Archive for May, 2005

Should I Buy a Hedge Fund?

May 31, 2005

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Hedge funds, private pools of money usually marketed to wealthy individuals and employing aggressive investing strategies like short selling, leverage, derivatives etc., are attracting a lot of new money these days. However, I am staying away from these funds for the following reasons:

  1. I mostly own stocks and ETFs, which are fractional interests in real businesses. I don’t understand exactly what I own in a hedge fund.
  2. The hedge fund industry is poorly regulated and has minimal disclosure requirements. It has a high fee structure, typically 2% of assets and 20% of the fund’s profit as “performance fees”. I just don’t understand why I should put up the capital and assume the risk and a fund manager gets a piece of the profits.
  3. Hedge funds have large minimum requirements that are larger than our current investment portfolios.

The Globe and Mail newspaper ran a series of stories on hedge funds available here, here, here and here.

Portfolio Diversification

May 30, 2005

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A recent column on MarketWatch.com points out that adding uncorrelated assets like real estate, commodities and energy to a portfolio composed of stocks and bonds reduces overall volatility. Using data from Ibbotson Associates, they point out that a portfolio mix of 50% stocks, 35% bonds, 10% REITs and 5% commodities outperformed the traditional 60% stocks, 40% bonds allocation with slightly less volatility.

The Sleepy Portfolio, which I track, already has 5% allocated to REITs and by virtue of 20-26% allocated to Canadian equities, energy and basic materials are well represented. REITs have outperformed most other asset classes over the past five years and it is difficult to see how it can be sustained in the future.

The Wall Street Journal Sunday

May 29, 2005

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Sunday’s edition of The Wall Street Journal features some interesting stories:

  • Should you sell in May and go away? Or, maybe buy some large caps.
  • Paul Farrell dislikes “enhanced” index funds due to their high costs and under whelming returns.
  • This story examines why cellphone service is still unreliable.
  • One way to think about stocks is as a bond with a variable earnings stream instead of fixed coupons. The earnings yield of a stock can be obtained by inverting the familiar P/E ratio.