Day Trading Like Billion Dollar Hedge Fund Managers

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Day Trading Like Billion Dollar Hedge Fund Managers

hedge funds strategies for traders

Anyone has always been fascinated by billionaire hedge fund managers. These are people who have amassed a fortune by trading currencies, stocks, ETFs, options, indices, and bonds among others.

Some of the most successful hedge fund managers We follow closely include: William Ackman, Ray Dalio, and Dan Loeb. Each of them manages more than $20 billion with Dalio owning the largest hedge fund company globally.

A common dream as a trader has always been to be just like these guys. In her book, Day trading and swing trading the currency market, Kathy Lien notes that as day traders, we can all confidently call ourselves hedge fund managers. With your $10,000 trading account, you are probably a more successful hedge fund manager than those mentioned above.

This is simply because of the fact that you own the $10,000 while the $20 billion hedge fund managers’ funds are from institutions and high net worth individuals. Therefore, to be a successful small scale hedge fund manager, here are the key details you must always follow.

» Related: How to use hedging trading

Defining the strategy

Hedge fund managers use different strategies to boost their revenues. As such, there are many strategies that have been developed. Some of them are strict technical traders who specialize on charting while others are fundamentalists who believe in using the news and market data. Others combine the two strategies.

On the other hand, others use the hedging technique while others are long, short traders. Others are contrarian while others are activist investors.

As a day trader, you need to define the strategy to use and fall in love with it. Perhaps, your strategy can entail trading currencies from the emerging markets only. Alternatively, you can have the strategy of trading precious metals or crude oil.

You also need to define the timeframe through which you will be trading. By having a specific strategy, you will be at a good position to understand the market and place trades that you are comfortable with.

Art of entering and exiting

The time you enter or exit a trade will be very important for you. This is simply because if you enter a trade at the wrong time, you might end up losing. On the other hand, if you exit early, chances are that you might avoid an upside.

There are 4 key strategies to enter and exit in trading:

  • Single entry, single exit. This is a strategy where you put your entire position at one price and then exit the entire position at a specific price.
  • Single entry, multiple exits. Here, you will make one entry and then position the trade to exit at multiple levels. This strategy is ideal for riding a breakout.
  • Multiple entries, single exit. In this strategy, you enter a trade at different times but exit once a certain level has been reached by averaging up or averaging down. Averaging down is to add a position if it moves against you while averaging up is to add a position that is going against you. Dollar Cost Averaging could be a good solution for day traders.
  • Multiple entries, multiple exits. This is a strategy where you scale into and out of positions where you make multiple entries and multiple exits especially in a trending session.

Test your strategy

Testing your hedge fund strategies is the best thing you should do. Backtesting will help you avoid making serious mistakes which people make on a daily basis.

If this is your first time trading, you should spend about 6 months testing the strategy you will use with real funds in a demo account. On the other hand, if this is not your first time trading, you need to ensure that your strategy is solid.

Doing this will help you have an ease of mind when trading.

Hedge fund strategies

Quantitative Trading

Quantitative trading is the use of computing and mathematical techniques to perform analysis. It involves combining a number of mathematical ideas to achieve a certain goal.

For instance, a trader can create a formula that places a buy trade when certain points of technical indicators are reached. In the past, the performance of quant hedge funds has been better than their other peers.

For instance, in 2008 when most hedge funds reported losses, the James Simons’ led Renaissance Technologies reported a 80% jump in profits.

Other large quant hedge funds include: Citadel (led by Ken Griffin), Bridgewater Associates (led by Ray Dalio), D.E. Shaw, and Quantitative Management Associates among others.

Related » 5 Reasons Why Quantitative Trading Is The Future of Trading


Most hedge fund managers use this strategy to hedge against a downside. Arbitrage is a term that simply means pairs trading where you buy a certain ‘asset’ while shorting a related ‘asset’.

For instance, generally, if the price of oil is falling, we expect that BP and Exxon will both fall. Using arbitrage, you can buy BP (LSE) while shorting Exxon (NYSE). You will therefore gain from the spread if your theory becomes true.

Alternatively, if company A is being bought by company B, then you can short company B while going long A. This is known as merger arbitrage. It is also possible to do arbitrage in one company where you short its shares while going long its bonds. This is known as convertible arbitrage.

Event Driven

This is a strategy that hedge funds love!

There are so many financial or economic events that you can use to gain alpha. As example, many investors love IPOs. In many cases, when a hot Silicon Valley startup lists, chances are that it goes up. For instance, BOX went up by more than 10% on its inaugural day. Many hedge fund managers shorted the company because they knew that the company would later go down.

Other events such as mergers and acquisition (as stated above) and the earnings season is also ideal for hedge fund managers to maximize their returns.

Global Macro

A global macro hedge fund is one that looks at the global economic and financial world and then makes decision based on this.

If for instance a hedge fund manager believes that the Mexican economy will lose ground, then they will short the Mexican Real. In addition, if the economies of the emerging markets are not stable as a result of the weakened commodity prices, then the manager might short the emerging markets.

The benefits of all these? You have the data with you and so you can replicate the strategy (the same concept of Excel’s Macro).


Other hedge fund managers follow a multi-strategy approach where they use different strategies and target various sectors.

A good example of such a hedge fund is one that combines arbitrage with quantitative techniques. Also, another example is one which uses various asset classes such as currencies, commodities, and equities to trade.

There are other strategies used by hedge funds that you can apply to your trading. These are: directional (which bases investment on long or short positions only), sector (bases investment on single sectors), long/short equity (buying and shorting stocks), and activism among others.

Trading psychology

All successful hedge fund managers have had their down years. In fact, many of them have in different years lost billions of dollars in their careers. The key to their success has always been to manage their losses in a credible manner. They understand that the market is made up of a series of bumps.

As a day trader, you need to be psychologically prepared for any eventuality. At times, you might do a comprehensive review of the market and place your trade accordingly but the market fails to respond in your favour. At this time, you might be forced to recoup your funds by placing trades in the opposite direction and make huge losses (maybe with a Double Down).

Therefore, you should always learn to manage the risks of trade up and down market movements.

» Related: Start again after a big loss

The Right Mindset of a Trader

The stock market is a tough arena, even for experienced traders. These traders quickly buy and sell stocks on extremely short notice in order to capitalize on the current market. This fast-paced environment and demand for quick decisions can really rattle day traders.

Those with the highest level of calm and professional distance are typically most successful. These individuals are able to create a trading plan, stick to it, and manage their wins and losses without letting their personal emotions cloud their judgment.

Source of funds

Your source of funds is another important thing you must think about when trading like a hedge fund manager.

Most hedge fund managers you know trade using other people’s funds. For instance, Ackman has more than $12 billion in assets under management but Forbes values his estate to be worth about $1.2 billion.

Only a few managers invest their own funds (kie George Soros and Steve Cohen). The benefit of trading your own funds is that you will have peace of mind no matter the losses you make. When trading other people’s funds, you will always fear their next actions such as withdrawals and redemptions.

We prefer you trade with your own $10,000 than with a million dollars of other people’s funds.

Related » 7 Emotions Can Destroy Your Day Trading Dream!

Fear Awareness

In the ever-changing world of the stock market, traders watch their screens as the values of stocks rise and fall with each passing minute. These screens can change to pulsating red at a moment’s notice, a sure sign that a particular stock is taking a nosedive.

For some traders, the moment that their screens cut to scarlet leads to immediate fear and the need to liquidate their holdings. This is an over-reaction and a sign of fear. Such over-reactions and fear typically lead to unavoidable losses, and these traders are less successful.

Fear is a natural reaction to a problematic situation, especially one involving large sums of money. When expensive stocks take a dip in value, it is unsurprising that these traders feel their business is threatened, and they react irrationally in protection of their assets.

» Related: Why 90% of traders lose money

Avoid Greed

Equally as detrimental as fear is the greed for more profit and more success. Traders that experience a winning run in the market are often tempted to hold on too long, until their positions and potential returns are greatly diminished.

It can be very difficult to suddenly walk away from a valuable and successful investment. This is another reason that a trade plan is necessary. Successful traders are able to develop their plans based on logical business decisions rather than emotional attachments or sudden instincts

» Related: The 3 Most Common Psychological Trading Mistakes


As a trader, self-reflection is an important ingredient for success. All successful hedge fund managers take time to reflect on their daily, weekly, or monthly traders.

According to Kathy, most of the hedge fund managers she interviewed for her book spent time to reflect on the gains and losses they made in a certain duration of time. This helps them to avoid the same mistakes again. A day trading journal could be the right way for you.

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