Create Your Own ETF Hedge Fund E-Book

David Fry

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 476

Veröffentlichungsjahr: 2011

Beschreibung

Many investors are intrigued by the profit potential of today's hedge funds, but most feel like they're on the outside looking in, due to the high investment requirements and complexity of these vehicles. Create Your Own ETF Hedge Fund allows you to break down these barriers and effectively operate within this environment. By focusing on the essential approaches of global macro long/short and aggressive growth, this book will help you create a fund that can take advantage of both bullish and bearish conditions across the globe.

Leseprobe

Table of Contents

Praise

Title Page

Copyright Page

Dedication

Acknowledgments

About the Author

Introduction

PART One - Contemporary Investment Conditions

CHAPTER 1 - Hobson’s Choice

CURRENT SITUATION: THE CAPTIVE CLIENT

HOW THE INVESTMENT BUSINESS CHANGED

THE AGE OF THE DIY INVESTOR

IF YOU CAN’T BEAT ′EM, JOIN ′EM

BAD APPLES AND UNETHICAL PRACTICES

HIGH PRESSURE ENVIRONMENT

THE REGULATORS CRACKDOWN

THE MOTHER OF ALL MUTUAL FUND SCANDALS

BUT WAIT, THERE’S MORE POTENTIAL SCANDAL AHEAD

CLIENT RUMBLINGS AND GRUMBLINGS

I STILL WANT SOMEONE ELSE TO DO IT

REPORTS OF MY DEATH HAVE BEEN GREATLY EXAGGERATED

FUTURE AREA OF GROWTH: UNIFIED ACCOUNTS

THE FUTURE FOR FINANCIAL ADVISORS NEVER BRIGHTER—MAYBE

TWO BODY BLOWS TO WALL STREET FEES

CONCLUSION

CHAPTER 2 - ETFs—The New Investment of Choice

DIY INVESTORS TAKE CHARGE

WHAT TOOK ETFs SO LONG TO CATCH ON?

INDEXING VERSUS ACTIVE MANAGEMENT

PRACTICAL APPLICATIONS FOR FINANCIAL PLANNERS

ETFs AND INDEXING

THE ETF TSUNAMI

NEW QUANTITATIVE INDEXES

INTERNATIONAL ETFs

INVERSE ETFs

ULTRA, LEVERAGED SHORT, OR LONG ETFs

COMMODITY AND CURRENCY ETFs

ACTIVELY MANAGED ETFs?

WITH GROWTH COME OTHER PROBLEMS

A DISRUPTIVE TECHNOLOGY INDEED!

CHAPTER 3 - The Rise of Hedge Funds

WHAT WE REALLY MEAN BY HEDGE FUND

HOT NEW SECTOR: PRIVATE EQUITY

GROWTH OF HEDGE FUNDS

WHO INVESTS IN THESE COMPLEX STRATEGIES?

WHY INVEST IN HEDGE FUNDS ANYWAY?

BUT CAN RETAIL INVESTORS PARTICIPATE?

HEDGE FUND DISASTERS

TO REGULATE OR NOT

HEDGE FUNDS ARE HERE TO STAY

CHAPTER 4 - A Convergence Story

MUTUAL FUNDS ADOPTING SOME HEDGE FUND STRATEGIES

FUTURES INVESTMENT STRATEGIES IN HEDGE FUNDS

RYDEX INVESTMENTS LEADS A BIG CHANGE

POWERSHARES ACTIVELY TRADED ETF

POWERSHARES PRIVATE EQUITY ETF

COMMODITY ETFs DIRECT

CURRENCY ETFs DIRECT

INVERSE ETFs DIRECT

NEW MARGIN RULES

THE ZERO COMMISSION

CONVERGENCE WELL UNDERWAY

CHAPTER 5 - The Bullish Bias Gets a Makeover

OTHER CONTRIBUTING FORCES

COMMISSIONS OUT, FEES IN

RECURRING FEES

THE GREENSPAN AND BERNANKE PUT

MONEY SUPPLY SHENANIGANS

EXCESS LIQUIDITY AND STOCK BUYBACKS

I’M FOREVER BLOWING BUBBLES

BYE-BYE GLASS-STEAGALL

“DA BOYZ” AND PRIMARY DEALERS MERGE

DOES THE FED OR TREASURY MANIPULATE MARKETS?

TIME TO CONNECT THE DOTS

THE NEW ROBBER BARONS

TWO JOKERS IN THE DECK

WHAT BEARS ARE UP AGAINST

PART Two - Strategies

CHAPTER 6 - Market Neutral

THE NORTHWEST QUADRANT

EVEN HERE, RISKS REMAIN

ETFs AND MARKET NEUTRAL STRATEGIES

ALPHA STRATEGIES

MARKET NEUTRAL MUTUAL FUNDS

CONCLUSION

CHAPTER 7 - Global Macro

LTCM BLOWS UP

GUNSLINGERS

THINK GLOBAL, INVEST GLOBAL

TRADE GLOBAL

SO YOU WANNA BE A GUNSLINGER, TOO?

CONCLUSION

CHAPTER 8 - Doing It Their Way

SELECTED TRADER PROFILES

SELECTED STOCK PICKERS PROFILES

SELECTED DISTRESSED SECURITIES PROFILES

SELECTED QUANTITATIVE PROFILES

OTHER FAMOUS HEDGE FUND PRACTITIONERS

INSIDER TRADING BUILDING PERFORMANCE?

SO IF IT’S A GAME FOR THE BIG BOYS, HOW CAN WE PLAY?

CHAPTER 9 - Trading—Do I Have To?

ONE TRUE THING

MARKET TIMING MYTHS AND REALITIES

THE LAZY OR PASSIVE INVESTOR: NO SINGLE STRATEGY ALWAYS PERFORMS BEST

THE LAZY HEDGE FUND INVESTOR: THE DO-NOTHING CROWD

MERRILL AND GOLDMAN TRY TO SHAKE THINGS UP: CAN PASSIVE INDEXES DESTROY FEES?

DAY TRADING: FRENETIC AND INTENSE

SHORTING EXPLAINED: TO GO NORTH, HEAD SOUTH

QUANTITATIVE TRADING: RESERVED FOR THE LEFT BRAIN CROWD

MULTISTRATEGY: ALL THINGS TO ALL PEOPLE

CONCLUSION

PART Three - Hedge Funds for the Rest of Us

CHAPTER 10 - Lower-Risk Global Macro Long/Short Strategies

OVERWHELMED

FAST-FORWARD 35 YEARS

TREND FOLLOWING

RISK MANAGEMENT

THE TWO-THIRDS OBJECTIVE

FINDING YOUR SACRED COWS

ETFs PROVIDE THE TOOLS FOR IMPLEMENTING GLOBAL MACRO LONG/SHORT STRATEGIES

THE TRICK IS PUTTING THEM TOGETHER

CHAPTER 11 - Constructing Your Own ETF Hedge Fund

TYPICAL QUESTIONNAIRE

LONG-TERM INVESTOR OR SHORT-TERM TRADER

AWASH IN ETF CHOICES

PERFORMANCE MYTHS AND REALITIES OF STYLE

ONE WORLD MARKET

TRUE DIVERSIFICATION

SHORTING ESSENTIALS

PORTFOLIO REALLOCATION

ACTIVELY MANAGED ETFS AND MUTUAL FUND POSERS

CONCLUSION

CHAPTER 12 - ETF Hedge Fund Portfolios

LONG-TERM OR SHORT-TERM APPROACH

AGGRESSIVE GROWTH

GROWTH

GROWTH AND INCOME

DAVE’S SPECIAL PORTFOLIO

ETF SUBSTITUTES

CONCLUSION

CHAPTER 13 - Tools and Resources

ONLINE TOOLS

IMPORTANT TOOLS I LIKE

MARKET INFORMATION RESOURCES

CONCLUSION

CHAPTER 14 - Eight Steps to Building Your ETF Hedge Fund

STEP 1: DEFINE YOURSELF

STEP 2: DEVELOP YOUR HEDGE FUND STRATEGY

STEP 3: USE ETFS AS THE PRIMARY TOOL

STEP 4: USING MUTUAL FUNDS AS AN ALTERNATIVE VEHICLE

STEP 5: GET HELP, EVEN IF YOU’RE A DIY

STEP 6: IF YOU WANT TO USE A FINANCIAL ADVISOR, FIND THE RIGHT ONE

STEP 7: DIYS NEED AN ONLINE BROKER

STEP 8: FIND THE SUPPORT TOOLS YOU NEED

CONCLUSION

Index

Additional Praise forCreate Your Own ETF Hedge Fund

“If you’re thinking about building a portfolio of ETFs, David Fry’s expertise can help!”

—Charles E. Kirk, The Kirk Report

“I had the good fortune of working with David Fry when I was a rookie at PaineWebber in the late 1970s. Of all the people whom I have met in the securities industry, Dave may be the most diligent about putting his clients’ interests first and managing the inevitable conflicts of interest that arise. Dave’s greatest talent, though, is his ability to analyze and distill complex financial concepts and explain them in language that a reasonably intelligent layperson can understand.”

—William W. Bowden, municipal bond trader and salesman

“David Fry is one of the most popular contributors to SeekingAlpha.com. His annotated charts and accompanying commentary provide an actionable and compelling commentary on the market.”

—David Jackson, founder, Seeking Alpha

“In Create Your Own ETF Hedge Fund, Dave Fry channels his vast industry experience and keen insight into a practical and useful guide that will help investors effectively use ETFs as building blocks for their investment portfolios. Fry’s description of how the markets developed along with the evolution of the participants and their incentives provides the context to further understand the relative effectiveness of ETFs, why ETFs have experienced such accelerated growth, and positive long-term prospects for the ETF industry and the investors who use them.”

—Kevin Rich, CEO, DB Commodity Services LLC, a wholly owned subsidiary of Deutsche Bank AG

“David’s immense experience and expertise shine through in this highly enjoyable and invaluable insight into the evolution and use of ETFs, a necessary tool in the expanding universe of global investment.” —Terry Alexander, Head of Country Risk,

Business Monitor International

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Copyright © 2008 by David Fry. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Fry, David, 1945-

Create your own ETF hedge found: a do-it-yourself ETF strategy for private wealth management / David Fry.

p.cm.—(Wiley finance series)

Includes index.

ISBN 978-0-470-13895-3 (cloth)

1. Exchange traded funds. 2. Hedge funds. 3. Portfolio management. I. Title.

HG6043.F79 2008

332.63′ 27—dc22

2007029953

For “FF”

Acknowledgments

The author would like to thank the following people and organizations:

Tiburon Strategic Advisors FPA Journal & Millicent Holmes StockCharts.comPowerShares Hedge Fund Alert Greg Newton, Naked Shorts HedgeCo.netHedge Fund Research, Inc. Stocks & Commodities Magazine Richard Dennis DB Commodity Services Investment News Business WeekNate Most Index Universe Investopedia.comInvestment Company Institute Stephen Winks, SrConsultant.comNYSE AMEX FTSE Bloomberg.comForex-Markets.comFinancial TimesMorningstar SSgA Funds Barclays Global Investors Mark Hoyer Marissa Fry Francia Fry Seeking Alpha Pritchett Cartoons Shadow Government Statistics Kitco.comAMG Data Services Charles Kirk [The Kirk Report] Barron’sInvestors Business Dailythe Wall Street JournalThe EconomistJohn W. Henry [John W. Henry & Company] Ben Murillo Jr. Robin Kameda Patricia Reilly Sidney Eng Donald Putnam [Grail Partners, LLC] The Hennessee Group

About the Author

Dave Fry has devoted more than 35 years to the business of trading and portfolio management. His registration as an arbitrator with both the National Association of Securities Dealers [NASD] and the National Futures Association [NFA] attests to his extensive experience and spotless compliance record.

Dave founded the ETF Digest in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing.

By 2002 ETF Digest trading programs were making triple-digit gains, despite the sharp overall market decline at that time, and Dave’s newsletter began attracting favorable coverage in Barron’s with three positive reviews in 2002, 2004, and 2007.

Dave is a frequent commentator on ETFs and other issues important to individual investors, and his perspectives are featured in financial news sources such as the Wall Street Journal, MarketWatch, Investors Business Daily, Smart Money, Dow Jones Newswire, National Business Review, MSN Money, Yahoo! Finance, Bankrate.com, Emerging Markets Monitor, IndexUniverse.com, and ETF Investor.

As the scope of ETF investing has expanded dramatically over the past few years, Dave has maintained a vital position as an investor advocate. He speaks out in favor of new ETFs to cover important market sectors and has seen new ETFs issued as a result. He is also very active in pointing out problems in the ETF marketplace to sponsors, issuers, brokers, and the media. Dave is committed to remaining at the forefront as this major investment trend continues to grow.

Some of the highlights of Dave’s career before he launched ETF Digest include the following:

• In 1999, he founded TechInvest Inc. and began sharing his expertise through the Internet in his Tech Trend Advisor newsletter.

• From 1997-1999, he was Managing Director, Proprietary Investments, at JWH Investment Management [JWHIMI], an affiliated company of John W. Henry & Company. In that capacity, Dave was responsible for the management of private investments as well as some corporate accounts.

• For a period of 10 years prior to joining JWHIMI, David owned and operated an NASD broker/dealer, Fry & Co., and an SEC registered investment advisory firm, Asia-Pacific Investment Management Inc. He was also a registered Commodity Pool Operator, Commodity Trading Advisor, and Introducing Broker.

• Prior to operating his own investment firms, Dave was a Vice President, Investments, at Shearson Lehman Bros. and held a similar position at Paine Webber.

During his tenure with registered firms he maintained the following licenses: Municipal Bond Principal [Series 53], Options Principal [Series 4], General Securities Principal [Series 24], General Securities [Series 7], Commodity [Series 3], State Securities License [Series 63], and State Insurance License [Life].

Introduction

To modify the message of a popular book, the investment world is really flat these days. Money flow to both traditional and far-flung overseas markets is increasing dramatically, major U.S. stock exchanges are merging with their overseas counterparts, electronic trading platforms are becoming more ubiquitous, and Wall Street firms are positioning themselves to take advantage of what soon will become a 24-hour trading world. As contemporary investors, you’re either with the major trend of the twenty-first century both as to global exposure and hedge fund style, or as hip urbanites say, “You’re so last century.”

Here are the new facts and trends individual investors should know:

• The flow of new investment funds favors exchange traded funds [ETFs] more than common mutual funds or any other product except hedge funds.

• The number of ETFs in 2005 numbered 201 with assets of $296 billion.

• At the close of 2006 there were 359 issues with $417 billion in assets—a growth rate of nearly 80 percent year-over-year.

• And guess what? There are nearly 350 new ETFs in registration with the Securities and Exchange Commission [SEC] that if issued would double the issues outstanding in 2007.

• The number of new ETF issues is constrained only by the imagination of new product engineers on Wall Street.

ETFs are still tiny when compared to conventional mutual funds where according to the Investment Company Institute assets at the end of 2006 were $7.9 trillion excluding money market accounts, an increase of roughly $1 trillion from 2005. However, these figures include asset growth while fresh contributions including money market accounts averaged $140 billion—almost at the same rate as ETF growth.

Meanwhile according to consulting firm the Hennessee Group, hedge funds expanded from around 8,000 at the end of 2005 to 8,900 by the end of 2006. Further, assets under management grew from roughly $1 trillion to $1.3 trillion by the end of 2006. The source of all these funds comes from a variety of institutional and high net worth individuals. And many of these funds utilize ETFs as a major part of their focus.

All this activity isn’t lost on conventional mutual fund issuers. A convergence story is developing whereby mutual funds will start issuing hedge fund-like funds using ETFs as basic components. Incorporating these strategies will allow mutual funds to charge and maintain higher fees. Doing so will alleviate some of the drain conventional mutual funds are losing to low-cost ETFs.

As someone who’s spent more than three decades either managing investments or advising clients one thing remains clear to me: Things change. If you’re an advisor utilizing antiquated financial plans from the past century, you’re behind the curve. To retain your clients, keep them satisfied, and grow your business, you’ll need to adopt a newer approach. In so doing you’ll be perceived as contemporary knowledgeable, and on the cutting edge of investment trends.

Further, the business model for financial advisors is ever changing. Commissions have yielded to discount firms and in-house “wrap fee” accounts, discount firms are facing competition from commission-free regimes, and recurring fee-based models built on high mutual fund fees are being threatened by low-cost ETFs that pay no fees to advisors. Finally, younger investors are more in tune with the online world and will opt for the more hip route rather than seeking an advisor.

What’s an advisor to do? If you can’t beat ’em, join ’em. Use ETFs in a portfolio structure that incorporates simple hedge fund strategies, charge a realistic fee for doing so and grow your business. That may include trendier mutual fund issues that will incorporate hedge fund-like strategies.

Individual investors who want to change or break away from their conventional relationships and plans find it difficult. For retail investors most Wall Street firms are designed like a typical casino—easy to find your way in, hard to find your way out. Most investors feel trapped and handcuffed to outdated, inflexible, and costly financial plans as assets are distributed over a wide variety of high-fee mutual funds. And most of these funds contain costly redemption fees, making the exit even more difficult.

This book is designed to help you by:

• Demystifying hedge funds.

• Explaining why they’re so popular.

• Outlining basic portfolio strategies in a clear and easy to understand language.

• Outlining the number and type of current, new, and proposed ETFs that provide you the tools you need to put some oomph into your investment returns.

And, most importantly, give you sample portfolios to help you get started.

Even with the simple strategies outlined in this book, individual investors may still want help either because the information is still overwhelming, they don’t have time, or they like their current advisor. There are tools available to help both individuals and advisors alike such as investment newsletters that can assist both in portfolio construction, research, and timing. If you’re an individual investor not interested in the do it yourself [DIY] thing, find an investment advisor who understands the concepts outlined in this book and is willing to implement them for a reasonable fee.

Most investors are intrigued by the buzz about popular hedge funds and feel like they’re on the outside looking in. High investment level thresholds, usually greater than $1,000,000 are off-putting or beyond the reach of most investors. So hedge funds have remained the playground of the superrich.

Again, a wide variety of ETFs from those linked to basic equity market indexes, currency, commodity, Emerging Market, fixed income, and so forth, combined with severely discounted [or even new commission-free accounts] have given typical investors the tools they need to get in the game. And this is true without having to pay the enormous fixed and incentive fee laden funds customarily the province of hedge funds.

There are at least 20 different hedge fund strategies and structures. Average investors wouldn’t be interested in 99 percent of them from Distressed Securities to Convertible Arbitrage. These strategies exist to fit complex and arcane overall institutional portfolio needs beyond the interest of retail investors. No, this book primarily focuses on the most common and popular Global Macro Long/Short and Aggressive Growth themes where portfolios are constructed to take advantage of both bullish and bearish conditions across the globe. Although available for those wishing to use it, the use of leverage is not required, only a desire and willingness to put a plan of action together and, if necessary, find the help you need to put it to work.

What is commonplace on the investment scene is that popular hedge fund investment strategies and new products like ETFs become overdone as their attraction increases. For example, as the summer of 2007 ended hedge fund strategies revolving around “private equity” peaked as a so-called credit crunch developed making new buyouts almost impossible to finance. Further, strategies utilizing leveraged mortgage-backed securities and exotic derivatives like CDOs [Collateralized Debt Obligations] caused heavy investor losses. As July 2007 data revealed nervous investors withdrew assets [$32 billion] from hedge funds for the first time since 2000 according to TrimTabs BarclayHedge Fund report. It would come as no surprise if this trend continued.

The tsunami of ETF issuance seems overdone to most and it probably is. But from our perspective the more ETFs the better since among the many being issued will be some needed that can complete an all-ETF hedge fund. We strive to identify only those ETFs from the hundreds issued that are the most useful.

This book will help you develop a strategy that suits your goals and personality. Better still, we outline real portfolio construction techniques that are easy to explain and implement.

PART One

Contemporary Investment Conditions

CHAPTER 1

Hobson’s Choice

For the Model T, you may have any color as long as it’s black.

—Henry Ford

“Hobson’s choice” originated from English liveryman Thomas Hobson, who kept at least 40 horses for hire but never let a customer choose his own horse in the stable. He offered only the horse nearest the door or no horse at all.

No choice at all has been the theme for many retail investors when securing investment choices from most FAs [financial advisors, consultants, and brokers]. In 2004 a distressed friend told me of a difficult situation she was experiencing with her FA, also a family friend of hers, making solutions even more awkward. She is a well-educated, intelligent, professional person and has maintained a long-term relationship with her FA who was associated with a well-known national firm. She had a variety of small accounts, which the advisor loaded up with high fee mutual funds that pay a share of the recurring annual fees back to the firm and advisor.

She had become increasingly dissatisfied with the low returns, so she asked the FA if she could consolidate her accounts and invest in exchange-traded funds [ETFs] or index funds instead since she had read and heard so many positive things about them. Rather than accommodate her, the advisor just told her no, that it wouldn’t be appropriate for her and to stick with what she had. Further she was told that what positive attributes she had heard about ETFs and index funds was nonsense, that if she went down that road, the commissions to make these changes would be too high both in redemption penalties and transaction commissions. Frustrated and very reluctantly, she did as she was told but her relationship with her family friend and FA was forever changed.