How does it work when hedge fund managers bet “against” the market and make money?
It is a case of a hedge fund manager believing that something is overvalued and taking a position that will profit from its decline. The best example is John Paulson, a trader who believe that housing prices were overvalued and entered into massive positions that would profit if people started defaulting on their loans. As is well known, the housing market in the US is still in decline and his decision made nearly a half billion in profit for his firm. In other cases, a manager can believe that a company’s profitability do not support its current stock price and can either short the stock or purchase put contracts, either of which will increase in value with a decrease in the underlying stock’s market price.
