Ranking HEDGE FUND Trading Strategies

0:00 When you hear the word hedge funds, you probably think of these guys like they're the great white sharks of Wall Street. Wrong. They're the killer whales. The guys who eat the great white sharks. Nonetheless, they're still wankers who have a massively inflated sense of self-importance and all look like they've been spat off the Wharton school production line of trust fund babies who have no real personality. But behind their massive egos and Patagonia vests lays one simple question. How do they actually make their money? See, hedge funds aren't just buying a stock and hoping it goes up. That's for peasants. Instead, they're running entire playbooks full of obscure, aggressive, and sometimes borderline psychotic trading strategies, all designed to beat the market and make an absolute killing. So, today we're going to go through them one by one and rank them. From the quant gods to the

0:45 activist crybab to the macro profits and even to the insider traders who got a little too confident. By the end of this video, you'll understand which strategies are worth respecting and which ones are utter dog [ __ ] Let's get into it. If hedge funds were McDonald's, the long short equity trading strat would be the Big Mac. Classic and iconic. It's what most people think hedge funds do because for decades, it's pretty much all hedge funds actually did. The idea is simple. You go long the stocks you think will go up, and you short the ones you think will go down. If you don't know what going long or going short means, go check out my other video on hedge funds. When you're done here, don't leave now and ruin my average view duration, though. No, no. One of the benefits of this strat is that you can use it to hedge against market risk. Let's say you like Nvidia stock and want to go long and you

1:31 think AMD is overpriced, so you want to go short, but you're also scared the market might crash or that Trump's tariffs are going to cause a massive collapse in microchips being made in Taiwan. If the market doesn't crash, then your Nvidia stock goes on a tear and makes money. If the market does crash, then your AMD short will print cash. It's obviously not foolproof. What if AMD does better than you expected and outperforms Nvidia? You still need to get your fundamental analysis right. Digging into the trenches and digging up as much information as possible. The other risk is that shorting sucks. Unlimited downside, limited upside, margin calls, borrow fees. If you want to know what happens in a short squeeze, just ask Melvin Capital. So, here's the breakdown. Cool [ __ ] [ __ ] And a new category for this special video. Meh [ __ ] Cool [ __ ] It's very scalable. You can deploy billions using this strat and it's got a very low inherent regulatory

2:17 risk. Meh [ __ ] Time to profit depends on a lot of factors. Could be months or maybe even years. And it takes moderate operational complexity for a hedge fund. You'll need analysts, models, and Bloomberg terminals, but nothing crazy like a quant firm would require. And the [ __ ] It's going to pretty much be impossible to gain anformational edge unless you're cheating. The market's too efficient these days. You think you're the only genius who found the supply chain vulnerability on page 98 of the 10K report? No. 200 other analysts and the LLM they feed their reports to found it at the exact same time you did. And the other shitty aspect is edge durability. As soon as your thesis is known, which will fairly easily be figured out once you file your 13Fs each quarter, your alpha is going to decay almost immediately. So long short equities is a solid Btier trading strat.

3:06 Distressed debt investing is exactly what it sounds like. You're investing in debt that's stressed out. What that really means is you're buying debt from dying companies. It's the hedge fund equivalent of looting a burning building. Ain't nobody got time for that. If you already know what corporate bonds are, skip ahead like 60 seconds or so. I need to quickly explain it for the juniors watching the video, though. So, bonds are a debt instrument that companies and governments can use to raise cash. Right now, if you wanted some cash and were willing to go into debt for it, you could go to the bank and get a loan. The loan would mean you get a bunch of cash instantly, and you promise to repay that cash plus interest over the term of the loan. Corporate bonds are basically identical, except the company that needs the cash isn't going to a bank. They're selling bonds to anyone. There's a second layer of complexity here, though. So, imagine a company says, "We're selling bonds at

3:51 $100 a pop with a 5% interest rate payable over 20 years." For simplicity sake, let's say they sell one of these to this guy, Bob. So, the company now has $100 cash, and Bob has the bond. Bob now owns the company's debt and is getting paid $5 a year in interest, which is 5% of the face value of the bond, the initial $100, and will also get paid back his initial $100 at the end of the 20-year term, so long as the company doesn't default on its debt. What Bob can now do, though, is sell the bond to someone else. Maybe the company's doing great and other investors are willing to pay more than $100 to get that very secure $5 a year payout. Or maybe the company's tanking and someone only wants to pay $60 because they're not sure if they'll even get paid back at the end. And that's where distressed debt comes in. Imagine a company is doing pretty [ __ ] This company is called Joe Biden LLC. It

4:38 ain't looking too good and it probably won't be around for much longer. And I've got a sister who's the love of my life. So, its bonds are trading for pennies on the dollar. Now, hedge funds like Elliot Management or Oak Tree Capital, also known as Vulture Funds, come swooping in and buy up the debt for super cheap. But they're not hoping the company magically turns it around. No, no, no. They want the company to go bankrupt because when it does, bond holders get first dibs in the bankruptcy process. When a company goes bankrupt, it doesn't just disappear. It enters a legal process where all of its assets, cash, real estate, equipment, trademarks, whatever, get assessed and sold off or reorganized. So, if the company gets reorganized or restructured, your debt might get converted into equity. And so you end up owning a big chunk of the new company.

5:24 It's like buying someone's overdue mortgage bills for super cheap and then when they default legally taking over the house. One of the most famous cases in history is Elliot Management versus Argentina. These guys bought up Argentina's debt for dirt cheap and then sued the entire country for full repayment plus interest. During this process, they literally got an Argentinian Navy ship impounded in Ghana. We own your country's debt and you guys owe us money. So, see that little Navy ship of yours? It's mine now, [ __ ] In the end, they made about 2.4 billion from this deal. So, what's the catch in all this? Well, it's risky as hell. You're betting on legal outcomes. Bankruptcy courts, restructuring lawyers, sometimes even international politics. You're not

6:09 trading stocks anymore. You're kneede in litigation. But if you're good, the returns are huge. Like pre-diet Lizo huge. You can make two to 5x your investment, sometimes more, just for being patient, brutal, and legally clever. So, cool [ __ ] Alpha generation is super high. You're buying debt for 30 cents and hoping to get a dollar's value after bankruptcy. Pretty low regulatory risk. You'd have a team of killer lawyers at your fund, so you're not in danger. You are the danger. I am the danger. It's also got strong edge durability and informationational edge. If you've got a killer team of lawyers who understand their [ __ ] you'd get paid big. Me [ __ ] it's not the most scalable. There's only so many bankruptcies to go around. And [ __ ] operational complexity, super high.

6:56 Endless lawyers, restructuring experts, and cold-blooded killers. Time to profit long, will almost always take years. And finally, liquidity trash. Good luck selling distressed debt quickly. Overall though, I think it deserves a solid A. You're not some stock jockey gambling on the street. You're cold, calculated, and putting the final dagger into a company's heart right after you've written yourself into the will. Macro investing is all about making huge directional bets based on what's happening in the global economy. We're not talking about is Apple overpriced. We're talking is China going to invade Taiwan and what does that mean for the price of nickel? It's a strategy based on placing big bets on interest rates, currencies, commodities, and geopolitical events. Basically, it's trading at god mode. So, you're looking

7:41 at the big picture trends. Is the Fed about to hike rates? Is a civil war about to kick off in some oil rich nation? Or is a country about to devalue its currency? And you're doing it with massive leverage using things like currency forwards, interest rate swaps, futures and options, and sovereign bonds. This is how big dogs like George Soros, Ray Dalio, and Stanley Draen Miller have made their billions. In 1992, Soros bet against the British pound, made a billion dollars in a day, and forced the UK to their knees. Light work. Quick shout out to Ray Dio's books. When Ray writes, I read. Incredibly beneficial stuff, guys. And his new book just dropped on how countries go broke. Links in bio. Cool [ __ ] Alpha Generation. You've got insane upside if you time it right. It's an extremely scalable strategy because you're operating at such a large level,

8:27 which also goes handinhand with its liquidity. Me [ __ ] a lot of operational complexity. You'll need teams of economists, data analysts, and geopolitical nerds. Edge durability. This entirely depends on your forecasting and often political knowledge, but 1G7 Summit could ruin your thesis entirely. And the biggest [ __ ] aspect is probably its sharp ratio. This is a highly highly volatile game to be playing. Overall, considering multiple of the world's most successful traders and hedge funds utilize this strat, has to be a solid A tier. Activist investing is what happens when a hedge fund decides they're not just going to invest in a company, they're going to fix it. It's like Gordon Ramsay walking into your home kitchen and telling you everything is [ __ ] and he's going to fix it. Just stand up straight and at least look like a [ __ ] cook.

9:13 Here's how it works. An activist hedge fund buys a meaningful chunk of a publicly traded company. Say 5%, maybe even 10. Then they roll up with a list of demands. Fire the CEO, cut costs, spin off your most profitable division. Stop wasting money on dumb projects. Basically, you're not doing your job properly. And I'm going to tell you how it should be done. And since I'm a pretty big shareholder in the company, you better start listening. One of the kings of this strategy is Billy Aman. One of the OGs of this strategy is Carl Icon. Funnily enough, these guys ended up going to war with each other over Herbal Life, a company that Aman considered to be a pyramid scheme piece of crap. And Icon decided to bully him and bet in the other direction. So Alpha potential is solid. You're creating your own catalysts instead of waiting for the market to notice value. And durability is also high. They don't rely on

9:59 fleeting arbitrage. They rely on being louder and meaner than other shareholders. Time to profit is slow. You've got to buy, campaign, win support, maybe win a proxy fight, and then hope the company executes. And because of the lengthy process, your operational complexity is fairly substantial. The downsides, scalability is very limited. You can't be running 50 activist plays at once. And worse yet, reputational risk is real. If you keep tanking companies with your brilliant ideas, people do eventually stop taking your calls. All in all, A tier strategy, not S tier because it's resourceheavy and slow, but when it works, it's glorious. It's also the only hedge fund strategy where you can claim, "We're just trying to unlock shareholder value while you set fire to someone else's business model." If you watch my quant video, then you

10:45 know that quantitative trading is what happens when you give a bunch of maths nerds a Bloomberg terminal, a PhD in computer science, and billions of dollars to play with. They become gods of Wall Street. These guys don't care about earnings calls or corporate strategy. They care about data. Massive amounts of data. Prices, volume, order flow, satellite images, credit card transactions, Reddit sentiment, shipping patterns in the South China Sea. Anything that might give a signal, they'll scrape it, model it, and trade it. Their goal is simple. Find patterns, build models, automate trades, and scale it across every market in the world. One of the strats they'll use to execute on this goal is called statistical arbitrage or stat arb. It's one of the original quan strategies born in the 1980s and is still very much alive today. At its core, it's about using

11:32 historical statistical relationships between securities, usually stocks, to find trades where prices have temporarily deviated from their historical patterns. You're betting on mean reversion that they'll return to their statistical norm. Imagine you're a school teacher and you know two boys, Tom and Jerry, are best friends and have been for years. and then one random day they don't hang out with each other at lunchtime. You're making a bet that in the near future they'll get back together and hang out again. Another strat they'll use is index rebalancing arbitrage. So when big indices like the S&P 500 add or drop companies, index tracking funds like Vanguard must buy or sell those stocks, but there's a delay. And so Quant will trade on the announcement with their superfast computers or model its likelihood before it even happens. It's exactly like knowing in advance that everyone in town

12:17 is about to rush into a single store for a sale. You buy all the inventory before they show up and sell it to them at a markup. One more strat cuz I know you guys love your qu and it's something called high frequency trading. The formula 1 of Wall Street. We've now spent maybe 10 seconds talking about highfrequency trading. In that time, thousands of trades have been executed. The biggest highfrequency trading strat is simply market making. They post buy and sell quotes for securities at the same time. So they'll say, "I'll buy Apple stock at $99.98." And they'll also say, "I'll sell Apple stock at $1002." When the deal goes through, you've cleared 4 cents. Do this thousands of times a second across hundreds of stocks. The pennies add up fast. So where does this leave us on the tier list? Quant fund sharp ratios are

13:03 often insane, which means their risk versus reward ratio is off the charts. Scalability as high as Joey Diaz on a random Tuesday. Durability. If you've got the tech and the brains, your alpha will last. Google Renaissance Technologies average annual return since 1988. They're still killing it. And probably the coolest [ __ ] Low human bias. No emotions, no panic, just coldblooded machines. [ __ ] Operational complexity is out of this world. Your computers need to be the best in the world, and so do your employees. Overfitting risk. Some models look genius in back tests but collapse in the real world. And crowding risk. Once a strategy is discovered by multiple firms, returns can very quickly disappear. Me [ __ ] barrier to entry.

13:48 Yes, you can technically quantitatively trade from your mother's basement, but A, you won't because you're too dumb. And B, even if you did, you wouldn't be able to scale it too high considering your resource limitations. Overall, S tier. No question. It's hard. It's nerdy. It's brutally competitive, but when it works, you get medallion fund numbers and legendary status. It's the closest thing to an infinite money glitch Wall Street has ever seen. Our final trading strategy for this video, before we dive into insider trading, at least when company A announces it's acquiring company B, company B's stock usually jumps, but doesn't hit the full offer price immediately because there's still deal risk. Maybe regulators block it, maybe company A backs out of the deal. In any case, hedge funds jump in to exploit the gap. So, let's say Tesla announces it's

14:35 going to buy a battery company for $100 a share. Battery company shares jump up to $92 again because of the risk that the deal falls apart. But this price difference leaves an opening for hedge funds with specialized knowledge in M&A to bet on whether or not the deal is going through. Its alpha generation is solid if the fund knows how to evaluate deal risk or has some insider knowledge on whether the deal's actually going through. Its scalability is kind of [ __ ] though and highly dependent on the kind of economy you're in. If it's a bare market and no one can afford to acquire other companies, then there's just not that many deals going around. The time to profit risk is also there. Could be weeks, could be 18 months, and these days, the longer the deal takes to close, the higher the likelihood that a new AI company pops up and makes the deal seem not as attractive. Still though, when it's done right, it's like clipping coupons from billion-dollar transactions. Overall, a solid Btier

15:22 strategy. This is the ultimate hedge fund trading strategy. Imagine instead of doing all that annoying research and spending money on supercomputers powered by nerds, you just pick up the phone, call your guy at FISA, and go, "Sup, bro. You guys getting FDA approval tomorrow or no?" And boom, now you know something no one else does. You load up on call options, wait for the stock to explode, and then spend the next 6 months pretending it was just good intuition. Let's break it down. Technically speaking, insider trading is when you make trades based on material, non-public information. material as in it would move the stock price and non-public as in not available to the general investing public. And yes, it's obviously illegal, but that hasn't stopped anyone. Steven A. Cohen's SACE Capital, now rebranded as 72, were the

16:09 kings of this strategy. At one point, over 20 employees were charged or investigated, and the firm ended up paying a record $1.8 billion fine and agreed to stop managing outside money. Even Martha Stewart's been caught for insider trading. Her broker told her that the CEO of a company she was invested in was dumping his stock because he knew the FDA were about to reject their newest drug. She sold around $230 worth of the stock and saved herself from a 45K hit, but ended up doing 5 months in prison for it. So, how do we rank this? Alpha generation off the charts. Sharp ratio looks like God's own P&L before you get caught. Operational complexity low. You just need a golf body and no conscience. But scalability is limited. You can't exactly run a $20 billion firm off of

16:54 Whisper Networks. And your regulatory risk is well, yeah. So overall, S tier, unbeatable, really. And if you manage to cut a deal like Steven Cohen, you never spend any time in jail, pay a little fine, and get back to managing outside money within 5 years. There were obviously other trading strats I could have explored here, guys. I couldn't explore them all because the video is already getting a bit long. I'm going to be starting a new series on this channel where I show you new and upcoming startups from around the world doing the most interesting stuff possible. Let me know below if you'd be interested in this. I'm also going to mainly be staying within the finance niche for all future videos, seeing as it's basically my specialty. So, let me know what other videos you'd like to see and I'll get to making them. Love you guys. Please like, comment, and subscribe.