How to Profit from a Hedge Fund

Many people have criticized hedge funds and private equity funds for profiting from the big run up in various equities during the time when the bubble was inflating while buying credit default swaps to profit when the bubble burst.  While that may be the case, sometimes, investors have a chance to trade a hedge fund stock to profit.

That is the case with Blackstone Group.  The company will pay a dividend of $0.30 soon, with the ex-dividend date falling on March 11, 2010.  As you know, that means investors need to hold the shares by the day before the ex-dividend date in order to receive the dividend.

The stock is trading at a shade under $15 right now, and it is yielding 8.1 percent.  That means that if you buy the stock and hold it until the ex-dividend date, you will receive income of a little more than two percent.  You'll receive that income for holding the stock for just four days, and you can profit more from any capital gains that occur.  Or, if the share price goes down -- and the shares fluctuated by $0.48 on Friday so that's possible -- you just hold on until you break even.  Even if that takes a month, you earn a little more than 24 percent on an annualized basis on your trade.

To boost your earnings, you can sell call options.  The $15 March call for Blackstone is trading for $0.19, which means you book that additional income and goose your returns even more.  That will increase your earnings to 3.3 percent, and you'll receive that for holding on to your shares for two weeks until the options expire.  That's an annualized return of 85 percent, something you should be happy to take.

Many people hate hedge funds, saying that they make money unfairly and don't play by the same rules small investors do.  While that may be true, sometimes, you can play the same game as they do, and profit from it.

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