You might be shocked to hear this, but there aren’t many differences between you and a professional hedge fund manager. The only real differences are the balance of your trading account and your ability to control yourself.

Hedge fund managers oversee a specific hedge fund or a targeted portion of it. A hedge fund features a pool of investments managed with less regulation than more traditional investment vehicles. Fund managers capitalize on market opportunities, while consistently balancing high-risk investments with the rate of return. The high stress and the demanding hours of the job are reflected in a hedge fund manager salary, in which top earners bring in billions. Even though hedge funds manage billions of dollars, they use well-known trading strategies that aim to reduce their overall market risk while simultaneously boosting their trading performance.

We’ve summarized some of the most important techniques used by hedge funds to beat the market. Feel free to try them out and adopt those that match your trading style.

What are hedge funds and how do they trade ?

Hedge funds invest in a variety of financial markets using pooled funds collected from investors. They use numerous different trading strategies to boost their performance and the return for their investors. Usually, hedge funds are only accessible to high-net-worth individuals and professional investors, as they are less regulated than other types of funds such as mutual funds.  As long as the potential return on an investment exceeds the costs associated with the borrowed funds, trading on leverage can significantly increase a hedge fund’s return. Unfortunately, since leverage is a double-edged sword which also increases potential losses, many hedge funds have ceased business since the financial crisis of 2008.

Hedge funds often require investors to keep their money invested for a specific period of time, often at least one year or a minimum period of time. During this period investors aren’t able to withdraw their money. This is called the lock-up period. Even after that period, many hedge funds have certain withdrawal limitations in place which are designed to boost the liquidity of the fund, and withdrawals are often allowed only at certain intervals, such as bi-annually or quarterly.

It’s important to note that hedging refers to a technique of reducing market risk, but most hedge funds aim to outperform the market. The name hedge fund was coined with the first hedge fund in the 1940s which tried to hedge long equity positions with short equity positions also known as long-short strategy.

Defining the strategy

Hedge fund managers use different strategies to boost their revenues. As such, there are many strategies that have been developed. Some of them are strict technical traders who specialize on charting while others are fundamentalists who believe in using the news and market data. Others combine the two strategies. On the other hand, others use the hedging technique while others are long, short traders. Others are contrarian while others are activist investors. As a trader, you need to define the strategy to use and fall in love with it. Perhaps, your strategy can entail trading currencies from the emerging markets only. Alternatively, you can have the strategy of trading precious metals or crude oil. You also need to define the timeframe through which you will be trading. By having a specific strategy, you will be at a good position to understand the market and place trades that you are comfortable with.

When to enter and exit the trade

The time you enter or exit a trade will be very important for you. This is simply because if you enter a trade at the wrong time, you might end up losing. On the other hand, if you exit early, chances are that you might avoid an upside. There are 4 key strategies to enter and exit in trading.

• Single entry, single exit. This is a strategy where you put your entire position at one price and then exit the entire position at a specific price.
• Single entry, multiple exits. Here, you will make one entry and then position the trade to exit at multiple levels. This strategy is ideal for riding a breakout.
• Multiple entries, single exit. In this strategy, you enter a trade at different times but exit once a certain level has been reached by averaging up or averaging down. Averaging down is to add a position if it moves against you while averaging up is to add a position that is going against you.
• Multiple entries, multiple exits. This is a strategy where you scale into and out of positions where you make multiple entries and multiple exits especially in a trending session.

Psychology of Hedge fund manager.

All successful hedge fund managers have had their down years. In fact, many of them have in different years lost billions of dollars in their careers. The key to their success has always been to manage their losses in a credible manner. They understand that the market is made up of a series of bumps. As a trader, you need to be psychologically prepared for any eventuality. At times, you might do a comprehensive review of the market and place your trade accordingly but the market fails to respond in your favor. At this time, you might be forced to recoup your funds by placing trades in the opposite direction and make huge losses. Therefore, you should always learn to manage the risks of trade up and down market movements.

Your think should be the success of the game

The ability to change how you think about the money in your trading account is what you really need to succeed at this game.

What professional hedge fund traders know and do, is think about the accounts they trade as score boards, keeping score in a giant world-wide game. The score is the trading account balance and to them, it’s nothing more than digits on a screen, the more zeros they rack up after the first couple digits the better they are doing.

Imagine managing a billion dollar position the same as you would manage a $1,000 position? The only way to accomplish this is by remembering it’s all just zeros; it’s just digits on a screen. If you start allowing yourself to truly “feel” the power of the money, you have already lost.

The ONLY true weapon you have as a small retail trader, is not allowing yourself to be affected by the money you have at risk in your account. This can be accomplished a number of different ways:

• Don’t trade with money you really can’t afford to lose.
• Know your overall net-worth, liquid money left over after debt.
• Risk a very small amount of your liquid money per trade.
• I like to do the “sleep test”; if you are able to sleep with your position on, then you’re good.

If you are doing all of the above, then the final step to trading your account like a hedge fund manager lies in how you think about the money you’re trading.

Conclusion

As a trader, self-reflection is an important ingredient for success. All successful hedge fund managers take time to reflect on their daily, weekly, or monthly traders. We can tell you from our personal experience, that the only thing more potentially nerve-racking than trading your own real money, is trading someone else’s money. Thus, a hedge fund manager needs to have ‘ice in their veins’ (discipline, self-control), otherwise they are not going to get above average returns for their clients.