Showtime's hit series Billions follows the exploits of hedge fund billionaire Bobby "Axe" Axelrod. He navigates the legally iffy waters of investing huge amounts of borrowed capital via his firm Axe Capital.
All the while, Bobby is hounded by U.S. Attorney Chuck Rhoades, who is committed to stamping out the types of financial crimes committed by infamous hedge fund managers such as Bernie Madoff and "pharma bro" Martin Shkreli.
Learn more about the world of hedge funds and how Billions — back for its fourth season — compares to the real world of high-risk investment.
What is a hedge fund?
Also known as an investment trust, a hedge fund is a high-risk investment vehicle that uses traditional and speculative strategies to earn big returns. Hedge funds make use of capital pooled from high-net-worth individuals or big institutional investors, like insurance companies or pension funds.
Hedge funds collectively manage over $3.1 trillion, according to a recent estimate. On Billions, Axe Capital manages approximately $10 billion.
The funds are notoriously complex. As former Federal Reserve Chairman Alan Greenspan once said, “One of the problems with hedge funds is that they are changing so rapidly. If you have the balance sheet that closed business last night, by 11 a.m. this morning, that won’t tell you very much about what they’re doing.”
Hedge funds are not closely regulated like more traditional investments, such as mutual funds, and investors don't have the same level of legal protections.
But hedge funds have flexibility in the types of assets they can invest in. Unlike a mutual fund, a hedge fund can invest in real estate (actual property or property management companies), currencies, stocks, or more speculative investments. It can be difficult to track just where a fund's assets are invested.
How do hedge funds work?
The name "hedge fund" originally came from the way their managers tried to reduce or "hedge" risk as much as possible. But these days, hedge fund managers use practically any means at their disposal to produce the largest returns possible.
While investments can be withdrawn at certain points throughout the year, money placed into hedge funds is usually locked up for at least a few months. This prevents investors from backing out if they're spooked by a significant dip during a particular week.
Hedge fund managers often make a great deal of money over a short period of time through leverage: using investors' money to take out loans.
For instance, a hedge fund might use an initial investment of $1 million to take out a loan of $4 million, which gives the managers more capital to pour into the fund's investments.
While this strategy can result in massive gains, it's also incredibly risky — as the 2008 financial crisis demonstrated.
What about fees?
Hedge funds might be thought of as mutual funds for the wealthy. And like other investment funds, they charge investors management expense ratios, or MERs: fees that go toward administrative costs.
Hedge funds' standard yearly MER is 2%, and they also charge performance fees of up to 20% on gains generated.
Billions kicks all of this up a notch: Axe Capital charges its investors a 3% MER and a 30% performance fee.
The fact that investors are willing to hand back up to 22% of their gains (or one-third, in the case of Axe Capital) for access to hedge funds is a testament to the huge returns these funds can produce.
But, understandably, hedge fund managers feel a significant amount of pressure to perform.
"Kennedy wasn't under as much pressure as I am." - Bobby "Axe" Axelrod
How do you know a hedge fund is successful?
Hedge funds are always going to be risky for investors, but some are better than others.
As investors select funds to work with, they take a look at what are called absolute performance guidelines and relative performance guidelines.
To determine a fund's absolute performance guidelines, investors inspect the annualized rate of return: the amount of money the hedge fund has generated over a year.
But annualized rates of return don't tell investors everything that they need to know about a hedge fund, so it's also necessary to take a look at factors like (and here we go into the weeds just a little bit!) five-year annualized returns, standard deviation, maximum drawdown and downside deviation.
After that, you observe relative performance guidelines. This is done by categorizing and comparing funds by their strategy. After all, it doesn't make sense to compare a fund that invests in real estate to one that invests in the stock market.
By taking a look at these metrics, investors can determine whether a fund's success was a fluke or whether it was based on sound long-term investment strategies.
Can everyday investors get in?
Hedge funds can be lucrative — if you can afford the investment. It typically takes a minimum of anywhere from $100,000 to over $1 million.
That's why hedge funds are usually reserved for "accredited investors." Individual accredited investors must have at least $1 million in assets, either on their own or held jointly with a spouse, and not including the value of their primary home.
Even so, if you've got $1 million a hedge fund would be a big gamble. The minimum investment for one fund could eat at least 10% of your assets. And if you lose, it will really hurt.
A wiser way to invest is by using one of today's automated investment services that rely on long-term investment strategies using index funds and other investments that are much safer than hedge funds.
Billions might have you wondering if hedge funds are your ticket to quick riches. But while Bobby Axelrod makes lots of money as a hedge fund manager, his every step is haunted by the underlying risk of his ventures and the looming presence of the law.
It's all exciting in the context of a TV show but terrifying in real life.