Is it possible to make quarterly returns in hedge funds?
Your edit indicates that you may not yet be ready to get heavily involved in investing. I say this because it seems you are not very familiar with foundational finance/investing concepts.  The returns that you are seeing as 'yearly' are just the reported earnings every 12 months, which all public companies must publish. Those 'returns' are not the same as the earnings of individual investors (which will be on the basis of dividends paid by the company [which are often annual, sometimes semi-annual, and sometimes quarterly], and by selling shares purchased previously. Note that over 3 months time, investing in interest-earning investments [like bank deposits] will earn you something like 0.5%. Investing in the stock market will earn you something like 2% (but with generally higher risk than investing in something earning interest). If you expect to earn significant amounts of money in only 3 months, you will not be able to without taking on extreme levels of risk [risk as high as going to a casino].  Safe investing takes time - years. In the short term, the best thing you can do to earn money is by earning more [through a better job, or a second part-time job], or spending less [budget, pay down high interest debt, and spend less than you earn]. I highly recommend you look through this site for more budgeting questions on how to get control of your finances. If you feel that doesn't apply to you, I encourage you to do a lot more research on investing before you send your money somewhere - you could be taking on more risk than you realize, if you are not properly informed.
The 20%+ returns you have observed in the mutual funds are not free money.  They are compensation for the risk associated with owning those funds.  Given the extraordinarily high returns you are seeing I would expect extremely high risk.  This means there is a good possibility of extreme losses at some point.  By putting a lot of money in those mutual funds you are taking a gamble that may or may not pay off. Assuming what your friend is paying you for rent is fair, you are not losing money on your house relative to the market.  You are earning less because you are invested in a less risky asset.  If you want a higher return, you should borrow some money (or sell your house) and invest in the market.  You may make more money that way. But if you do that, you will have a larger chance of losing a lot of money at some point.  That's the way risk works.  No one can promise a 20% return on a risky asset, they can only hint that it may do in the future what it did in the past. A reasonable approach to investment is to get invested in lots of different things: stocks, bonds, real estate.  If you are afraid of risk and willing to earn less, keep more money in safe assets.  If you are willing to take big risks in exchange for the possibility of high returns, move more assets into risky stuff.  If you want extreme returns and are willing to take extreme risk, borrow and use the money to invest in risky assets. As you look over investment options, remember that anything that pays high returns most likely has high risk as well. "For one thing fund managers, even fund management companies, own less money than their clients put together. On the whole they simply cannot underwrite 50% of the potential losses of the funds they manage, and an offer to do so would be completely unsecured. Warren Buffet owns about 1/3 of Berkshire Hathaway, so I suppose maybe he could do it if he wanted to, and I won't guess why he prefers his own business model (investing in the fund he manages, or used to manage) over the one you propose for him (keeping his money in something so secure he could use it to cover arbitrary losses on B-H). Buffett and his investors have always felt that he has sufficient incentive to see B-H do well, and it's not clear that your scheme would provide him any useful further incentive. You say that the details are immaterial. Supposing instead of 50% it was 0.0001%, one part in a million. Then it would be completely plausible for a fund manager to offer this: ""invest 50 million, lose it all, and I'll buy dinner to apologise"". But would you be as attracted to it as you would be to 50%? Then the details are material. Actually a fund manager could do it by taking your money, putting 50% into the fund and 50% into a cash account. If you make money on the fund, you only make half as much as if you'd been fully invested, so half your profit has been ""taken"" when you get back the fund value + cash. If you lose money on the fund, pay you back 50% of your losses using the cash. Worst case scenario[*], the fund is completely wiped out but you still get back 50% of your initial investment. The combined fund+cash investment vehicle has covered exactly half your losses and it subtracts exactly half your profit. The manager has offered the terms you asked for (-50% leverage) but still doesn't have skin the game. Your proposed terms do not provide the incentive you expect. Why don't fund managers offer this? Because with a few exceptions 50% is an absurd amount for an investment fund to keep in cash, and nobody would buy it. If you want to use cash for that level of inverse leverage you call the bank, open an account, and keep the interest for yourself. You don't expect your managed fund to do it. Furthermore, supposing the manager did invest 100% of your subscription in the fund and cover the risk with their own capital, that means the only place they actually make any profit is the return on a risk that they take with their capital on the fund's wins/losses. You've given them no incentive to invest your money as well as their own: they might as well just put their capital in the fund and let you keep your money. They're better off without you since there's less paperwork, and they can invest whatever they like instead of carefully matching whatever money you send them. If you think they can make better picks than you, and you want them to do so on your behalf, then you need to pay them for the privilege. Riding their coattails for free is not a service they have any reason to offer you. It turns out that you cannot force someone to expose themselves to a particular risk other than by agreeing that they will expose themselves to that risk and then closely monitoring their investment portfolio. Otherwise they can find ways to insure/hedge the risk they're required to take on. If it's on their books but cancelled by something else then they aren't really exposed. So to provide incentive what we normally want is what Buffett does, which is for the fund manager to be invested in the fund to keep them keen, and to draw a salary in return for letting you in[**]. Their investment cannot precisely match yours because the fund manager's capital doesn't precisely match your capital. It doesn't cover your losses because it's in the same fund, so if your money vanishes the fund manager loses too and has nothing to cover you with. But it does provide the incentive. [*] All right, I admit it, worst case scenario there's a total banking collapse, end of civilization as we know it, and the cash account defaults. But then even in your proposed scheme it's possible that whatever assets the fund manager was using as security could fail to materialise. [**] So why, you might ask, do individual fund managers get bonuses in return for meeting fixed targets instead of only being part-paid in shares in their own fund whose value they can then maximise? I honestly don't know, but I suspect ""lots of reasons"". Probably the psychology of rewarding them for performance in a way that compares with other executive posts or professions they might take up instead of fund management. Probably the benefit to the fund itself, which wants to attract more clients, of beating certain benchmarks. Probably other things including, frankly, human error in setting their compensation packages." Any time you are optimizing a portfolio, the right horizon to use for computing the statistics you will use for optimization (expected return, covariance, etc.) will be the same as your rebalance/trading frequency.  If you expect your trading strategy to trade once a day, you should use daily data for optimization.  Ditto for monthly or quarterly.  If at all possible you should use statistics across the board that are computed at the same frequency as your trading. Regarding currency pricing, I see no reason you can't take the reported prices and convert them to whatever currency you want using that day's foriegn exchange rate.  Foreign exchange rates are available for free at the Fed and elsewhere.  Converting prices from one currency to another is not rocket science. Since you are contemplating putting actual money behind this, note that using data to compute statistics is less reliable for lower statistical moments.  The mean (expected return) is the first moment, so using historical returns is extremely unreliable at predicting future returns.  The variances and covariances are second moments, they are better.  Skewness and kurtosis, yet better.  The fact that the expected return can't reliably be estimated from past returns is the major downfall of the Markowitz method (resulting portfolios are often very crazy and will depend critically on the data period you use to set them up).   There are approaches to fixing this, such as Black-Litterman's (1992) method, but they get complicated fast. Generally speaking, having more institutional investors is a good sign. Of course there are many types of institutions.  Normally we are thinking of mutual funds, pension funds, endowments, and hedge funds.  They may not all have the same implications.  Hedge funds, in particular, are out to make a buck with very little restriction on how they do it.  They may buy an undervalued stock and then use their voting power to improve the company or they may do something more questionable, like pump up the stock price and then sell at the high, causing volatility.  The people you are referring to may be thinking of something like the latter. Those concerns are generally small when compared with the known positives of institutional ownership. Here is a simple example of how daily leverage fails, when applied over periods longer than a day. It is specifically adjusted to be more extreme than the actual market so you can see the effects more readily. You buy a daily leveraged fund and the index is at 1000. Suddenly the market goes crazy, and goes up to 2000 - a 100% gain! Because you have a 2x ETF, you will find your return to be somewhere near 200% (if the ETF did its job). Then tomorrow it goes back to normal and falls back down to 1000. This is a fall of 50%. If your ETF did its job, you should find your loss is somewhere near twice that: 100%. You have wiped out all your money. Forever. You lose. :) The stock market does not, in practice, make jumps that huge in a single day. But it does go up and down, not just up, and if you're doing a daily leveraged ETF, your money will be gradually eroded. It doesn't matter whether it's 2x leveraged or 8x leveraged or inverse (-1x) or anything else. Do the math, get some historical data, run some simulations. You're right that it is possible to beat the market using a 2x ETF, in the short run. But the longer you hold the stock, the more ups and downs you experience along the way, and the more opportunity your money has to decay. If you really want to double your exposure to the market over the intermediate term, borrow the money yourself. This is why they invented the margin account: Your broker will essentially give you a loan using your existing portfolio as collateral. You can then invest the borrowed money, increasing your exposure even more. Alternatively, if you have existing assets like, say, a house, you can take out a mortgage on it and invest the proceeds. (This isn't necessarily a good idea, but it's not really worse than a margin account; investing with borrowed money is investing with borrowed money, and you might get a better interest rate. Actually, a lot of rich people who could pay off their mortgages don't, and invest the money instead, and keep the tax deduction for mortgage interest. But I digress.) Remember that assets shrink; liabilities (loans) never shrink. If you really want to double your return over the long term, invest twice as much money. "You're correct that the trading costs would be covered by the expense ratio. Just to be clear here, the expense ratio is static and doesn't change very often. It's set in such a way that the fund manager *expects* it to cover *all* of their operational costs. It's not some sort of slider that they move around with their costs.  I'm not familiar with any ETF providers doing agreements which cover rent and equipment (hedge funds do - see ""hedge fund hotels""). ETF providers do routinely enter into agreements with larger institutions that cover stuff like marketing. PowerShares, for a while, outsourced all of the management of the Qs to BNY and was responsible solely for marketing it themselves." In my experiences most hedge funds won't have a benchmark in their mandate and are evaluated based upon absolute returns.  Their benchmarks are generally cash + x basis points.  So, no attribution and no IR.  No experience at all with CTA's though, so not sure how things are there. "Matt Levine's first point here is very interesting as a lens for understanding why so many large hedge funds seem to have difficulty beating the market, while the ones that do tend to be either smaller operations or more independent groups within the giants.  If you look at the best firms in the world, like RenTec or TGS, you see a trend where they typically stop taking in outside capital and effectively convert to family offices (at least for the most profitable strategies). Levine's point here is particularly applicable to RenTec; it has famously incredible returns via Medallion, but not so much the other funds. Unsurprisingly, the Medallion fund is entirely employee and owner capital.  As extremely profitable strategies scale up to their capacity constraints, fund managers naturally decide to pool greater amounts of their own capital into the firm. Therefore, ""skin in the game"" is not only effective as an intuitive heuristic for skill (""this manager believes in the fund enough to put most of their personal net worth into it""), but it's also practically effective for showing how likely the firm is to perform based on how much you're able to participate.  As the percentage of ""skin in the game"" increases, the likelihood of outside investors being able to participate decreases, because the fund managers know they no longer need to share risk, and don't want to waste allocations on the way to capacity constraints. If a firm is soliciting capital, it's highly suspect, and managers who go on to become the next Jim Simons or Seth Klarman will mostly be ""on the market"" for relatively short periods of time."