Like David, I’ve often been curi­ous about the minu­tiae of hedge fund oper­a­tions: I’ve long known the vague gen­er­al­i­ties, but never the specifics. For those in a sim­i­lar sit­u­a­tion, the Lon­don Review offers a thor­ough intro­duc­tion to hedge funds. This was the basic strat­egy of the first hedge fund, as run by A.W. Jones—sociologist and finan­cial journalist:

By adding mod­est bor­row­ing to, let’s say, $100,000 of investors’ money, Jones might buy $110,000 worth of the shares in com­pa­nies he liked, while simul­ta­ne­ously short sell­ing $40,000 of shares he thought might do badly. He was thus par­tially insu­lated (‘hedged’) against over­all mar­ket move­ments. If the over­all mar­ket fell, the shares he had bought (his ‘long posi­tions’, in mar­ket ter­mi­nol­ogy) would lose money, but his short posi­tions would gain because buy­ing back bor­rowed shares would now be cheaper.

Of course, you can’t have talk of hedge funds with­out men­tion­ing what may very well be one of the great­est finan­cial ‘hacks’ of all time: when Porsche/VW played the hedge funds to become the largest com­pany in the world by mar­ket cap­i­tal­i­sa­tion—even if it was just for a brief moment.