Hedge Funds are investment firms that speculate in very specific areas, by trying to obtain more data (information) about those areas than anyone else.
Example: Swine Asset Management
Let’s pretend there’s a fictional hedge fund called Swine Asset Management that speculates in hog futures (the price meat buyers will pay for hogs in the near future).
Swine Asset Management has fifty investors (most hedge funds are small, limited by law to 99 investors). They’ve each given Swine’s managers $20 million, so Swine’s total investment fund is $1 billion.
Swine must use that money to bet that hog prices will go up or down. If they’re correct, they’ll make lots of money. If they fail, they’ll lose lots of money, and probably lose their investors, too.
To win, Swine must get more information about hog supply and demand than anyone else. They do this by assembling a ‘mosaic’ of data from multiple sources.
First, Swine buys all the publicly available data they can. Data about trends in pork production and consumption by country. Weather forecasting data. Data about diseases affecting hogs and the effectiveness of hog vaccines.
Next, Swine buys proprietary (not publicly available) data. Maybe they’ll hire drones to fly over pork production centers to estimate shipments, for example, or fund consumer surveys revealing how appetites for pork are changing in different countries.
Finally, Swine’s analysts talk to lots of people and ask lots of questions. They’ll talk to meat buyers for large supermarket chains; hog farmers; slaughterhouse managers; restaurant chefs; people in the freezer truck business; people working at deli counters, people who run food distribution companies.
How do they get these people to talk? They just call them up and ask! Or they play golf with them. Or bump into them at industry conferences. Or meet them at a dinner party.
At the end of all this, our friends at Swine Asset Management know more about hogs than anyone else.
And then they make a big bet. Will hog futures go up or down? A billion dollars may be riding on the answer…