Investopedia: Hedge Fund

Hedge Fund

	An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.
	For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies. It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

Why Discount Rate?

when evaluating an investment decision you must discount future cash flows.

you find out how much the cash flows will be from the future and discount them back to present value. why? because instead of putting your money in that investment decision, you could have it somewhere else - gaining interest.

Thomas Nelson Email (book recs)

Hi Devin

I don’t want you to think that I believe stock analysis, selection, and timing are a worthless activity. I just think it’s very hard to use such activities to “achieve consistent above average returns”, as you indicate. For most casual investors (most of us), this pursuit is not likely to obtain these results, and is likely to hurt returns, given the costs of trading. Only those who are full time experts close to the market are likely to achieve the kinds of returns you indicate, and even then it’s hard. Bear in mind one can certainly achieve above average returns by taking on above average risk, but to get higher returns for the same risk is difficult, especially in markets that are deemed semi-strong efficient.

On the issue of “diversified mutual funds”, I would agree that index funds (a subset of diversified mutual funds), are a good way to go for the core portion of a portfolio. These funds are typically no-load and extremely low expense ratios (see Vanguard). You mention SPR, which is an ETF, and that is fine. However, usually it’s cheaper to use the index mutuals than the ETF when you’re making regular periodic investments, because the mutuals have no charge with each investment, while the ETF will have a broker fee each time.

Here are my recommendations for reading:

The Psychology of Investing by John R. Nofsinger

The Little Book of Common Sense Investing by John Bogle

Yes, You Can Time the Market by Ben Stein and Phil DeMuth

Investment Valuation by Aswath Damadaran (a big technical valuation book)

Take care and good luck,

Tom

Investopedia: Alternative Investment

Alternative Investment

	An investment that is not one of the three traditional asset types (stocks, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity. Alternative investments include hedge funds, managed futures, real estate, commodities and derivatives contracts.
	Many alternative investments also have high minimum investments and fee structures compared to mutual funds and ETFs. While they are subject to less regulation, they also have less opportunity to publish verifiable performance data and advertise to potential investors. Alternative investments are favored mainly because their returns have a low correlation with those of standard asset classes. Because of this, many large institutional funds such as pensions and private endowments have begun to allocate a small portion (typically less than 10%) of their portfolios to alternative investments such as hedge funds. While the small investor may be shut out of some alternative investment opportunities, real estate and commodities such as precious metals are widely available.