various strategies to try to make that money grow.

Unlike traditional funds, such as mutual funds or index funds, hedge funds don’t just buy stocks or bonds and wait for them to increase in value.

They take a more aggressive, active approach to investing.

Here's the key difference: while most traditional funds are designed to make money when the stock market goes up…

…hedge funds are designed to make money no matter what happens, whether the market goes up or down.

But how do they do this?

And how can you apply these highly lucrative strategies to your personal wealth?

Advanced Hedge Fund Strategies: Short Selling

1. Short Selling
This is where it gets a little different from what most people know about investing.

Normally, when you buy a stock, you want its price to go up so you can sell it later for a profit. That’s the “buy low, sell high” strategy we’re all familiar with.

But short selling is the opposite. In short selling, the hedge fund bets that the price of a stock will go down.

You’re probably familiar with this concept from the movie The Big Short with Christian Bale and Steve Carell.

Here’s how it works: the hedge fund borrows shares of a stock from someone else and sells them right away.

Then, they wait. If the stock price drops, they buy the same stock back at the lower price and return the borrowed shares to the original owner.

The difference between the price they sold the stock at and the price they bought it back for is their profit.

For example, if they borrow a stock worth $100, sell it, and then buy it back when the price drops to $70, they make $30 in profit.

They can predict these moves in the market using highly advanced computers and skilled statisticians who are trained to find and predict new patterns in the market.

And with the rise of AI and quantum computing, the landscape of stock shorting could rapidly change as barriers lower and predictions gain more and more accuracy.

Although it’s not recommend on an individual basis, you could get into it if you feel you have the statistical expertise and drive to learn advanced financial models.

To short sell, you first need to open a margin account with your broker. A margin account is necessary because you’re borrowing shares to sell. Here's how it works practically:

• Collateral: The broker requires you to put up collateral (cash or securities) to cover the risk of borrowing shares. This is called the margin requirement, and it ensures that the broker has some protection if the trade goes against you.
  

• Minimum Balance: Most brokers require a minimum balance to open a margin account, typically around $2,000.

Margin accounts come with their own risks because you're borrowing money. If the stock price rises significantly, you could be hit with a margin call, where the broker requires you to deposit more funds to cover potential losses. Failure to do so may force the broker to close your position.

Using Leverage To Get Bigger Profits Sooner

Leverage is essentially using borrowed money to increase the size of an investment.

Imagine a hedge fund manager finds a stock they believe will increase in value by 10% over the next year. They have $1 million to invest, but they want to maximize their returns. Instead of just investing the $1 million, they decide to borrow another $1 million, giving them a total of $2 million to invest in the stock.

After a year, if the stock goes up by 10%, the hedge fund’s $2 million investment grows to $2.2 million, making a $200,000 profit.

Now, they repay the $1 million they borrowed, leaving them with $1.2 million. Since they started with $1 million, they’ve made a $200,000 profit—a 20% return on their original investment, even though the stock itself only went up by 10%.

By borrowing money, the hedge fund doubled its profits compared to what it would have made without using leverage.

You could do the same with a rental property, for example.

Let’s say you have $50,000 saved up, and you find a rental property worth $200,000 that you think will increase in value over the next few years.

Instead of paying the full price in cash, you use your $50,000 as a down payment and borrow the remaining $150,000 as a mortgage.

If the property’s value increases by 10% over the next year, it’s now worth $220,000.

Here’s the math:

You invested $50,000, but because you used leverage (borrowing the other $150,000), the value of the property increased by $20,000 (10% of $200,000), not just the value of your down payment.

After repaying your mortgage (if you were to sell the property), you’d be left with $70,000—a $20,000 profit. That’s a 40% return on your original $50,000 investment, thanks to leverage.

Utilizing Covered Call Writing For Extra Income

Covered call writing is an innovative strategy hedge funds use to generate income from stocks they already own, and it’s something a regular investor like you can easily apply to boost returns on their own portfolio.

Here’s how it works:

1. Own a Stock: Hedge funds (or you) already own shares of a stock.
   

2. Sell a Call Option: They then sell a call option to another investor. A call option is a contract that gives someone else the right to buy the stock from you at a specific price (the strike price) by a certain date (the expiration date). For this, they pay you a premium—cash in your pocket right now.
   

3. Income from the Premium: The hedge fund (or you) collects the premium immediately, no matter what happens. This is the profit-generating part of the strategy.
   

4. Two Possible Outcomes:

   • If the stock’s price doesn’t go above the strike price by the expiration date, the option expires worthless, and you keep both the stock and the premium.
     

   • If the stock’s price does go above the strike price, the option holder buys the stock from you at the strike price. You still keep the premium and make money on the stock’s price appreciation up to the strike price, but you forgo any gains above that.

Let’s say you own 100 shares of Apple stock (AAPL) and it’s trading at $150 per share. You could sell a covered call option with a strike price of $160, expiring in a month.

• Premium: You sell the option and collect a premium of, say, $200. This is income you pocket right away.
  

• If Apple stays below $160: The option expires worthless, and you keep your 100 shares of Apple and the $200 premium.
  

• If Apple goes above $160: You have to sell your Apple shares for $160, regardless of how high the stock goes above that. You miss out on the additional gains, but you still made money from the premium and the appreciation up to $160.

This strategy is a low-risk way to generate extra income from stocks you already own.

You're simply getting paid for owning the stock and giving someone the option to buy it at a higher price.

The BMM Takeaway

Hedge fund strategies like short selling and covered call writing aren’t just for Wall Street pros, they’re tools and concepts you can use to greatly increase your own wealth.

The key is applying these advanced tactics with the right mindset and approach.

But these strategies require knowledge, discipline, and a solid plan. So don’t jump into any without all three.

By leveraging these advanced techniques, you can think more like a hedge fund manager, making more rewarding choices and positioning yourself for long term wealth creation.

Disclaimer: Big Money Methods provides educational content for informational purposes only and is not responsible for any financial decisions you make. All investment and financial decisions should be made based on your own research, risk tolerance, and consultation with a licensed financial advisor.