You Wanna Manage a Hedge Fund? Here Are Ways to Try It at Home

Forget stocks and bonds. Today, the craze is for gold, hedge funds, real estate and other alternative investments. My contention: Putting a little money into such investments is probably a smart idea. But there's no need to venture beyond the comforting world of mutual funds.

...you need to rebalance. The idea is to set target percentages for all of your funds and thereafter regularly rebalance back to your targets, thus cutting back on the funds that are performing well and adding to those that are suffering. This rebalancing, which would be much more difficult with a hedge fund, forces you to buy low and sell high and thus tends to boost long-run returns.

Well, I have never made any secret of the fact that as an investor, I'm a complete idiot. They're recommending I take profits from my "winners" and sink more into the "losers", to "rebalance my portfolio?! Geez..no wonder I never catch on. I thought it might be a better idea to DUMP the losers, and put that money somewhere else.. anywhere else..i dunno..maybe under my pillow?

It's a very simple concept: Historically different asset classes have performed the best at different times. The idea is to keep the smae weighting so that you have a constant level of exposure.

For example: Your portfolio is 50% Stocks and 50% bonds. Stocks are are down 10%, and bonds are up 10%. At the end of the year, your porfolio performance was flat, but the allocation will now be 55% bonds and 45% stocks. But past performance is no guarantee of future results. So you take your profit on bonds and buy more stocks to get back to 50/50. The thinking goes that if you remain over exposed tp bonds, you are taking on more risk. And, lacking a crystal ball, you have no way of knowinth that bonds will outperform stocks once again this year.

Asset Allocation is a bit more complicated than that, of course, but that's the general idea. It is unexciting, and returns tend to be less spectacular, but it does work.

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Take it out of your pocket; fold it neatly end to end; put it back in your pocket.

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Seriously, the column offers good advice, although I think that if these funds are the performers he claims, you could prudently put more than 20% of your cash in them, as a group. It's not all that prudent to blithely commit 80% of your assets to index funds and low-yielding bonds, as he implicitly supposes, imo.

Seriously, the column offers good advice, although I think that if these funds are the performers he claims, you could prudently put more than 20% of your cash in them, as a group. It's not all that prudent to blithely commit 80% of your assets to index funds and low-yielding bonds, as he implicitly supposes, imo.

The problem with alternative investments is specifically their non-correlation and potential volatility. The gold fund has a standard deviation of 43!!!

"The gold fund has a standard deviation of 43!!!

I can understand the !!! 43 SDs out would be something! lol

Frankly, I think the non-correlation is the desired feature, presuming the alternatives are non-correlative with each other, as well as with the broader market.

As to volatility(even of .43), the attractiveness of that is self-evident, if one is using an asset-allocation model adjusted annually. Similarly to dollar-cost averaging over time, the strategy of selling fully-priced assets and replacing them with under-priced assets is enhanced by volatility, not endangered.

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