Consolidated List of Hedge Fund Strategies

1. Hedged Equity

The most popular strategy in terms of assets under management has historically been hedged equity. This strategy is diverse and encompasses any combination of long and short equity positions. The total portfolio position may be net long or net short. In other words, these positions are not designed to be market neutral. The hedged component is designed to enable capital appreciation with lower volatility (more alpha with less beta).


2. Equity Market Neutral

Equity market neutral funds combine long and short positions in order to exploit equity mispricings without exposure to market risk. This strategy is appropriate when managers want to bet on the performance of specific stock picks and don’t want exposure to broad market movements. The key element of this strategy is that investments must be selected and balanced so as to create a neutral position with respect to market, industry, sector, and currency factors.


3. Convertible Arbitrage

Convertible arbitrage involves long and short positions in corporate convertible securities such as convertible bonds, warrants, and convertible preferred stock. For instance, a manager may believe that a company’s convertible bonds are priced inefficiently relative to the company’s common stock. In this scenario, the manager may buy convertible bonds and short the underlying common stock to exploit the pricing error. If the company’s stock declines in value, the convertible security will likely lose less value due to its dual nature as a fixed income instrument. At the same time, if the stock price rises, the convertible bond can be converted to stock, neutralizing losses from the short position. Of course there are many players operating in this space, making exploitable mispricing difficult to find.
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Financial Planning Software for Advisers

Although a quick Google search reveals a myriad of alternatives for financial planning software, advisers are focused on just a handful of options. As reported by Financial Planning Magazine, the following four tools hold an overwhelming popularity among advisers:


1. MoneyGuidePro – MoneyGuidePro is a web based software that takes on a goal based approach. It allows the planner to enter goals, asset allocation, and liabilities. It then determines how likely it is that the client’s goals will be met. The software performs analysis around asset allocation and identifies target allocation bands among cash, bonds, and stocks. MoneyGuidePro also allows the adviser to run multiple scenarios through the “What if Worksheet”.  Additionally, the impact of adjusting goals and asset allocations can be quickly understood through the “Play Zone” module. The cost of MoneyGuidePro for one adviser is $1,295/yr. Standard pricing for larger offices with multiple advisers is not published.


2. NaviPlan – Like MoneyGuidePro, NaviPlan is a web based tool. It comes in two versions, NaviPlan Standard, which is a goal based tool, and NaviPlan Extended, which is a cash flow based tool. NaviPlan Standard allows the user to select between three levels of analysis, ranging from quick entry to comprehensive planning. Similarly, NaviPlan Extended has two levels of analysis for the adviser to select from. The first involves significantly less data entry but also provides less powerful analytics. It can be promoted to level two, where additional data is entered and more comprehensive analysis is provided.

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What is the Risk Free Rate and Market Risk Premium?

IESE Business School recently conducted a survey of over six thousand professors and practitioners to understand what assumptions are currently being used around the risk free rate and market risk premium. You can find the full survey results here: Market Risk Premium and Risk Free Rate Used for 51 Countries. Below, we will review what each of these measures represents, as well as the assumptions currently being used in the field for the world’s top markets.


What are the largest exchanges by market capitalization?

The survey results included estimates for 51 countries, but here we will focus only on the world’s largest markets. The World Federation of Exchanges publishes monthly data sets, one of which provides a breakdown of market capitalization for the world’s exchanges. Here is a list of all the exchanges with market cap over one trillion USD:

No. Exchange  Market Cap (MM)
1 NYSE Euronext (USA)  $         15,869,517
2 NASDAQ OMX (USA)  $           5,279,555
3 Japan Exchange Group – Tokyo  $           3,975,434
4 London SE Group  $           3,828,468
5 NYSE Euronext (Europe)  $           3,036,921
6 Hong Kong Exchanges  $           2,873,421
7 Shanghai SE  $           2,645,981
8 TMX Group (Canada)  $           2,010,218
9 Deutsche Börse (Germany)  $           1,616,973
10 Shenzhen SE (China)  $           1,392,730
11 SIX Swiss Exchange  $           1,361,997
12 Australian SE  $           1,327,812
13 BSE India  $           1,182,391
14 National Stock Exchange India  $           1,153,975
15 BM&F BOVESPA (Brazil)  $           1,151,987
16 Korea Exchange  $           1,145,508
17 NASDAQ OMX (Nordic)  $           1,077,026


Below, let’s focus on the countries represented by these exchanges.

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Is the Berkshire Hathaway Portfolio Underperforming?

Each year the Berkshire Hathaway annual report starts with the Chairman’s letter to shareholders. Of course this letter is closely watched because it is written by Warren Buffett himself. Not only does it discuss the company’s results, but it also contains nuggets about Buffett’s views on industry trends and the markets as a whole.

Buffett’s writing style is genuine and honest, and he chooses to address headwinds affecting his investments directly. In his 2012 letter he starts off on a down note. Buffett writes:

For the ninth time in 48 years, Berkshire’s percentage increase in book value was less than the S&P’s percentage gain…to date, we’ve never had a five-year period of underperformance, having managed 43 times to surpass the S&P over such a stretch…But the S&P has now had gains in each of the last four years, outpacing us over that period. If the market continues to advance in 2013, our streak of five year wins will end.

So is Berkshire underperforming, or is Buffett being too hard on himself?

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Budgeting Tips to Avoid a Dead Dog and an Empty Wallet

via pretendtious on Flickr

via pretendtious on Flickr

Why do some people seem to attract misfortune? Admittedly, there are those who fall victim to bad luck. However, others help bad luck along by not giving themselves the opportunity to have a backup plan. When there are no reserves and there is no slack in a system, any issue will compound and create a myriad of other issues further down the line.

For instance, let’s consider the example of an airport. If planes came into the airport at a rate of one per hour, a slight delay for one flight would have no impact on other flights. However, at some of our busiest airports, planes are landing at a rate of over one per minute.

This means that when one flight does not land on time, the next flight gets stuck in a holding pattern waiting for its turn. Moderate delays and inefficiencies can add up to create a standstill. If forces of nature (rain, snow, ice) come into play all of these issues are further magnified.

It turns out that everyday life is not so different from an airport. People who don’t leave slack in their lives risk being victims to forces of nature as well.

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5 Key US Unemployment Statistics Explained

Data on the labor markets can tell us much about the health of the broader economy. That is why these numbers are so closely watched from month to month and even week to week. However, with all the data available on the topic, both from the government and private companies, it is easy to get confused. Here is a rundown of the key US unemployment statistics to watch:


1. Household Survey

Alternative Name: Current Population Survey (CPS)
Released By: Bureau of Labor Statistics
Release Date: First Friday of each Month; 8:30 am Eastern
Sample: 60,000 US Households, including about 110,000 individuals

The Household Survey provides data for the monthly Employment Situation report, published by the Bureau of Labor Statistics. Unemployment rate is approximated through a monthly survey of US households, which is conducted by interviewers either in person or by phone. The survey defines unemployed individuals as those who:

  • Do not have a job
  • Are available for work
  • Have actively looked for work over the past four weeks

Interviewers ask survey participants a series of questions in order to determine whether these conditions are met. [Read more...]

What is the Dow Theory of Technical Analysis?

Charles Dow (1851-1902) founded the Wall Street Journal, acting as its first editor. The thoughts he laid out in his editorials would develop into a form of technical analysis that is widely practiced today.

Despite being a well known market observer and theorist, Dow never wrote a book unifying his ideas. The term “Dow’s Theory” was actually coined by his friend S.A. Nelson, who published a book called The ABC of Stock Speculation. This work included a compilation of Dow’s WSJ editorials and referred to them in the footnotes as “Dow’s Theory”.

The thoughts that Dow expressed in his writing are simply stated and remain amazingly relevant today. Here are a couple of excerpts from Dow’s editorials, which embody his ideas around market timing, strategy, and investor psychology:


Scientific Speculation

“It means that if a stock has been purchased and it goes up, it is well to wait; but if it goes down, it is well to stop the loss quickly on the ground that the theory on which the purchase was made was wrong.

The public, as a whole, exactly reverses this rule. The average operator, when he sees two or three points profit, takes it; but, if a stock goes against him two or three points, he holds on waiting for the price to recover, with, oftentimes, the result of seeing a loss of two or three points run into a loss of ten points. He then becomes discouraged and sells out near the bottom to protect the margin in which he has left.”

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Intra-Family Loans: Tap That Family Bank

via dsearls on Flickr

I have a friend who has student loans. Lots of them. At the same time his parents are struggling to find decent investments. Within a multigenerational family, you invariably see one generation trying to grow and preserve wealth, while another generation is looking to borrow money for major expenditures. In the current interest rate environment, it is quite likely that both parties will be frustrated. That’s because with current rates they can expect to:

  • Pay 7.5% on student loans
  • Pay 3.5% on mortgages
  • Earn 1.5% on 5 year CDs

To preserve wealth within a family unit, it makes a lot of sense for family members to lend to each other. While my friend is paying 7.5% on his loans, his parents are watching the purchasing power of their money erode. The interest they are earning does not even keep up with inflation.

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Martha Stewart Insider Trading Case: A Peek Into her Portfolio

Wall Street, David Paul Ohmer on Flickr

In October 2004 Martha Stewart was sentenced to five months in prison for insider trading. Martha Stewart had sold $229,513 worth of ImClone shares based on inside information given to her by her broker Peter Bacanovic. Executives at ImClone had learned that the company’s new cancer drug Erbitux had not gotten FDA approval. Bacanovic knew that that the founder and CEO of the company, Samuel Waksal, and his family members planned to dump shares in the stock, and suggested that Stewart sell before insiders liquidated their stakes.

One little known fact about Martha Stewart is that she started her career as a stockbroker. Before she was known as the expert on home decor, she was licensed by NASD, a national securities association, and she worked on Wall Street from 1968 to 1973. This certainly did not help her case, as her past experience should have made her even more keenly aware of the regulations against insider trading. Ironically, in June 2002, Stewart was elected to the New York Stock Exchange board of directors, a position she was forced to resign from only a couple of months later in October 2002.

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A Brief History of the Credit Card Nation

Credit Card Pile, sovietmole on Flickr

In 1950 Frank McNamara and his partner Ralph Schneider shared a meal at Major’s Cabin Grill. When time came to pay the bill instead of using cash, Mr. McNamara produced a small, rectangular, cardboard card. That payment was the first ever use of a multipurpose charge card.

The two partners had conceived the idea for the charge card in that very same restaurant some months prior. The card that Mr. McNamara used was the first Diners Club charge card, and this pivotal dinner in the history of the credit card is referred to as the first supper of credit. By 1951 membership in the Diners Club reached forty two thousand, and by 1959 it hit one million.

Prior to the Diners Club card, many department stores provided shoppers with charge accounts. However, consumers were required to open a separate account in each store. Diners club unified the participating businesses into one network. It charged businesses a fee and in return assumed credit risk as well as the costs of operations and financing.

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