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Seeking Yield and Capital Preservation

Posted: November 4th, 2012 | Author: | Filed under: Opinion | Tags: , , | Make a Comment »

If income and capital preservation are important, it might be prudent to limit exposures to the public equity markets. Your risk preference curve is likely one in which the joy from a capital gain will not nearly equal the pain from a capital loss of the same magnitude. In pages 183 – 190 of DIYHF I give various methods for risk weighting a portfolio using easy steps. They work.

Income is always attractive. Consider allocating some portion of your funds to REITS, which have not only a strong prospect for capital appreciation henceforth but also an attractive dividend.

Also consider the crowd funding alternatives. Crowd funding is an innovative and profitable disintermediation of the banks (who are scarcely lending anyway) for the investor. Right now banks take your money, pay no interest and lend it to borrowers out at 400 to 600 basis points in profit. Crowd funding allows you to invest directly to consumers or to businesses and keep that 400 – 600 basis points for yourself. The default rates are low, your capital is diversified across multiple borrowers (like a bank) and the annual returns range from 5% (for high credit-worthy borrowers) to as much as 30% annually (for the riskier borrowers). Of them all I believe that www.prosper.com is the most professional offering.

- Wayne Weddington


Size matters. Small ones perform better.

Posted: December 29th, 2011 | Author: | Filed under: Opinion | Tags: , , | 1 Comment »

The institutionalization of the hedge fund industry has forever changed the business.  In the early days, speculative investment in the nascent hedge fund stratosphere consisted of the individual rogues.  The outsiders.  The CTAs.  The floor traders.  The CPOs.

They used various techniques:  technical analysis, stochastics and momentum….  More often than not they traded “paper”, taking positions in a commodity knowing that other natural hedgers were taking a position.

But the pension funds caught return envy, particularly when comparing their own returns to their counterparts who were early adopters of alternative investment strategies…. executed deftly by Harvard University endowment, or Marvin Damsma at Amoco Corporation.

And so the also-rans increased their allocations to alternative strategies, exposing their constituents to risks they did not always understand.   And when they did not, they would use the compulsion of their gorilla size to impose upon a manager’s investment style.

What has happened to absolute returns is that as institutional investors started to enter the game, and as hedge funds managers were happy to clip coupons in management fee, the institutions demanded risk controls that make the large hedge funds look a lot more like mutual funds.

The hedge funds’ “victim” in the early days used to be the plodding, long-only, slow-moving institutional players; and to some extent retail investors.  Now the predators have become the prey.   The ultra-big hedge funds have become the market participants that they used to take advantage of…. slow-moving, plodding, ‘market-noisy.’  Now that the majority of the $2 trillion in hedge fund assets is controlled by 300 hedge funds, the new, new “smart money” is allocating to the smaller hedge funds, where they are the beneficiaries of nimbleness and an out-performance on average 3% – 4% annually.

–Wayne Weddington