The most elegant description of a hedge fund ever written

The most elegant description of a hedge fund ever written appears in The Fear Index, by Robert Harris:

” You see that girl over there, the one in that group with the short dark hair that keeps looking at you? Let’s say I’m convinced she’s wearing black knickers – she looks like a black-knickers kind of a gal to me – and I’m so sure that’s what she’s wearing, so positive of that one sartorial fact, I want to bet a million dollars on it. The trouble is, if I’m wrong, I’m wiped out. So I also bet she’d wearing knickers that aren’t black, but are any one of a whole basket of colours – let’s say I put nine hundred and fifty thousand dollars on that possibility: that’s the rest of the market; that’s the hedge. This is a crude example, okay, in every sense, but hear me out. Now if I’m right, I make fifty K, but even if I’m wrong I’m only going to lose fifty K, because I’m hedged. And because ninety-five percent of my million dollars is not in use – I’m never going to be called on to show it: the only risk is the spread – I can make similar best with other people. Or I can bet on something else entirely. And the beauty of it is I don’t have to be right all the time – if I can just get the colour of her underwear right fifty-five percent of the time I’m going to wind up very rich. She really is looking at you, you know.”

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