NOT How to Create Your Own Hedge Fund

The WSJ had a peculiar article about how to use ETFs to “create your own hedge fund.” The article isolated several hedge strategies, some recent performance data of these strategies at a broader index level and offered ETF combos to serve as proxies that would have delivered the same results for much less in the way of fees. The suggested hedge fund replicating ETF combos came from research done by William Bernstein who concluded that hedge funds can be mimicked with “varying amounts of just two ETFs, plus cash.” The two ETFs that Bernstein used for this were the iShares Russell 3000 Growth Fund (IWZ) and the Vanguard Russell 3000 ETF (VTHR)–so a total market fund of sorts and the growth slice of the total market. So to capture equity, relative value, event driven or macro hedge fund performance (the four categories cited in the article) all that needs to be done is combine the two funds and cash in different percentages. The article was not clear on the amount of time that was analyzed to draw these conclusions but there was a reference to how one of the combos did over the last two years. The last time I looked at the article there was only one comment and it called the portfolios ridiculous. Since the March 2009 low, hedge funds have broadly lagged the S&P 500 which the article attributes to hedge fund managers being too bearish (or skeptical?) for the last three and a half years. So, stated another way the various hedge strategies have lagged for being too bearish. One flaw in the article is...

NOT How to Create Your Own Hedge Fund

The WSJ had a peculiar article about how to use ETFs to “create your own hedge fund.” The article isolated several hedge strategies, some recent performance data of these strategies at a broader index level and offered ETF combos to serve as proxies that would have delivered the same results for much less in the way of fees. The suggested hedge fund replicating ETF combos came from research done by William Bernstein who concluded that hedge funds can be mimicked with “varying amounts of just two ETFs, plus cash.” The two ETFs that Bernstein used for this were the iShares Russell 3000 Growth Fund (IWZ) and the Vanguard Russell 3000 ETF (VTHR)–so a total market fund of sorts and the growth slice of the total market. So to capture equity, relative value, event driven or macro hedge fund performance (the four categories cited in the article) all that needs to be done is combine the two funds and cash in different percentages. The article was not clear on the amount of time that was analyzed to draw these conclusions but there was a reference to how one of the combos did over the last two years. The last time I looked at the article there was only one comment and it called the portfolios ridiculous. Since the March 2009 low, hedge funds have broadly lagged the S&P 500 which the article attributes to hedge fund managers being too bearish (or skeptical?) for the last three and a half years. So, stated another way the various hedge strategies have lagged for being too bearish. One flaw in the article is...

Confirmation Bias, Again

Jeff Saut quoted a couple of investment luminaries this week including one I know personally. From Ken Fisher in 1989 was; Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route. And from Benjamin Graham; The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept. From John Serapere I would add; 75-50 I don’t remember hearing that when I worked at Fisher (for a few months in 2002) but long time readers will know that the above, even if worded differently, are cornerstones to my approach. The 75-50 refers to a portfolio strategy that targets 75% of the upside of the market and only 50% of the downside (do the math, it works). In terms of people who read my site or others like it, many of you are do-it-yourselfers but may not necessarily be expert stock pickers (and you don’t have to be). The idea of going along for the ride during the up phases of the cycle and then being devoted to learning and understanding what causes large declines and seeking to take defensive action fairly early in the decline to avoid the full brunt of down a lot as I call it is not only valid, but I would say easier and places even less emphasis on stock picking which seems to be something many prefer not to do. Another aspect to avoiding the full brunt of down a lot is it places less importance in...

Confirmation Bias, Again

Jeff Saut quoted a couple of investment luminaries this week including one I know personally. From Ken Fisher in 1989 was; Here’s the paradox: the odds are overwhelming I will end up richer by aiming for a good return rather than a brilliant return – and sleep better en route. And from Benjamin Graham; The essence of investment management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept. From John Serapere I would add; 75-50 I don’t remember hearing that when I worked at Fisher (for a few months in 2002) but long time readers will know that the above, even if worded differently, are cornerstones to my approach. The 75-50 refers to a portfolio strategy that targets 75% of the upside of the market and only 50% of the downside (do the math, it works). In terms of people who read my site or others like it, many of you are do-it-yourselfers but may not necessarily be expert stock pickers (and you don’t have to be). The idea of going along for the ride during the up phases of the cycle and then being devoted to learning and understanding what causes large declines and seeking to take defensive action fairly early in the decline to avoid the full brunt of down a lot as I call it is not only valid, but I would say easier and places even less emphasis on stock picking which seems to be something many prefer not to do. Another aspect to avoiding the full brunt of down a lot is it places less importance in...

Damages

If you have Directv then for months you’ve been seeing commercials for the TV series Damages coming on Directv Channel 101. I know the show is first run on FX but I’d never seen it but from the commercials for the second run on Directv we were planning to watch it. Then coincidentally the PR firm working with Directv contacted me about doing a write up on the show in exchange for a DVD (no money). I said yes but I would have changed my mind if after watching I thought it was bad. Joellyn and I watch the first episode last night (episodes first air on Wednesday nights and then again on Friday nights) and it was very fun. The Glenn Close character (Patty Hewes) is clever and cutthroat (literally) along the lines of Al Swearengen from Deadwood. In the opening scene she cracked open an adversary on a case like an egg–it was very funny. The reason for contacting me to write about the show is that there is a capital markets tie in to the plot. The main storyline involves Hewes going after Arthur Frobisher (played by Ted Danson) who pumped his company stock as CEO to employees and then sold it before it went bust. This character appears to be a take on either Bernie Ebbers or one of the boys from Enron only more sinister. All in all it was a very entertaining show and I guess the idea is to show the first three seasons on Directv until the fourth season premieres this summer on FX. I can’t stress enough the ruthlessness of...

Damages

If you have Directv then for months you’ve been seeing commercials for the TV series Damages coming on Directv Channel 101. I know the show is first run on FX but I’d never seen it but from the commercials for the second run on Directv we were planning to watch it. Then coincidentally the PR firm working with Directv contacted me about doing a write up on the show in exchange for a DVD (no money). I said yes but I would have changed my mind if after watching I thought it was bad. Joellyn and I watch the first episode last night (episodes first air on Wednesday nights and then again on Friday nights) and it was very fun. The Glenn Close character (Patty Hewes) is clever and cutthroat (literally) along the lines of Al Swearengen from Deadwood. In the opening scene she cracked open an adversary on a case like an egg–it was very funny. The reason for contacting me to write about the show is that there is a capital markets tie in to the plot. The main storyline involves Hewes going after Arthur Frobisher (played by Ted Danson) who pumped his company stock as CEO to employees and then sold it before it went bust. This character appears to be a take on either Bernie Ebbers or one of the boys from Enron only more sinister. All in all it was a very entertaining show and I guess the idea is to show the first three seasons on Directv until the fourth season premieres this summer on FX. I can’t stress enough the ruthlessness of...