In spite of our faltering economy and the recent devaluing of investments on Wall Street, current estimates tally the hedge fund business at over one TRILLION dollars and the industry is expected to continue to expand. As hedge fund managers find increasingly outrageous ways to spend their huge fortunes (many are paid 20 percent of the profits and 2 percent of the assets annually), the average investor feels left out and wonders what a hedge fund is and does and how it works. Do you really need an MBA from Harvard to understand how a hedge fund works? No. Can you start one yourself? According to author Wayne P. Weddington, III, the answer is YES!
In Do-It-Yourself Hedge Funds, Weddington, a senior portfolio manager of one of the world’s top hedge funds, gives instructions on how to use hedge fund strategies to maximize your portfolio and make extra money. If you’re looking for a way to pump up your portfolio, avoid losses, or to just out-perform the majority of investors, Do-It-Yourself Hedge Funds is the book for you. Weddington reveals the complicated rules of hedging in understandable, real world examples that can help you gain an investing edge.
Though there are a few occasions where Weddington uses some in depth investing terminology, he generally explains the basics of hedge funds in layman’s terms and defines the words hedge fund investors need to know. He also outlines a step by step plan for investing in your own hedge fund, but more importantly, he shows the ways in which hedge funds can go wrong. If you’ve ever wondered how those guys make their millions (billions?), Do-It-Yourself Hedge Funds is a must read.
Chapter one deals with a lot of definitions and teaches what investable instruments are.
Chapter two, “Okay, what is a hedge fund,” was probably my favorite chapter. Here, he goes over the history of hedge funds and sums up investing strategy in three points:
- Have investment discipline. By sticking to a structured discipline, an investor can yield more predictable results.
- Use some creativity in expressing your investment views. Find the right combination of tradeable securities that reflect your own risk tolerance balanced with the rewards you personally seek.
- Don’t be afraid to evolve your strategy as the market changes. Too many people bite the dist by insisting on consistency at any cost. Know when to move to plan B.
A foolish consistency is the hobgoblin of little minds.
From the essay “Self-Reliance” by Ralph Waldo Emerson.
Chapter two also deals with different arbitrage methods and he reminds us that most don’t stick around for long. Once they’re discovered, they tend to self correct as others figure out what you’re doing.
Chapter three, “Why hedge funds matter,” exposes the effects that different hedging strategies have on the market. Hedge funds seek to find places where the market undervalues one security and uses that knowledge to make a boatload of money.
In chapter four, “Investing in themes,” Weddington says that there are five primary market movers in the economy:
- The growth or decay of the Gross National Product
- Expectations on interest rates
- Consumer confidence
- Short term inflation
- Long term inflation expectations
The challenge is to determine what effect these factors will have on a security and to use your own investment creativity and knowledge to design a strategy to take advantage of how that security will react. One of his tips is to remember that “shorting” a security is a valid hedge!
Chapter five, “Finding co-relationships,” examines a strategy of linking two securities together, for example, the cost of oil and the profitability of airlines. Another might be Apple vs Palm (as one increases in value, the other decreases). Simply take a long position in one and a short position in the other.
In chapter six, Weddington shows how each industry (classified by the Global Industry Classification Standard – GICS) is affected by changes in the five primary market movers.
Chapter seven, “Data,” shows you how to find basic data on the Internet and use it, or how to get around having to use it if you want! He says,
“If you use some basic data analysis techniques, your conclusions will not be far from what the professionals recommend. I promise.”
In chapter eight, “Sizing, selling, and risk control,” we’re told that self discipline is the “single most important attribute of a successful investor.” Discipline is more important than the underlying strategy, Weddington says.
Chapter nine deals with an “Overview of hedge fund styles.”
Chapter ten, “Tales from the crypt,” was a very interesting chapter. He tells one story about a broker who had a customer that always lost money. The broker began to NOT execute the trades his customer requested and still charge the customer for the losses. The customer never knew it and the broker was pocketing the customer’s losses. Weddington says that “Brokers are not your friend,” and after reading that story, I can understand why. This chapter had a lot of personal stories but one thing I took from it was that the global markets are more vast than I can begin to imagine.
Buy or Don’t Buy
Why buy when you can WIN? I’ll be drawing to send one reader my copy of this book. If you would like to be entered in the drawing, simply email the FREE BOOK CODE listed at the bottom of my RSS or email feed.
This was a pretty advanced book (and it was dumbed down for the general public), so I would recommend picking it up at the local library. Of course, of you want to buy one, please feel free to use the Amazon link to pick it up!