• How To Invest Like A Hedge Fund


    Ever wonder how hedge funds think and how they are sometimes able to generate explosive returns for their investors? You aren’t alone. For years, hedge funds have retained a certain level of mystery about them and the way they operate; and for years, public companies and retail investors have tried to figure out the methods behind their (sometimes) apparent madness.

    It’s impossible to uncover and understand each and every hedge fund’s strategy - after all, there are literally thousands of them out there. However, there are some constants when it comes to investment style, the methods of analysis used and other preferences.

    SEE: A Brief History Of The Hedge Fund.)

    Cash Flow Is King
    Hedge funds can come in all shapes and sizes. Some may place a heavy emphasis on arbitrage situations (like buyouts or stock offerings), while others focus on special situations. Others still may aim to be market neutral and profit in any environment, or employ complicated dual long/short investment strategies.

    While many investors track metrics such as earnings per share (EPS), many hedge funds also tend to keep a very close eye on another key metric: cash flow.

    Cash flow is important because bottom-line EPS can be manipulated or altered by one-time events, such as charges or tax benefits. Cash flow and the cash flow statement tracks money flow, so it can tell you if the company has generated a large sum from investments, or if it has taken in money from third parties as well as how it’s performing operationally. Because of the detail and the breakup of the cash flow statement into three parts (operations, investing and financing), it’s considered to be a very valuable tool.

    This statement can also tip off the investor if the company is having trouble paying its bills or provide a clue as to how much cash it might have on hand to repurchase shares, pay down debts or conduct another potentially value-enhancing transaction.

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