How to Run a Successful Hedge Fund

Successful hedge funds follow a very simple strategy.

1. Borrow from the Federal Reserve at an artificially low rate of 4.25% and buy tangible assets (stocks, commodities, etc.). Hedge funds pay some transaction fees to their bank, but borrowing at 4.5% is a great deal.
1.a. Maximize your leverage, but be careful you don't get blown out of your positions by margin calls during the economic bust phase. It helps to invest in illiquid assets so you don't have to "mark to market" during the bust phase of the economic cycle. Alternatively, buy such a large position that you are inflating the price of whatever you buy. It helps if you can go on CNBC and tout the asset you just bought, so others buy after the price increase; the price increase you caused is evidence that it's a good buy!
2. Wait for inflation.
3. Profit!

This is better than being an underpants gnome!

Suppose a hedge fund can use a 7x leverage ratio. The hedge fund can borrow at 5% while inflation is 15%. That means they can make a 70% profit just from inflation, if the stocks they pick keep up with inflation. For some asset classes, larger leverage ratios are allowed; a 7x leverage ratio is typical for equity investments.

It helps to buy something illiquid, such as doing a leveraged buyout of an entire company. This way, the hedge fund doesn't have to mark down its position to market during the bust phase of the economic cycle. During an economic bust, the hedge fund gets to continue operating even though it's technically bankrupt. (This is the same perk that large banks get.) Eventually, the money supply will be expanding during a boom phase, and that's when the hedge fund sells off its holdings and returns money to its shareholders. Most hedge fund provisions that "lock-up" investor assets are designed to prevent the hedge fund from being forced to sell assets during an economic bust phase.

Of course, hedge fund managers try to obfuscate what they're doing. They obfuscate it to others to make them sound like geniuses. They obfuscate to themselves so they don't realize they're just taking in a massive government subsidy.

Overall, that's the essentials of how to run a hedge fund.

Under a pure gold standard, you can't have negative real interest rates. That destroys the whole hedge fund profit equation. Hedge funds didn't become widespread until after the gold standard was abandoned.