Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

A Tale Of Two Hedges

The hottest topic in investing today is undoubtedly that of hedge funds. Exciting and enigmatic, hedge funds have become the buzz of nearly every investment symposium or trade show the world over. But why all the fuss? Is it because of sub-par equity returns in the past few years? Or is it due to the purportedly superior risk/reward profiles boasted by hedge funds? Or is it perhaps their limited access?

Whatever the cause, it is safe to say that hedge funds have earned a permanent place in the financial vocabulary of most investors. The world of investments is often surrounded by a “stock of the week” mentality, a short-term mindset. Yet hedge funds are not just a fashionable fad. In fact, a diversified group of hedge strategies has historically produced equity-like returns, but with substantially less market risk. In fact, over the past ten years hedge funds have produced similar positive results as the S&P 500 yet at less than half the risk. It cannot be forgotten that this time period encapsulated one of the greatest domestic large-cap bull markets in history.

While the benefits of hedge strategies may no longer be in question, investors still have difficulty implementing them in their portfolios. Typically, a hedge fund in a limited partnership format requires investors to be “accredited.” This means that the individual investor must have a $1 million net worth or earn an annual salary of over $200,000. To be certain, this is not the profile of the average investor. This begs the question; how does the average investor use hedge tactics in his or her portfolio? Perhaps more importantly, if they do find a means of doing so, are they giving up performance to the “accredited” elite?

We contend that the most suitable alternative to limited partnership hedge funds is a mutual fund that uses hedge fund techniques. These of course are not your run-of-the-mill mutual funds. Just like their hedge fund limited partnership cousins, they employ strategies like global macro (a hedge fund name for tactical asset allocation) market neutral, long/short equity, announced merger arbitrage and convertible arbitrage, to name a few. While the jury is still out on long-term performance differences between the two formats, the mutual fund does offer some distinct advantages. Some of the differences are outlined below:

Private Hedge Fund

Mutual Fund (Hedge-like Strategy)

Aggressive Use of Leverage

Sometimes

No

Diversified

Often Concentrated

35-100 Positions

Fees

2-3% + 20% Performance

0.80 to 2.50%

Regulation

Little or None

Closely regulated by the SEC

Daily Pricing

Infrequently

Yes

Daily Liquidity

Almost Never

Yes

Transparency

Rare

Yes

It is no secret that many of the most talented portfolio managers have begun a migration toward the hedge funds (limited partnership format) arena. This will put a premium on talented mutual fund mangers who can implement these hedge type strategies. However, they do exist and in fact many of these same managers run both types of funds. By and large, non-accredited investors are better off with these mutual hedge funds in their portfolio than without. What follows is a comparison between hedge strategy indices, as provided by CSFB Tremont Hedge World, and sample mutual fund performance of funds that are comparable to the strategies employed by the hedge funds (Data per Morningstar as of January 31, 2004). The results may surprise you.

Without question, there are biases in these types of examples. Primarily, the funds selected for comparison are identified as some of the best in their class. Yet the results are positive enough to warrant consideration. We continue to believe that investors can use these hedge-like mutual funds to reduce their portfolio risk and increase their long-term performance.

For further information, contact Louis P. Stanasolovich, CFPÔat (412) 635-9210 or e-mail him at legend@legend-financial.com.



INDEX
  • Watch Out For ''Grandparent Scams''
  • Tune Into The Tax Break For NUA
  • How You Can Manage Risk Aversion
  • When To Disclaim An Inherited IRA
  • IRS Reveals The ''Dirty Dozen'' Tax Scams For '17
  • Timely Tax Angles To Dividends
  • 7 Financial Steps Forward In A Second Marriage
  • IRS Applies IRA Rollover Limit To Coverdell ESAs
  • Seek The Comfort Of A Pet Trust
  • Mutual Fund Sell Downs And Other Unintended Consequenses For Investors:
  • What's The Truth About Probate?
  • Britain Votes To Leave The European Union, Surprising The World
  • Five Big Tax Penalties To Avoid At All Costs
  • 5 Reasons To Amend Your Estate Plan
  • Top Court Mandates 401(k) Fee Duty
  • Turning Up The HEET For Education
  • Saving For Private Or Prep School? A Tax-Smart Way
  • Here Are 6 Common Roth IRA Mistakes To Avoid
  • IRS Zeroes In On Dirty Tax Scams In 2015
  • Combine Investment And Tax Benefits In 529 Plans
  • Want To Get Your Business Noticed By The News Media?
  • Learn The Ins And Outs Of Education Tax Breaks
  • Locked Out Of A Roth IRA? Go In Through Back Door
  • How To Manage Your Tax Brackets Now And Later
  • Fill Up Tax Brackets To The Brim
  • Why Roth IRAs Are Still Red-Hot
  • Want To Get A Copy Of Your Credit Report? It's Free!
  • 5 Tips That Can Help Get Your Kids Into College
  • Reminders On Your Beneficiary Choices
  • Enter The Five Dimensions Of Federal Income Taxes
  • How Did The Federal Government Shutdown Affect The Economy?
  • SLATs Fit Through The Cracks In Estate Plans
  • The Bypass Trust: Not Pronounced Dead Quite Yet
  • When Do You Need An Appraisal?
  • 7 Major Tax Changes In The Fiscal Cliff Law
  • What Is Safe For You To Put Into A Safe Deposit Box?
  • Dig Deep Into ''Treasure Assets''
  • It's A Question Of Proper Balance
  • Tough Talk On Hardship Withdrawals
  • Stock Option Rules After Job Loss
  • Don't Put Mid-Year Moves On Hold
  • Which Retirement Funds Should You Withdraw First?
  • Is The Federal Reserve Risking Hyperinflation?
  • A Common Error In Powers Of Attorney
  • When Is Life Insurance A Sensible Solution?
  • 5 Excellent Tax Blogs And Websites
  • Knowhow On Year-End Tax Planning
  • A Once-In-A-Lifetime Estate Tax Choice
  • Set Up Your Trust To ''Fail'' On Purpose
  • Charitable Rollovers: There's Still Time
  • 7 Reasons To Update Your Financial Plan
  • Website Matches Volunteers With Non-Profits In Need
  • Trust Protector Is Useful, But Little-Known Solution
  • Tax Tips When You Acquire Software
  • Not All ETFs Are Tax-Efficient Anymore
  • The Delicate Dynamics Of China-U.S. Economic Policy
  • U.S. Government Bailouts Have A Mixed Record
  • Planning Your Retirement Using Stock Options
  • What Historically Follows Severe Economic Crises
  • Despite The Global Crisis, The World Is Getting Better
  • Will The New Silicon Valley Transform The Economy?
  • What A Difference A Year Makes In Ten-Year Returns
  • Now's A Time To Recall Financial Planning Basics
  • The Importance Of Year-Round Tax Planning
  • Federal Estate Tax Exemption... Going Up!
  • Court Ruling Limits Fee Deductions For Trusts
  • Not All Variable Annuities Have High Fees
  • Are You Putting Too Much Money Back Into Your Business
  • Credit Crunch Places Focus On Rating Agencies
  • Find An Expert In Almost Anything On The Internet
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Succession Planning For Solo Businesses
  • Energy Systems Scale and Timeline
  • The Oil Patch Profit Squeeze
  • Free Credit Reports Available Online
  • Don't Forget About Roth 401(k)
  • Understanding the Importance of a Fiduciary Standard
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Timber As A Liquid Investment
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Ethanol: Salvation or Panacea?
  • Timber Facts
  • Bank Loan Funds - A Primer
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • Too Many ''Phish'' In The Sea
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • The Case For Industrial Metals
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft: Help Is On Its Way
  • Identity Theft: Tips to Protect Yourself
  • Identity Theft: What Documents Should You Shred or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • REITs: A Great Diversification Investment
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Understanding Deflation
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Evaluating The Quality Of A Company's Earnings
  • Yesterday's Great Companies
  • 2001 Tax Relief Act Changes Education Planning
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Custodial Accounts: One Way To Make Gifts To Children
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning
  • Is Your 401(k) Plan A Failure?



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.