Until recently, only institutional investors such as retirement funds were allowed to invest in hedge funds, but recent legislation changes mean that all investors can now consider hedge funds as part of a balanced portfolio.
While no investment type can guarantee returns, particularly over the short term, hedge funds are great diversification tools and offer advantages that other investments cannot.
The South African retail hedge fund market (the hedge funds that are available to the public) officially opened in February with the launch of two products from Novare.
So, what does a person who is considering a hedge fund investment for the first time need to know about these products?
Hedge Funds vs Unit Trusts
“All the money invested in a hedge fund goes into a pool, with a fund manager deciding which assets to invest in,” explains Eugene Visagie, Head of Hedge Fund Investments at Novare Investments.
“Just as is the case with the unit trusts that represent the majority of people’s retirement investments, fund managers for the most part invest in stocks or bonds. However, hedge funds have other tools at their disposal that unit trusts do not. Probably the most significant of these is that hedge funds are able to make money on an asset even if it declines in value.”
“This approach is called taking a short position on an asset. To use a simple example, taking a short position is like borrowing a set of clubs from another person with the undertaking of returning them after a while.
“Because you think that the price of the clubs is about to go down, you sell it to a third person. The price then goes down and you buy it for a cheaper price. You then give the clubs back to the person who lent it to you and pay a small fee for the privilege of borrowing it, keeping the rest of the profits that you made from the difference in the price of the clubs you borrowed and the new ones you bought.”
Short Position vs Long Position
In contrast to short positions, long positions are the normal asset investments most of us are familiar with, where you purchase items such as shares in the hope that their price will go up in the future. Hedge funds can consist of both long and short positions, to give investors the best of both worlds.
“In a hedge fund, the fund manager looks for stocks that are overvalued to take a short position on, and stocks that are undervalued to take a long position on. Together, they make up the hedge fund portfolio,” explains Visagie.
Because of the mix between long and short positions, the price movements of hedge funds are usually independent from the movement of the general financial market, which is why hedge funds are valued as an important component of a well-diversified portfolio.
Lower Fees, Better Investment Terms
“Another advantage of hedge funds is that their size allows them to negotiate better investment terms, which can include lower fees,” says Visagie. “As a result, investors benefit from the economies of scale inherent in a hedge fund.”
Also, there are many different hedge funds to suit the many different personalities and goals of investors. Each fund manager has a different mandate, covering the entire spectrum from very risky to very conservative. However, the new regulations ensure that the hedge funds that have been made available to the public will not take on excessive risk.
In addition to their approach to risk, fund managers are also bound by other conditions in their mandates to tailor the hedge fund to a particular investor need. Some might look more towards long or short positions; others only at particular industries, like mining; and others only at particular markets, like Asia.
Related: Investing Trends In South Africa
A Fund Of Hedge Funds
With so many different hedge funds to choose from, the first-time investor might not know where to start to evaluate the right investment, which is why Visagie recommends looking at a fund of hedge funds.
“A fund of hedge funds is a hedge fund that is made up of other hedge funds. You therefore get the benefit of a combination of the different strategies from a couple of fund managers, all rolled into one.”
Another trait of hedge funds that distinguishes them from other investments is their ability to make leveraged investments.
Leveraging means that growth in an investment is multiplied, sometimes by as much ten times the original percentage. However, it also means that losses are multiplied in the same way.
“I would not advise investors to invest in leveraged hedge funds from the start, as they can be very risky,” advises Visagie. “Later, when you have built up a solid portfolio, you could allocate a small percentage to more risky investments that have the potential to maximise returns.”
The Best Way To Get Your Teenager To Start Investing Right Now
Jeff Rose advises a young fan on where to start his investment journey.
In this video, Entrepreneur Network partner Jeff Rose talks about receiving a letter from a young investor, who is looking for advice on how to begin investing.
Rose talks about the act of actually doing the investing versus worrying about reading books or asking others about the process. Taking action gets the most results, since you are able to make mistakes and start the learning process. Taking action also leads to more experience, which is to say if you begin investing as a teen, you will be much more savvy about investing as a twenty-something.
In answering this young investor’s concern about investment direction – the fan hopes to balance short-term gain and long-term gain, as well as to establish some padding for a future business – Rose turns him in one specific direction: A Roth IRA. When he was younger, Rose didn’t even know what a stock was until far into his college years; during this time, he discovered the Roth IRA and learned of its compounding power, as well as the accessibility of an initial investment.
As another route, Rose also mentions starting a business. This path, Rose explains, will help you achieve the most return on investment.
Click on the video to hear more tips for a younger investor.
This article was originally posted here on Entrepreneur.com.
5 Insider Tips Every Trader Needs to Know
Here are five insider tips that every trader needs to know.
Like in every profession, there are a lot of figures circulating regarding how many forex traders actually make money, and how many traders lose more money than they earn. We are not going to launch into speculations that we can’t prove with accurate statistics. However, there is one thing we can say without citing any official sources: there are more people losing money than those earning.
Why? The answer can be found in the annals of human psychology. Some go into forex expecting to get rich overnight, while others do not (understandably) have the time to dedicate themselves fully to this activity. So what can you do, concretely, to join the group of people earning money? Here are five insider tips that every trader needs to know.
1. Choose a Methodology and Stick With It
Even before executing your first trade, you need to have a rough idea on what you will base your decisions on. In this sense, you must know what intel you will need to make the appropriate decision, like when to enter and exit a trade, which timeframes are the best (more on that later) and so on and so forth.
Some people are partial toward fundamental factors (foreign investments, inflation, unemployment rates, and other economic indicators), coupled with a chart, for executing a trade. Others prefer the raw numbers and stats of technical analysis.
But, whichever methodology you choose, make sure to be consistent and that it is adaptive, as there is no objective way to tell if one is truly better than the other. The most important thing to consider is whether or not your methodology and the strategies built around it are adaptive enough to keep up with the changing dynamics of the forex market.
2. Always Calculate Your Expectancy
Expectancy is a formula that traders use to determine how reliable their trading system is. It involves going back in time to your previous trades (a journal will come in handy here), measuring how many traders were winners versus losers, and then finding out how profitable your winning trades were as opposed to how much money was lost after bad trades. The formula is as follows:
E=[1+(W/L) x P – 1, wherein W is the average winning trade, L represents Average Losing Trade, while P is Percentage Win Ratio.
3. Define Your Trading Goals and Build a Strategy Fitting of Your Personality
Most forex beginners come into the market thinking that they know everything that one could possibly know, without any sort of long term plan or concrete goals. This is the one mistake that eventually leads most traders to quit forex, because the reality of the market – and the trade itself – will hit them straight on sooner rather than later.
Therefore, the first thing you need to do is set a couple of goals. Start small and realistic at first – do not set yourself for winning a ridiculous amount of money in the first months because you will be sorely disappointed.
After setting the goals, you can start looking at various trading strategies and see which ones will help you achieve these goals and, most importantly, whether or not they are a good fit for your personality.
Some helpful questions to ask in this case are in the lines of ‘’Do I feel comfortable holding positions overnight?’’ or ‘’How much risk am I willing to assume for a given trade?’’, ‘’Am I more comfortable following a trend or betting against it?’’, ‘’Will I trade to gain some additional income, or full time?’’. Another equally viable method which will help you asses your strengths and weaknesses is doing a personal SWOT analysis.
4. Make use of Multi Time Frame Analysis
Regardless of whether you are a swing, day or long term position trader, it is highly recommended you always approach trading in a top-down fashion. This technique involves starting with a higher time frame chart and gradually zooming down to your current trading time frame chart. By doing this, you can get a ‘’big picture’’ view of the price action.
This tip is important because many traders commit the grave error of building their trading decisions around the time frame in which they are currently trading. For instance, when a trader sees a hammer candlestick pattern on a five-hour chart, they push forward with the trade without considering what might happen in the following time frame. What you are doing here is similar to a game of chess – you have to think a few steps ahead and choose your forex trading products and tools wisely in order to land a successful trade.
5. Do Not Use More Indicators Than Necessary
Indicators are simply visual representations of market realities that show things such as price movements, patterns and the like. As useful as they are, after trading for a while, you will soon realise that at some point they become quite counterproductive.
Many traders will tell you that the only indicator that you need is price, and everything else is there just to make one understand how the market got to that point. And since succeeding in the forex market is mostly about getting in on a trend before anyone else spots it, you can probably guess why over-crowding your monitor with indicators is not such a good idea.
Whatever some might tell you, forex is not a walk in the park. Like everything in life, it takes hard work and dedication to reach the point where you can state without doubt that you have achieved excellence. However, even the most dedicated and hard-working traders need a push in the right direction in the form of some lesser known insider tips that only traders will know. Hopefully, the tips in this article will provide you with the insight necessary to take your trading efforts to the next level.
Time For An Alternative Investment Approach
The age of high-risk, high-reward thinking may be all but done, for now.
For years the investment formula applied by investors has been to craft a diversified portfolio of assets weighted more towards equities. It made sense to build a foundation on safe, low-risk, low-return capital preservation investments and, depending on your age, allocate a relatively larger portion of your investable income into higher risk, higher return equities.
But is this justified in the local context? While global equity markets have enjoyed a decade-long bull run following the 2008-2009 financial crisis, consistently delivering 10% to 15% annual returns, the JSE has been a perennial under-performer over the last four to five years.
Despite this fact, significant investor capital has continued to flow into local equities, either directly into stocks or via unit trusts, ETFs and endowments. And now amid more volatile global economic conditions, where global indexes have come off record highs in early 2018, local equities are still projected to underperform in the medium-term as the market correction that many predicted gathers momentum.
This shift is symptomatic of the volatility that currently characterises global markets as Brexit plays out, trade wars intensify, and widespread socio-political instability creates systemic economic risks. Yet, investors are still being advised to put their money into higher-risk vehicles.
Further compounding the issue is the fact that the country’s exchanges are dominated by a few large entities, which are all negatively impacted by the country’s dire economic situation. This means local investors must also contend with concentrated risk.
Despite these threats, many financial advisors have stuck to the traditional investment playbook by telling clients to “stay calm and remain invested in equities.” But given the prevailing market conditions, investors can realise better returns from investment opportunities that break from this conventional approach.
Returns from various fixed-rate investments, for example, have and continue to outperform equity investments, and do so without the associated risks.
While reducing risk is not necessarily a key concern for naturally risk-included entrepreneurs, when it comes to investing our hard-earned money we have the power to manage that risk. So, forget the old, pervasive attitude of “no risk, no reward.” It’s dated and, quite frankly, unwarranted.
The new reality is that fixed-term, low-risk investments have become among the best-performing asset classes — a fact that is tearing at the foundations of conventional investment advice. Entrenched beliefs must therefore be challenged, especially when investments that offer security can match or outperform high-risk options such as equities.
So, what are our options, given that fixed-rate investment options currently abound? Well, before diving into a vanilla offering from a bank, consider what your capital is secured against.
Banks generate their returns by lending out pooled deposits in the form of loans and credit. Some of this lending is secured, much of it is not. This can introduce risk into your investment, because the ability of debtors to repay debt is often compromised in a struggling economy, and bad debts will impact the returns that a bank can offer depositors.
Forward-looking secured investments, on the other hand, offer a set rate for five years and are secured against a variety of assets, like Fedgroup’s Secured Investment in participation bonds, which removes significant risk from the equation. These types of collective investment schemes are also regulated to protect investors.
While it may not be prudent to completely disinvest from the local stock market, there is a case to be made to be more circumspect with future investments, matured investments, or that portion of your portfolio that is earmarked for reallocation. With this money, an investment that delivers both capital security and a high, fixed rate of return might well prove more attractive than the traditional wisdom of local equities.
The guaranteed, low-risk returns currently offered by fixed-rate investments have transformed these products from fringe options into mainstream investment vehicles that can no longer be ignored. With the chance to outperform the average equity investor, isn’t it time to rethink your conventional investment approach and consider the lucrative and, more importantly in such volatile times, secure opportunities offered by these alternative investment options?
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