Financial Blog

What are Hedge Funds and Starting Your Own Hedge Fund

WHAT ARE HEDGE FUNDS?   

 www.turnkeyhedgefunds.com

In the securities world, the term “Hedge Fund” does not necessarily imply any use of “hedging” as commonly understood; for example where commodity traders use options to “hedge” a commodity position. Presently, in the securities world the term “hedge fund” refers to any type of Private Investment Company operating under certain exemptions from registration under the Securities Act of 1933 and the Investment Company Act of 1940. “Hedge Funds” are often referred to as “alternate investment vehicles” and are tailored to the needs of sophisticated, high net worth private investors. A Hedge Fund is generally structured as a limited partnership having a general partner responsible for the investment activities and day-to-day operation of the fund, and limited partners who are the investors supplying capital but not participating in trading or operations of the fund. The limited partners have limited liability. That is, their exposure to loss is limited to their investment. The General Partner has unlimited liability and is liable for the activities of the partnership. The General Partners principals limit their liability through the use of a corporation or limited liability company as the General Partner. (Of course, the principals cannot limit their liability from the application of the anti fraud provisions of the Federal Securities Laws.) All of the investors’ capital is pooled and is utilized by the General Partner or Investment Manager to implement its trading or investment strategy.

 Hedge Funds are “Non-Public Offerings.” The private offering exemption prohibits Hedge Funds from making any public offering. Therefore, Hedge Funds are prohibited from general advertising and generally secure investors through word of mouth, consultants, registered representatives, brokers or investment advisors. Hedge Funds have investors that are either “accredited investors” or “qualified purchasers.” In general, the Federal Securities Laws define the terms “accredited investor” and “qualified purchaser” in terms of minimum asset and income threshold that must be met before they qualify to be investors in the Hedge Fund. Since the Hedge Fund generally limits investment to “accredited investors” or “qualified purchasers” both of whom are required to meet certain minimal asset and/or income thresholds, the Fund Manager or administrator must gather background information on potential investors to determine whether they meet the minimum requirements to be “accredited investors” or “qualified purchasers.” By making a non-public offering to certain kinds of investors, (accredited investors or qualified purchasers) the investment vehicle will be exempt from registration requirements of The Securities Act of 1933 pursuant to the safe harbour provisions of Rule 506 of Regulation D. Where the investment vehicle is limited to no more than 100 investors, and otherwise complies with the safe harbour provisions of Regulation D, such an investment entity is exempt from the extensive regulation pursuant to Section 3(c)1 of The Investment Company Act. Section 3(c)7 of The Investment Company Act offers a similar exemption to private investment companies with “qualified purchasers” as investors.

As an unregulated entity, the Hedge Fund Investment Manager is free to undertake greater risk on more volatile positions thereby exposing investors to potential substantial profit as well as substantial losses.

 Typically, Hedge Funds provide for the payment of an Incentive Allocation or Performance Fee to the hedge Fund Manager/General Partner. Performance Fees range from 20% to 40% depending on the strategy employed by the Hedge Fund Manager. Typically, the Performance Fee provides for a “high water mark” structure which provides that incentive fees are paid only to the extent that the fund continues to meet or exceed the “high water mark.” Additionally, typical Hedge Funds include Management Fee of 1% to 2% of all assets under management.

 Generally there are two kinds of Hedge Funds. On the one hand, there are the huge worldwide funds operated by charismatic managers such as George Soros. On the other hand, there are small boutique-styled Hedge Funds identified with a particular segment or investment strategy. The Fund Manager’s expertise, experience and background in recognizing investment opportunity will dictate that fund’s particular niche. For example, there are the “Biotech Hedge Funds” which are managed by experienced and highly qualified investment managers who may also hold advanced degrees in science and medicine. There are “Tech Hedge Funds” specializing in the technology sector managed by individuals having specialized experience trading in that sector. With the emergence of day trading and the availability of the trading technology, a number of floor traders and brokers are leaving the traditional brokerage and exchange venue to participate in the computer screen trading phenomena.

 The boutique “Hedge Fund” typically relies on the particular skill and expertise of the Investment Manager or Trader. The highly specialized Investment Manager may utilize a “Sector” style of investing focusing on a particular industry or economic sector. Conversely, an Investment Manager utilizing a “Market Neutral” style will maintain a portfolio of securities which are generally ½ short and ½ long. Some Investment Managers utilize a “Value” investment style based upon assets, cash flow and book value; while other Investment Managers follow the “Emerging Markets” style and invest in emerging and foreign market equity and debt. “Trading” funds utilize an opportunistic investment style taking advantage of market trends, events and opportunities for short term profits. Each Fund Manager develops and uses a particular investment style that is unique to the experience, expertise and personality of its manager.

 Unlike Hedge Funds, Mutual Funds raise money publicly; are highly regulated by the Securities and Exchange Commission, the Internal Revenue Service and other agencies; and offer investment diversification and are restricted from purchasing many types of derivative instruments, leveraging, short selling and other kinds of transactions.

 Unlike the Mutual Fund Managers, the Hedge Fund Manager generally invests in the fund that they manage and participate in profits as well as risks with their investors. Unlike the Mutual Fund fee structure (which is determined on assets under management) the Hedge Fund Manager receives incentive allocations on performance.

 www.turnkeyhedgefunds.com

Sprott AM will launch the Sprott All Cap Fund on September 18th. Also, Maryland hires 6 pension managers.

Buy (product) Red Gadgets – Help Global Fund – Save Lives

Gadget geeks are always like kids on Christmas Day whenever they get a gizmo that they really want.But you know what feels way better than that? That is being able to indulge in your gadget heaven and know that the money you spent in buying that gadget helped save a person’s life in Africa. That is the pitch of (Product) RED.

(Product) RED is a line of products from highly recognizable brand-name companies that chose to support (RED). (RED) is an organization that was co-founded by Bono and DATA chairman Bobby Shriver to assist the Global Fund in raising funds for the fight against HIV and AIDS in Africa. RED products cost just as much as a regular product, but a portion of the money a consumer spends in buying a RED product goes directly to the Global Fund

Gadget geeks will be happy to note that there are RED gadgets included in the list of offerings under the (Product) RED line.

Motorola (Product) RED

Wireless company Motorola has launched a line of RED products, including RED MOTOSLVR and RED MOTORAZR. Part of the money used to purchase these RED products will go straight to Global Fund. In the United Kingdom, users of the cellphone units under Motorola’s (Product) RED line have a percentage of their monthly bills donated to the Global Fund as well

iPod (Product) RED

Music lovers will not only enjoy the feeling of doing something good with their money, but they will also love playing with their sleek and sexy iPod nano and iPod shuffle (Product) RED line from Apple. It has all the good things that the regular iPod nano and the iPod shuffle have. Apple also has the iTunes (Product) RED card that can be used to make purchases on the iTunes store.

Dell and Windows (Product) RED

The newest XPS (Product) RED line of Dell offers state-of-the-art computing pleasure. The XPS (Product) RED line includes one desktop, the XPS ONE; two notebooks, the XPS M1330 and the XPS M1530; and the Dell 946 All-in-One Printer. The XPS One desktop and the XPS notebooks are bundled with the Microsoft Windows Vista Ultimate (Product) RED edition. The Vista Ultimate (Product) RED edition also has exclusive (Product) RED-related content such as gadgets and wallpapers.

Other RED Products

RED products are not limited to these RED gadgets. GAP and Converse also have garments under the (Product) RED line, as well as Armani. American Express has a (Product) RED card that allows its users to contribute 1% of their spending to the Global Fund. Hallmark also has a (Product) RED line of greeting cards and other items.

Buying (Product) RED items is a cool way to make a difference in this world. In buying RED products, not just RED gadgets, you get to contribute to the Global Fund and help save a life in Africa.

Since the Global Fund was founded in 2002, it has changed the way world is working to defeat the three diseases. In this short film, some of the Global Funds closest friends and best-known advocates talk about the way the Global Fund works, achievements thus far, and the prospect for a world where AIDS, Tuberculosis and Malaria can be overcome. Featuring Ban Ki-moon, Bono, Carla Bruni-Sarkozy, Bill Gates, and Michel Kazatchkine.
Video Rating: 4 / 5

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Spending or Saving your Home Equity – Part 2

In Part 1 ways to accumulate home equity were discussed, both incidental and deliberate; and in Part 2 how to access it is investigated.

Basically home equity is the difference between what is owed on your home and the market value of it. Once you have established that you have accrued some home equity, you need to get the banker who holds your loan to agree with you that this is the case!

In order to convince the lender of this, you should take along your house tax bill and an estimate from a realtor, or proof that your house value has increased by showing evidence of the price of other similar houses in your area.

It is always advisable to go to the original mortgage lender on the property to start with. They will have to know anyway, as the loan will be lodged against the deeds that they are holding.

If your original banker declines, or if you think that you can do better than their offer, then you can shop around. Institutions that might be interested in offering you an equity loan include credit unions, private lenders, banks and of course, mortgage brokers.

It is usual to have a variable rate on an equity loan, and this will fluctuate with the bank rate. Most equity loans demand a higher rate of interest than your first loan will be. The interest on this loan will be tax deductible.

Equity income is usually offered in a choice of two ways. One of these ways is similar to a line of credit; that is you pay interest only on the money that you are using. You can withdraw and repay money as you wish.

The other way to access equity cash is to request a conventional type of mortgage. In the same way that your original loan worked, you are given the proceeds in a single lump sum and you pay interest on the entire sum right from the time you receive the cash.

It is always easier to get an equity loan if the money is to be used for improvements to the home i.e. a new kitchen or roof. This is because in a way, the bank is lending you money to improve their own asset!

18 months before joining the Tycoon Mastermind Alliance mentoring program, Glenn went through a long and painful business break up that left him with a debt of £2k per month for EIGHT years. He joined us with the initial goal of acquiring large properties let to a number of individuals to create a passive income of £2k per month to cover his debt payments. We worked with Glenn to help him form a successful property investment strategy and bring back focus into his life. We then showed him WHAT to do on a daily basis and HOW to do it to get him to his goals – the results speak for themselves… Within just 6 months, Glenn purchased 5 properties with £150000 of equity + £2000 per month cashflow. He then started his own letting agency which started generating £2k per month in revenue within just 3 months of start up. In total that’s £4000 per month in cashflow in less than 10 months and he’s only just started. The video reveals his achievements in more detail. Glenn is an inspirational property investor who has shown that no matter where you are right now or how much debt you have YOU CAN make it in property! You can watch many more more inspirational videos and download essays from successful property investors from this link: www.property-system.com
Video Rating: 3 / 5

Offshore Merchant Accounts: Offer Multi-Currency Flexibility

Compared to onshore accounts offshore merchant accounts are much better as these have lot more advantages. Being offered only by offshore banks these accounts do not have account limitations or restrictions like onshore accounts.

With features such as multi-currency accounts and more tax benefits offshore merchant accounts facilitate international trading. This type of offshore bank account is a new addition to the offshore banking system and it allows you to trade 24 hours a day, 365 days a year.

As these accounts are tax-free it allows offshore companies to offer products to clients at a much lower rate than competitors. High risk companies engaged in activities such as gaming, pharmaceuticals, phone card sales, timeshare rentals, multilevel marketing, credit card repair and counseling are best suited to have offshore merchant accounts.

Offshore merchant accounts offers immense benefits such as more tax benefits, better privacy and security, multi-currency trading enabling international trade, setting in currencies of choice, zero restrictions on transactions which means unlimited transactions, short set up time requiring just one week, international forgery/fraud protection cover etc.

All this however comes with a high price tag and expenses such as initial set up costs, discount rates and transaction fees are much higher in comparison to domestic banks. Almost anyone can open such an account and it is simple and easy. All you require is to own an offshore trading company and must have a bank account in its name.

There are however exceptions, with some offshore banks insisting on security in the form of either upfront cash deposit or ongoing cash reserve. Apart from offshore banks, offshore merchant accounts are also offered by certain international financial service providers.

You can also apply online to open such an account after you have decided on a particular offshore bank. Before opening such an offshore account you need to check out the background of the bank and services being offered by it such as privacy, security and tax benefits.

With offshore banking becoming more and more popular the need of the hour is offshore ecommerce merchant accounts and offshore destinations are going all out of their way to provide their clients with this facility. In offshore business it is no longer feasible to transact through onshore accounts and with offshore accounts giving clients so many benefits that they did not even think that they would get with their onshore accounts.

Tax and investor-friendly countries like Mauritius, Seychelles and BVI possess the most secure financial sectors in the world. Applying for offshore e-commerce merchant accounts in such countries will account for a single corporate structure. You get privileges such as the option to choose your settlement jurisdiction either within the Caribbean or Europe thereby giving you a dual acquiring presence.

This facility enables you to implement a comprehensive, multi-jurisdictional and multi-currency acquiring services. Other benefits includes opportunity of presenting your customers secure payment alternatives, currency solutions, advantage of offshore and e-zone tax structures and channeled marketing which in turn reduces currency and location costs and also simplifies cross-border processing.

Samples of my work from 2008-2010. I do Performance Art and I also rap under the name AKU-MATU, creating music. I am a Multi-Disciplinary artist who enjoys working on environmental and political topics – issues affecting the people of the community of the arctic, and the rest of the world. I also have a multi-disciplinary approach to my performance art – using all mediums to support themes that I explore. There is more work that I have done in the last two years that wasn’t able to fit on the video. If you want to book me, contact me at akootchook@gmail.com If you believe in my work, you can make a donation to my paypal account at akootchook@gmail.com Thanks for your support! Allison

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Options Trading Strategies – Book Review – Sheldon Natenberg, Option Volatility and Pricing

As with most books on the topic of how to trade options, the amount of material to get through can be daunting. For example, with Sheldon Natenberg’s Option Volatility & Pricing, it is about 418 pages to digest.  

There are adequate reader reviews on Amazon and Google Book Search, to help you decide if you will get the book. For those who have just started or are about to read the book, I’ve summarized the core concepts in the larger and essential chapters to help you get through them quicker.

The number on the right of the title of the chapter is the number of pages contained within that chapter. It is not the page number.  The percentages represent how much each chapter makes up of the 418 pages in total, excluding appendices.

1  The Language of Options.  12, 2.87%.
2  Elementary Strategies.  22, 5.26%.
3  Introduction to Theoretical Pricing Models.  16, 3.83%.
4  Volatility.  30, 7.18%.
5  Using an Option’s Theoretical Value.  14, 3.35%.
6  Option Values and Changing Market Conditions.  32, 7.66%.
7  Introduction to Spreading.  10, 2.39%.
8  Volatility Spreads.  36, 8.61%.
9  Risk Considerations.  26, 6.22%.
10  Bull and Bear Spreads.  14, 3.35%.
11  Option Arbitrage.  28, 6.70%.
12  Early Exercise of American Options.  16, 3.83%.
13  Hedging with Options.  16, 3.83%.
14  Volatility Revisited.  28, 6.70%.
15  Stock Index Futures and Options.  30, 7.18%.
16  Intermarket Spreading.  22, 5.26%.
17  Position Analysis.  32, 7.66%.
18  Models and the Real World.  34, 8.13%.

Focus on chapters 4, 6, 8, 9, 11, 14, 15, 17 and 18, which makes up about 66% of the book.  These chapters are relevant for practical trading purposes. Here are the key points for these focus chapters, which I’m summarizing from a retail option trader’s perspective.

4  Volatility. Volatility as a measure of speed in context of price in/stability for a given product in a particular market.  Despite its shortcomings, the definition of volatility still defaults to these assumptions of the Black-Scholes Model: 1. Price changes of  a product remain random and cannot be engineered, making it impossible to predict price direction prior to its movement. 2. Percent changes in the product’s price are normally distributed.  3. As the product’s price percent changes are counted as continuously compounded, the product’s price on expiry will become lognormally distributed.  4. The lognormal distribution’s mean (mean reversion) is to be found in the product’s forward price.

6  Option Values and Changing Market Conditions. Use of Delta in its 3 equivalent forms: Rate of Change, Hedge Ratio & Theoretical Equivalent of the  Position.  Treatment of Gamma as an option’s curvature to explain the opposite relationship of OTM/ITM strikes to the ATM strike having the highest Gamma. Dealing with the Theta-Gamma inverse relationship, as well as Theta being intertwined synthetically as long decay and short premium with Implied Volatility, as measured by Vega.

8  Volatility Spreads. Emphasis is on the sensitivities of a Ratio Back Spread, Ratio Vertical Spread, Straddle/Strangle, Butterfly, Calendar, and Diagonal to Interest Rates, Dividends and the 4 Greeks with specific attention on the effects of Gamma and Vega.

9  Risk Considerations. A sobering reminder to select spreads with the lowest aggregate risk spread versus the highest probability of profit.  Aggregate Risk as measured in terms of Delta (Directional Risk), Gamma (Curvature Risk), Theta (Decay/Premium Risk) and Vega (Volatility Risk).

11  Option Arbitrage. Synthetic positions are explained in terms of manufacturing an equivalent risk profile of the original spread, using a mix of single options, other spreads and the underlying product. Clear caution that transforming trades into Conversions, Reversals and Adjustments are not risk-free; but, may raise the trade’s nearer-term risks even though the longer-term net risk is lowered.  There are material differences in the cash flows of being long options versus short options, arising from the Skew bias unique to a product and the interest rate built into Calls making them disparate against Puts.

14  Volatility Revisited. Different expiry cycles between near-term versus longer-term options creates a longer-term volatility average, a mean volatility.   When volatility rises above its mean, there is relative certainty that it will revert to its mean. Likewise, mean reversion is highly likely as volatility drops below its mean. Gyration around the mean is an identifiable characteristic. Discernible volatility traits make it essential to forecast volatility in 30 day periods: 30-60-90-120 days, give the typical term to be short credit spreads between 30-45 and long debit spreads between 90-120 days.  Reconciling Implied Volatility as a measure of consensus volatility of all buyer/sellers for a given product, with inconsistencies in Historical Volatility and predictive constraints of Future Volatility.

15  Stock Index Futures and Options. Effective use of Indexing to remove single stock risk.  Distinct treatment of the risks for stock-settled Indexes (including impact of dividend/exercise) separate from cash-settled Indices (absent of dividend/exercise).  Explains logic for Theoretically Pricing the options on Stock Index Futures, in addition to pricing the Futures contract itself, to determine which is economically viable to trade – the Futures contract itself or the options on the Futures.

17  Position Analysis. A more robust method than just eye balling the Delta, Gamma, Vega and Theta of a position is to use the relevant Theoretical Pricing model (Bjerksund-Stensland, Black-Scholes, Binomial) to scenario test for changes in dates (daily/weekly) before expiration, % changes in Implied Volatility and price changes within and near +/- 1 Standard Deviation. These factors feeding the scenario tests, once graphed, reveal the relative ratios of Delta/Gamma/Vega/Theta risks in terms of their proportionality impacting the Theoretical Price of specific strikes making up the construction of a spread.

18  Models and the Real World. Addresses the weaknesses of these core assumptions used in a traditional pricing model: 1. Markets are not frictionless: buying/selling an underlying contract has restrictions in terms of tax implications, limitation on funding and transaction costs. 2. Interest rates are variable, not constant over the option’s life. 3. Volatilty is variable, not constant over the options’ life. 4. Trading is not continous 24/7 – there are exchange holidays resulting in gaps in price changes.  5. Volatility is linked to Theoretical Price of the underlying contract, not independent of it. 6. Percentage of price changes in an underlying contract does not result in a lognormal distribution  of underlying prices at distribution due to Skew & Kurtosis.

To conclude, reading these chapters is not academic. Understanding techniques discussed in the chapters must enable you to answer the following key questions.  In the total inventory of your trading account, if you are …

Net Long more Calls than Puts, have you forecasted Implied Volatility (IV) to increase, expecting prices of the traded products in your portfolio to rise? Net Long more Puts than Calls, have you forecasted for IV to increase, expecting prices of traded products to fall? Net Long an equivalent amount of Calls and Puts, have you forecasted for IV to increase, expecting prices to drift non-directionally? Net Short more Calls than Puts, have you forecasted IV to fall; but, expect prices to fall? Net Short more Puts than Calls, have you forecasted IV to fall; but, expect prices to rise? Net Short an equivalent amount of Calls and Puts, have you forecasted IV to fall; but, expect prices to drift non-directionally?

Matt Roberts, Extension economist at The Ohio State University talks about the January 2010 World Agricultural Supply and Demand Estimates report and what producers can do to market their crops.
Video Rating: 0 / 5

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