Reddit reviews The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
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Crown Business
PROBLEMS WITH HEDGE FUNDS
One thing you have to hand to hedge funds is that in 2008 and 2009, when investment and commercial banks were all begging for bailouts from the federal government because they were all "to big to fail", thousands of hedge funds died fast and anonymous deaths. Many of them lack the wealth, political connections, and systematic importance to influence the government. If people want to gamble with their money in financial markets, that isn't problematic as long as they are willing to suffer the losses they incur. (It is worth noting that money of them benefited indirectly from the various bank bailouts, and especially the bailout of AIG. Much of the bailout of AIG was to pay off credit default swaps (CDS) on mortgage backed securities, and the proceeds of those CDSs went to certain hedge funds.)
There has been some concern that some of the larger hedge funds could be systematically important, and could cause problems in the future if they place unmitigated bets in financial markets. The Dodd Frank Act made some effort to control them by having them register with the SEC and provide information on their bets to regulators, but as usual the regulation is watered down and many will comply with the letter but not the spirit of the law.
Also, in reviewing the results of most hedge funds, the investors don't seem to be getting a very good deal. First, it's incredibly expensive to pay someone 2% of your money up front and give them 20% of all returns that they earn on the remaining 98% of your money. Many investors would have been better off investing in more conventional vehicles, but the allure of investing in a hedge fund combined with the possibility of outsized returns lures in a lot of people.
The other risk of hedge funds is that they are frauds. Bernie Madoff was running a long short hedge fund, but it was actually a Ponzi scheme. A number of fund of funds were supposed to be diversifying their investor's assets, but were actually just giving it all to Madoff. (It's pretty insulting to pay someone to invest money for you, and give them 2% plus 20%, only to have them dump it all in a Ponzi scheme after performing no due diligence.) Another form of fraud might just be taking on asymmetrical risk. For example if, like AIG, you sell tons of insurance on the housing market, you can pocket a lot of money in the hopes that you never have to pay up on this insurance, and if you do, you just make vague statements about "once in a lifetime" financial calamities.
Further Reading and Sources:
The Economist Guide to Hedge Funds
More Money Than God: Hedge Funds and the Making of a New Elite
When Genius Failed: The Rise and Fall of Long-Term Capital Management
The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History
The Big Short: Inside the Doomsday Machine
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets
TL;DR: They are investment vehicles for rich people and institutions that invest in whatever they think will make money. They're supposed to make their investors a lot of money, but they definitely make themselves a lot of money.
You should read this book or watch the documentary Inside Job
The book gets a little boring but it's relatively short and explains everything quite well.
The doc gives a worldly view to the entire crisis.
Enjoy!
Don't forget John Paulson, who made muuuuch more than Burry in 2007-2008.
https://www.amazon.com/Greatest-Trade-Ever-Behind-Scenes/dp/0385529945
+$15,000,000,000 would have made a good Robinhood Screenshot.
Biggest YOLO of all time.
Totally depends. People have made Billions during crashes- selloffs tend to be faster than bull runs, so traders holding short positions can make money hand over fist.
John Paulson made $15 billion in 2008 by betting against the housing market, for instance.
https://www.amazon.com/Greatest-Trade-Ever-Behind-Scenes/dp/0385529945
Then yes, if those investors close their shorts at the right time, and try to catch the bottom of the crash, they can pivot long and buy up assets cheap. As can anyone sitting on cash.
Given, this is much easier said than done, trying to time markets is like trying to surf in a hurricane.
The Devi's Casino by Vicky Ward.
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The Greatest Trade Ever by Gregory Zuckerman
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They give a look inside the firms that failed and gained (and how) in the crisis.