Creating Consistent Returns – Examples from Einhorn Buffett Soros

Investors looking for ways to reduce risk in their portfolios, and create consistent returns need look no further than hedge fund managers. These people are pros at creating consistently strong returns. While they each use different strategies to accomplish this, there is one technique they all use – “hedging”.

Hedging is a way of balancing risk. At its most basic, hedging involves balancing one risk against another. For example, if you buy a stock in two competitors, betting that one will do better, you are “hedging” your investment in Company A with your investment in Company B. This way, no matter which brand emerges as the leader, you come out on top. In doing so, you won’t get the same gain as if you had just bet on a single stock and  that one was the champion, but you also won’t lose as much if you pick the wrong one.

GREENLIGHT CAPITAL

In other words, you aren’t putting all your eggs in one basket. Hedge fund manager David Einhorn, Greenlight Capital plainly used this technique in buying a stake in Microsoft (MSFT) that is roughly equal to his one in Apple (AAPL) when it comes to the value of the position (see David Einhorn’s entire stock portfolio here).

BALANCING ACT

Using the principle of hedging, you can create balance in your investments and make strong consistent returns more likely. The technique is so valuable that an entire class of investments, called “hedge funds”. Obviously, other types of investments use this strategy, be it a portfolio manager handling an individual investor’s interests, a pension fund or a mutual fund. Hedge funds are a little different. They operate by different rules and can use other types of investments than just stocks to hedge their portfolios.

CREATING CONSISTENT INCOME

Hedge funds may use real estate, currencies, commodities, bonds, private equity and much more in addition to publicly traded equities. Take George Soros’ Soros Fund Management for example. Of the top 20 positions in his portfolio, 9 were bonds at the end of the second quarter (check out George Soros’s portfolio here). Bonds allow hedge fund managers to profit from principal appreciation and interest income. This helps reduce the volatility of the fund’s earnings.

MAXIMIZING RETURN WITH DIVIDENDS

Dividends can also stabilize returns. Whether you take the dividends as they are paid or roll them back into the investment, dividends can substantially add to the value you receive from an investment and the dividends can help offset poor performance. So, even when things are bad, they aren’t that bad, and when they are good, they are really good. Many big name investors use this technique as well. Look at Warren Buffett’s Berkshire Hathaway for instance. Of the top 10 holdings in Berkshire Hathaway, all of them pay dividends – all of them (see Warren Buffett’s top holdings here). That has to tell you something.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!