The wealth gap has been expanding for decades. For one reason: billionaires are experts at capital, preservation and growing wealth. That being said, public sec disclosures allow retail investors like you and me to see exactly how billionaires are building their wealth. The vast majority of top tier fund managers and billionaires have recently been hedging their net worth against the u.s stock market crash.

That is what this video will focus on before we get into it. Please consider subscribing if you haven't already, as only 21 of you are, and thank you to those who have done so as well as to ftx for sponsoring this video. Most investors assume that hedge funds are terrible at managing money because the average fund manager underperforms the s p 500. However, further context is necessary before one can make such a conclusion.

The majority of hedge funds are not interested in beating the s p because they are simply focused on one goal: steady capital growth. This graph compares the performance of the average hedge fund and the s p 500 from 1994 to 2017.. What you will notice is that hedge funds are much less volatile in comparison to the s p. The s p 500 outperformed hedge funds during the dot-com bubble by a large margin.

But when the dot-com bubble popped, the s p collapsed. While hedge funds barely even moved a similar situation, happens during the 2008 recession, the average hedge fund crashed by roughly 22 percent, while the s p crashed by over 50 percent. The reason why this always happens is because fund managers are focused on alpha. Alpha is a statistic that tracks a fund's risk-adjusted return, making large sums of money during a bull run is fantastic, but that doesn't mean anything if your gains disappeared within a matter of months, billionaires have recently begun hedging their portfolios against future market weakness.

It's no secret that valuations are at all time highs, inflation is rampant and the federal reserve is set on raising interest rates and slowing quantitative easing, which is when the fed purchases bonds interest rates are directly correlated with market valuations and a rise in interest rates could Easily crash the market, elon musk, kathy wood, ray dalio, michael burry, bill ackman, charlie munger, warren buffett and chamoth palihapatiya have all been hedging against a market recession. The key to market hedging ultimately comes down to position sizing timing. The market is notoriously difficult and you should never bet a significant portion of your portfolio on a market crash. Instead of going all in on short dated options or shorting the market, you should allocate a small portion of your portfolio as a hedge against your long portfolio.

In the event that a market crash occurs, you can sell that hedged position to purchase stocks for long-term gains bill ackman a hedge fund manager that manages over 13 billion dollars recently initiated a small short position on the bond market. This position is only worth roughly one to two percent of his total portfolio, but in the event that bonds crash it could rise to become 10 or even 20 percent of his portfolio. Bond yields are currently at 1.8 percent, which is much lower than inflation. These yields could easily increase to 4 or even five percent.

If inflation gets out of control. On the flip side, bond yields will never go below zero percent because investors can hold cash for zero percent returns. This is asymmetric risk because those that are shorting the bond market are taking on low risk, while having high potential reward. Ackman recently stated how he believes the federal reserve is understating their attraction plan.

He said, while it has become conventional wisdom, that the federal reserve will raise rates three to four times this year to mitigate inflation. The market expects 25 basis point increments. The unresolved elephant in the room is a loss of the fed's perceived credibility as an inflation fighter, and whether three to four would therefore be enough. The federal reserve could work to restore its credibility with an initial 50 basis.

Point surprise: move to shock in all the market, which would demonstrate its resolve on inflation. Bill ackman is essentially pressuring the fed to raise interest rates at the sake of the economy. Ackman is known for manipulating the market. His hedging strategy is still noteworthy, but you should never follow what he says.

Ackman is using bond derivatives that are similar to options contracts, but for bonds. Speaking of inflation, crypto has historically been an incredible store of value. The sponsor of this video ftx us is one of the top crypto exchanges with billions of dollars of crypto exchanged every day you might have heard of ftx from their partnerships with major league baseball tom brady, giselle bunchen and stephen curry. The ftx us application allows users to buy and sell crypto and nfts with no fees, use a crypto debit card and track their entire crypto portfolio.

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The long short strategy is commonly used by top tier hedge fund managers, because it dramatically lowers short term risk. Two fund managers that have recently begun using this strategy are chamath palihapatiya, the ceo of social capital and kathy wood. The ceo of arc invest. The key with the long-shore equity approach is to go long and short on companies in the same sector.

By doing such a move, you would be making money on the difference in performance of the companies also known as the spread. Chamath is shorting apple, meta, amazon and netflix, while going long on microsoft and google. This means that if big tech as a whole goes down, chamat's position will not be affected. Similarly, if big tech goes up, chemoth would still be mutual in his position.

Instead of betting on the growth of the sector, he is profiting on whether microsoft and google will outperform apple meta, amazon and netflix. This reduces the risk dramatically because valuations, don't matter as much if big tech at large is overvalued, it won't affect chamath's trade. Only comparative valuations for the individual companies matter jamal. Do you think that the google long netflix short play is the right play? I think, what's going on, i think the best trade on the best trade on the internet, the most obvious, simple money making trade is long.

Microsoft, google short big tech, short, the rest of the big tech short ibm, short netflix. No, no, no, no! No! No sure short, i don't know meaning you could you can very comfortably short apple facebook, amazon, netflix and be long, microsoft, google, so as a spread trade right right, it's the most. It's the best risk parity trade on the internet. Right now i mean period in the market.

Chamath has performed incredibly well over the past decade, but this trade actually isn't even from him. He simply just heard it from another undisclosed hedge fund manager and copied it. So when you're betting on internet stocks, you don't necessarily have to be naked, long or naked short, which comes with a lot more risk than if you were long one security and short another against it. So, for example, over the last 10 years, you would have made a lot of money by being long, amazon and short a basket of traditional commerce companies, offline commerce, i'm gon na make up a basket, but macy's jcpenney.

You know kmart sears right. So if you're short, those and long amazon, that's what's called a spread trade you're you're, basically playing the gap between your longs and your shorts, it's independent of where the market generally trades. It's one of those irrelevant of the market. You're basically saying those stocks could go up, but just not everything could go near yeah when you put that trade on, for example, it's oh i'm gon na bet that if everything goes up, amazon will go up more than kmart walmart sears, and if the stock market Goes down, amazon won't go down that much, but these ones will go down a lot and you you're playing the spread.

Another spread trade that chamath recently initiated is in the financial payment sector. Chamath is shorting visa and mastercard, while going along on cryptocurrencies with a strong payment infrastructure. I think that this is the year you can put on what probably will be the most profitable spread trade of my lifetime, which is to be short, these companies and that anybody that basically lives off of this two or three percent tax and be long well thought Out web three crypto projects that are rebuilding payments infrastructure in a completely decentralized way. Now that doesn't necessarily mean that what you say won't also happen both that stripe will have an incredible ipo and that a lot of these scammy crypto projects will go to zero.

However, if you read the white papers of these crypto projects and you systematically put together a framework, i think you can be long. Those and you can be short visa, mastercard, because i think this is their peak market cap. The reason why chamath believes this is going to be the most profitable spread trade ever is because visa and mastercard charge an unnecessary fee on consumer spending. The average payment fee on transactions ranges from 1.5 to 3.3 percent, with the release of decentralized cryptocurrencies out of quick payments and low fees.

The payment system may begin to change, even though crypto may not be ready quite yet to replace all payments. Every change has to start somewhere and market prices are always forward-looking. That being said, a lot of these crypto projects are targeting developing countries that need an online payment system. Replacing the traditional credit card companies with crypto will not happen until scale is achieved.

That's why cryptocurrencies are targeting countries like ia to test and scale their payment infrastructure. Amazon recently stopped accepting uk issued visa credit cards, which could be a sign that companies are looking for new ways to process payments amazon earlier this year. Nick, maybe you can post this decided to just shut visa off in the uk, oh yeah. Now amazon is not going to do something like that.

In my opinion, unless it's a test of what they can do all around the world and again going back to this idea of arming the rebels, there really is no need today for all of these small businesses to sit on top of visa, mastercard and amex rails. It's unnecessary and so it'll probably get developed in the developing world first. This is why i think you know focusing in markets like ia to me are way more exciting than talking about. You know these fading western european countries.

Who cares right? This is where this stuff will happen: um, it's not to say that those are those other companies can't you know trundle along for a while, but when i say you know we'll look back in 10 years and their market caps will be materially lower. Anybody in those traditional infrastructure and rails versus anybody in this new infrastructure and rails will be. It will look like a no-brainer. You might assume that chamoth spread trade is intended for the next 5-10 years, but he actually believes that such disruption will be apparent within one year.

This is not one where i think this disruption happens slow. I think it happens swiftly swiftly being five to ten years. No like in a year kathy wood also recently began using the longshore equity strategy for the traditional companies that are getting disrupted by innovation. One of the most prominent examples of this is kathy going long on tesla, while shorting gm and ford, even though gm and ford are trying to electrify 99 of their revenue, will probably disappear over time.

This will theoretically allow tesla to benefit from taking ford and gm's market share. Well, we have uh. We have internally for employees, only we're testing out a portfolio, but it's really arc on steroids. If you can believe that uh, we don't think the we want to test it out on ourselves first and make sure that uh, you know everybody keeps their eye on that five-year investment time horizon, as which is our time horizon and uh and doesn't pay attention to The day-to-day, because what we would be doing is shorting stocks that are in the big benchmarks and when we get into a wrist off situation, what happens is portfolio managers and analysts generally run back to those stocks, get closer to their benchmarks and they dump our stocks, Which are either small parts of benchmarks or not in benchmarks, in addition to the strategies that we talked about, there is also another way to hedge against the recession.

What's interesting about this strategy is that you don't need the short companies or asset classes? The strategy that i'm talking about is going long on international stocks. This will be controversial to some, but many fund managers have embraced the controversy and purchased chinese stocks. This is because, when the u.s dollar is deflating in value, other currencies will comparatively increase in value. If someone holds chinese stocks, they will essentially be hedging themselves against the decline of the u.s dollar.

This is because chinese companies will be dealing with revenue in chinese rent. Rather than us dollars, so when the u.s dollar goes down, the chinese rent would increase in value ray dalio. The world's largest hedge fund manager is taking advantage of that opportunity. Dalio recently launched his biggest ever china fund in november 2021 that exclusively invests in china.

There are also macroeconomic factors at play that i covered in a previous video linked on the top right and in the description. Ray dalio is known as the king of alpha because he always looks for ways to lower volatility, while keeping long-term returns by adding china into his portfolio. He is hedging himself and his clans against the us dollar, as well as the u.s stock market. Warren buffett's, right-hand man, charlie munger, may also have a similar mindset.

Monger has been warning of a lost decade for u.s equities due to high valuations. Over the past few months, mongrel has been branching out by purchasing alibaba stock in the latest quarter. Munger disclosed that he doubled down on alibaba over 25 percent of his portfolio is now in alibaba stock, which is a significant amount relative to his whole portfolio. The last way to hedge, your portfolio against the recession is simply to hold some cash.

Elon musk likely had this in mind when he sold a portion of his tesla stock. Shortly after selling his stock elon revealed that he believes a recession will come as soon as spring 2022. Warren buffett also has this mindset, as berkshire has a record cash pile of 149 billion dollars. Berkshire's total market cap is currently at 715 billion dollars at the time that i'm recording this video.

This means that over 20 of brochures market cap is in cash, which is a substantial amount. If you do decide to hold cash, it's important to keep position sizing in mind. The market could easily continue going up, while inflation eats away at your cash. Therefore, i would personally only keep 15 of your portfolio in cash, especially if you currently have income.

We've talked about many ways that billionaires have been hedging against the market crash, but regardless most of these investors still have a lot of money invested in the market, they've simply added the necessary positions to protect their existing portfolio against overall market downturns. These positions have likely been influencing the market negatively over the past couple of months. Retail investors do have influence on the market, as demonstrated by gamestop, but the fund managers that we covered in this video arguably have even more impact. We can learn these tactics and implement them in our own investing strategies.

If that sounds interesting to you hit the like and subscribe button, let me know if and how you're hedging your portfolio against the market crash thanks for watching as always and i'll see you in the next one.