We Purchase and Sell Business Note Portfolios, Bond Portfolios and RE Note Portfolios (Commercial Real Estate). Minimum Amount Per Transaction: Five Million USD. Collaterals Which Are Acceptable: Commercial Real Estate, Infrastructure, Energy, Mining, Oil Refineries, Power Plants, Oil Tankers, Commercial Ships, Cruise Ships, Cargo Ships, Ethanol Plants, Stone, Gold, Precious Metals, Preferred Equity Titles (Strong Fundamentals Stocks), Zero Coupon Long Term Government Securities (T-Strips), Medium Term Notes (MTN), Bank Guarantees (BG), Treasuries And Other Financial Instruments.
W A R N I N G: We Neither Buy Nor Sell Derivatives Or Any Tricky Instrument. Should you decide to contact us for purchase or sale of Note Portfolios
Investment and Retirement with 401K Accounts
Employer and employee profit sharing plans are known as 401k accounts. They are corporate pension plans where an employee contributes a defined amount into the 401k and the employer can match a percentage of it. These contributions are normally made with after tax dollar amounts. This is considered a defined contribution plan.
All contributions made into the account by the company are made in the name of the employee. Should the employee leave, the contributions and the investment value of the account belong to the employee - perhaps only to a point.
If the employee has not fulfilled their minimum number of years with the company, the company can retract a percentage of the 401k contributions they made - under the rules of the plan. All money invested by the employee remain with the employee when transferring or rolling over the 401k into another corporate retirement plan or personal retirement plan.
Vesting. The vesting period in a 401k investment account is the time the employee must fulfill their years to 100% vested. This means all contributions made by the company under the plan are 100% available to the person should they leave their job. The vesting period under these accounts can vary. Usually this period runs 5 years.
Investments. The securities account or investments within the 401k are varied with each plan or company. Usually, the employee will have a wide array of mutual fund or other fund choices to dedicate investment money to. The investor can change the allocation and choices in the 401k as they see fit. Rates of return and retirement value will vary with the performance of the securities in the investment account.
Investment Money Management
With the amount of full service assets management firms available, many investors are using advisory firms for full money or assets management on their investments.
A money manager can handle all of investor's financial investments under one umbrella account. A good financial advisor will spread investor assets over a
diversified field of investment choices to create a well diversified portfolio.
Assets Management . Securities and Investment. Trust account set up. Contracts and Fees .
Assets Management can vary with each advisor or money manager. Usually, a full service assets management program is a for fee management based on the total assets the firm is advising for investor. Many large Assets Managers provide to investors Assets Management based on paying per transaction (commission).
Should a Money Manager is paid on a percentage of assets under management usually there is no monetary incentive for the advisor to do any trading. Should such Money Manager is paid on a percentage of the profit there is a monetary incentive for the advisor to do any trading which makes sense. There is also a comfort level should all of investor's assets are managed in one place by a trustworthy Money Manager whose profit rely on investor's profit.
When a financial advisor manages assets for investor, investment in each field can be made with the other investment fields in mind.
Should the Assets Manager is in touch with investor's entire financial situation Assets Manager is able to know how each investment decision affects investor' s
entire investments.
Choosing a Money Manager. When choosing a money manager investor must find such that is willing to do a free review of investor's current assets and/or investments. This will allow investor to see how deep the money manager do his work and the advice he is giving. It can be very educational, investor is under no obligation and investor may decide to go with that particular money management firm.
Investment Portfolio Management. Most full service assets management firms offer full or active portfolio management for their investors. The investment management could include, stocks, bonds, funds, etc. A firm who provide assets management for investor gives such investor a full line of products and allows the investor to have his entire portfolio managed and kept by such firm.
Active. When an assets manager or advisor is involved in active management, this normally means the investor is frequently investing or changing assets. It
also could mean the firm is involved in every financial assets the client has.
Bonds and Fixed Income Portfolio. Many large investors or institutional clients like Banks and insurance companies have large holdings of bonds and other fixed income product. The active management of these portfolios include seeing the maturities of these investments, and managing interest rate risk. A good bond money manager will work to make sure there is limited interest rate exposure and will offer management of the cash flow from these bonds. A fixed income portfolio specialist will also survey the entire market for the best product available through many broker dealers. This is especially important when dealing with municipal bonds - since most of those are held by firms in each state. New issues of mortgage backed securities and corporate issues should also be part of most large bond product holdings.
Eurodollar Currency - Euro Bonds. U.S dollars held in banks in European countries are known as Eurodollars. The dividend or interest payment on these
securities are made using the US dollars on deposit with European banks. There is also a bond market aspect.
Bonds
The Eurobond market is larger than the U.S Corporate bond market. The Euro Dollar center is in London, where most of the trading is. This bond market is
either denominated in U.S dollars or in foreign currencies like the Euro.
Many Eurobonds are Eurodollar bonds.
Some foreign investors prefer Eurodollar issues because the maturities range from 5-10 years which is shorter and they have better bond call
protection than many US bonds. Euro bonds are also not subject to withholding tax on interest earned. Most Eurodollar bonds are traded in bearer
form. These securities normally pay once per year. US based corporate and agency bonds normally pay semi annually. Euro dollar bonds do not have
to register with the SEC, where corporate securities are not exempt.
Trading - Payments
Companies with offices overseas will use the corporate Eurodollar market as well. Foreign governments can float these bond issues to attract
trading investors outside the country who want payment in the international currency which is American dollars. International agencies can raise
funding in the Eurodollar market. The U.S Government does not issue foreign currency or Eurodollar bonds. They are issued outside the US and are
purchased and traded by people outside the US. Interest payments are made in dollars.
Zero Coupon Bonds
Bonds that are bought at a deep discount and pay no rate of interest are known as zero coupon bonds. These securities will mature at a larger face value
than the price it was bought at. These investments offer growth within a bond, but they do not offer any current income. These can be found in
funds and annuities, since many of those assets are long term.
Taxation
Tax is normally paid each year on the earned interest from zero coupon bonds. This is also known as phantom income, so there is no taxation
advantage to them unless they are bought into an IRA or other tax deferred account.
Investment Risks
Fiixed income investments and bonds that do not have a coupons or nominal yields have little or no reinvestment risk. The term reinvestment risk refers to
an investor having to deposit or invest their interest payments received from other securities. When interest rates are low, this risk can be amplified.
However with 0 coupon bonds - that issue is minimized by the fact that no payments are received until maturity. Since Zeros are usually longer term - this risk
is even less realized.
Treasury STRIPS are also Zero coupons. T Strips are Government guaranteed bonds that have no interest paid until the end. Also municipalities and
corporations offer them.
Proper assets management should be a successful arrangement for the investor and the portfolio manager.
Investments are with qualified businessmen, developers, operators, etc, in transactions where there is a significant opportunity for value creation or cash flow
enhancement.
Preferred Equity
(Preferred Stock): It is best suited for situations where the businessman, developer, etc, lacks the additional equity capital required to bridge the gap between
debt and purchase or development cost. It is typically structured so that the investor receives his investment plus a preferred return and a participation in profits.
Mezzanine Debt:
It provides businessmen, developers, etc, with subordinated debt funding up to approximately 90 % of the value of the property. It is attractive to businessmen,
developers, etc, who want to retain a greater share of the profits. The first mortgage is typically straight debt and the second mortgage is the higher risk and
higher yield instrument, which has either a higher coupon or exit fees. The lender may be the same for both debt instruments or could be two different
lenders. This structure is excellent for developers who want to retain100 % ownership.
Participating Debt:
It leverages the property to 90 % of the cost in a blended first and second mortgage structure. This structure has many of the characteristics as Mezzanine
Debt, but typically there is only one lender.
Development Agreement:
The investor takes the ownership position and through a Development Agreement contracts the developer to build and manage the asset. The developer
receives 25 % to 30 % of the profits. This is suited for developers who have no cash equity of their own.
If you are in the market to sell or buy a note, deed of trust, land contract, promissory note, seller financed note, accounts receivable, lottery winnings or
any other type of debt instrument we, along with a network of private investors are looking to give you the best price for your note. A GLOBAL
NETWORK OF INSTITUTIONAL INVESTORS WHO ARE TOP WORLD BANKS, TRUSTS AND OTHER ENTITIES, WHO SELL AND BUY INSTRUMENTS,
SUCH AS SELLER FINANCED NOTES, PERFORMING NOTES, NON-PERFORMING NOTES, BANK GUARANTEES (BG's) AND MEDIUM TERM NOTES
(MTN's). We can provide the opportunity to sell notes at the highest cash price in the note business. We can help you to sell a note or to buy a note. Are You
Receiving Payments?. If You Want a sum of cash now You can Get the Highest Cash Price for your note!. Should you want to sell a seller financed note,
owner financed, Trust Deed, or land contract, we can provide access to the biggest note buyer and the best note buyer. You can sell to our investors business,
residential and commercial Note portfolios on all types of property along with many other Types of receivables. Upon review, a confidential purchase
proposal will be provided. If you would like to sell your note we can convert all, or just a portion (partial purchase), of your future payments into a significant
sum of cash. When you sell your note our investors will try to minimize all of the transaction expenses. There are entities that claim to be free
transaction providers. There is no free stuff in the business field and, disclosed or undisclosed, always there are fees or costs for seller and buyer. A serious
company will try to minimize such costs but such company will not try to hide the transaction costs. If a company says that seller will have the full sale
proceeds in cash, such company has obtained from seller an additional discount on the note or note portfolio fair market value. If you are in the market to
sell or buy Bulk (REO's) Real Estate Owned, (MTN's) Medium Term Notes, CMO's, Business Notes, etc, we can provide the buyer or seller. New investors and
Note Buyers are welcomed.
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We can provide opportunities for the sale and purchase of notes secured by properties generally known as Real Estate Owned (taken back by a lender).
We can bring together the interested parties: owners, lenders, investors, buyers, sellers and service providers. Every corner could be covered: Brokers,
Agents, Sellers, Buyers, Investors , REO Management, Broker Referral Service, broker/agent network, Vendor Management, Offer Management System
(OMS), Auctions, Settlement Services, Listing Opportunities, BPO Opportunities, access to all the information and resources. We provide serious
investors who have sound financial capabilities the access to REO, Note Portfolios, Builder Buyouts, clients' LOI's, private seller's, seller mandates, clearing
houses, etc. The integrity of the transaction and the client's confidential information is never compromised. Likewise we provide access to sellers that pulls
down from Wall Street Banks and a Wall Street Platform that can compile tapes of any size or match up buyer LOI's with Wall Street fall-outs. Sellers have
implemented the Patiot Act which has substantially changed the REO process. Here are some highlights. All LOI's need to be notarized. Sellers require a
state or government issued ID from all buyers at some time during the transaction. Proofing of funds has substantially changed as well. Buyers need to have
liquid funds in a bank account at the time the tape is ordered and provide the banking coordinates to the seller, i.e. routing and account number. Buyer's can
no longer hard proof through escrow or their attorney. The banks are electronically proofing buyers' bank accounts (a bank cannot ping an escrow account).
Buyers may soft proof (provide the name of banking officer, attorney or escrow officer) in their LOI, but they must have the liquid funds available in their bank
account, and the escrow officer or attorney must be instructed to release the banking coordinates to the seller during hard proofing. All procedures and
forms will be provided. We may begin to work directly with the buyer or mandate. This procedure ensures the confidentiality of the buyer's documents,
facilitates communication, and the fast and timely delivery portfolios.
Our business field is Notes, and we provide the note seller or note buyer the best possible transaction. We deal with all kinds of notes, on all types of
property. We do our Due Diligent part and take an individual approach to business, having in mind the quality of our people and their commitment to
professionalism, integrity, and service. We have a group of global professional associates, who provide excellent service, which includes, Real Estate
Attorney, Corporate Attorney, Real Estate Broker, etc, that can assist in handling any Real Estate or Business Note transactions or to verify confidential
information. We are able to provide a global network of private investors who would like to sell or buy a note portfolio. We can consider Notes or Note
Portfolios from funding of transactions of entities who cannot acquire loans or funding from traditional banks or other financial institutions for development
projects, Investment opportunities, Joint Ventures and Business funding, factoring of account receivables and many other Types of Receivables.
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Methods of Purchasing: Whole note full purchase, Purchase of balloon payments, Multi-stage pay outs
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Instrument Portfolio Purchased: (From $10,000,000). First Mortgages, Second Mortgages, Wrap-Around Mortgages, Contracts For Sale, Lease Purchase
Agreements, Contracts-For-Deed, First & Second Deeds of Trust, Purchase Money Mortgages, Real Estate Lien Notes, Real Estate Land Contracts,
Structured Insurance Settlements, Divorce Settlements Liens
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Investors: Our Investors buy Monthly, Quarterly, Annual, and Interest Only payments, Any Interest Rate, Any term of loan. They purchase worldwide and pay
top dollar. We minimize closing costs and fees. Although our primary business is purchasing notes secured by real estate, We can arrange several
transactions in order to convert virtually any regular cash flow into immediate cash.
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Property Types:
RESIDENTIAL, DUPLEX, TRIPLEX, FOURPLEX, APARTMENTS, INCOME PROPERTIES, IMPROVED LAND, SMALL TRACTS, RECREATIONAL & RESORT,
COMMERCIAL IMPROVED LOTS, MOBILE HOMES WITH LOT, FARM & RANCH, CONDOS, MOTELS, VACANT LAND PORTFOLIOS
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Global Note Selling:
We have a widespread marketing area serving investors worldwide. In fact, we presently have business relations with an important amount of real estate
mortgage investors and business note investors worldwide, as well as several regional and local note purchasers. Each note is reviewed and quoted
individually 72 hours from receiving it. We offer extremely competitive buy rates. Depending on the type of Note we could minimize fees for appraisal,
title insurance, closing and processing. Discounts are determined by several factors, including: Current Market Conditions, Type of Real Estate
Securing the Mortgage, Loan-To-Value Ratio, Discounted Loan-To-Value Ratio, Seasoning, Interest Rate Of Note, Payor's Credit, Verifiable Payment
History, Investor Yield Requirements, Remaining Term To Maturity, Residential / Owner Occupied Versus vs. Non-Owner Occupied, Balloon Maturity, Fair
Market Value, Lien Position
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Buying Mortgage Notes:
Buying mortgage notes. If your documents are inadequate investors and advisors prepare new ones; if there are title problems they get them corrected. They
can take care of the appraisal and handle everything all the way through to the closing. There is no substitute for experience in buying/selling notes
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Selling Mortgage Notes:
Selling mortgage notes and listing mortgage notes. We can get you top dollar by selling your mortgage notes, we call it as we see it and give you the best price
in the marketplace. Investors do all the paperwork necessary to see that your mortgage notes are handled as they should be.
Consumer Based;
Health/Country Club Memberships, Time-Share Memberships, Credit Card Debt/Charge offs, Corporate Retirement Plans, Inheritances, Trust Advances,
Probates, Retail Installment Contracts, Unsecured Non-Performing or Delinquent Debt, Prizes and Awards, Consumer Receivables, License Impound
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Contingency Based:
Corporate Contribution Portfolios, Royalty Payment Portfolios, Commercial Judgment Portfolios, License Fee Portfolios, Consumer Judgment Portfolios,
Franchise Fee Portfolios
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Government Based:
Voluntary Separation Incentive Portfolios, Farm Production Flexibility Contracts, Tax Refund Portfolios, Military Retirement and Disability Pension Portfolios,
Lottery Winning Portfolios
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Business Based:
Commercial Deficiency Portfolios, Chapter 11 Reorganization Plans, Bankruptcy Receivables, Commercial Judgment Portfolios, Equipment Lease Portfolios,
Equipment Timeshares Contracts, Letter of Credit Portfolios, Aerospace Leases, Commission Portfolios, Property Lease Portfolios, Sport Contract Portfolios,
Purchase Order Portfolios, Commercial Lease Portfolios, Seasoned or New Notes, Preferred Equity Titles
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Insurance Based:
Insurance Settlement Portfolios, Land Purchase Assignments, Worker's Compensation Awards, Annuities, Structured Settlement Portfolios
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Other Collateral Based:
Vendor Carry-back Paper, Mobile Home Note Portfolios, RV and Business Vehicle Note Portfolios, Warehouse Inventory Line Portfolios, Seasoned or New Notes,
Business Notes, Aerospace Notes, Equipment Notes, Marine Notes, Collectibles Notes, Automobile Notes
12b 1 plan and Fund. A specific type of mutual fund set up that allows fund companies to assess fees for advertising and other expenses are called 12b 1
fees or 12b. There are specific rules and regulations that 12b 1 fund companies have to comply with. The cost or fee is used to pay the costs associated with
attracting new investors into the fund.
Companies with this type of SEC set up have been around for many years. As with any other investment vehicle, choice in an investors best decision maker.
Some shareholders do not want to pay traditional sales charges, whether front end or back end. There is a strong market for 12b 1 fee structures.
As with any mutual fund plan, the fee involved in these funds should only make up part of your decision to invest. Many 12b 1 mutual funds offer greater
returns than others. Investing in funds should involve many aspects in your decision.
Who is the sponsor or owner of the company?
What are the historical rates of return?
What is the objective of the fund?
Does the 12b fee more than make up for the attractiveness of the mutual fund?
Closed End Fund Investing
Management companies that trade on the secondary market are known as Closed End Funds. These investments are similar to mutual funds, except unlike
mutual funds - they are not issuing new shares in the primary market ongoing. The company does a one time initial public offering and then the shares of the
closed end fund trade Over The Counter or on an exchange.
Trading
To buy shares in a closed end company, you will buy through a broker and pay a commission. These funds are trading in the market, so the buying and
selling of closed end fund shares are the same as buying shares of stock.
The value or price of the traded funds are based on performance of the fund along with supply and demand - just like any other negotiable security.
NAV - Net Asset Value
The true value per share of a closed end fund can be found in it's NAV or Net Asset Value. This is calculated daily and is based on the total net income -
operatating expenses such as costodian banks etc. divided by the number of outstanding shareholders.
Although the NAV is calculated daily and represents the true value of the fund per share, the share price is based on the trading in the market. The trading
price of a closed end fund should trade fairly close to it's NAV.
Closed end funds have an investment advisor that trades the securities and manages the cash in the fund. The advisor has discretionary authority within the
limits of the funds investment objectives. The securities can be composed of stocks, bonds or in the case of a REIT - real estate investments.
Dividends are paid to shareholders and taxable to the shareholders. This also applies to open end mutual funds.
CMO Bonds
Collateralized Mortgage Obligations or CMO's are a series of bonds backed by an agency and their mortgage backed securities. These investments are AAA
rated and pay monthly principal and interest.
Collateralized Mortgage Obligations differ from pass through securities in that they have different types of paying bonds within the CMO. There are many
types and tranches to evaluate - each with it's own bond risk.
A CMO has different payment timing risk depending on the type of bond you own. Some offer more protection than others from prepayment or extension risk.
These bonds have a more predicatable duration to the bondholder vs. a pass through agency bond. Some CMO's can pay off faster than others.
Collateralized Mortgage Obligations are generally meant for institutional investors or wealthy bond investors. The money invested, while earning monthly
income - can take a while if interest rates rise. When interest rates rise, a these bonds will pay slower. The refinancing that normally can happen with
mortgage pools will slow down or stop when interest rates or bond yields rise.
Types
Plain Vanilla
This is a cmo bond that is set up more simply than others - thus the name "plain vanilla". It spreads the principal and interest payments to all tranches. The
principal is apllied to the early tranches first and paying them off the earliest. Plain vanilla Collateralized Mortgage Obligations have prepayment and
extension risk.
PAC - Planned Ammortization Class
A PAC Bond or Planned Ammortization Class CMO has more predicatble cash flows and more certainty of final maturity for the investor. A PAC bond has
certain protections against pre payment risk or extension risk.
TAC BOND Targeted Amortization Class
A TAC Bond also has scheduled cash flows. However, TACs are designed to remain stable at one PSA speed and faster. TAC Bonds are created to protect
against the risk of faster prepayments (“contraction risk”), but typically offer limited protection against slower prepayments (“extension risk”).
Sequential CMO VADM (Very Accurately Defined Maturity)- A VADM has scheduled cash flows within a stated range of prepayments (similar to a PAC Bond).
However, a VADM extends this “guaranteed” cash flow schedule all the way down to 0% PSA (no prepayments at all). Therefore, a VADM has no extension
risk, and a “very accurate; defined maturity.”
Companion or Support Bond -Support Bonds are the other Tranches within a CMO that contains PAC or TAC Tranches. Support Bonds are dedicated to
absorbing excess principal prepayments (under faster PSAs) or giving up needed principal (under slower PSAs) to the PAC or TAC Bonds, in order to maintain
scheduled cash flows. Because of the increased cash flow volatility, Support Bonds offer a higher coupon rate and yield than PACs or TACs.
Floater Tranche
Floaters are a variable rate CMO Tranche. Floaters are quoted at a spread to an index (the LIBOR rate, Cost of Funds Index, or Treasury bond CMT) and will
adjust periodically up or down as the index moves up or down.
Inverse Floater
The Inverse Floater Tranche of a CMO is also an Adjustable Rate Bond. The Inverse Floater moves in the opposite direction of the stated index. Simply put,
if the general level of interest rates goes down, the Inverse Floater’s rate will go up and visa versa.
I.O. (Interest Only Class)
An I.O. receives cash flow exclusively from the interest payments of the underlying Mortgage-Backed Securities (the collateral). An I.O. is purchased at deep
discount to face value.
P.O. Principal Only Class
A P.O. receives cash flow exclusively from the principal payments of the underlying collateral. A P.O. is also purchased at a deep discount to face value.
Z BOND A Z Bond is a “Zero Coupon” or accrual Tranche of a CMO. The Z Bond accrues its interest at the coupon rate but instead of the interest paying out
to the investor, it is reinvested into the principal balance, and then paid out as part of the principal payments. This provides a “compounded interest” effect
on the yield. Z Bonds are purchased at a deep discount to face value.
Commodity Futures Broker
A person who trades on an exchange in futures and commodities for other customers is acting as a futures or commodities broker. Investing in commodities
and futures is not simple. Investors looking to maximize returns in various industries like oil and gas, wheat, and foreign currency need to invest a decent
amount of capital.
A good futures brokerage firm will have done their research and provided you with good trading ideas in this dynamic market.
To trade futures and commodities, you must pass the Series 3.
The salary of a commodities broker is normally commission based.
Commodity Trading System
When you open an account with a futures brokerage firm, you may have access to their trading platforms. These would include ongoing quotes, news and
trade reporting. There are other commodity trading systems on the market. Having a state of the art and accurate futures trading system is very important in
this ever changing, fast moving market.
A firm will go through an approval process for each account to see what level they can begin trading with an advisor or trader and on what system. Margin
limits will apply. Customers will sign a new account stating the level of advisor broker trading they can engage in. Initial deposit minimums in the account is
normal as well.
Investing on the Futures can include wheat, gold, copper, and oil futures. Since contracts are used along with long and short commodity investing, these are
very speculative investments. A broker and trading advisor should be used for any investor beginning to invest in the commodities and futures markets.
Discount Futures Brokerage Firm
There are many discount brokers and traders in the market, but many are for seasoned investors who have experience in these markets. If the person is not a
seasoned trader, having full support and research during trading hours is very important.
Convertible Bond Pricing
A convertible debt that can be converted into shares of common stock is known as a convertible corporate bond. The pricing or conversion ratio is based on
a fixed convert price and the par value amount of bonds owned.
If an investor owns $1000 par value of a corporate bond that has a convertible price of 50 can own 20 shares of stock (1000 divided by 50). The pricing of
these bonds tends to trade near par, since the price or interest rate risk with these bonds is less because of the conversion feature.
Normally when interest rates rise, bond prices go down. That is true with most bonds. Convertible securities offer investors a way out of the bond into stock of
the company. That fact keeps the pricing market fairly stable on these bonds.
Parity Definition
The definition of parity is when the value of the bond is equal to the value of the common stock on a convertible security. Using the above numbers, if the
common stock was selling at $50 a share, a par bond of $1000 is equal (20 shares times 50 = 1000)
If the stock was only selling at $45 a share, the stock value would be $900. The shares would be trading at a discount to parity with the bond or the debt is at
a pricing premium parity to the stock.
Convertible bonds can be an attractive investment for portfolios. They offer guaranteed interest and the ability to own shares in the corporation at a fixed
conversion price, for as long as you own the debt.
Bond Current Yield for Investments
Investments and bonds have several rates of return and yield indicators. One of them is the current yield. To determine current yield, you need to divide the
annual interest payments on a bond and divided them into the current market price. This can also be done with stocks funds that have annual dividends.
The current yield will be lower than the nominal (coupon rate) rate on the bond when the investment is bought at a premium. Since the coupon rate only
pays to par, the premium paid will show a lower current number. If a bond is bought at a discount, the nominal yield will be higher.
Calculation
A bond has a nominal yield or coupon rate of 6%. This is the fixed rate of interest paid to bond investors. If the current price on the bond was $95 or $950,
the current yield can be found by dividing $60 by $950. In this example the calculation would come out to 6.31%.
The current yield is always higher than the coupon rate when the bond is selling at a discount. The bond investor is getting a 6% rate of return on the bond
and will receive par at maturity. This increases the bond yield. The yield to maturity would also be higher. That calculation is handled differently though, as
it will take into account the nominal rate, pricing and years to maturity.
As with any bond, the yield to maturity and yield to call are the most important indicator - when judging total rate of return on a bond.
Dividend Investment Payment
A dividend is a portion of a company's earnings that the board of directors has decided to pay shareholders as a rate of return or yield on the company's net
earnings available for stockholders. Dividend payments can be in stock or in cash.
Common stockholders receive payments based on earnings and are usually paid quarterly or annual. Preferred stockholders normally receive a fixed cash
dividend, similar to bondholders getting interest payments.
Emerging or growth companies normally do not pay high or sometimes any dividends.
Dates
When a company announces an investment dividend payment to shareholders, there are certain dates that get set. The declaration date is when the board
announces a dividend is being paid (cash or stock). The Record date is also set. That is when people must own the stock on (settlement included) to get the
yield payment. The payable date is when the money or stock credit is mailed to shareholders.
Ex Dividend Date
The ex dividend date or ex-date is the first day the stock will trade without the dividend on it. Thus people who wish to get their payment credited, they must
buy the stock no later than 3 business days prior to the record date. The ex-dividend date is 2 business days prior to the record date.
Yield
A stock's yield is based on the share price and the amount of yearly dividend that is paid to shareholders.
Foreign Currency Contract and Option
A contract traded in the interbank market to buy or sell a foreign currency. Trades of these option contracts settle either spot or forward.
In the US, options are traded on all currency except the US Dollar. If a put option was invested on an overseas currency, that means the US investor thinks
that currency will decline vs. the dollar. If the options trader thought the US dollar would fall, he could buy a foreign currency call option against the dollar.
Call and put options have short term expirations. If a currency option was bought, the investor could lose 100% of the premium invested - if the contract was
not exercised or traded prior to the expiration month.
The maximum gain for foreign currency calls is unlimited, since the contract value is based on an increase in the foreign money value.
Puts could gain the full difference between the contract strike price and zero - minus the premium paid. Put options on foreign currency gain when the value
declines.
Futures Forex Trading and trading Strategies. Options Investing Trading.
Hedge Fund Trading
An investment company or mutual fund that engages in aggressive trading and investing strategies to get its rate of return. Hedge funds use techniques such
as short selling of stock and option trading.
Short selling of stock is considered a high risk than long buying, because if the stock rises after it is sold short, the security could lose an unlimited amount of
value. Option contracts can also expire worthless. However, if positioned well in a hedge fund investing portfolio, they can succeed and generate very large
rates of return.
Investing in these pools or to buy these funds can earn investors a very high rate of return, however there are many that do not perform well - especially in
certain stock market years or interest rate cycles. Hedge funds are very sensitive to these changes. Viewing a detailed prospectus on these clubs is a very
important part of deciding to invest in them.
There are brokerage firms and hedge fund trading companies that specialize in them. Over the years many of them have been successful with strong track
records of returns.
Some successful smaller investors have looked into starting their own hedge fund.
Investors should have a large amount of risk capital and disposable securities related assets before trading in these funds. There are specialty firms who
handle large pools of money for investors in this higher risk group. Hedge related pools and money funds generally can out perform the S & P 500 and other
indicators in certain times of bullish periods. These money managers can also report very low or negative trading returns in times of economic downturns and
market corrections.
Index Mutual Fund
There are many funds that are based on the value and appreciation of an index in the market. Examples of what these stock mutual funds focus in on could
be the S&P 100, S&P 500, NASDAQ or other broad based groups.
Broad based funds perform with the market as a whole. Index funds could also be based on a narrow based side of the market. A narrow based index
concentrates on a specific sector of the market, either in industry or geographical location.
These areas could include only Telecommunications, South American Companies, Asian Energy groups of stock, etc.
These index investments tend to move with the market, as the money is invested equally into the stock market of whichever group or objective makes up that
fund strategy.
IRA Retirement Account
A personal investing account where an individual or couple (in separate accounts) can contribute money for their retirement is known as an IRA. An IRA
allows for cash contributions of up to $4000 per year per individual. This contribution amount will increase in the future.
Investing in an IRA is something investors should consider if they do not have a company retirement plan or other vehicle for the future. Early withdrawals
prior to age 59 1/2 are subject to a 10% penalty and the amount withdrawn is taxed as income.
Traditional IRA accounts are tax qualified, which means the contributions are tax deferred and grow tax free. When the money is drawn after retirement age,
it is taxed as income.
Investments
Stocks, bonds, funds and most other negotiable securities are allowed to be purchased through a broker dealer in an IRA. These investments should be
carefully chosen by you and your IRA financial planner.
Types
There are many types of IRA's including: Traditional, Education and Roth.
Rollover
An IRA rollover is when you close out the account and deposit the full proceeds to another retirement plan. This is allowed with certain restrictions. The
rollover must be completed within 60 days and can only be done once a year.
Annuity Funding
An annuity contract used in an IRA must be nontransferable by the owner. The practical effect of this rule is that the annuity cannot be used as collateral for
a loan. That means that an annuity used to fund an IRA cannot be used as security for a loan, either from the insurance company that issued it or from any
other lender. An automatic premium loan would be prohibited and, if taken, could cause the plan to become disqualified. The plan would simply cease to
be an individual retirement annuity. When a plan is disqualified, the funds are immediately subject to income taxation and, if the individual is less than age
59½, a penalty equal to 10 percent of the amount included in the individual’s income may be imposed for premature distribution.
The premium for the annuity used to fund an IRA must not be a fixed premium; instead, any annuity used to fund an IRA must have flexible premiums. The
annual premium may not exceed the maximum permitted contribution. Any dividend payable under the contract must be used to reduce future premiums or
purchase additional benefits.
If the IRA is a traditional IRA, the individual’s entire interest must be distributed by April 1 of the year following the year in which he or she attained age 70½,
or distribution must begin by that date in accordance with required minimum distribution regulations.
Distribution
Withdrawing money from IRA is normally done after age 59 1/2. This amount should be pre-set based on your tax bracket (since you will be paying taxes on
this account), and the amount of money in it. You must take your IRS minimum distribution by age 70 1/2 or a 50% penalty will be assessed for that minimum
amount.
IRA investing should be done after consulting with your financial planner, asset manager or broker dealer.
SEP - Simplified Employee Pension
SEP IRA's are used by small business that wish to have a simpler solution to their employee pension needs vs. 401k accounts and alike.
An employer makes a contribution to an IRA for each employee and takes a deduction for the contribution on the investing portion. An SEP pension account
is available to part time or full time employees if they meet certain requirements related to age and years employed.
Limited Liability Partnership and Investing
To qualify as a limited partnership, the agreement must have at least one general partner and one limited. These investments could be in real estate, oil and
gas or other investment objectives.
The partnership is not a taxable entity. Each partner will be taxed based off of their investment in the agreement. The arrangement among the partners will
normally have an end date where each partner will be paid out - if there is anything to payout.
Limited Partner Liability and Facts
The LP has limited financial exposure. He or she is only at risk to the investment into the partnership. Any debts above and beyond the assets in the
partnership will not be incurred by the limited partner(s).
Investors who get involved in these agreements are looking for tax write offs, with the hope of high capital gains later on.
LP's normally have above average portfolios and can take the risk, both to capital and liquidity during the length of the partnership agreement.
LP's are paid out before General Partners when the partnership is liquidated.
General Partner Facts and Liability
The GP has unlimited personal liability. He or she is the manager or agent for the partnership investments. Should the entity have investment losses or
operating losses above and beyond the cash or assets - the GP can be personally sued.
The GP can also be removed, should he do anything to violate the agreement in any way. A new GP would then be named.
Types of Investment Partnerships
There are a few key areas of investment in these arrangements. The goals vary, but they are largely focused on depreciation, depletion and capital gains.
They include:
Real Estate Investment
Oil and Gas Investment
General Business Investment
Distribution of Investment Assets
When the agreement ends or the entity goes out of business, the partnership must pay off certain creditors and other debts before the principals will be paid.
The order of payout is:
Secured Creditors
General Creditors
Limited Partner
General Partner
The GP's financial interest is always paid out last. Most major brokerage firms and financial advisors can help investors in getting involved in limited liability
companies or other partnerships.
Margin Account - How to Buy or Sell On Margin
Brokerage firms can open an account for their trading customers to buy or sell on margin. This means the firm will allow the customer to borrow against the
firm's assets or collateral to leverage stock or bond trades.
Accounts can be long or short. Long margin accounts allow investors to borrow up to 50% to buy securities. New margin account customers on a first trade,
may be required to deposit more. Once the account is established, the investor must maintain a minimum level of equity value. Should that level fall below
the requirement, the investor will get a margin call on the account. They cannot buy or sell stock during this period, until they deposit cash or fully paid
securities to meet the payment needed.
Short selling must be done on margin. The stock is not owned by the customer when it is sold short, thus the broker or brokerage firm must provide that
leverage. A cash deposit would be required before trading can begin. Minimum equity levels must be kept in the short account as well.
Most broker dealer investors like to have the margin account option available to them. This way, certain trading can be done above their current cash
account position without having to open another account.
Long Margin Example
A customer buy 100 shares of ASD at $80 and wishes to do this trade in his margin account. The requirement would be a 50% deposit from the customer.
Since this trade is valued at $8000 long market value, the deposit required is $4000.
The account breakdown would be as follows:
Long Market Value: $8,000
Debit Balance: $4,000
Equity: $4000
With the stock value at $8,000, the investor has $4,000 in equity. Should the stock vlaue rise in the long margin account, the equity would rise and the debit
balance would remain the same. If the market value of the stock declines in the margin account, the equity would decline as well.
Brokerage firms will have a minimum equity requirement that must be maintained. 25% is the NYSE minimum, but most brokerage require higher
percentages on their margin account customers.
Mortgage Real Estate Investment Trust REIT
A leveraged investment trust that makes loans to builders and mortgage loans to buyers of real estate are known as Mortgage REITS. A REIT is a closed end
fund that invests in real estate activities. They can invest in direct property or mortgage loans and related product. They can trade on a stock exchange or OTC
and pay regular dividends to shareholders.
Most brokerage firms and financial advisor companies have many choices in the Mortgage REIT area or real estate trusts.
Dividends
Since these trusts invest in mortgage related investments, the dividend rate is considered good current income to the investor.
Trading
While the investments withing the mortgage REIT are fixed income and guaranteed, the price value of the trust shares themselves are largely based on supply
and demand within the trading stock market. The real estate market itself is also a major factor. Since this is a generalized industry, all property related
investments tend to move with the broader real estate market itself. The trading value will tend to increase or decrease within that trend.
Taxation
REIT's are regulated under Subchapter M of the IRS code. If the trust qualifies under Subchapter M, it does not pay tax on the distributed net income. The
distributions flow to the shareholders, who then pay the tax on their personal taxation forms.
To qualify as a Mortgage REIT or any real estate investment trust on a taxation basis, they must meet these 4 catagories:
At least 75% of income must be related to real estate or mortgage
At least 75% of the assets must be in real estate
At least 90% of the net investment income must be distributed to REIT holders
Cash dividends paid by Mortgage or other real estate trusts do not qualify for a lower tax rate.
Municipal Bond Investment
People who are looking for tax free yield investing will look to make investments in municipal bonds. The interest earned is federally tax free and the after tax
yeild in normally higher than US Government securities.
The higher the tax bracket of the bond investor, the higher the tax free yield. Investing in these bonds is normally done based on the state the person lives in.
People who buy municipal securities will normally be free from federal, state and local taxation.
Municipal brokers can help customers with investing in them. They are normally offered broker to broker, so many firms will have a list of other firms and their
inventory. Investing in these normally comes down to these important factors:
State issue of the bonds
Tax bracket of the investor
Maturity
Call dates, if any
Rating
Coupon and yield
Coupon or the nominal yield on municipals can be low, but the after tax yield is normally much better. Again, this is based on the income bracket of the
investor.
In State Municipal Issues
Investors should consider buying bonds issued in their own state. This is because most states offer a "triple tax free" incentive to individuals. Municipal bonds
that are bought by in state investors are exempt from federal, state and local tax. If you buy securities outside of your state, you are subject to state and local
taxation. This applies to both General Obligation Bonds and Revenue Bonds.
When you are looking to begin investing in these debts, you should consider this factor.
Callable Muni Bonds
Most Muni bonds are callable. This is because states, cities and other authorities want the fiscal flexibility to call back bonds early. The primary reason for a
bond being called is that interest rates have gone down enough where the current coupon rate or Nominal Yield is considered too high.
When investing in Municipal bonds, buyers should ladder their portfolio where the call dates are spread out or staggered. This allows for greater management
of interest rate risk within their Municipal portfolio.
Callable issued will normally have a higher coupon rate than non call bonds.
Yield and Interest Rate
When investing in these securities, bond yield and interest rate payments need to be looked at. The tax bracket of the investor will create a greater tax free
yield with municipal bond investments. A Muni with a 4% interest rate may have a tax free yield of 6% or more, if the buyer is in a high tax bracket. To
calculate the tax yield, you need to take the states nominal yield or yield to maturity (if purchased above or below par) and divide that by 100 minus your tax
bracket.
Yields on Municipal debt are largely based on the individual and their tax rate.
Bond Rating
All Municipal issues will have a rating attached to the bond. AAA is the highest credit rating in the system. However, bonds that are AA, A or Baa are
considered very safe and investment grade.
Investing in Muni bonds offers income and tax advantages.
No Load Mutual Fund
An open end fund that does not assess a sales charge to investors is known as a no load mutual fund. These become popular years ago as the competition for
mutual fund money grew.
Although some funds do not charge a sales charge, it does not automatically make them the right investment for everyone. Some funds that charge 4% to
buy shares, may be earning 20% a year vs. a no load company earning only 8%.
The no sales fee should only be a factor in your decision to buy the mutual fund.
Most of these companies will charge a redemption fee when the fund is redeemed. Dividend payments and investment objectives could be the same as any
other open or closed end company.
Nominal Bond Yield
The coupon rate on a bond is also known as the nominal yield. The interest payments investors get from their bond investments come from the this yield. This
bond interest yield is the rate the issuer pays to par value (amount of bonds owned). It is fixed and never changes during the life of the investment.
The nominal yield is not always your overall rate of return on a security - it usually is not. When someone buys a bond at a premium, their total rate of return
will be lower than the coupon rate. Since the interest is only paid to par, the premium (amount above par) is lost over the life of the security. This will give the
investor a lower yield to maturity.
Bonds bought at a discount will have a higher YTM, compared to it's nominal.
Call - Callable
Bonds with higher coupon rates also get called first, since their interest rate is higher than the market. When issuers examine their fixed income debt
securities, the true interest cost to them regardless of price is the coupon rate. That is why the higher nominal yield issues will see a call first.
The yield to call is also usually lower with higher coupon issues since those are normally bought at a premium and many bonds are called at par or slightly
over par. If the call price (the price it costs the issuer to redeem) is lower than the price paid by the investor, the yield to call is lower. If a nominal yield is low,
the YTC may not be lower but lower coupon securities are not called as often so the higher yield to call is many times at best hypothetical given the lower
interest rate.
Higher bond coupon rates will provide more current income to the investor, so as far as income - higher is better. As far as yield, it is not always better to
chase the highest nominal coupon.
Online Commodities Broker
People who offer investors the ability to trade commodities and futures online are commodities brokers. These firms allow investors to open online accounts
and begin buying and selling futures contracts and other type of trading. Successful traders will use the experience these brokers have and the systems they
use. This area of the market is very up and down, so experience and risk tolerance is very important.
Using an online broker vs. a full service firm gives investors quick execution, real time quotes and access to the various FOREX and futures exchange markets.
Commodities brokers will normally require an initial account balance before any trading can begin. Many commodities trades require margin deposits. There
are also specific rules and regulations that account holders must abide by when working with these online firms.
Futures Investing- information on profit strategies and futures contract investing mechanisms
Estate Online Broker
Brokers and agents who are licensed to sell real estate often get business online. With many investors and home seekers on the Internet looking for properties,
an online real estate agent can show properties that are priced to sell.
Auctions. Many real estate firms and brokers have begun online auctions of properties to prospects. With technology and streaming video available, online
real estate brokers have new ways of selling commercial or residential properties to the public
Price Earnings Ratio
Many analysts and stock traders look at the price earnings ratio of stocks to judge value when buying. The PE Ratio is calculated by dividing the current
market price by it's earnings per share. This is also known as a stock's multiple and a common financial formula.
When the ratio is higher, it can indicate that a security is over priced, relative to other stocks in it's industry. While this should not be the only investment
indicator a stock investor should look at, it is a true number - combining the real market price and the real earnings on a per share basis.
Multiple
When someone says "We are only interested in stocks with low multiples....", they are focused on the Price Earnings Ratio. A company that is trading at $65
and has an EPS of $1.40, has an approximate PE of 46:1. This may or may not be a good ratio for a particular company. Some industries and sectors have
historic low or high PE's.
Certain industries and stocks will value this number more or less. Start ups and growth companies are less concerned with Prices and Earnings.
In the end, investors should judge these ratios vs. companies in similar industries or type. A technology stock should not be measured against a utility
company only on a PE Ratio basis.
Investing In Preferred Stock
Preferred shares are sold in par value amounts and pay a fixed dividend to all stock owners. Many preferred stocks are convertible into common stock, and are
callable by the issuing company. People who begin buying or investing in preferred shares enjoy a regular dividend payment and the ability to switch to
common shares in the company. The preferred dividend rate is similar to a bond interest payment, although unlike debt payments - the dividend is not an
obligation to the company.
Most of the corporations that issue this type of stock are income based companies. They have the income to make these dividend payments. Buying preferred
stock in a company is an income strategy.
Most dividends are cumulative. This means that if a preferred share has a dividend rate of 6%, but the company only paid 4% one year, they will them owe
you 8% going forward. The amount of the stock dividend that was missed, is made up. Although this is not an obligation. Buying preferred shares gives the
person the chance to get the benefit of fixed income investing, but at a higher rate than a bond.
If the company goes out of business, preferred stockholders are paid ahead of common shareholders. Common shares get paid dividends only after preferred
investors are paid.
Buying this type of stock or investing offers a fixed rate of return, but stockholders are still at risk if the company does not earn any income going forward.
Unlike bond creditors, preferred stock investors cannot make claims on lost money if the company fails.
Private Placement Investments
Stock offerings offered only to wealthy or seasoned investors are private placements. Under Regulation D of the SEC, these investment offerings can be sold to
no more than 35 non accredited investors.
These normally carry a stock holding period requirement.
Brokerage firms that handle wealthy clients that are looking for investment opportunities may offer private placements. The investors would be made aware of
the risks regarding the holding period, after market potential and other risks. There are many private placement offerings covering a broad spectrum of the
investment market.
Real Estate Investment Trust REIT
Funds that specialize in building a portfolio of real estate products and investments, are known as REIT's. These investment companies are closed end funds,
pay high dividends and trade on an exchange or Over The Counter.
What is a REPO Repurchase Agreement?
A Repo is where the federal reserve or a Government securities dealer buy securities from another, promising to sell them back at a higher price on a set date.
Repurchase agreements are source for short term financing for broker dealers. The federal reserve will engage in this repurchase agreements with member
banks.
Municipal Revenue Bonds
Bonds issued by municipalities, such as states, cities and counties where the money raised to pay off the bonds comes from a non-tax revenue source, are
called revenue bonds.
Municipal issuers could include transportation entities and others. Revenue bonds are rated and yield based on their own merit.
Investing in these municipal securities is normally based on the location of the issue, the tax bracket of the investor (for greater tax free yield), maturity and
rating.
Types of Revenue Issues
Transportation - These bonds are issued backed by tolls, fees and other transportation collections.
Utility - These revenue bonds are secured by the income of a public utility.
Industrial - These municipal issues are backed by a corporation's payments back to the municipality.
Revenue bonds should be invested based on the geographical area of the investor. Most states offer municipal buyers triple tax free treatment (no state,
federal or local tax), if the investment is issued in the home state of the buyer. This will increase the overall tax free yield of the municipal bond investor.
Not every brokerage firm offers revenue bonds. The best selection will normally come from municipal bond brokers that hold inventory for these bonds. These
securities are normally traded over the counter OTC between broker to broker. There is usually a mark up for these bonds, not a commission.
Secured Bonds
A secured corporate bond is debt that is backed by a specific asset of the company. These bonds are normally issued by companies who do not want to back
their bond based on their full, faith and credit. These corporate issues could be secured by equipment, real estate, or other collateral - such as stock and
bond holdings.
If the company fails to pay off of the bonds to investors, the assets are liquidated and the investors can claim those proceeds.
These investments can be callable or non callable and are individually rated based on credit quality. Secured bonds will normally rate higher than
debentures of equal specifics because of the guaranteed liquidation to pay off bondholders.
Stock Short Sale
A trader or investor who sells a stock that he does not own, hoping the price falls later on is selling short. This is a risky form of trading, as the market on the
shares could rise on the investor.
The person must buy back or cover the stock, so the investor needs to be careful with watching price movement and direction.
Most broker dealers will permit this practice when it is done in a margin account. The stock trader will put in money above the proceeds of the short sell to
cover the brokerage firm, in case the stock rises.
Selling short should only be for experienced investors and day traders.
Options and Short Sales LONG CALL protects SHORT STOCK
A customer sells 100 shares of XYZ short at $37 and wishes to protect against a sudden increase in the price. A Registered Representative recommends that
the customer Buy 1 XYZ DEC 40 call paying a $200 premium. The Call option gives the holder the right to buy the stock at 40, thus limiting the potential loss
on the stock to 3 points plus the $200 premium. The stock needs to decline at least to $35 to pay for the option and to reach break-even on the short stock
position.
SHORT 100 Shares @ 37
BUY 1 DEC 40 CALL @ 2
The call option protects the short sale until December
The option costs $200 which lowers (more difficult) the break-even needed to $35
Option will expire should the stock decline in the investors favor
Maximum Gain: $3500 (Short sale to decline to “0” minus the premium paid)
Maximum Loss: $500 (Sold short at $37. Option allows for buy at $40 plus the premium paid)
Break-even: $35 (Stock needs to decline 2 points to make up premium paid)
Simplified Employee Pension SEP IRA
A simplified employee pension plan or account that is designed for a small business. A SEP IRA is when the employer of a company opens an IRA for each
employee and makes contributions into the account.
The contribution limits are higher than a regular IRA.
A SEP requires less management and administration than a typical corporate retirement plan, like a 401-k or defined benefit account.
SEPs provide a much simpler alternative to other qualified employer retirement plans and are generally far less costly to install.
Employer contributions, which are discretionary, are tax-deductible to the employer and not included in the employees’ income.
Required minimum distributions of Simplified Employee Plan account balances must begin by age 70½. Funds in a SEP may be rolled over according to
the rules governing rollovers of traditional IRAs.
Distributions
Like traditional IRAs, required distributions from a Simplified Employee Pension plan must begin no later than the employee’s age 70½, even if the individual
is continuing employment. The first distribution can be delayed until April 1 of the year following the year in which the employee turns age 70½. Again, the
individual should know that by waiting until this required beginning date to take the initial minimum required distribution, he or she must also take a second
distribution by December 31 of that same year, resulting in two taxable distributions occurring in the same year, with consequently greater tax liability.
What is a subordinated Debenture?
A bond that issues where the interest is higher than the company's other bonds, but the issue has a lower priority if the company goes out of business is called
a subordinated debenture. The interest paid to this debt is guaranteed, but if the company liquidates, these debts are the lowest creditor priority. Investors
would have to wait for other obligations, including secured and debenture holders to be paid.
T Bill
Treasury Bills are short term Government securities. Their maturities are 1 month, 3 month and 6 months. They are backed by the US Government, thus they
carry no credit risk. T Bills do not pay interest. They are 0 coupon securities. The investor will buy the treasury Bills at a discount price and then mature at a
par value amount. The yield is calculated based on the discount price, the par and the time frame (30, 90 or 180).
These securities are auctioned weekly and bidded on by US Government securities dealers.
T Notes
Treasury Notes are medium term Government securities. Their initial maturities are 2 years, 5 years 10 years. They are backed by the US Government, thus
they carry no credit risk.
T Notes pay interest every 6 months and they are priced in 32nds. Many loans are priced off of the various maturities of these notes.
These securities are auctioned monthly or quarterly and bidded on by US Government securities dealers.
All of these securities are AAA rated. The yield on treasury notes will be lower than corporate bonds and agency securities of the same maturity. Most broker
dealers and brokerage firms can offer investors T-Notes. The minimum investing amount is $1000, but normally the buying of them should be in amounts of
$10,000 or more to make the income worth it.
T Bonds - Trading and Yield
Treasury Bonds are long term Government securities. Their maturities are over 10 years out to 30 years and are often used in block trading. They are backed
by the US Government, thus they carry no credit risk. Their yields reflect interest rates and supply and demand.
T Notes pay interest every 6 months and they are priced in 32nds. Many loans are pissed off of the various maturities of these bonds.
These securities are auctioned semi annually or longer and bidded on by US Government securities dealers.
Yield
The yield on treasury bonds reflect the supply and demand of debt and interest rates long term. Since they are AAA quality, they will yield less than private
debt securities or Government Agency Bonds. Yields will fluctuate as part of the yield curve that other securities and loans are priced off of.
Trading
T Bonds are actively traded in a global market. The brokers who engage in the trading of these securities will normally trade them in large blocks, as the
spreads can be thin for smaller amounts.
US T STRIPS
Treasury STRIPS are 0 coupon long term Government securities. Their maturities are normally over 10 years out to 30 years. They are backed by the US
Government, thus they carry no credit risk. T STRIPS do not pay interest, since they are 0 coupon bonds. They are created from called back treasury notes
and bonds by the US Government. The yield is calculated based on the price paid and par value at redemption.
During times of lower short term interest rates, Strips are more popular. When yield levels are low - especially short term bank rates, reinvesting bond proceeds
is not attractive. T Strips do not have reinvestment risk, because they are zero coupon securities. Reinvestment risk is when you are forced to reinvest
proceeds or interest from one security. During times of low interest yields, having 0 coupon investments works to an investor's benefit - in theory.
UGMA Account
A type of account where a custodian or investment advisor manages and oversees (acts as custodian) an investment account for a minor. The state laws vary
when it comes to taxation and majority age.
Most major brokerage firms and financial advisors can help set up a UGMA account.
The investments cannot be bought on margin and the custodian cannot sell short securities. All securities are bought in a cash account. The custodian does
not have to be a relative or legal guardian to oversee the investment management of a Uniform Gift To Minor trust.
Donor - Custodian
A donor may make a gift to a custodial account for the benefit of a minor child. The parent or custodian may retain responsibility of management of the
assets in the account subject to the terms of the act. The donor may choose to contribute from a number of assets in the UGMA, including stocks, bonds and
mutual funds. The funds can be used for education or other needs.
UIT Trust
A unit investment trust is a non managed investment company, where a set rate of return is calculated based on purchased securities. The UIT will pay
dividends paid to the number of units an investor owns.
When investors buy Mutual Funds or Closed End Funds, they are looking for diversity and professional management from an investment advisor who is
actively trading the account. UIT investments are divided by units and are normally invested in fixed income.
Unit Investment Trusts can perform very well in certain market times and can give a guaranteed rate of return - which is their main appeal.
Types:
Fixed
The trust selects and invests into a portfolio of fixed income securities - including bonds. There is no active trading or management of the securities in the
UIT.
Participating
This is when the money is invested into mutual fund shares to get a more aggressive rate of return.
Unit Investment Trusts were established as non managed investment companies under the investment co. act of 1940. That act defined 3 types:
Management Companies - Open end mutual funds and closed end funds
UIT - Unit Investment Trusts
Face Amount Certificates - These are now obsolete.
Bond Yield To Maturity
This is a bond's total rate of return during the full life of the investment. The yield to maturity factors in the nominal rate or coupon, the price paid and the
length of the maturity.
The YTM is the most important yield indicator for a bond investment. It factors in the nominal yield, bond price and length of maturity held.
When investors buy bonds, the coupon rate is important, but if the bond price is higher than par - the yield to maturity will be lower. If the bond is bought at a
discount, the yield to maturity will be higher.
The nominal yield (coupon) is a fixed rate that is only paid to par value. All bonds redeem at par as well. So, if the investment is purchased below or above
par, the yield will be different.
Premium and Discount Bond Yield
The YTM is actually the current interest rate on a particular bond or similar bonds. If a 7% bond is available, but interest rates are actually only 5%, the
broker or the market will price that bond higher (premium) - to reflect the current interest rate environment. The broker is not going to sell a 7% bond at par
when interest rates are 200 basis points lower. A premium will be the market.
If the interest rate climate on these bonds is 5%, the security will be priced for a yield to maturity of around 5%. So, the investor is really getting a 5% overall
rate of return on this bond, if held to maturity - even though the nominal yield is 7%. Interest is never paid to a premium or discount. It is only paid to par.
If an investor is seeking higher current income, having a higher coupon rate is important. The yield to maturity is not a paying yield, it is an overall rate of
return of the investment.
If a person is not seeking current income, they can choose a below market coupon bond and buy it a discount. Doing this will allow the investor to pay less
and earn less interest, but the overall yield to redemption or maturity will be higher.
YTM uses all the components of a bond investment to come up with a true overall yield on the security.
Bond Yield To Call
If a bond is callable, it is very important to be aware of the yield to call. If the investment is called early at a lower price than what you paid, your YTC will be
lower. If the call price is higher, then yield is higher. Usually it is best for call dates to be as far out as possible for an investor. Normally a called bond is an
unwanted event for an investor. Bonds are usually called when interest rates decline, so an investor will be forced to invest the proceeds elsewhere at lower
rates.
Callable bonds are priced to the call date or the maturity date. Bond brokers will price the bond to the call when it's a premium, and price to the yield to
maturity when it is a discount bond.
Premium and Discount Bonds
The reason for pricing these bonds differently is twofold. A bond is priced at a premium because the Nominal Yield or coupon rate is higher than current
interest rates. Since bonds with higher nominal yields will get called first, it makes sense to price the to the call (ytc). It is also the worse case for the investor.
If the bond is called early, the investor will lose the premium faster than if it went to maturity. The yield will be lower if the investment is finished early.
Discount bonds will have a higher yield if they were called early vs. pricing them to maturity. They are not priced to the call normally. Discount debt has a
lower nominal yield than the market, so they are less likely to see a call date acted on. Discount bonds are priced to a Yield To Maturity.
Assets Management Prospectus. A prospectus is a document that describes the investment being involved. In the case of hedge funds, a prospectus would be
distributed to potential investors informing them about the fund objectives, investment philosophy and risk tolerance as well as fee structure, reinvestment and
divestment. For instance, a hedge fund prospectus may disclose that the fund charges 20-40% of profits (when there are not charges or fees based on the total
assets under management, disregarding the investment performance) as a management fee and only allows capital withdrawals once a year at a set time.
These items are only the most basic, though often most scrutinized, elements of a hedge fund prospectus. Investors must have the choice to discuss the
Prospectus at any time.
Accredited Investors
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the
registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D,
a company may sell its securities to what are known as "accredited investors."
The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
a bank, insurance company, registered investment company, business development company, or small business investment company;
an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment
adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
a charitable organization, corporation, or partnership with assets exceeding $5 million;
a director, executive officer, or general partner of the company selling the securities;
a business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years
and a reasonable expectation of the same income level in the current year; or
a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Accredited Investor
A term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced
need for the protection provided by certain government filings.
Also known as "qualified purchaser".
In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:
1) earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain
the same level of income.
2) have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
3) be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
These investors are considered to be fully functional without all the restrictions of the SEC.
3C7 Hedge Fund High Net Worth Investor - HNWI Institutional Investor
Qualified Institutional Buyer - QIB Regulation D Retail Investor
Securities and Exchange Commission - SEC Sophisticated Investor
Introduction To Hedge Funds - Part One - Learn everything you need to know about the characteristics and strategies of hedge funds.
Fly High With Angel Investors - When your business needs capital, put your faith in these wealthy investors.
How The Wild West Markets Were Tamed - The average investor can trade stocks with a sense of security thanks to this Lone Ranger.
Hedge Funds' Higher Returns Come At A Price - Learn how hedge funds win big gains for investors
Source: Investopedia
Asset Mix
Asset mix is the allocation of a portfolio between asset classes, it balances return and risk. Returns are a combination of the income from an investment and the
price appreciation over the period. Risk is usually proxied by the "standard deviation" of returns, how much the return changes about the long-term average.
Returns are calculated on a nominal (dollar) basis or as "real" returns, the nominal return less inflation. Inflation is usually taken as the change in the Consumer
Price Index (CPI) over the observation period. Long-term studies have demonstrated that equities have the highest overall returns over longer periods of time,
but they also have the highest volatility. Bonds have lower returns, but greater stability. Cash and short-term securities have very certain returns, but very smaller
long-term returns. Other asset classes such as real estate, mortgages and inflation-linked bonds have different risk and return patterns. To the extent that asset
class returns tend to move together, they are said to be "correlated". The overall risk of the portfolio can be reduced by combining asset classes with differing
return patterns.
Establishing an Investment Policy
A long-term "investment policy" is usually established based on the investor's long-term objectives and constraints of the investor. The return objective is the
key variable. A high return objective can only be obtained by investing in asset classes with a higher return. Based on historical experience, without constraints
equities have by far the highest return. An asset planning study which sought to obtain the highest overall return would recommend an investor's entire portfolio
be invested in equities.
Investor Constraints
Constraints state the risk preferences of the investor. The time horizon of the investor dictates the time frame for the investor's portfolio. For example, since
equities have a high long-term return but higher volatility in the short term, the return from equities very uncertain over shorter time periods. Risk averse
investors (those without the capability of absorbing capital losses) would have a higher cash and short-term component. Investors with a higher tolerance for
capital risk should favour equities. Investors with a high income requirement would tend to favour a higher fixed income weighting.
Market Timing Strategies
Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or bonds, and less risky short term securities like Treasury Bills
based on "technical", "fundamental" or "quantitative" analyses. Reduced to its core proposition, market timing means "buying low and selling high." Identifying
high or "overvalued" versus low or "undervalued" is the complicated thing. Since riskier assets usually have higher returns over longer periods, staying "out of
the market" or invested in less-risky short term securities can mean a considerable sacrifice of overall return.
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial assets like stocks or bonds involves all components of the
human condition; fear, greed, optimism, pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have impact.
Vain attempts to divine the direction and outcomes of "the market" have involved astrology, superstition and the supernatural.
Academics have surrendered unconditionally. After quantitative techniques and supercomputers proved duds in predicting the financial future, the most highly
educated and qualified financial researchers ran up the white flag of the "efficient market". In their rational world, everyone knows everything and it is only
random chance that moves markets in a dice-throwing "stochastic process". Basically, they reasoned, no one could predict the market since there were so
many smart people trying to do it. They then set about proving this, hopefully making their insulated lives easier since they would never have to stick their necks
out with market predictions.
For most investors however, market timing is too attractive to let pass by. If one could participate in all the 25% up years in the stock market and pass by the
-25% years in TBills with a modest 5% return, the rewards would be huge. Even capturing a little of this outperformance would lead to a superb performance
compared to a "passive" or fully invested strategy.
A market timing strategy is conceptually easy to understand. Stay invested when the market is up or flat. Avoid the downturns. The market timer develops signals
to identify what condition a market is in. An overvalued market is called "expensive", "overbought" or "overextended". A normal market is "fairly valued". An
undervalued market is "cheap".
The market timer can use a variety of measures to judge the status of the market. These techniques are a combination of technical, fundamental and
quantitative indicators and measures.
Technical Indicators
The technical indicators are based on "price" and "volume" movements and patterns. The technical analyst looks at the patterns and movements
independently of their causes. It is patterns alone that tells the state of the market. For example, the analyst might see a "topping" pattern developing in the
overall market or one of the important sectors from his charts. A "head and shoulders" formation would see the market index rise steeply, fall and then rise
again. This would be a very "bearish" or negative signal pointing to a large and sudden drop in the market. The analyst might discern the depth of the fall from
the length of the neck or relative height of the shoulders. Other technical indicators involve the "volume" statistics or trading activities of investors. A sudden
drop in trading activity or a large differential between smaller and larger stocks would be an indication of a potentially large move, with the direction
dependent on what "expert" investors are doing compared to individuals.
Fundamental Indicators
Fundamental indicators are financial and economic measures that affect the overall valuation of the market. A good example of this would be money supply.
Generally, a loose monetary policy and expanding money supply indicate healthy financial markets. When monetary policy is tightened, as in 1994, the price
of longer term assets like stocks and bonds fall as money and credit become scarcer. Another fundamental measure would be the dividend yield on stocks, the
dividend divided by the stock price, both the absolute level and the relative level compared to bonds. From a historical standpoint, when the overall dividend
yield on the stock market is below 2%, independent of other factors, this means that the stock market is expensive. When the dividend yield on stocks is low
relative to bond yields, this means investors are willing to pay more for stocks relative to bonds than has generally been the case historically.
Quantitative Measures
Quantitative techniques involve associating different market measures or "variables" in quantitative equations or "models". For example, an analyst might
"build a model" that related the movements in stock prices to money supply, dividend yields and economic activity. From this, he would attempt to identify the
periods when the market had setbacks. The analyst would then develop some "decision rules" or guidelines to dictate his trading positions that would be
programmed into his model. This type of investing is formally called "Tactical Asset Allocation" (TAA). It has become very popular and results in large flows in
modern financial markets.
Does Market Timing Work?
It has become accepted wisdom in financial circles that it is impossible to consistently "time the markets". This has resulted partly from the theoretical
academic arguments that no one can have such an advantage (legally!) in their "efficient markets". In practice, the complexity of modern financial markets
means that it is very, very difficult to predict the vast number of variables that can affect the markets. Who knew that Saddam Hussein planned to invade Kuwait
in 1990 and the price of oil would soar? An investor predicting the unification of Germany and its resultant affect on the capital markets would have been
shipped to the funny farms only a couple of years before it happened.
It is possible to establish a valuation level for the markets, like a stock. Compare these tasks. A small company might have a few competitors, a known product
line and management. The cashflows can be identified and assessed. Even so, where we can value this company, its stock might not be appropriately valued
for years and its future prospects depend on the economy in general. What about the market overall? Who is the management? What matters most, monetary
policy or fiscal policy? What are demographics doing to demand? What about international considerations?
That is why most market mavens have one or two great predictions before they are hopelessly out to lunch in the forecasting wilderness. While it is possible to
tie it all together a few times, it is virtually impossible to do it consistently.
Most good market strategists only try to identify "extremes" when things are very overvalued. They stay invested until these periods, knowing the smaller swings
are "noise" that usually work themselves out. Even so, staying in cash until the eventual crash comes gets harder and harder as the markets run ahead. Usually
the final charge of the bull market results in public "bears" being hopelessly discredited and throwing in the towel at exactly the wrong moment.
Should you time the markets?
Should you time the markets? Only if you have the necessary insight and discipline to know when to"hold" and when to "fold" as the song says. Both of these
are very hard to come by. For most of us, risk is having your money available when you need it. If you can't afford a 30% drop in value, you shouldn't be in
longer term assets in the first place.
If you decide to time the markets, remember one thing. Those who are really good at market timing aren't going to do television and newspaper interviews just
before the crash. You'll only know what they did a few months after the fact. If you can't do it yourself, you probably shouldn't try.
If you only invest in stocks when the guys at work have made lots of money or your GICs aren't paying anything, you probably are doing exactly the wrong thing.
Investing when newspaper headlines are doom and gloom and the boys have been blown away would be a better timing strategy. At the peak, it's impossible to
find a bearish forecast. At the bottom its impossible to see the upside. Source: The Financial Pipeline
Hedge Fund: History and the Definition of a Hedge Fund
The first hedge fund was set up by Alfred W. Jones in 1949. Jones was the first to use short sales and leverage techniques in combination. In 1952, he
converted his general partnership fund into a limited partnership investing with several independent portfolio managers and created the first multi-manager
hedge fund. In the mid 1950's other funds started using the short-selling of shares, although for the majority of these funds the hedging of market risk was not
central to their investment strategy.
In 1966, an article in Fortune magazine about a "hedge fund" run by a certain A. W. Jones shocked the investment community. Apparently, the fund had
outperformed all the mutual funds of its time, even after accounting for a hefty 20% incentive fee. This is because the rate of return was higher on the hedge
fund versus all other mutual funds.
"Hedge fund" is a general, non-legal term that was originally used to describe a type of private and unregistered investment pool that employed sophisticated
hedging and arbitrage techniques to trade in the corporate equity markets. Hedge funds have traditionally been limited to sophisticated, wealthy investors.
Over time, the activities of hedge funds broadened into other financial instruments and activities. Today, the term "hedge fund" refers not so much to
hedging techniques, which hedge funds may or may not employ, as it does to their status as private and unregistered investment pools.
Hedge funds are similar to mutual funds in that they both are pooled investment vehicles that accept investors’ money and generally invest it on a collective
basis. However, they are regulated in significantly different ways. Up until 2005, hedge funds in the United States often relied on Section 4(2) and Rule 506
of Regulation D of the Securities Act of 1933 to avoid having to register their securities with the Securities and Exchange Commission of the United States
(SEC). Further, to avoid regulation regarding mutual funds (a type of “investment company”), hedge funds relied on Sections 3(c)(1) and 3(c)(7) of the
Investment Company Act of 1940. In short, hedge funds escaped most U.S. regulation directed at other investment vehicles such as mutual funds.
European nations regulate hedge funds by either regulating the type of investor who can invest in a hedge fund or by regulating the minimum subscription
level required to invest in a hedge fund. In the years to come, experts are predicting the rise of an alternative regulatory framework that will be tiered yet
flexible.
The “Hedge Fund Rule” and the Effect on Hedge Fund Clients
The increasing incidence of hedge fund fraud (which exceeded $1 billion in recent years) prompted the SEC to introduce regulations aimed at protecting
the security markets. In addition to fraud, the SEC was also concerned with the increasing growth of hedge funds and wanted to find a way to police the $870
billion wrapped up in the hedge fund business. During the 1990s and the early 2000s, hedge funds experienced a five-fold increase in size. Additionally,
wealthy individuals were no longer the only investors in hedge funds; instead, pensions, universities, charities, and endowments began to place their money
in hedge funds. In order to protect these investors, the SEC revised the Investment Advisors Act of 1940 to create the “hedge fund rule.”
The hedge fund rule, effective February 2005, adopted the interpretation of “client” to mean shareholders, limited partners, members, or beneficiaries of the
funds. (Sec. 203(b)(3) of the Investment Advisors Act of 1940). This interpretation required hedge fund advisers previously exempt from registration, since they
had less than 15 “clients” under the previous interpretation, to register with the SEC. According to the SEC, mandatory registration was expected to have a
number of benefits such as serving as a deterrent to fraud, providing it with examination authority, fostering strong compliance practices and raising standards
for investments in hedge funds. However, in June 2006, a D.C. Circuit Court case ruled that the SEC’s interpretation of “client” was incorrect and that clients
of hedge fund managers only include the funds they manage, not the individual investors of the funds. Therefore, hedge fund managers who manage fewer
than 15 funds are once again exempt from SEC registration. (Goldstein v. SEC)
Hedge funds are also exempt from other requirements that apply to mutual funds for the protection of investors, such as regulations requiring a certain degree
of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations to assure
fairness in the pricing of fund shares, disclosure regulations, and regulations limiting the use of leverage. These exemptions permit hedge funds to engage in
leveraging and other sophisticated investment techniques to a much greater extent, which typically allows them to generate higher returns than other
investment vehicles. Of course, like mutual funds, hedge funds are subject to the anti-fraud provisions of U.S. federal securities laws.
Facts about Hedge Funds
Estimated to be a $1 trillion worldwide industry and growing at about 20% per year, with approximately 8350 active hedge funds in the world.
Includes a variety of investment strategies, some of which use leverage while others are more conservative and employ little or no leverage. Many hedge
fund strategies seek to reduce market risk specifically by shorting equities or derivatives.
Their returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities.
The popular misconception is that all hedge funds are volatile -- that they all use risky techniques and strategies and place large “bets” on stocks, currencies,
bonds, commodities, and gold, while using lots of leverage. In reality, less than 5% of hedge funds are of this sort. Most hedge funds use derivatives only for
hedging or don’t use derivatives at all, and many use no leverage.
Classification of Hedge Funds:
It is important to understand the differences between the various hedge fund strategies because all hedge funds are not the same -- investment returns,
volatility, and risk vary enormously among the different hedge fund strategies. Some strategies which are not correlated to equity markets are able to deliver
consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds.
Growth Fund Definition: The definition of a growth fund is a mutual or other fund that has it's core investments in emerging or growth companies. These funds
and the stocks within it do not pay high dividends, but offer the chance for high capital gains later on. These funds are usually more turbulent in up and down
years for the stock market. A growth fund is best for younger people or investors willing to assume some degree of risk.
Most portfolios should have some balance of these types of mutual funds. One of the characteristics of the stocks in growths are low dividend pay out ratios.
Since these stocks are normally emerging companies, the profit or net income that would normally go to shareholders in blue chip stocks - will be reinvested
into the growth fund itself. This helps explain the full definition of this type.
Trading. Trading growth type stock funds will depend on whether they are closed end or open end mutual funds. Closed end funds trade in the secondary
market, so there is no sales charge to worry about - only a commission. Open end stock funds are not meant for active trading. They are issued as new issues
and are then bought and sold directly with the growth fund itself. A sales charge may apply to each purchase.
Mutual growth investments are prices daily - once a day, to it's Net Asset Value. Any trading that is done during the day will be filled at the close of business
day. This makes it difficult to actively trade. Exchange traded funds (ETF's) allow for more active trading of growths.
Online Broker
Since the increase in Internet stock and investment trading, online stockbrokers and traders have become a source for people looking for quick execution and
low commission charges. Investment and stock firms have put major money and effort into gaining an online share of the market. For investors and traders, it
gives them the ability to trade more actively and buy and sell for less.
Most of these firms are not there to give personal advice or explain the risks associated with certain investments. If an investor is seeking more service and
willing to maybe pay a little more commission, then working with a full service brokerage firm might make more sense.
Some Online brokerage firms will provide trading platforms and software, along with real time quotes and fast execution.
Accredited investor
The examples and perspective in this article or section may not represent a worldwide view of the subject.
Accredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments, limited
partnerships, hedge funds, and angel investor networks. The term generally includes wealthy individuals and organizations such as a corporation, endowment,
or retirement plans.
In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars or have made at
least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year.
This rule came into effect in 1933 by way of the Securities Act of 1933. In Canada, the same prerequisites apply, however one's net worth must be a minimum
of one million dollars not including the value of the principal residence.
U.S. criteria. The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
a bank, insurance company, registered investment company, business development company, or small business investment company;
an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment
adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
a charitable organization, corporation, or partnership with assets exceeding $5 million;
a director, executive officer, or general partner of the company selling the securities;
a business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and
a reasonable expectation of the same income level in the current year; or
a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Proposed new accredited investor class for hedge funds. At an open meeting on December 13, 2006, the U.S. Securities and Exchange Commission (SEC)
voted to propose a change to the definition of "accredited investor" that, if adopted, would apply to offers and sales of securities issued by hedge funds and
other private investment pools to "accredited natural persons". The proposal requires "accredited natural person" to be both "accredited investors" under the
existing standards and own not less than $2.5 million in investments (as currently defined in the Investment Company Act for purposes of the Section 3(c)(7)
exemption) on the date an investment is made. The $2.5 million test will be periodically adjusted for inflation.
The SEC release estimates that the accredited natural person definition, if adopted as proposed, would significantly reduce the number of U.S. households that
are eligible to invest in private investment vehicles. By the SEC Staff’s calculation, approximately 8.47% of U.S. households currently qualify for accredited
investor status under Regulation D. The Staff estimates that this percentage would drop to approximately 1.3% with respect to investments in private investment
vehicles if the accredited natural person standard is adopted.
Reference: U.S. Securities and Exchange Commission on Accredited Investors. Category: Investment, Source: Wikipedia
A hedge fund is a private investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of activities than
other investment funds and also pays a performance fee to its investment manager. Each fund will have its own strategy which determines the type of
investments and the methods of investment it undertakes. Hedge funds as a class invest in a broad range of investments extending over shares, debt,
commodities and so forth.
As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of
methods, most notably short selling. However, the term "hedge fund" has come to be applied to many funds that do not actually hedge their investments, and
in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing return.
Hedge funds are typically open only to a limited range of professional or wealthy investors. This provides them with an exemption in many jurisdictions from
regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity of interests in the fund. A hedge fund will typically commit
itself to a particular investment strategy, investment types and leverage levels via statements in its offering documentation, thereby giving investors some
indication of the nature of the fund.
The net asset value of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Hedge funds dominate certain
specialty markets such as trading within derivatives with high-yield ratings and distressed debt.
History
Sociologist, author, and financial journalist Alfred W. Jones is credited with the creation of the first hedge fund in 1949. Jones believed that price
movements of an individual asset could be seen as having a component due to the overall market and a component due to the performance of the asset
itself. In order to neutralize the effect of overall market movement he balanced his portfolio by buying assets whose price he expected to be stronger than the
market and selling short assets he expected to be weaker than the market. He saw that price movements due to the overall market would be cancelled out
because if the overall market rose the loss on shorted assets would be cancelled by the additional gain on assets bought and vice-versa. Because the effect is
to 'hedge' that part of the risk due to overall market movements this became known as a hedge fund.
Industry size
Estimates of industry size vary widely due to the lack of central statistics; the lack of a single definition of hedge funds; and the rapid growth of the industry. As
a general indicator of scale the industry may have managed around $2.5 trillion at its peak in the summer of 2008. The credit crunch has caused assets
under management (AUM) to fall sharply through a combination of trading losses and the withdrawal of assets from funds by investors.
Fees
A hedge fund manager will typically receive both a management fee and a performance fee (also known as an incentive fee). Performance fees are closely
associated with hedge funds, and are intended to be an incentive for the investment manager to produce the largest returns he can. A typical manager will
charge fees of "2 and 20", which refers to a management fee of 2% of the fund's net asset value (or "NAV") per annum and a performance fee of 20% of the
fund's profit (being the increase in its NAV).
Fees are payable by the fund to the investment manager. They are therefore taken directly from the assets that the investor holds in the fund.
Management fees
As with other investment funds, the management fee is calculated as a percentage of the fund's net asset value (the total of the investors' capital accounts) at
the time when the fee becomes payable. Management fees typically range from 1% to 4% per annum, with 2% being the standard figure. Therefore, if a
fund has $1 billion of assets at year-end and charges a 2% management fee, the management fee will be $20 million. Management fees are usually
expressed as an annual percentage but are both calculated and paid monthly (or sometimes quarterly or weekly) at annualized rates.
Performance fees
One of the defining characteristics of hedge funds are performance fees (also known as incentive fees) which give a share of positive returns to the manager.
The manager's performance fee is calculated as a percentage of the fund's profits, counting both unrealized profits and actual realized trading profits.
Performance fees exist because investors are usually willing to pay managers more generously when the investors have themselves made money. Thus, the
performance fee is extremely lucrative for managers who perform well.
Typically, hedge funds charge from 20% of gross returns as a performance fee. However, the range is wide with highly regarded managers charging higher
fees. In particular, Steven Cohen's SAC Capital Partners charges a 3% management fee and a 35-50% performance fee, while Jim Simons' Renaissance
Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund.
Performance fees are intended to align the interests of manager and investor better than flat fees that are payable even when performance is poor. However,
performance fees are better for investors as said by many people, including notable investor Warren Buffett, should the portfolio is widely diversified and
managers do not take excessive risk rather than targeting high long-term returns. In an attempt to control this problem, fees are usually limited by a high water
mark and sometimes limited by a hurdle rate. Alternatively a "claw-back" provision may be included, whereby the investment manager might be required to
return performance fees when the value of the fund drops.
High water marks
A high water mark (also known as a loss carryforward provision) is often applied to a performance fee calculation. This means that the manager only receives
performance fees on the value of the fund that exceeds the highest net asset value it has previously achieved. For example, if a fund were launched at a
NAV (net asset value) per share of $100, which then rose to $130 in its first year, a performance fee would be payable on the $30 return for each share. If the
next year it dropped to $120, no fee is payable. If in the third year the NAV per share rises to $143, a performance fee will be payable only on the $13 return
from $130 to $143 rather than on the full return from $120 to $143.
This measure is intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. If a
high water mark is not used, a fund that ends alternate years at $100 and $110 would generate performance fee every other year, enriching the manager but
not the investors.
The mechanism does not provide complete protection to investors: an unscrupulous manager who has lost a significant percentage of the fund's value may
close the fund and start again with a clean slate, rather than continue working for no performance fee until the loss has been made good. This tactic is
dependent on the manager's ability to persuade investors to trust him or her with their money in the new fund.
Hurdle rates
Some managers specify a hurdle rate, signifying that they will not charge a performance fee until the fund's annualized performance exceeds a benchmark
rate, such as T-bill yield, LIBOR or a fixed percentage. This links performance fees to the ability of the manager to provide a higher return than an
alternative, usually lower risk, investment.
With a "soft" hurdle, a performance fee is charged on the entire annualized return if the hurdle rate is cleared. With a "hard" hurdle, a performance fee is
only charged on returns above the hurdle rate. Prior to the credit crisis of 2008 demand for hedge funds tended to outstrip supply, making hurdle rates
relatively rare.
Withdrawal/Redemption fees
Some managers charge investors a fee if they withdraw money from the fund before a certain period of time, typically one year, has elapsed since the money
was invested. The purpose is to encourage long-term investment in the fund: as a fund's investments need to be liquidated to raise cash for withdrawals, the
fee allows the fund manager to reduce the turnover of its own investments and invest in more complex, longer-term strategies. The fee may also dissuade
investors from withdrawing funds after periods of poor performance.
This fee is typically called a withdrawal fee where the fund is a limited partnership and a redemption fee where the fund is a corporate entity; it is also
sometimes known as a surrender charge.
Strategies
Hedge funds employ many different trading strategies, which are classified in many different ways, with no standard system used. Each strategy can be said to
be built from a number of different elements:
Style: global macro, directional, event driven, relative value (arbitrage), managed futures (CTA)
Market: equity, fixed income, commodity, currency
Instrument: long/short, futures, options
Exposure: directional, market neutral
Sector: emerging market, technology, healthcare etc.
Method: discretionary/qualitative (where the individual investments are selected by managers), systematic/quantitative (or "quant" - where the investments are
selected according to numerical methods using a computerized system)
Diversification: multi manager, multi strategy, multi fund, multi market
The four main strategy groups are based on the investment style and have their own risk and return characteristics. The most common label for a hedge fund
is "long/short equity", meaning that the fund takes both long and short positions in shares traded on public stock exchanges.
Global macro
(Macro, Trading) Anticipate to global macroeconomic events using all markets and instruments.
Discretionary macro - trading is done by investment managers instead of generated by software.
Systematic macro - trading is done purely mathematically, generated by software without human intervention.
Commodity Trading Advisors (CTA, Managed futures, Trading) - trading in futures (or options contracts) in commodity markets.
Systematic diversified - trading in diversified markets.
Systematic currency - trading in currency markets.
Trend following - profit from long-term or short-term trends.
Non-trend following (Counter trend) - profit from trend reversals.
Multi strategy - combination of discretionary and systematic macro.
Directional
(Equity hedge) Hedged investments with exposure to the equity market.
Long / short equity (Equity hedge) - long equity positions hedged with short sales of stocks or stock market index options.
Emerging markets - specialized in emerging markets, such as China, India etc.
Sector funds - expertise in niche areas such as technology, healthcare, biotechnology, pharmaceuticals, energy, basic materials.
Fundamental growth - invest in companies with more earnings growth than the broad equity market.
Fundamental value - invest in undervalued companies.
Quantitative Directional - equity trading using quantitative techniques.
Short bias - take advantage of declining equity markets using short positions.
Multi strategy - diversification through different styles to reduce risk.
Event driven
(Special situations) Exploit pricing inefficiencies caused by anticipated specific corporate events.
Distressed securities (Distressed debt) - specialized in companies trading at discounts to their value because of (potential) bankruptcy.
Merger arbitrage (Risk arbitrage) - exploit pricing inefficiencies between merging companies.
Special situations - specialized in restructuring companies or companies engaged in a corporate transaction.
Multi strategy - diversification through different styles to reduce risk.
Credit arbitrage - specialized in corporate fixed income securities.
Regulation D - specialized in private equities.
Activist - take large positions in companies and use the ownership to be active in the management
Relative value
(Arbitrage, Market neutral) Exploit pricing inefficiencies between related assets that are mispriced.
Fixed income arbitrage - exploit pricing inefficiencies between related fixed income securities.
Equity market neutral (Equity arbitrage) - being market neutral by maintaining a close balance between long and short positions.
Convertible arbitrage - exploit pricing inefficiencies between convertible securities and the corresponding stocks.
Fixed Income corporate - fixed income arbitrage strategy using corporate fixed income instruments.
Asset-backed securities (Fixed Income asset backed) - fixed income arbitrage strategy using asset-backed securities.
Credit long / short - as long / short equity but in credit markets instead of equity markets.
Statistical arbitrage - equity market neutral strategy using statistical models.
Volatility arbitrage - exploit the change in implied volatility instead of the change in price.
Yield alternatives - non fixed income arbitrage strategies based on the yield instead of the price.
Multi strategy - diversification through different styles to reduce risk.
Regulatory Arbitrage - the practice of taking advantage of regulatory differences between two or more markets.
Under certain circumstances an investor can completely hedge the risks of an investment, leaving pure profit. For example, at one time it was possible for
exchange traders to buy shares of, say, IBM on one exchange and simultaneously sell them on another exchange, leaving pure profit. Competition among
investors has leached away such profits, leaving hedge fund managers with trades that are partially hedged, at best. These trades still contain residual risks
which can be considerable.
Miscellaneous
Fund of hedge funds (Multi manager) - a hedge fund with a diversified portfolio of numerous underlying hedge funds to reduce risk.
Fund of fund of hedge funds (F3, F cube) - ultra diversified by investing in other funds of hedge funds.
Multi strategy - a hedge fund exploiting a combination of different hedge fund strategies to reduce market risk.
Multi manager - a hedge fund where the investment is spread along separate sub managers investing in their own strategy.
130-30 funds - unhedged equity fund with 130% long and 30% short positions, the market exposure is 100%.
Long only absolute return funds - partly hedged fund excluding short selling but allow derivatives.
Hedge fund risk
Investing in certain types of hedge fund can be a riskier proposition than investing in a regulated fund, despite a "hedge" being a means of reducing the risk
of a bet or investment. Many hedge funds have some of these characteristics:
Leverage - in addition to money invested into the fund by investors, a hedge fund will typically borrow money, with certain funds borrowing sums many times
greater than the initial investment. If a hedge fund has borrowed $9 for every $1 received from investors, a loss of only 10% of the value of the investments of
the hedge fund will wipe out 100% of the value of the investor's stake in the fund, once the creditors have called in their loans. In September 1998, shortly
before its collapse, Long Term Capital Management had $125 billion of assets on a base of $4 billion of investors' money, a leverage of over 30 times. It also
had off-balance sheet positions with a notional value of approximately $1 trillion.
Short selling - due to the nature of short selling, the losses that can be incurred on a losing bet are theoretically limitless, unless the short position directly
hedges a corresponding long position. Therefore, where a hedge fund uses short selling as an investment strategy rather than as a hedging strategy it can
suffer very high losses if the market turns against it. Ordinary funds very rarely use short selling in this way.
Appetite for risk - hedge funds are culturally more likely than other types of funds to take on underlying investments that carry high degrees of risk, such as
high yield bonds, distressed securities and collateral backed debt obligations based on sub-prime mortgages.
Lack of transparency - hedge funds are secretive entities with few public disclosure requirements. It can therefore be difficult for an investor to assess trading
strategies, diversification of the portfolio and other factors relevant to an investment decision.
Lack of regulation - hedge funds are not subject to as much oversight from financial regulators as regulated funds, and therefore some may carry undisclosed
structural risks.
Investors in hedge funds are, in most countries, required to be sophisticated investors who will be aware of the risk implications of these factors. They are
willing to take these risks because of the corresponding rewards: leverage amplifies profits as well as losses; short selling opens up new investment
opportunities; riskier investments typically provide higher returns; secrecy helps to prevent imitation by competitors; and being unregulated reduces costs and
allows the investment manager more freedom to make decisions on a purely commercial basis.
Hedge fund structure
A hedge fund is a vehicle for holding and investing the funds of its investors. The fund itself has no employees and no assets other than its investment
portfolio and cash, while its investors are its clients. The portfolio is managed by the hedge fund manager, which is the actual business and has employees.
Saying a person works at a hedge fund is not technically correct, they work at the hedge fund manager.
Many service providers assist the hedge fund and hedge fund manager. The primary ones are:
Prime broker – prime brokerage services include lending money, acting as counter-party to derivative contracts, lending securities for the purpose of short
selling, trade execution, clearing and settlement. Until recently Prime brokers were typically large investment banks.
Administrator – the administrator typically deals with the issue and redemption of interests and shares, and calculates the net asset value of the fund. In some
funds, particularly in the U.S. some of these functions are performed by the hedge fund manager, a practice that gives rise to a potential conflict of interest
inherent in having the investment manager both determine the NAV and benefit from its increase through performance fees. Outside of the U.S. regulations
often require this role to be taken by a third party.
Distributor - the distributor is responsible for marketing the fund to potential investors. Frequently this role is taken by the hedge fund manager.
Domicile
The specific legal structure of a hedge fund – in particular its domicile and the type of legal entity used – is usually determined by the tax environment of
the fund’s expected investors. Regulatory considerations will also play a role. Many hedge funds are established in offshore tax havens so that the fund can
avoid paying tax on the increase in the value of its portfolio. An investor will still pay tax on any profit he makes when he realizes its investment, and the
investment manager, usually based in a major financial centre, will pay tax on the fees that he receives for managing the fund.
At end of 2007, 52% of the number of hedge funds were registered offshore. The most popular offshore location was the Cayman Islands (57% of number of
offshore funds), followed by British Virgin Islands (16%) and Bermuda (11%). The other offshore centers are the Isle of Man and Mauritius. The US was the
most popular onshore location (with funds mostly registered in Delaware) accounting for 65% of the number of onshore funds, followed by Europe with 31%.
Manager locations
In contrast to the funds themselves, hedge fund managers are primarily located onshore in order to draw on the major pools of financial talent and to be
close to investors. With the bulk of hedge fund investment coming from the US East coast – principally New York City and the Gold Coast area of Connecticut
– this has become the leading location for hedge fund managers. It was estimated there were 7,000 hedge funds in the United States in 2004.
London is Europe’s leading centre for hedge fund managers, with three-quarters of European hedge fund investments, about $400bn (£200bn), at the end of
2007. Australia was the most important centre for the management of Asia-Pacific hedge funds, with managers located there accounting for approximately a
quarter of the $140bn of hedge fund assets managed in the Asia-Pacific region in 2008.
The legal entity
Limited partnerships are principally used for hedge funds aimed at US-based investors who pay tax, as the investors will receive relatively favorable tax
treatment in the US. The general partner of the limited partnership is typically the investment manager (though is sometimes an offshore corporation) and the
investors are the limited partners. Offshore corporate funds are used for non-US investors and US entities that do not pay tax (such as pension funds), as such
investors do not receive the same tax benefits from investing in a limited partnership. Unit trusts are typically marketed to Japanese investors. Other than
taxation, the type of entity used does not have a significant bearing on the nature of the fund.
Many hedge funds are structured as master/feeder funds. In such a structure the investors will invest into a feeder fund which will in turn invest all of its assets
into the master fund. The assets of the master fund will then be managed by the investment manager in the usual way. This allows several feeder funds (e.g.
an offshore corporate fund, a US limited partnership and a unit trust) to invest into the same master fund, allowing an investment manager the benefit of
managing the assets of a single entity while giving all investors the best possible tax treatment.
The investment manager, which will have organized the establishment of the hedge fund, may retain an interest in the hedge fund, either as the general
partner of a limited partnership or as the holder of “founder shares” in a corporate fund. Founder shares typically have no economic rights, and voting rights
over only a limited range of issues, such as selection of the investment manager – most of the fund’s decisions are taken by the board of directors of the fund,
which is nominally independent but often appears loyal to the investment manager.
Open-ended nature
Hedge funds are typically open-ended, in that the fund will periodically issue additional partnership interests or shares directly to new investors, the price of
each being the net asset value (“NAV”) per interest/share. To realize the investment, the investor will redeem the interests or shares at the NAV per
interest/share prevailing at that time. Therefore, if the value of the underlying investments has increased (and the NAV per interest/share has therefore also
increased) then the investor will receive a larger sum on redemption than it paid on investment. Investors do not typically trade shares among themselves and
hedge funds do not typically distribute profits to investors before redemption. This contrasts with a closed-ended fund, which has a limited number of shares
which are traded among investors, and which distributes its profits.
Listed funds
Corporate hedge funds often list their shares on smaller stock exchanges, such as the Irish Stock Exchange, as this provides a low level of regulatory oversight
that is required by some investors. Shares in the listed hedge fund are not generally traded on the exchange.
A fund listing is distinct from the listing or initial public offering (“IPO”) of shares in an investment manager. Although widely reported as a "hedge-fund IPO",
the IPO of Fortress Investment Group LLC was for the sale of the investment manager, not of the hedge funds that it managed.
Regulatory Issues
The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject.
Part of what gives hedge funds their competitive edge, and their cachet in the public imagination, is that they straddle multiple definitions and categories;
some aspects of their dealings are well-regulated, others are unregulated or at best quasi-regulated.
US regulation
The typical public investment company in the United States is required to be registered with the U.S. Securities and Exchange Commission (SEC). Mutual
funds are the most common type of registered investment companies. Aside from registration and reporting requirements, investment companies are subject
to strict limitations on short-selling and the use of leverage. There are other limitations and restrictions placed on public investment company managers,
including the prohibition on charging incentive or performance fees.
Although hedge funds fall within the statutory definition of an investment company, the limited-access, private nature of hedge funds permits them to operate
pursuant to exemptions from the registration requirements. The two major exemptions are set forth in Sections 3(c)1 and 3(c)7 of the Investment Company
Act of 1940. Those exemptions are for funds with 100 or fewer investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3(c) 7
Fund"). A qualified purchaser is an individual with over US$5,000,000 in investment assets. (Some institutional investors also qualify as accredited investors
or qualified purchasers.) A 3(c)1 Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number of investors. However, a 3(c)7
fund with more than 499 investors must register its securities with the SEC. Both types of funds can charge performance or incentive fees.
In order to comply with 3(c)(1) or 3(c)(7), hedge funds are sold via private placement under the Securities Act of 1933. Thus interests in a hedge fund cannot
be offered or advertised to the general public, and are normally offered under Regulation D. Although it is possible to have non-accredited investors in a
hedge fund, the exemptions under the Investment Company Act, combined with the restrictions contained in Regulation D, effectively require hedge funds to
be offered solely to accredited investors. An accredited investor is an individual person with a minimum net worth of US $1,000,000 or, alternatively, a
minimum income of US$200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year. For
banks and corporate entities, the minimum net worth is $5,000,000 in invested assets.
The regulatory landscape for Investment Advisors is changing, and there have been attempts to register hedge fund investment managers. There are
numerous issues surrounding these proposed requirements. One issue of importance to hedge fund managers is the requirement that a client who is charged
an incentive fee must be a "qualified client" under Advisers Act Rule 205-3. To be a qualified client, an individual must have US$750,000 in assets invested
with the adviser or a net worth in excess of US$1.5 million, or be one of certain high-level employees of the investment adviser.
For the funds, the trade-off of operating under these exemptions is that they have fewer investors to sell to, but they have few government-imposed restrictions
on their investment strategies. The presumption is that hedge funds are pursuing more risky strategies, which may or may not be true depending on the fund,
and that the ability to invest in these funds should be restricted to wealthier investors who are presumed to be more sophisticated and who have the financial
reserves to absorb a possible loss.
In December 2004, the SEC issued a rule change that required most hedge fund advisers to register with the SEC by February 1, 2006, as investment advisers
under the Investment Advisers Act. The requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over 15 investors.
The SEC stated that it was adopting a "risk-based approach" to monitoring hedge funds as part of its evolving regulatory regimen for the burgeoning industry.]
The rule change was challenged in court by a hedge fund manager, and in June 2006, the U.S. Court of Appeals for the District of Columbia overturned it
and sent it back to the agency to be reviewed. See Goldstein v. SEC.
Although the SEC is currently examining how it can address the Goldstein decision, commentators have stated that the SEC currently has neither the staff
nor expertise to comprehensively monitor the estimated 8,000 U.S. and international hedge funds. See New Hedge Fund Advisor Rule. One of the
Commissioners, Roel Campos, has said that the SEC is forming internal teams that will identify and evaluate irregular trading patterns or other phenomena
that may threaten individual investors, the stability of the industry, or the financial world. "It's pretty clear that we will not be knocking on [hedge fund] doors
very often," Campos told several hundred hedge fund managers, industry lawyers and others. And even if it did, "the SEC will never have the degree of
knowledge or background that you do."
In February 2007, the President's Working Group on Financial Markets rejected further regulation of hedge funds and said that the industry should instead
follow voluntary guidelines.
Comparison to private equity funds
Hedge funds are similar to private equity funds in many respects. Both are lightly regulated, private pools of capital that invest in securities and compensate
their managers with a share of the fund's profits. Most hedge funds invest in relatively liquid assets, and permit investors to enter or leave the fund, perhaps
requiring some months notice. Private equity funds invest primarily in very illiquid assets such as early-stage companies and so investors are "locked in" for
the entire term of the fund. Hedge funds often invest in private equity companies' acquisition funds.
Between 2004 and February 2006 some hedge funds adopted 25 month lock-up rules expressly to exempt themselves from the SEC's new registration
requirements and cause them to fall under the registration exemption that had been intended to exempt private equity funds.
Comparison to U.S. mutual funds
Like hedge funds, mutual funds are pools of investment capital (i.e., money people want to invest). However, there are many differences between the two,
including:
Mutual funds are regulated by the SEC, while hedge funds are not
A hedge fund investor must be an accredited investor with certain exceptions (employees, etc.)
Mutual funds must price and be liquid on a daily basis
Some hedge funds that are based offshore report their prices to the Financial Times, but for most there is no method of ascertaining pricing on a regular
basis. Additionally, mutual funds must have a prospectus available to anyone that requests one (either electronically or via US postal mail), and must
disclose their asset allocation quarterly, while hedge funds do not have to abide by these terms.
Hedge funds also ordinarily do not have daily liquidity, but rather "lock up" periods of time where the total returns are generated (net of fees) for their investors
and then returned when the term ends, through a pass-through requiring CPAs and US Tax W-forms. Hedge fund investors tolerate these policies because
hedge funds are expected to generate higher total returns for their investors versus mutual funds.
Recently, however, the mutual fund industry has created products with features that have traditionally only been found in hedge funds.
Mutual funds have appeared which utilize some of the trading strategies noted above. Grizzly Short Fund (GRZZX), for example, is always net short, while
Arbitrage Fund (ARBFX) specializes in merger arbitrage. Such funds are SEC regulated, but they offer hedge fund strategies and protection for mutual fund
investors.
Also, a few mutual funds have introduced performance-based fees, where the compensation to the manager is based on the performance of the fund.
However, under Section 205(b) of the Investment Advisers Act of 1940, such compensation is limited to so-called "fulcrum fees". Under these arrangements,
fees can be performance-based so long as they increase and decrease symmetrically.
For example, the TFS Capital Small Cap Fund (TFSSX) has a management fee that behaves, within limits and symmetrically, similarly to a hedge fund "0
and 50" fee: A 0% management fee coupled with a 50% performance fee if the fund outperforms its benchmark index. However, the 125 bp base fee is
reduced (but not below zero) by 50% of under-performance and increased (but not to more than 250 bp) by 50% of out-performance.
Offshore regulation
Many offshore centers are keen to encourage the establishment of hedge funds. To do this they offer some combination of professional services, a favorable
tax environment, and business-friendly regulation. Major centers include Cayman Islands, Dublin, Luxembourg, British Virgin Islands and Bermuda. The
Cayman Islands have been estimated to be home to about 75% of world’s hedge funds, with nearly half the industry's estimated $1.225 trillion AUM.
Hedge funds have to file accounts and conduct their business in compliance with the requirements of these offshore centres. Typical rules concern
restrictions on the availability of funds to retail investors (Dublin), protection of client confidentiality (Luxembourg) and the requirement for the fund to be
independent of the fund manager.
Many offshore hedge funds, such as the Soros funds, are structured as mutual funds rather than as limited partnerships.
Proposed US regulation
Hedge funds are exempt from regulation in the United States. Several bills have been introduced in the 110th Congress (2007-08), however, relating to such
funds. Among them are:
S. 681, a bill to restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation;
H.R. 3417, which would establish a Commission on the Tax Treatment of Hedge Funds and Private Equity to investigate imposing regulations;
S. 1402, a bill to amend the Investment Advisors Act of 1940, with respect to the exemption to registration requirements for hedge funds; and
S. 1624, a bill to amend the Internal Revenue Code of 1986 to provide that the exception from the treatment of publicly traded partnerships as corporations
for partnerships with passive-type income shall not apply to partnerships directly or indirectly deriving income from providing investment adviser and related
asset management services.
S. 3268, a bill to amend the Commodity Exchange Act to prevent excessive price speculation with respect to energy commodities. The bill would give the
federal regulator of futures markets the resources to detect, prevent, and punish price manipulation and excessive speculation.
None of the bills has received serious consideration yet.
Hedge Fund Indices
There are a many indices that track the hedge fund industry, and these fall into three main categories. In their historical order of development they are Non-
investable, Investable and Clone.
In traditional equity investment, indices play a central and unambiguous role. They are widely accepted as representative, and products such as futures and
ETFs provide investable access to them in most developed markets. However hedge funds are illiquid, heterogeneous and ephemeral, which makes it hard to
construct a satisfactory index. Non-investable indices are representative, but due to various biases their quoted returns may not be available in practice.
Investable indices achieve liquidity at the expense of limited representativeness. Clone indices seek to replicate some statistical properties of hedge funds
but are not directly based on them. None of these approaches is wholly satisfactory.
Non-investable indices
Non-investable indices are indicative in nature, and aim to represent the performance of some database of hedge funds using some measure such as mean,
median or weighted mean from a hedge fund database. The databases have diverse selection criteria and methods of construction, and no single database
captures all funds. This leads to significant differences in reported performance between different indices.
Although they aim to be representative, non-investable indices suffer from a lengthy and largely unavoidable list of biases.
Funds’ participation in a database is voluntary, leading to self-selection bias because those funds that choose to report may not be typical of funds as a
whole. For example, some do not report because of poor results or because they have already reached their target size and do not wish to raise further money.
The short lifetimes of many hedge funds means that there are many new entrants and many departures each year, which raises the problem of survivorship
bias. If we examine only funds that have survived to the present, we will overestimate past returns because many of the worst-performing funds have not
survived, and the observed association between fund youth and fund performance suggests that this bias may be substantial.
When a fund is added to a database for the first time, all or part of its historical data is recorded ex-post in the database. It is likely that funds only publish
their results when they are favorable, so that the average performances displayed by the funds during their incubation period are inflated. This is known as
"instant history bias” or “backfill bias”.
Investable indices
Investable indices are an attempt to reduce these problems by ensuring that the return of the index is available to shareholders. To create an investable
index, the index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index. When investors
buy these products the index provider makes the investments in the underlying funds. This makes an investable index similar in some ways to a fund of hedge
funds portfolio.
Only Hedge Funds that agree to accept investments on terms acceptable to the constructor of the index are included in the index, so that the provider can
sell products based on it. This guarantees that the indices are investable, which is an attractive property for an index because it makes the index more
relevant to the choices available to investors in practice.
However, investable indices do not represent the total universe of hedge funds. Most seriously they may under-represent the more successful managers
because these may find the index terms unattractive, for example due to reduced fees or onerous redemption terms being demanded by the provider.
Clone indices
The most recent addition to the field approach the problem in a different manner. Instead of reflecting the performance of actual hedge funds they take a
statistical approach to the analysis of historic hedge fund returns, and use this to construct a model of how hedge fund returns respond to the movements of
various investable financial assets. This model is then used to construct an investable portfolio of those assets. This makes the index investable, and in
principle they can be as representative as the hedge fund database from which they were constructed.
Unfortunately they rely on a statistical modelling process. As clone indices have are relatively short history it is not yet possible to know how reliable this
process will be in practice.
Debates and controversies
Systemic risk
Hedge funds came under heightened scrutiny as a result of the failure of Long-Term Capital Management (LTCM) in 1998, which necessitated a bailout
coordinated (but not financed) by the U.S. Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster. The
excessive leverage (through derivatives) that can be used by hedge funds to achieve their return is outlined as one of the main factors of the hedge funds'
contribution to systemic risk.
The ECB (European Central Bank) issued a warning in June 2006 on hedge fund risk for financial stability and systemic risk: "... the increasingly similar
positioning of individual hedge funds within broad hedge fund investment strategies is another major risk for financial stability which warrants close
monitoring despite the essential lack of any possible remedies. This risk is further magnified by evidence that broad hedge fund investment strategies have
also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades." However the ECB
statement has been disputed by parts of the financial industry.
The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in June 2007. The funds invested in mortgage-backed
securities. The funds' financial problems necessitated an infusion of cash into one of the funds from Bear Stearns but no outside assistance. It was the largest
fund bailout since Long Term Capital Management's collapse in 1998. The U.S. Securities and Exchange commission is investigating.
Transparency
As private, lightly regulated partnerships, hedge funds are not obliged to disclose their activities to third parties. This is in contrast to a regulated mutual fund
(or unit trust) which will typically have to meet regulatory requirements for disclosure. An investor in a hedge fund usually has direct access to the investment
advisor of the fund, and may enjoy more personalized reporting than investors in retail investment funds. This may include detailed discussions of risks
assumed and significant positions. However, this high level of disclosure is not available to non-investors, contributing to hedge funds' reputation for secrecy,
while several hedge funds are offer very limited transparency even to investors.
Some hedge funds, mainly American, do not use third parties either as the custodian of their assets or as their administrator (who will calculate the NAV of
the fund). This can lead to conflicts of interest, and in extreme cases can assist fraud. In a recent example, Kirk Wright of International Management
Associates has been accused of mail fraud and other securities violations[37] which allegedly defrauded clients of close to $180 million.
Market capacity
The rather disappointing hedge fund performance of the past five years calls into question the alternative investment industry's value proposition. Alpha
appears to have been becoming rarer for two related reasons. First, the increase in traded volume may have been reducing the market anomalies that are a
source of hedge fund performance. Second, the remuneration model is attracting more managers, which may dilute the talent available in the industry,
though these causes are disputed
U.S. Investigations
In June 2006. the Senate Judiciary Committee began an investigation into the links between hedge funds and independent analysts
The SEC is also focusing resources on investigating insider trading by hedge funds.
Performance measurement
The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. Traditional indicators
(Sharpe, Treynor, Jensen) work best when returns follow a symmetrical distribution. In that case, risk is represented by the standard deviation. Unfortunately,
hedge fund returns are not normally distributed, and hedge fund return series are auto-correlated. Consequently, traditional performance measures suffer from
theoretical problems when they are applied to hedge funds, making them even less reliable than is suggested by the shortness of the available return series.
Innovative performance measures have been introduced in an attempt to deal with this problem: Modified Sharpe ratio by Gregoriou and Gueyie (2003),
Omega by Keating and Shadwick (2002), Alternative Investments Risk Adjusted Performance (AIRAP) by Sharma (2004), and Kappa by Kaplan and Knowles
(2004). However, there is no consensus on the most appropriate absolute performance measure, and traditional performance measures are still widely used in
the industry.
Value in mean/variance efficient portfolios
According to Modern Portfolio Theory, rational investors will seek to hold portfolios that are mean/variance efficient (that is, portfolios offer the highest level
of return per unit of risk, and the lowest level of risk per unit of return). One of the attractive features of hedge funds (in particular market neutral and similar
funds) is that they sometimes have a modest correlation with traditional assets such as equities. This means that hedge funds have a potentially quite
valuable role in investment portfolios as diversifiers, reducing overall portfolio risk.
However, there are three reasons why one might not wish to allocate a high proportion of assets into hedge funds. These reasons are:
Hedge funds are highly individual and it is hard to estimate the likely returns or risks;
Hedge funds’ low correlation with other assets tends to dissipate during stressful market events, making them much less useful for diversification than they may
appear; and Hedge fund returns are reduced considerably by the high fee structures that are typically charged.
Several studies have suggested that hedge funds are sufficiently diversifying to merit inclusion in investor portfolios, but this is disputed for example by Mark
Krtitzman who performed a mean-variance optimization calculation on an opportunity set that consisted of a stock index fund, a bond index fund, and ten
hypothetical hedge funds. The optimizer found that a mean-variance efficient portfolio did not contain any allocation to hedge funds, largely because of the
impact of performance fees. To demonstrate this, Kritzman repeated the optimization using an assumption that the hedge funds incurred no performance
fees. The result from this second optimization was an allocation of 74% to hedge funds.
The other factor reducing the attractiveness of hedge funds in a diversified portfolio is that they tend to under-perform during equity bear markets, just when
an investor needs part of their portfolio to add value. For example, in January-September 2008, the Credit Suisse/Tremont Hedge Fund Index was down
9.87%. According to the same index series, even "dedicated short bias" funds had a return of -6.08% during September 2008. In other words, even though
low average correlations may appear to make hedge funds attractive this may not work in turbulent period, for example around the collapse of Lehman
Brothers in September 2008.
Impact on other investment sectors
The hedge fund remuneration structure is attractive to all investment managers generally, which tends to blur the definition of hedge funds. Indeed, it has
been joked that hedge funds are best viewed "... not as a unique asset class or investment strategy, but as a unique “fee structure“".
Hedge fund data
Top performing
The top 50 performing hedge funds, based on average annual return over the previous three years, were ranked by Barron's Online in October 2007 (Hedge
Fund 50). The top 10 are as follows:
RAB Special Situations Fund (RAB Capital, London) - 47.69%
The Children's Investment Fund (TCI), (The Children's Investment Fund Management, London) - 44.27%
Highland CDO Opportunity Fund (Highland Capital Management, Dallas) - 43.98%
BTR Global Opportunity Fund, Class D (Salida Capital, Toronto) - 43.42%
SR Phoenicia Fund (Sloane Robinson, London) - 43.10%
Atticus European Fund (Atticus Management, New York) - 40.76%
Gradient European Fund A (Gradient Capital Partners, London) - 39.18%
Polar Capital Paragon Absolute Return Fund (Polar Capital Partners, London) - 38.00%
Paulson Enhanced Partners Fund (Paulson & Co., New York) - 37.97%
Firebird Global Fund (Firebird Management, New York) - 37.18%
Because of the unavailability of reliable figures, the top 50 list excludes funds such as Renaissance Technologies' Renaissance Medallion Fund and ESL
Investments' ESL Partners (each thought to have returned an average of over 35% in the previous 3 years) and funds by SAC Capital and Appaloosa
Management, which might otherwise have made the list.
The list also excludes funds with a net asset value of less than $250 million. The returns are net of fees.
Highest-earning managers
A manager's earnings from a hedge fund are his share of the performance fee plus 100% of the capital gains on his own equity stake in the fund. Exact
figures are not made publicly available, meaning that all reported figures are estimations, but several publications publish annual lists of top earning hedge
fund managers.
Trader Monthly's list of top 10 earners among hedge fund managers in 2007 was:
John Paulson, Paulson & Co. - $3 billion+
Philip Falcone, Harbinger Capital Partners - $1.5-$2 billion
Jim Simons, Renaissance Technologies - $1 billion
Steven A. Cohen, SAC Capital Advisors - $1 billion
Ken Griffin, Citadel Investment Group - $1–$1.5 billion
Chris Hohn, The Children's Investment Fund Management (TCI) - $800–$900 million
Noam Gottesman, GLG Partners - $700–$800 million
Alan Howard, Brevan Howard Asset Management - $700–$800 million
Pierre Lagrange, GLG Partners - $700–$800 million
Paul Tudor Jones, Tudor Investment Corp. - $600–$700 million
Trader Monthly's top 3 in 2006 were:
John D. Arnold, Centaurus Energy - $1.5-$2 billion
Jim Simons, Renaissance Technologies - $1.5-$2 billion
Eddie Lampert, ESL Investments - $1-$1.5 billion
Trader Monthly's top 3 in 2005 were:
T. Boone Pickens, BP Capital Management - $1.5 billion+
Steven A. Cohen, SAC Capital Advisers - $1 billion+
Jim Simons, Renaissance Technologies - $900 million-$1 billion
In comparison, Institutional Investor's list of top 3 earners among hedge fund managers in 2007 were:
John Paulson, Paulson & Co. - $3.7 billion
George Soros, Soros Fund Management - $2.9 billion
Jim Simons, Renaissance Technologies - $2.8 billion
Institutional Investor's 2005 top earner was Jim Simons with $1.6 billion, and their 2004 top earner was Edward Lampert of ESL Investments, who earned
$1.02 billion during the year.
Largest by assets
Single manager funds as of March 5, 2008:
Name AUM
JP Morgan $44.7bn
Farallon Capital $36bn
Bridgewater Associates $36bn
Renaissance Technologies $34bn
Och-Ziff Capital Management $33.2bn
Goldman Sachs Asset Management $32.5bn
DE Shaw $32.2bn
Paulson and Company $29bn
Barclays Global Investors $18.9bn
Man Investments $18.8bn
ESL Investments $17.5bn
Notable companies
Amaranth Advisors
Bernard L. Madoff Investment Securities LLC ( MADOFF GOT INVOLVED IN AN UNFORGIVABLE FRAUD)
Bridgewater Associates
Citadel Investment Group
D.E. Shaw
Fortress Investment Group
Goldman Sachs Asset Management
Long Term Capital Management
Man Group
Moore Capital Management
RAB Capital
Renaissance Technologies
Soros Fund Management
The Children's Investment Fund Management (TCI)
Bear Stearns Asset Management
Related topics:
130-30 funds
Securities lending
Mutual funds
Mutual-fund scandal (2003)
Finance
Financial markets
Financial regulation
Global assets under management
Securities
Taxation of private equity and hedge funds
Trading strategy
Fund derivatives
Commodity pool
Derivatives market
Investment fund
Venture capital
References
^ "Hedge Funds Do About 60% Of Bond Trading, Study Says", The Wall Street Journal (August 30, 2007). Retrieved on 19 December 2007. Durbin Hunter
^ a b AIMA Roadmap to Hedge Funds
^ http://www.compoundinghappens.com/performance_fees.htm CompoundingHappens.com Performance fees page
^ http://www.compoundinghappens.com/performance_fees.htm CompoundingHappens.com Performance fees page
^ http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html?ref=yourmoney New York Times, "2 + 20, And Other Hedge Math", Mark Hulbert,
March 4 2007.
^ Hedge Fund Math: Why Fees Matter (Newsletter), Epoch Investment Partners Inc.
^ Forbes 400 Richest Americans: Stephen A. Cohen
^ Loomis, Carol J. "Buffett's Big Bet", Fortune Magazine, June 9 2008.
^ Hedge Funds: Fees Down? Close Shop
^ Hedge Funds: Fees Down? Close Shop
^ http://riskinstitute.ch/146490.htm Lessons from the Collapse of Hedge Fund, Long-Term Capital Management
^ Hedge Funds, pg 7 International Financial Services London
^ http://sec.gov/rules/final/ia-2333.htm#IA
^ Hedge Funds, pg 2 International Financial Services London
^ Fortress files for first US hedge fund IPO, Marketwatch
^ FORTRESS INVESTMENT GROUP LLC, SEC Registration Statement
^ The Investment Company Act of 1940
^ The Investment Company Act of 1940
^ http://www.hedgefundworld.com/forming_a_hedge_fund.htm
^ a b General Rules and Regulations promulgated under the Securities Act of 1933
^ Rules and Regulations promulgated under the Investment Advisers Act of 1940
^ Registration Under the Advisers Act of Certain Hedge Fund Advisers
^ Registration Under the Advisers Act of Certain Hedge Fund Advisers
^ Officials Reject More Oversight of Hedge Funds
^ Working Group Releases Common Approach to Private Pools of Capital Guidance on hedge fund issues focuses on systemic risk, investor protection
^ The Investment Advisers Act of 1940
^ http://www.tfscapital.com/products/mutual/files/Prospectus.pdf
^ Institutional Investor, May 15, 2006, Article Link, although statistics in the Hedge Fund industry are notoriously speculative
^ http://www.ustreas.gov/press/releases/reports/hedgfund.pdf
^ ECB Financial Stability Review June 2006, p. 142
^ Gary Duncan (2006-06-02). "ECB warns on hedge fund risk", The Times. Retrieved on 1 May 2007.
^ edhec-risk.com
^ Blowing up the Lab on Wall Street
^ Times Online, "SEC Probing Bear Stearns hedge funds," June 27, 2007
^ SEC v. Kirk S. Wright, International Management Associates, LLC; International Management Associates Advisory Group, LLC; International Management
Associates Platinum Group, LLC; International Management Associates Emerald Fund, LLC; International Management Associates Taurus Fund, LLC;
International Management Associates Growth & Income Fund, LLC; International Management Associates Sunset Fund, LLC; Platinum II Fund, LP; and
Emerald II Fund, LP, Civil Action
^ Hedge fund manager faces fraud charges
^ Géhin and Vaissié, 2006, The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy, The Journal of
Alternative Investments, Vol. 9, No. 1, pp. 9-18
^ Scrutiny Urged for Hedge Funds
^ "Testimony Concerning Insider Trading by Linda Chatman Thomsen", Securities and Exchange Commission (September 26, 2006). Retrieved on 19
December 2007.
^ "Hedge Funds to Face More Scrutiny From U.S. Market Regulators", Bloomberg News (December 5, 2006). Retrieved on 19 December 2007.
^ CompoundingHappens.com page on “Portfolio Risk Measurement and Management”
^ ’’Portfolio Efficiency with Performance Fees’’, Economics and Political Strategy (newsletter), February 2007, Peter L. Bernstein Inc.
^ Hulbert, Mark ‘’2 + 20, and Other Hedge Fund Math’’, New York Times, March 4, 2007.
^ "Absolute Returns? What Has Been Happening to Hedge Funds?", CompoundingHappens.com
^ Credit Suisse/Tremont Hedge Index web page
^ http://allaboutalpha.com/blog/2008/09/25/annus-horribilis-for-hedge-funds-illustrates-benefits-of-performance-based-fees/ All about Alpha: Annus horribilis
for hedge funds illustrates benefits of performance-based fees
^ High Performance - Barron's Online
^ "Trader Monthly's Top 100 for 2007 Unveiled". 1440 Wall Street, April 7, 2008. Retrieved on May 25, 2008.
^ Traders Monthly. Top Hedge Fund Earners of 2005.
^ "Best-Paid Hedge Fund Managers". Institutional Investor, Alpha magazine, May 25, 2008. Retrieved on May 25, 2008.
^ "$363M is average pay for top hedge fund managers". Institutional Investor, Alpha magazine (USA TODAY article, May 26, 2006). Retrieved on May 25,
2008.
^ The Billion Dollar Man: Edward Lampert Leads Institutional Investor's Alpha's Ranking of the World's 25 Highest-Paid Hedge Fund Managers in 2004.
^ http://www.ft.com/cms/s/0/077f79ee-ea57-11dc-b3c9-0000779fd2ac.html?dlbk
Links
Center for International Securities and Derivatives Markets at the University of Massachusetts Amherst is a research center specializing in hedge fund research
Hedge Fund Research Initiative of the International Center for Finance at the Yale School of Management
The Hedge Fund Journal - covers the European hedge fund industry; from London, UK. Source: Wikipedia
Stock, Stock Market and Trading
XXX Inc (XXXX) (NASDAQ). Confidence: High (VP7, SS375) (SR1); Price: $2.41, EPS last 12 months: $0.20 / 12-08: $0.23 / 12-09: $0.27, EPS
Growth Next Five Years: 40.00 %,
Number of Analysts: 10; Mean: n/a, Return on Equity: 29.38 %; Net Profit Margin: 19.29 %, Debt to Equity Ratio: 0.0; P/E Ratio: 12.00 ; Internet Service
Providers: 26.50,
Price Target: $375.09; Rate of Return: 15,563 %
Name & Symbol IV CP PT Return
Cubist Pharmac.(CBST) 25.45 18.75 67.67 361
Previous Day's Closing Price >= 1, Book Value/Share >= Previous Day's Closing Price, P/E Ratio: Current <= 10, EPS Growth Next Yr >= 20,
EPS Growth Next 5 Yr Display Only,
Current Yr Growth Rate Display Only, Avg. Daily Vol. Last Qtr. >= 100,000, Return on Equity >= 12, Net Profit Margin >= 10, Debt/Equity Ratio <= 0.5,
Symbol, Company Name, (Jan/09) Price, Book Value, P/E Ratio, EPS Gr Next Yr, ROE, N Profit M
BLDPD, Ballard Power Systems Inc 1.04 1.76 2.90 42.60 17.47 59.62
CPSL, China Precision Steel Inc 1.25 2.65 3.60 20.90 17.22 18.18
POWR, Power Secure International Inc 3.27 4.15 3.10 38.60 29.83 12.42
SWKS, Skyworks Solutions 4.11 5.70 6.40 39.40 12.83 12.91
RICK, Ricks Cabaret International Inc 4.11 8.76 4.30 41.50 14.95 12.73
GCOM, Globecomm Systems Inc 5.36 7.37 4.40 69.30 18.13 12.63
BMA, Banco Macro SA, 10.82 11.72 3.90 22.10 24.42 27.63
HURC, Hurco Cos Inc 12.95 19.23 3.70 25.00 20.37 10.05
RTI, RTI International Metals, Inc 13.53 27.00 4.30 28.40 13.17 12.33
CRDN, Ceradyne Inc 22.55 23.72 5.20 22.90 20.81 16.48
AXS, Axis Capital Holdings Ltd 26.69 33.34 8.60 62.20 12.31 18.53
PTP, Platinum Underwriters Hldgs Ltd 30.56 37.15 7.20 24.10 13.45 20.13
Fundamental Screens: Fundamental screens focus on sales, profits, and other business factors of the underlying companies.
Cheapest Stocks of Large, Growing Companies: Stocks of companies with market caps greater than $5 billion that are expected to grow earnings at least 20%
next year but have price/earnings ratios less than 20 and price/sales ratios less than 1.5.
Highest-Yielding S&P 500 Stocks: Stocks of companies in the Standard & Poor's 500 Index that have the highest dividend yields. These are often considered
the index's most undervalued stocks because their prices are low relative to their dividends.
Dogs of the Dow: Stocks in the Dow Jones Industrial Average with the highest dividend yield lowest price/earnings ratio and lowest price.
Contrarian Strategy: This approach is based on the idea that the market will eventually rediscover out-of-favor stocks and bring the high-flyers back down. It
looks for medium to large cap stocks with low price/earnings ratios and a potentially strong financial condition.
GARP Go-Getters: This screen, based on the so-called "growth at a reasonable price" approach, focuses on finding opportunities at modest risk in smaller
capitalization stocks.
Great Expectations: This screen is biased toward smaller companies and looks across all sectors for beaten-up stocks with a lot of potential growth ahead. The
screen may be particularly useful for "value" investors.
Institutional Ownership Up Last Month: Stocks whose ownership by professional investors has increased based on SEC filings made in the past month. Excludes
micro cap stocks and those trading below $3.
Institutional Ownership Down Last Month: Stocks whose ownership by professional investors has declined based on SEC filings made in the past month.
Excludes micro cap stocks and those trading below $3.
Righteous Rockets: Companies that appear undervalued, are profitable and have relatively low debt -- making them "righteous" -- but that are also fast growing
and have begun to see significant stock price appreciation -- making them "rockets".
SAPI Slugs: This simple but effective value screen presents a pure yield play. It is similar but potentially superior to the better-known Dogs of the Dow screen in
that it draws from a wider pool of large stocks and includes a secondary financial-strength overlay.
Technical Screens: Technical screens search for stocks based on patterns in their price or volume. (Source: MSN Money)
New 52-Week Highs: Stocks that during today's trading have recorded their highest intraday price in the past 52 weeks.
New 5-Year Highs: Stocks that during today's trading have recorded their highest intraday price in the past five years.
New 52-Week Lows: Stocks that during today's trading have recorded their lowest intraday price in the past 52 weeks.
New 5-Year Lows: Stocks that during today's trading have recorded their lowest intraday price in the past five years.
Intraday High-Volume Gainers: Stocks that have gained 3% or more in today's trading on at least double the average trading volume of the past quarter.
One-Week High-Volume Gainers: Stocks that have gained 5% or more in the past week with two-week average trading volume at least double the average
volume of the past quarter.
One-Month High-Volume Gainers: Stocks that have gained 10% or more in the past month with one-month average trading volume at least double the
average volume of the past quarter.
Intraday High-Volume Losers: Stocks that have lost 3% or more in today's trading on at least double the average trading volume of the past quarter.
One-Week High-Volume Losers: Stocks that have lost 5% or more in the past week with two-week average trading volume at least double the average volume
of the past quarter.
One-Month High-Volume Losers: Stocks that have lost 10% or more in the past month with one-month average trading volume at least double the average
volume of the past quarter.
Gapping Up Today: This screen typically uncovers stocks that have jumped higher because of a news event. It seeks a low price today that is at least 5%
above the previous day's close.
Gapping Down Today: This screen typically uncovers stocks whose price has gone down because of a news event. It seeks a high price today that is at least
5% below the previous day's close.
Crossed Above 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that have moved above
their 50-day moving average today -- a bullish sign.
Crossed Above 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that crossed above their
200-day moving average today --a bullish sign.
Closed Above 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed above their
50-day moving average in the most recent session -- a bullish sign.
Closed Above 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed above their
200-day moving average in the most recent session -- a bullish sign.
Crossed Below 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that have moved below
their 50-day moving average today -- a bearish sign.
Crossed Below 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that crossed below their
200-day moving average today -- a bearish sign.
Closed Below 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed below their
50-day moving average in the most recent session -- a bearish sign.
Closed Below 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed below their
200-day moving average in the most recent session -- a bearish sign.
This Year's Winners: Quickly scours the market for the stocks with the biggest percentage gains year-to-date.
This Year's Losers: Quickly scours the market for the stocks with the biggest percentage losses year-to-date.
Stock market. The Stock Market. The Stock Market (distributor).
A stock market, or equity market, is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are
securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. The world derivatives market has been
estimated at about $480 trillion face or nominal value, 12 times the size of the entire world economy. It must be noted though that the value of the derivatives
market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an
actual value. Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and
sellers of the organizations to a listing of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the
NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include
the London Stock Exchange, the Deutsche Börse and the Paris Bourse, now part of Euronext.
Trading
The London Stock Exchange. Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based
anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where
transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges
where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where
trades are made electronically via traders.
Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for
the stock. (Buying or selling at
market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first
served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The
exchanges provide real-time trading information on the listed securities, facilitating price discovery.
New York Stock Exchange. The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the
exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock
to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place, in this case the
specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are
reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant
amount of human contact in this process, computers play an important role, especially for so-called "program trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange.
However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always
purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of
an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order
matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG,
Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That
share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities
themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.
Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more
orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion
a year that institutional investors pay in trading commissions.
Market participants
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to
particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance
companies, mutual funds, index funds, exchange traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the
institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being
markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees they then went to
'negotiated' fees, but only for large institutions. However, corporate governance (at least in the West) has been very much adversely affected by the rise of
(largely 'absentee') institutional 'owners'.
History
Historian Fernand Braudel suggests that in Cairo in the 11th century, Muslim and Jewish merchants had already set up every form of trade association and
had knowledge of many methods of credit and payment, disproving the belief that these were originally invented later by Italians. In 12th century France the
courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also
traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Bruges commodity traders gathered inside the house
of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but
actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred [2]; the Van der Beurze had Antwerp, as most of the
merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened
in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors
intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th
century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started
joint stock companies, which let shareholders invest in business ventures and get a share of their profits or losses. In 1602, the Dutch East India Company
issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th
century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we
know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in virtually every developed and
most developing economies, with the world's biggest markets being in the United States, Canada, China (Hong Kong), India, UK, Germany, France and Japan.
The Bombay Stock Exchange in India. Importance of stock market
Function and purpose
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital
for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly
and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of
social mood. An economy where the stock market is on the rise is considered to be an up coming economy. In fact, the stock market is often considered the
primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the
control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the reason of central
banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a
security. This eliminates the risk to an individual buyer or seller that the counter-party could default on the transaction.
The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and
services as well as employment. In this way the financial system contributes to increased prosperity.
Relation of the stock market to the modern financial system
The financial system in most western countries has undergone a remarkable transformation. One feature of this development is dis-intermediation. A portion
of the funds involved in saving and financing flows directly to the financial markets instead of being routed via the traditional bank lending and deposit
operations. The general public' s heightened interest in investing in the stock market, either directly or through mutual funds, has been an important
component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in
many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial
wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal
now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment
of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher
proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European
Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured)
bank deposits to more risky securities of one sort or another.
The stock market, individual investors, and financial risk
Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked
contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but
also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is
certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property,
i.e., real estate and collectibles).
With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking
each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and
often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then
plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes
there appears to be no rhyme or reason to the market, only folly.
This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett. Buffett began his career with
$100, and $105,000 from seven limited partners consisting of Buffett ' s family and friends. Over the years he has built himself a multi-billion dollar fortune.
The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st.
The behavior of the stock market.
From experience we know that investors may temporarily pull financial prices away from their long term trend level. Over-reactions may occur—so that
excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments
have been put forward against the notion that financial markets are efficient.
According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits or dividends, ought to affect share prices. (But this
largely theoretic academic viewpoint also predicts that little or no trading should take place—contrary to fact—since prices are already at or near
equilibrium, having priced in all public knowledge.) But the efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when
the Dow Jones index plummeted 22.6 percent—the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall
dramatically even though, to this day, it is impossible to fix a definite cause: a thorough search failed to detect any specific or unexpected development that
might account for the crash. It also seems to be the case more generally that many price movements are not occasioned by new information; a study of the
fifty largest one-day share price movements in the United States in the post-war period confirms this.[4] Moreover, while the EMH predicts that all price
movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock
market to trend over time periods of weeks or longer.
Various explanations for large price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use
of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact.
Other research has shown that psychological factors may result in exaggerated stock price movements. Psychological research has demonstrated that people
are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink
blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably
driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.
Another phenomenon—also from psychology—that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an
opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is
empty; people generally prefer to have their opinion validated by those of others in the group. In one paper the authors draw an analogy with gambling. In
normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different
players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the
psychology of other investors and how they are likely to react psychologically.
The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the
period running up to the recent Nasdaq crash, less than 1 percent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 crash,
the average did not rise above 5%). The media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of
money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 crash,
so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)
Irrational behavior
Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself. Therefore,
the stock market can be swayed tremendously in either direction by press releases, rumors, euphoria and mass panic.
Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to
predict. Emotions can drive prices up and down. People may not be as rational as they think. Behaviorists argue that investors often behave irrationally when
making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money.
Crashes
The examples and perspective in this article or section may not represent a worldwide view of the subject. Please improve this article or discuss the issue on
the talk page.
Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates, from Irrational Exuberance, 2d ed.[8] In the preface to
this edition, Shiller warns, "The stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing
[2005], in the mid-20s, far higher than the historical average. . . . People still place too much confidence in the markets and have too strong a belief that
paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad
outcomes." Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1,[8] source). The horizontal axis shows
the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-
year mean of inflation-adjusted earnings). The vertical axis shows the geometric average real annual return on investing in the S&P Composite Stock Price
Index, reinvesting dividends, and selling twenty years later. Data from different twenty year periods is color-coded as shown in the key. See also ten-year
returns. Shiller states that this plot "confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when
prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the
stock market when it is high, as it has been recently, and get into the market when it is low." Main article: Stock market crash A stock market crash is often
defined as a sharp dip in share prices of equities listed on the stock exchanges. In parallel with various economic factors, a reason for stock market crashes is
also due to panic. Often, stock market crashes end speculative economic bubbles.
There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth destruction on a massive scale. An increasing
number of people are involved in the stock market, especially since the social security and retirement plans are being increasingly privatized and linked to
stocks and bonds and other elements of the market. There have been a number of famous stock market crashes like the Wall Street Crash of 1929, the stock
market crash of 1973–4, the Black Monday of 1987, the Dot-com bubble of 2000.
One of the most famous stock market crashes started October 24, 1929 on Black Thursday. The Dow Jones Industrial lost 50% during this stock market crash. It
was the beginning of the Great Depression. Another famous crash took place on October 19, 1987 – Black Monday. On Black Monday itself, the Dow Jones
fell by 22.6% after completing a 5 year continuous rise in share prices. This event not only shook the USA, but quickly spread across the world. Thus, by the
end of October, stock exchanges in Australia lost 41.8%, in Canada lost 22.5%, in Hong Kong lost 45.8%, and in Great Britain lost 26.4%. The names “Black
Monday” and “Black Tuesday” are also used for October 28-29, 1929, which followed Terrible Thursday, the starting day of the stock market crash in 1929.
The crash in 1987 raised some puzzles-–main news and events did not predict the catastrophe and visible reasons for the collapse were not identified. This
event raised questions about many important assumptions of modern economics, namely, the theory of rational human conduct, the theory of market
equilibrium and the hypothesis of market efficiency. For some time after the crash, trading in stock exchanges worldwide was halted, since the exchange
computers did not perform well owing to enormous quantity of trades being received at one time. This halt in trading allowed the Federal Reserve system and
central banks of other countries to take measures to control the spreading of worldwide financial crisis. In the United States the SEC introduced several new
measures of control into the stock market in an attempt to prevent a re-occurrence of the events of Black Monday. Computer systems were upgraded in the
stock exchanges to handle larger trading volumes in a more accurate and controlled manner. The SEC modified the margin requirements in an attempt to
lower the volatility of common stocks, stock options and the futures market. The New York Stock Exchange and the Chicago Mercantile Exchange introduced
the concept of a circuit breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribed amount of time.
New York Stock Exchange (NYSE) circuit breakers
% drop time of drop close trading for
10% drop before 2PM one hour halt
10% drop 2PM - 2:30PM half-hour halt
10% drop after 2:30PM market stays open
20% drop before 1PM halt for two hours
20% drop 1PM - 2PM halt for one hour
20% drop after 2PM close for the day
30% drop any time during day close for the day
Stock market index
The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the
S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to
the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.
Derivative instruments: Derivative (finance)
Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange-
traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures
exchanges (which are distinct from stock exchanges—their history traces back to commodities futures exchanges), or traded over-the-counter. As all of these
products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock
market.
Leveraged strategies
Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives
may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale.
Short selling
In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells
it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it
rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders to
artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur. The
practice of naked shorting is illegal in most (but not all) stock markets.
Margin buying
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if
the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In
the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and
there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade.
(Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the
margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall
following such forced sales.) Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators
typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the
prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then
selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not
declined in the interim).
New issuance: Thomson Financial league tables
Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase over the $389 billion raised in 2003. Initial public
offerings (IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by
333%, from $ 9 billion to $39 billion.
Investment strategies: Stock valuation
One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two
basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial
statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of
charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is
the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk
control and diversification. Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting
of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize
diversification, minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has averaged nearly 10%/year,
compounded annually, since World War II).
Taxation: Capital gains tax
According to much national or state legislation, a large array of fiscal obligations are taxed for capital gains. Taxes are charged by the state over the
transactions, dividends and capital gains on the stock market, in particular in the stock exchanges. However, these fiscal obligations may vary from jurisdiction
to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes
companies pay to the state, or that tax free stock market operations are useful to boost economic growth.
Balance sheet Dead cat bounce Modeling and analysis of financial markets Shareholders' equity Stock exchange Stock investor Stock market index Stock
market cycles Stock market bubble Stock market crash Stock market boom Securities regulation in the United States Trader (finance)
References
^ Alternative Stock Library (2008-02-14). "Japan Might Be Extremely Profitable Investment". Alternative Stock Library. Retrieved on 2008-02-25.
^ Hagstrom, Robert G. (2001). The Essential Buffett: Timeless Principles for the New Economy. New York: John Wiley & Sons. ISBN 0-471-22703-X.
^ Cutler, D. Poterba, J. & Summers, L. (1991). "Speculative dynamics". Review of Economic Studies 58: 520–546.
^ Tversky, A. & Kahneman, D. (1974). "Judgement under uncertainty: heuristics and biases". Science 185: 1124–1131. doi:10.1126/science.185.4157.1124.
^ Stephen Morris and Hyun Song Shin, Oxford Review of Economic Policy, vol. 15, no 3, 1999.
^ Sergey Perminov, Trendocracy and Stock Market Manipulations (2008, ISBN 9781435752443).
^ a b c Shiller, Robert (2005). Irrational Exuberance (2d ed.). Princeton University Press. ISBN 0-691-12335-7.
^ Chris Farrell. "Where are the circuit breakers". Retrieved on 2008-10-16.
Links: quotations related to Stock market Look up, Stock market, Stock exchanges, Stocks investing
Stock market: Types of stocks Stock · Common stock · Preferred stock · Outstanding stock · Treasury stock · Authorised stock · Restricted stock · Concentrated
stock · Golden share
Participants Investor · Stock trader/investor · Market maker · Floor trader · Floor broker · Broker-dealer. Exchanges Stock exchange · List of stock exchanges ·
Over-the-counter
Stock valuation Gordon model · Dividend yield · Earnings per share · Book value · Earnings yield · Beta · Alpha · CAPM · Arbitrage pricing theory
Financial ratios P/CF ratio · P/E · PEG · Price/sales ratio · P/B ratio · D/E ratio · Dividend payout ratio · Dividend cover · SGR · ROIC · ROCE · ROE · ROA ·
EV/EBITDA · RSI · Sharpe ratio ·
Treynor ratio · Cap rate
Trading theories Efficient market hypothesis · Fundamental analysis · Technical analysis · Modern portfolio theory · Post-modern portfolio theory · Mosaic
theory
Related terms: Dividend · Stock split · Reverse stock split · Growth stock · Speculation · Trade · IPO · Market trends · Short Selling · Momentum · Day trading ·
Swing trading · DuPont Model ·
Dark liquidity · Market depth . Stock market.
How Stocks and the Stock Market Work by Marshall Brain. 01 April 2000. HowStuffWorks.com.
Corporations, Shareholders, Stock Prices, Stock Averages and Brokers, Financial Planning articles, How Securities Work: NYSE
The stock market appears in the news every day. You hear about it any time it reaches a new high or a new low, and you also hear about it daily in
statements like "The Dow Jones Industrial Average rose 2 percent today, with advances leading declines by a margin of..."
Obviously, stocks and the stock market are important, but you may find that you know very little about them. What is a stock? What is a stock market? Why do
we need a stock market? Where does the stock come from to begin with, and why do people want to buy and sell it? If you have questions like these, then this
article will open your eyes to a whole new world!
Determining Value
Let's say that you want to start a business, and you decide to open a restaurant. You go out and buy a building, buy all the kitchen equipment, tables and
chairs that you need, buy your supplies and hire your cooks, servers, etc. You advertise and open your doors.
Let's say that:
You spend $500,000 buying the building and the equipment. In the first year, you spend $250,000 on supplies, food and the payroll for your employees. At
the end of your first year, you add up all of the money you have received from customers and find that your total income is $300,000. Since you have made
$300,000 and paid out the $250,000 for expenses, your net profit is: $300,000 (income) - $250,000 (expense) = $50,000 (profit). At the end of the second
year, you bring in $325,000 and your expenses remain the same, for a net profit of $75,000. At this point, you decide that you want to sell the business. What
is it worth?.
More on Investing: Determine Your Net Worth, Investment Scams, Arbitrage
One way to look at it is to say that the business is "worth" $500,000. If you close the restaurant, you can sell the building, the equipment and everything else
and get $500,000. This is a simplification, of course -- the building probably went up in value, and the equipment went down because it is now used. Let's
just say that things balance out to $500,000. This is the asset value, or book value, of the business -- the value of all of the business's assets if you sold them
outright today.
But what if you keep it going? Read on to find out. Selling Shares
If you keep the restaurant going, it will probably make at least $75,000 this year -- you know that from your history with the business. Therefore, you can think
of the restaurant as an investment that will pay out something like $75,000 in interest every year. Looking at it that way, someone might be willing to pay
$750,000 for the restaurant, as a $75,000 return per year on a $750,000 investment represents a 10-percent rate of return. Someone might even be willing to
pay $1,500,000, which represents a 5-percent rate of return, or more if he or she thought that the restaurant's income would grow and increase earnings over
time at a rate faster than the rate of inflation.
The restaurant's owner, therefore, will set the price accordingly. You might price the restaurant at $1,500,000. What if 10 people come to you and say, "Wow,
I would like to buy your restaurant but I don't have $1,500,000." You might want to somehow divide your restaurant into 10 equal pieces and sell each piece
for $150,000. In other words, you might sell shares in the restaurant.
Then, each person who bought a share would receive one-tenth of the profits at the end of the year, and each person would have one out of 10 votes in any
business decisions. Or, you might divide ownership up into 1,500 shares and sell each share for $1,000 to make the price something that more people could
afford. Or, you might divide ownership up into 3,000 shares, keep 1,500 for yourself, and sell the remaining shares for $500 each. That way, you retain a
majority of the shares (and therefore the votes) and remain in control of the restaurant while sharing the profit with other people. In the meantime, you get to
put $750,000 in the bank when you sell the 1,500 shares to other people.
Stock, at its core, is really that simple. It represents ownership of a company's assets and profits. A dividend on a share of stock represents that share's portion
of the company's profits, generally dispersed yearly. If the restaurant has 10 owners, each owning one share of stock, and the restaurant makes $75,000 in
profit during the year, then each owner gets a dividend of $7,500. A large company like IBM has millions of shares of stock outstanding -- about 1.7 billion in
February 2004 (see Quicken: International Business Machines for details). In this case, the total profits of the company are divided by 1.7 billion and sent to
the shareholders as dividends.
One measure of the value of a company, at least as far as investors are concerned, is the product of the number of outstanding shares multiplied by the share
price. This value is called the capitalization of the company.
A Stock Exchange
If I am a private citizen who owns a restaurant, and I am selling my restaurant stock to other private citizens in the community, I might do the whole
transaction by word-of-mouth, or by placing an ad in the newspaper. This makes selling the stock easy for me. However, it creates a problem down the line for
investors who want to sell their stock in the restaurant. The seller has to go out and find a buyer, which can be hard. A "stock market" solves this problem.
Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The New York Stock Exchange (NYSE) is an
example of such a market. In your neighborhood, you have a "supermarket" that sells food. The reason you go the supermarket is because you can go to one
place and buy all of the different types of food that you need in one stop -- it's a lot more convenient than driving around to the butcher, the dairy farmer, the
baker, etc. The NYSE is a supermarket for stocks. The NYSE can be thought of as a big room where everyone who wants to buy and sell shares of stocks can
go to do their buying and selling.
The exchange makes buying and selling easy. You don't have to actually travel to New York to visit the New York Stock Exchange -- you can call a stock
broker who does business with the NYSE, and he or she will go to the NYSE on your behalf to buy or sell your stock. If the exchange did not exist, buying or
selling stock would be a lot harder. You would have to place a classified ad in the newspaper, wait for a call and haggle on a price whenever you wanted to
sell stock. With an exchange in place, you can buy and sell shares instantly.
The stock exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known
every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports, national economic
news and lots of other factors. Buyers and sellers take all of these factors into account. So, for example, when the FAA (Federal Aviation Administration) shut
down the company ValuJet for a month in June 1996, the value of the stock plummeted.
Investors could not be sure that the airline represented a going concern and began selling, driving the price down. The asset value of the company acted as
a floor on the share price.
The price of a stock also reflects the dividend that the stock pays, the projected earnings of the company in the future, the price of tea in China (especially
Lipton stock) and so on.
Corporations. Any business that wants to sell shares of stock to a number of different people does so by turning itself into a corporation. The process of turning
a business into a corporation is called incorporating.
If you start a restaurant by taking your own money to buy the building and the equipment, then what you have done is formed a sole proprietorship. You own
the entire restaurant yourself -- you get to make all of the decisions and you keep all of the profit. If three people pool their money together and start a
restaurant as a team, what they have done is formed a partnership. The three people own the restaurant themselves, sharing the profit and decision-making.
A corporation is different, and it is a pretty interesting concept. A corporation is a "virtual person." That is, a corporation is registered with the government, it
has a social security number (known as a federal tax ID number), it can own property, it can go to court to sue people, it can be sued and it can make
contracts. By definition, a corporation has stock that can be bought and sold, and all of the owners of the corporation hold shares of stock in the corporation
to represent their ownership. One incredibly interesting characteristic of this "virtual person" is that it has an indefinite and potentially infinite life span.
There is a whole body of law that controls corporations -- these laws are in place to protect the shareholders and the public. These laws control a number of
things about how a corporation operates and is organized. For example, every corporation has a board of directors (if all of the shares of a corporation are
owned by one person, then that one person can decide that there will only be one person on the board of directors, but there is still a board). The
shareholders in the company meet every year to vote on the people for the board. The board of directors makes the decisions for the company. It hires the
officers (the president and other major officers of the company), makes the company's decisions and sets the company's policies. The board of
directors can be thought of as the brain of the virtual person.
Shareholders
From this description, you can see that a corporation has a group of owners -- the shareholders. The owners elect a board of directors to make the company's
major decisions. The owners of a corporation become owners by buying shares of stock in the corporation. The board of directors decides how many total
shares there will be. For example, a company might have one million shares of stock. The company can either be privately held or publicly held. In a
privately held company, the shares of stock are owned by a small number of people who probably all know one another. They buy and sell their shares
amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange.
One of the big reasons why corporations exist is to create a structure for collecting lots of investment dollars in a business. Let's say that you would like to start
your own airline. Most people cannot do this, because an airplane costs millions of dollars. An airline needs a whole fleet of planes and other equipment,
plus it has to hire a lot of employees. A person who wants to start an airline will therefore form a corporation and sell stock in order to collect the money
needed to get started.
A corporation is an easy way to gather large quantities of investment capital -- money from investors. When a corporation first sells stock to the public, it does
so in an IPO (Initial Public Offering). The company might sell one million shares of stock at $20 a share to raise $20 million very quickly (that is a
simplification -- the brokerage house in charge of the IPO will extract its fee from the $20 million, but let's ignore that here). The company then invests the
$20 million in equipment and employees. The investors (the shareholders who bought the $20 million in stock) hope that with the equipment and employees,
the company will make a profit and pay a dividend.
Another reason that corporations exist is to limit the liability of the owners to some extent. If the corporation gets sued, it is the corporation that pays the
settlement. The corporation may go out of business, but that is the worst that can happen. If you are a sole proprietor who owns a restaurant and the restaurant
gets sued, you are the one who is being sued. "You" and "the restaurant" are the same thing. If you lose the suit then you, personally, can lose everything you
own in the process.
Stock Prices. Let's say that a new corporation is created and in its IPO it raises $20 million by selling one million shares for $20 a share. The corporation buys
its equipment and hires its employees with that money. In the first year, when all the income and expenses are added up, the company makes a profit of $1
million. The board of directors of the company can decide to do a number of things with that $1 million:
It could put it in the bank and save it for a rainy day. It could decide to give all of the profits to its shareholders, so it would declare a dividend of $1 per share.
It could use the money to buy more equipment and hire more employees to expand the company. It could pick some combination of these three options. If a
company traditionally pays out most its profits to its shareholders, it is generally called an income stock. The shareholders get income from the company's
profits. If the company puts most of the money back into the business, it is called a growth stock. The company is trying to grow larger by increasing the
amount of equipment and the number of people who run it.
Stock Prices: Income vs. Growth
The price of an income stock tends to stay fairly flat. That is, from year to year, the price of the stock tends to remain about the same unless profits (and
therefore dividends) go up. People are getting their money each year and the business is not growing. This would be the case for stock in a single restaurant
that distributes all of its profits to the shareholders each year.
Let's say that the single restaurant decides, for several years, to save its profits, and eventually it opens a second restaurant. That is the behavior of a growth
company. The value of the stock rises because, when the second restaurant opens, there is twice as much equipment and twice as much profit being earned
by the company. In a growth stock, the shareholders do not get a yearly dividend, but they own a company whose value is increasing. Therefore, the
shareholders can get more money when they sell their shares -- someone buying the stock would see the increasing book value of the company (the value of
the buildings, equipment, etc.) and the increasing profit that the company is earning and, based on these factors, pay a higher price for the stock.
In a publicly traded company, all of the financial information about the company is public. The Securities and Exchange Commission (SEC) is in charge of
collecting this information and making it available to investors. Shareholders also use a number of other indicators to determine how much a stock is worth.
One simple indicator is the price/earnings ratio. This is the price of the stock divided by the earnings per share. There are all sorts of indicators like these, as
well as a great deal of other financial information available on any stock. You can look up all of it on the Web in thousands of different places -- see the links
at the end of this article for details.
Stock Averages and Brokers
Every day on the news you hear about the Dow Jones Industrial Average, and other averages like the S&P 500 or The Russell 2000. These are broad market
averages designed to tell you how companies traded on the stock market are doing in general. For example, the Dow Jones Industrial Average is simply the
average value of 30 large, industrial stocks. Big companies like General Motors, Goodyear, IBM and Exxon are the companies that make up this index. The
S&P 500 is the average value of 500 large companies. The Russel 2000 index averages the values of 2,000 smaller companies.
What these averages tell you is the general health of stock prices as a whole. If the economy is "doing well," then the prices of stocks as a group tend to rise in
what is referred to as a "bull market." If it is "doing poorly," prices as a group tend to fall in what is called a "bear market." The averages reveal these
tendencies in the market as a whole.
There are three big stock exchanges in the United States:
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
NASDAQ - National Association of Securities Dealers
A company "lists" its stock on an exchange. For example, the NYSE has about 3,000 companies listed. According to the NYSE: At the end of November,
1998, there were 3,104 companies with stock listed on the NYSE. These companies had over 236 billion shares worth a total of $10.1 trillion available for
trading on the Exchange, giving the NYSE the world's largest market capitalization (in global market-value terms, the total global value of the NYSE-listed
companies exceeded $12.8 trillion). Anyone who wants to buy or sell stock in any of these 3,000 or so companies goes to the New York Stock Exchange to do
it. Of course, no one wants to fly to New York to buy or sell their shares. A person therefore calls a stock broker in a firm that is authorized to trade at the
exchange. There are dozens of such brokerage houses, including such familiar names as Merrill Lynch, Charles Schwab and Morgan Stanley. When you call
up a broker at one of these companies, he or she relays your trade to the floor of the appropriate exchange, and a representative of the company (or, more
commonly, a computer representing the company) makes the trade on your behalf. You pay the broker a commission (generally $10 to $100 per trade,
depending on the broker) to provide this service to you. Today, you can also participate in online trading.
Stocks that are not listed on an exchange are sold Over The Counter (OTC). OTC stocks are generally in smaller, riskier companies. Usually, an OTC stock is
stock in a company that does not meet the requirements of an exchange. For lots more information on stock, the stock market and related topics, check out
the links on the next page.
How Investment Scams Work by John Barrymore. Top 10 Investment Scams . Why Do Investment Scams Work?. Avoiding Investment Scams
Ted and Sharon Bitter were victims of investment scammer Martin Frankel, who stole millions of dollars through fraudulent activities. You get a phone call
from a Mr. Davis of Mutual Systems, Inc. Surely you've heard of Mutual Systems? Of course you have.
Mr. Davis is a nice man. He's concerned about your finances, and he asks if you've given any thought to your financial future. He would love to help you out,
and he happens to have some hot, top-secret, inside information about a mobile device that Mutual Systems is releasing soon, a product that will change the
way you see the world. He tells you the stock is cheap right now, and you have to act now or you'll miss out on making a lot of money -- money that will help
secure your future.
"You can't lose," Mr. Davis says. But you do.
You weren't the only person Mr. Davis called that day. Mr. Davis and his associates contacted hundreds of other people. And even though Mutual Systems is
a legitimate company, its stock is not heavily traded. As it happens, the value of a so-called "thinly traded" stock is easy to boost with a burst of buyer action.
And after the value does indeed skyrocket, the scammers quickly sell their shares. The value of the stock plummets, and there goes your money.
Protect Yourself. How Pyramid Schemes Work. How Identity Theft Works. Identity Theft Quiz. Investing Quiz.
Most investment scams use the same basic principles: promises of great profit, assurances of no risk and assertions of urgency and secrecy. The con artist is
likable, friendly and professional. A lot of people think they can spot a scam from a mile away. But most scams aren't as obvious as the pushy salesman
calling out of the blue or the notorious Nigerian bank account scheme. Every year, Americans lose billions of dollars to scams of every size and shape
[source: National Futures Association]. Every citizen is a potential target.
So what schemes are lurking out there? Why do they succeed time and time again? How do you avoid them?
First, let's take a look at the top 10 investment scams.
Pump and Dump
Mr. Davis' scheme is called a pump-and-dump scam. It's so named because the burst of buyers "pumps" up the value of the stock. When the stock value peaks,
the scammers "dump" their stocks, which often causes the value to drop sharply [source: U.S. Securities and Exchange Commission].
Top 10 Investment Scams: Investment scams come in all shapes and sizes. Con artists often mix and match features of various scams to concoct a swindle
that is hard to detect. Below are descriptions of 10 common scams.
Affinity Scams: For better or worse, humans have a tendency to listen to people with whom they have something in common. Scammers depend on this trait.
They join hobbyist groups and religious groups, or trade on ethnic similarities.
Unlicensed Sales: Unlicensed brokers or sales agents approach you with financial advice or an investment opportunity. An unlicensed insurance agent might
sell fake insurance policies. Or, worse, you could seek advice from an unlicensed broker at a disreputable firm.
The Ponzi Scheme: The Ponzi money-shifting scheme consists of paying initial investors with the funds provided by later investors. As in affinity scams, Ponzi
scammers often target groups of people. Since these schemes rely on trust and word of mouth, initiating the scam in a group allows the con artist to spread it
quickly. Charles Ponzi. Charles Ponzi was an early 20th century Italian immigrant to the United States. Ponzi invited people to invest in International Postal
Reply Coupons. He promised extremely high returns. All he really did was take investors' money and deal out small payments to earlier investors. All told,
Ponzi cheated his victims of $10 million.
Internet Scams: Internet scams include e-mail offers and spurious Web sites promoting investment opportunities in nonexistent companies or products. Chat
rooms, newsgroups and bulletin boards are also common playgrounds for con artists. Schemers use multiple user names to endorse the company with false
testimonials, creating the illusion of legitimacy.
Promissory Note Scams: A promissory note is a written agreement to pay back a loan with a certain amount of interest. Scammers offer an opportunity to
invest in high-yield promissory notes, which work much like bonds. But the scammer never actually loans money to a third party. He simply takes the investor's
money. Or he does make the loan, but he pays the investor less than promised.
Prime Bank Scams: The fraudster offers investment opportunities through "prime banks," overseas institutions normally accessible only to the upper crust of
society. Unfortunately, these banks don't exist.
Unsuitable Investments: Fakers recommend investments that aren't suitable to the investor's financial situation. A common variation is the long-term
investment pushed on someone for whom a short-term investment would be better.
Senior Scams: Seniors often live alone, depend on others for care and worry about how their retirement savings will support them. Many seniors are eager to
believe the confident man who can dispel these fears with his sound advice and exciting opportunities. These scams include life insurance fraud and
unsuitable investments.
Commodity Scams: These schemes include investments in gold, silver, rare coins and gems. Con artists have recently capitalized on the political
circumstances that have driven up the cost of oil and natural gas. The same circumstances make investments in alternative energy quite attractive. Just
because it sounds good for the environment doesn't mean it can't be a scam.
Investment Seminars: The scammer invites a hundred people to a seminar, where she presents an unbeatable investment opportunity. You must sign up right
then and there. You can't sign up later because she is leaving town in two hours. So is your money.
Why do these schemes work? . Unfortunately, our instincts sometimes work against us. Learn more on the next page. Cons rely on basic principles of human
behavior for their schemes to succeed.
Risk: Most people are afraid to take risks. How much are you willing to gamble on a high-stakes poker game? What are your chances versus your possible
profit?. Con artists know you're afraid of risk. They'll tell you there is little or no risk in an opportunity that could yield untold riches. If there's no risk, why not
jump on in?
Greed: Most people have a tendency to believe that the grass really is greener on the other side of the fence. "If only I knew how to get past the fence," you
say, gazing longingly at that new sports car or the pile of gold coins. Con artists are greedy, for sure, but, more importantly, they know that you are greedy, too.
They know they can mesmerize you with promises of great riches and future security.
Urgency and Scarcity: "Act now and you'll receive…". "Memorial Day Weekend Sale.". "Clearance Sale -- Sunday Only!". An important principle of sales is
the limited-time, limited-supply offer: urgency and scarcity. Con artists use urgency and scarcity to lure their victims quickly, before the victims have a chance
to do any research or background checks on the legitimacy of the investment opportunity. "There's only room for a few more investors," Mr. Jones says. "If you
don't give me a check today, I can't guarantee you any share of the profits.". You don't want to miss the train to the greener side. And the greener side is
where the train is headed, right? Mr. Jones said so...
William Fogwell and his investment firm, Hobbs-Melville, swindled investors of more than $150 million.
Politeness: When a friend kindly offers to cook you dinner, and past experience has shown that he can't tell a skillet from a spatula, what do you say? You
don't want to hurt your friend's feelings, after all. Unfortunately, your fear of hurting someone's feelings works to a scammer ' s advantage. Yes, you're unsure
about investing in this beach front property in Montana, but Mr. Jones is such a nice young man. And he did drive all the way out to your house to talk to you,
not to mention comp your ticket to the investment seminar.
Trust: When you go to a play, and one of the actresses doesn't know her lines, you lose confidence in the actress's character. You cease to believe. The same
principle applies to the confidence man. People tend to trust a person who seems to know what he's talking about and has full confidence in his plan. After
all, not only are our emotions swayed by confidence and charisma, we are taught to trust experts. And if you tell a con artist, "No, I'm not investing," the con
won't reply, "You're right. You got me." The con will say, "Well, I'll just take the opportunity to someone who is interested in making money." And you start to
rethink your decision.
The Unconfident Man: A clever scammer can use an apparent lack of confidence to get your money. At first, Mr. Jones presents an opportunity to invest in a
biopharmaceutical company that is developing a cancer treatment. "But cancer is such a clever disease," Mr. Jones says. "I just don't think we'll ever be able
to beat it." He doesn't seem too confident in the investment opportunity. What you don't know is that Mr. Jones knows that one of your close relatives recently
died of cancer. He is depending on your desire to invest in the cure to work in tandem with his apparent lack of confidence in the investment opportunity.
"No, this is a great opportunity!" you say, playing right into his hands.
How can you spot a scheme? How do you know if you're already the victim of a scam? Send me your bank account number, and then go to the next page.
Avoiding Investment Scams
Here are some tips to help you steer clear of investment scams.
Don't judge a book by its cover. Salespeople are trained to be professional and charismatic. Con artists are salespeople, too; they just happen to also be
criminals. They depend on you to be polite and to not interrupt them, hang up on them or delete their email. Educate yourself. Scams succeed mostly with
people who have little investment experience or knowledge. Consult a professional financial adviser. Consult your friends and family. While you're starry-eyed
with the potential profit at your fingertips, others are more likely to have an objective viewpoint. Trust only professional, licensed brokers and sales agents.
Don't trust "top-secret insider information" and "hot tips." Don't rush to invest after receiving a single phone call, attending a single seminar, or meeting with
the salesperson a single time. However exciting the prospect may be, do not "act now" or "act before it's too late." Ask the salesperson for a prospectus, a
breakdown of the investment's procedures, risks and potential. Don't trust the "high returns, no risk" guarantee. An investment is a risk, just like playing roulette
(but hopefully with better odds). No investment is a sure thing. Don't trust a salesperson who tells you not to tell anyone about the investment. Always question
"secret" investment opportunities. Research every investment opportunity. Investigate the company, the product, the security, and/or the stock. Use resources
available at the Financial Industry Regulatory Authority and the Securities and Exchange Commission to investigate the company and/or salesperson. If you
are thinking of investing in a company not registered with the SEC, make sure you conduct a thorough background check on the company. Take extra
precautions when presented with an overseas investment opportunity. Steer clear of opportunities that claim to be tax-free investments. Investment returns,
like all legitimate ways to make money, are subject to taxes. When you make an investment, make the check payable to a company, never an individual
salesperson. After making an investment, examine your investment reports and make sure no unauthorized transactions are being conducted. Ask questions of
your adviser/broker/sales agent. Get answers. If your financial adviser or broker is slow to respond, gives vague answers, or denies your requests to withdraw
money from the investment when you have a right to do so, contact the authorities. Don't sign anything you don't understand. Have a lawyer review any
contracts you are asked to sign. Be wary of very quick returns on an investment. Scammers often lure cautious investors by sending a few small payments early
on to encourage them to invest more.
If you are the victim of a scam, the best thing you can do is report it. Scammers depend on your uncertainty and embarrassment at being swindled to keep
the scam going. Don't be embarrassed -- even the best get taken. If there's a time not to sit around and feel ashamed, it's when you suspect you're getting
robbed blind.
William Clark and his wife were victims of financial-planning fraud.
What Was That Nigerian Scam You Mentioned?: A deeply troubled official of the Nigerian government e-mails you. He wants to transfer several million
dollars into your bank account so that he can leave Nigeria with his fortune undetected. As a reward for your help, he'll give you a large portion of the money.
All you have to do is give him your banking information, including your account number. And of course you have to send him a small fee to cover the costs of
the transfer -- consider it an investment in both your futures.
Intrinsic Value .
1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both
tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in
order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.
2. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price
and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero.
1. For example, value investors that follow fundamental analysis look at both qualitative (business model, governance, target market factors etc.) and
quantitative (ratios, financial statement analysis, etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth
much more than its current valuation.
2. Intrinsic value in options is the in-the-money portion of the option's premium. For example, If a call options strike price is $15 and the underlying stock's
market price is at $25, then the intrinsic value of the call option is $10. An option is usually never worth less than what an option holder can receive if the
option is exercised.
In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value.
It is ordinarily calculated by summing the future income generated by the asset according to a criterion of present value.
1 Options 2 Equity 3 Real Estate
Options
An option is said to have intrinsic value if the option is in-the-money. When out-of-the-money, its intrinsic value is zero.
The intrinsic value for an in-the-money option is calculated as the absolute value of the difference between the current price (S) of the underlying and the
strike price (K) of the option, floored to zero.
For a call option
IVcall = max{0,S − K}
while for a put option
IVput = max{0,K − S}
For example, if the strike price for a call option is USD 1 and the price of the underlying is USD 1.20, then the option has an intrinsic value of USD 0.20.
The total value of an option is the sum of its intrinsic value and its time value.
Equity
In valuing equity, securities analysts may use fundamental analysis - as opposed to technical analysis - to estimate the intrinsic value of a company. Here the
"intrinsic" characteristic considered is the expected cash flow production of the company in question. Intrinsic value is therefore defined to be the present
value of all expected future net cash flows to the company; it is calculated via discounted cash flow valuation. See Valuation using discounted cash flows;
John Burr Williams: Theory
As opposed to the book value, or break-up value, of a business, the intrinsic value is the value of a business' ongoing operations. Warren Buffett is known for his
ability to calculate the intrinsic value of a business, and then buy that business at a discount to its intrinsic value.
Examples of 'Equity' includes Ordinary Shares and Preference Shares.
Real Estate
In valuing real estate, a similar approach may be used. The 'intrinsic value' of real estate is therefore defined as the net present value of all future net cash
flows which are foregone by buying a piece of real estate instead of renting it in perpetuity. These cash flows would include rent, inflation, maintenance and
property taxes. This calculation can be done using the gordon model.
Source: Wikipedia-Investopedia
An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item
itself. Most such theories look to the
process of producing an item, and the costs involved in that process, as a measure of the item's intrinsic value.
For instance, the labor theory of value - the most influential of the intrinsic theories - holds that the value of an item comes from the amount of labor spent
producing said item. For example, if a chair is produced by two workers in 6 hours, then that chair is worth 2 x 6 = 12 man-hours (this is a simplified case; the
labor theory of value takes into consideration only the "necessary" amount of labor that must go into the production of an item, which may be less than the
actual expended labor due to inefficiency). Present value is the value on a given date of a future payment or series of future payments, discounted to reflect
the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means
to compare cash flows at different times on a meaningful "like to like" basis.
1 Calculation
1.1 Technical details
2 Choice of interest rate
3 Annuities, perpetuities and other common forms
Calculation
The most commonly applied model of the time value of money is compound interest. To someone who can lend or borrow for years at an interest rate per
year (where interest of "5 percent" is expressed fully as 0.05), the present value of the receiving monetary units years in the future is: This is also found from
the formula for the future value with negative time. The purchasing power in today's money of an amount C of money, t years into the future, can be
computed with the same formula, where in this case i is an assumed future inflation rate. The expression enters almost all calculations of present value.
Where the interest rate is expected to be different over the term of the investment, different values for may be included; an investment over a two year period
would then have PV of:
Technical details
Present value is additive. The present value of a bundle of cash flows is the sum of each one's present value. In fact, the present value of a cashflow at a
constant interest rate is mathematically the same as the Laplace transform of that cashflow evaluated with the transform variable (usually denoted "s") equal to
the interest rate. For discrete time, where payments are separated by large time periods, the transform reduces to a sum, but when payments are ongoing on
an almost continual basis, the mathematics of continuous functions can be used as an approximation.
Choice of interest rate
The interest rate used is the risk-free interest rate. If there are no risks involved in the project, the expected rate of return from the project must equal or exceed
this rate of return or it would be better to invest the capital in these risk free assets. If there are risks involved in an investment this can be reflected through the
use of a risk premium. The risk premium required can be found by comparing the project with the rate of return required from other projects with similar risks.
Thus it is possible for investors to take account of any uncertainty involved in various investments.
Annuities, perpetuities and other common forms
Many financial arrangements (including bonds, other loans, leases, salaries, membership dues, annuities, straight-line depreciation charges) stipulate
structured payment schedules, which is to say payment of the same amount at regular time intervals. The term "annuity" is often used to refer to any such
arrangement when discussing calculation of present value. The expressions for the present value of such payments are summations of geometric series.
A cash flow stream with a limited number (n) of periodic payments (C), receivable at times 1 through n, is an annuity. Future payments are discounted by the
periodic rate of interest (i). The present value of this ordinary annuity is determined with this formula:
A periodic amount receivable indefinitely is called a perpetuity, although few such instruments exist. The present value of a perpetuity can be calculated by
taking the limit of the above formula as n approaches infinity. The bracketed term reduces to one leaving:
The first formula is found from subtracting from the latter result the present value of a perpetuity delayed n periods.
These calculations must be applied carefully, as there are underlying assumptions:
That it is not necessary to account for price inflation, or alternatively, that the cost of inflation is incorporated into the interest rate. That the likelihood of
receiving the payments is high — or, alternatively, that the default risk is incorporated into the interest rate. See time value of money for further discussion.
Buffett's Value Formula (?)
Warren Buffett hasn't exactly published his formula for what he calls the intrinsic value of a company, but he has dropped a number of hints. He apparently
multiplies estimated future earnings by a confidence margin between zero and a hundred percent (a bird in the bush being worth 0.5 birds in the hand, and
all that; bush birds are the earnings you hope for, and hand birds are the earnings you're confident will materialize). He then compares these probable
earnings with something he has total confidence in, by using a U.S. treasury yield as his discount rate. In calculator form it looks like this:
Earnings. Earnings per share (last 12 months): $
Growth Assumptions. Earnings are expected to grow at a rate of % annually for the next years, before leveling off to an annual growth rate of % thereafter.
Confidence Margin. How confident are you that these expected future earnings will really materialize? %
Discount Rate. Best available return that you have 100% confidence in (like a Treasury bond): %
Results. Stock Value per share: $ , Find EPS , Ticker:
This calculator doesn't use fancier math than the original one did. Its advantage is that it forces you to be explicit about your earnings expectations. It also
automatically provides you with a hard-headed investment strategy: always invest in government bonds, unless you can find something else you are confident
will yield more cash. One other hint that Buffett has dropped over the years is that he can estimate value in his head in about five seconds; so whatever he
does he keeps it simple, slugger.
Warren Buffett: How He Does It
Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by
2005? By comparison, $10,000 in the S&P 500 would have grown to only about $500,000. Whether you like him or not, Buffett's investment strategy is
arguably the most successful ever. With a sustained compound return this high for this long, it's no wonder Buffett's legend has swelled to mythical proportions.
But how the heck did he do it? In this article, we'll introduce you to some of the most important tenets of Buffett's investment philosophy.
Buffett's Philosophy
Warren Buffett descends from the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on
their intrinsic worth. When discussing stocks, determining intrinsic value can be a bit tricky as there is no universally accepted way to obtain this figure. Most
often intrinsic worth is estimated by analyzing a company's fundamentals. Like bargain hunters, value investors seek products that are beneficial and of high
quality but underpriced. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter,
the value investor tries to find those items that are valuable but not recognized as such by the majority of other buyers.
Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the efficient market hypothesis, but they do trust
that the market will eventually start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't
concerned with the supply and demand intricacies of the stock market. In fact, he's not really concerned with the activities of the stock market at all. This is
the implication this paraphrase of his famous quote : "In the short term the market is a popularity contest; in the long term it is a weighing machine."(see What
Is Warren Buffett's Investing Style?)
He chooses stocks solely on the basis of their overall potential as a company - he looks at each as a whole. Holding these stocks as a long-term play, Buffett
seeks not capital gain but ownership in quality companies extremely capable of generating earnings. When Buffett invests in a company, he isn't concerned
with whether the market will eventually recognize its worth; he is concerned with how well that company can make money as a business.
Buffett's Methodology
Here we look at how Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence
and its price. Keep in mind that these are not the only things he analyzes but rather a brief summary of what Buffett looks for:
1. Has the company consistently performed well?
Sometimes return on equity (ROE) is referred to as "stockholder's return on investment". It reveals the rate at which shareholders are earning income on their
shares. Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry.
ROE is calculated as follows: = Net Income / Shareholder's Equity
Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to get a good idea of historical
performance.
2. Has the company avoided excess debt?
The debt/equity ratio is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being
generated from shareholders' equity as opposed to borrowed money. The debt/equity ratio is calculated as follows = Total Liabilities / Shareholders' Equity
This ratio shows the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt - rather than equity - is
financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors
sometimes use only long-term debt instead of total liabilities in the calculation above.
3. Are profit margins high? Are they increasing?
The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is
calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high
profit margin indicates the company is executing its business well, but increasing margins means management has been extremely efficient and successful at
controlling expenses.
4. How long has the company been public?
Buffett typically considers only companies that have been around for at least 10 years. As a result, most of the technology companies that have had their
initial public offerings (IPOs) in the past decade wouldn't get on Buffett's radar (not to mention the fact that Buffett will invest only in a business that he fully
understands, and he admittedly does not understand what a lot of today's technology companies actually do). It makes sense that one of Buffet's criteria is
longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. Never underestimate the value of
historical performance, which demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that the past
performance of a stock does not guarantee future performance - the job of the value investor is to determine how well the company can perform as well as it
did in the past. Determining this is inherently tricky, but evidently Buffett is very good at it.
5. Do the company's products rely on a commodity?
Initially you might think of this question as a radical approach to narrowing down a company. Buffett, however, sees this question as an important one. He
tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on a commodity
such as oil and gas. If the company does not offer anything different than another firm within the same industry, Buffett sees little that sets the company apart.
Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage. The wider the moat, the tougher it is
for a competitor to gain market share.
6. Is the stock selling at a 25% discount to its real value?
This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of
value investing, and Buffett's most important skill. To check this, an investor must determine the intrinsic value of a company by analyzing a number of
business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation
value - what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand
name, which is not directly stated on the financial statements.
Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his
measurement of intrinsic value is at least 25% higher than the company's market capitalization, Buffett sees the company as one that has value. Sounds easy,
doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his
criteria, we have no way of knowing exactly how he gained such precise mastery of calculating value. (To learn more about the value investing strategy of
selecting stocks, check out our Guide To Stock-Picking Strategies.)
Conclusion
As you have probably noticed, Buffett's investing style, like the shopping style of a bargain hunter, reflects a practical, down-to-earth attitude. Buffett maintains
this attitude in other areas of his life: he doesn't live in a huge house, he doesn't collect cars and he doesn't take a limousine to work. The value-investing style
is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2004, he holds the title of the second-richest man in the
world, with a net worth of more $40 billion (Forbes 2004). Do note that the most difficult thing for any value investor, including Buffett, is in accurately
determining a company's intrinsic value. by Investopedia Staff,
Warren Buffett Investment Approach
Buffett's philosophy on business investing is a modification of the value investing approach of his mentor Benjamin Graham. Graham bought companies
because they were cheap compared to their intrinsic value. He was of the belief that as long as the market undervalued them relative to their intrinsic value
he was making a solid investment. He reasoned that the market will eventually realize it has undervalued the company and will correct its course regardless of
what type of business the company was in. In addition he believes that the business has to have solid economics behind it.
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The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:
Is the company in an industry of good economics, i.e., not an industry competing on price points.
Does the company have a consumer monopoly or brand name that commands loyalty?
Can any company with an abundance of resources compete successfully with the company?
Are the earnings on an upward trend with good and consistent margins?
Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average?
Is ROE consistent over its history, more than 12%, and high compared to the industry average? Or does the company have high and consistent Return on
Total Capital?
Does the company retain earnings for growth?
The business should not have high maintenance cost of operations, low capital expenditure or investment cash outflow. This is not the same as investing to
expand capacity.
Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
Is the company free to adjust prices for inflation?
Buffett's next concern would be when to buy. He does not hurry to invest in businesses with undiscernible value. He will wait for market corrections or
downturns to buy solid businesses at reasonable prices, since stock-market downturns present buying opportunities. He is conservative when greed and
speculation is rampant in the market and he is greedy and aggressive when others are fearing for their capital. This contrarian strategy is what led Buffett's
company through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on
potential opportunities during the same period.
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Then he asks at what price is the business a bargain, and his answer typically is when it provides a higher rate of compounded return relative to other available
investment opportunities.
Buffett has coined the term "economic moat," preferring to acquire companies that possess sustainable competitive advantages over their competitors.
Warren Buffett's letters to shareholders are a very valuable source in understanding his investment style and outlook. Warren Buffett Management Style
Buffett views himself as a capital allocator above anything else. His primary responsibility is to allocate capital to businesses with good economics and keep
their existing management to lead the company.
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When Buffett acquires a controlling interest in a business, he makes clear to the owner the following:
He will not interfere with the running of the company.
He will make the hiring and compensation a decision of the top executive.
Capital allocated to the business will have a price tag (a hurdle rate) attached. This process is to motivate owners to send excess capital that does not return
more than its cost to Berkshire headquarters rather than investing it at low returns. This cash is then free to be invested in opportunities that offer higher returns.
Buffett's hands-off approach has held strong appeal and created room for his managers to perform as owners and ultimate decision makers of their businesses.
This acquisition strategy enabled. Buffett to buy companies at fair prices because the sellers wanted room to operate independently after selling.
Besides his skills in managing Berkshire's cash flow, Buffett is skilled in managing the company's balance sheet. Since taking over Berkshire Hathaway, Buffett
has weighed every decision against its impact on the balance sheet. He has succeeded in building Berkshire into one of the eight companies (as of 005) that
are still rated by Moody's as Aaa, the highest credit rating achievable and thus with the lowest cost of debt. Buffett takes comfort in the knowledge that, for the
foreseeable future, his company will not be one of those shaken by economic or natural catastrophes. He repeated over the years that his catastrophe
insurance operation is the only one he knew that can keep the checks clearing during financial turmoil.
With an estimated fortune of $62 billion, Warren Buffett is the richest man in the entire world. In 1962, when he began buying stock in Berkshire Hathaway, a
share cost $7.50. Today, Buffett, 78, is Berkshire's chairman and CEO, and one share of the company's class A stock worth close to $119,000. He credits his
astonishing success to several key strategies, which he has shared with writer Alice Schroeder. She spend hundreds of hours interviewing the Sage of Omaha
for the new authorized biography. The Snowball. Here are some of Buffett's money-making secrets -- and how they could work for you.
1. Reinvest Your Profits: When you first make money, you may be tempted to spend it. Don't. Instead, reinvest the profits. Buffett learned this early on. In high
school, he and a pal bought a pinball machine to pun in a barbershop. With the money they earned, they bought more machines until they had eight in
different shops. When the friends sold the venture, Buffett used the proceeds to buy stocks and to start another small business. By age 26, he'd amassed
$174,000 -- or $1.4 million in today's money. Even a small sum can turn into great wealth.
2. Be Willing To Be Different: Don't base your decisions upon what everyone is saying or doing. When Buffett began managing money in 1956 with $100,000
cobbled together from a handful of investors, he was dubbed an oddball. He worked in Omaha, not Wall Street, and he refused to tell his parents where he was
putting their money. People predicted that he'd fail, but when he closed his partnership 14 years later, it was worth more than $100 million. Instead of
following the crowd, he looked for undervalued investments and ended up vastly beating the market average every single year. To Buffett, the average is just
that -- what everybody else is doing. to be above average, you need to measure yourself by what he calls the Inner Scorecard, judging yourself by your own
standards and not the world's.
3. Never Suck Your Thumb: Gather in advance any information you need to make a decision, and ask a friend or relative to make sure that you stick to a
deadline. Buffett prides himself on swiftly making up his mind and acting on it. He calls any unnecessary sitting and thinking "thumb sucking." When people
offer him a business or an investment, he says, "I won't talk unless they bring me a price." He gives them an answer on the spot.
4. Spell Out The Deal Before You Start: Your bargaining leverage is always greatest before you begin a job -- that's when you have something to offer that the
other party wants. Buffett learned this lesson the hard way as a kid, when his grandfather Ernest hired him and a friend to dig out the family grocery store after a
blizzard. The boys spent five hours shoveling until they could barely straighten their frozen hands. Afterward, his grandfather gave the pair less than 90 cents to
split. Buffett was horrified that he performed such backbreaking work only to earn pennies an hour. Always nail down the specifics of a deal in advance -- even
with your friends and relatives.
5. Watch Small Expenses: Buffett invests in businesses run by managers who obsess over the tiniest costs. He one acquired a company whose owner counted
the sheets in rolls of 500-sheet toilet paper to see if he was being cheated (he was). He also admired a friend who painted only on the side of his office
building that faced the road. Exercising vigilance over every expense can make your profits -- and your paycheck -- go much further.
6. Limit What You Borrow: Living on credit cards and loans won't make you rich. Buffett has never borrowed a significant amount -- not to invest, not for a
mortgage. He has gotten many heart-rendering letters from people who thought their borrowing was manageable but became overwhelmed by debt. His
advice: Negotiate with creditors to pay what you can. Then, when you're debt-free, work on saving some money that you can use to invest.
7. Be Persistent: With tenacity and ingenuity, you can win against a more established competitor. Buffett acquired the Nebraska Furniture Mart in 1983
because he liked the way its founder, Rose Blumkin, did business. A Russian immigrant, she built the mart from a pawnshop into the largest furniture store in
North America. Her strategy was to undersell the big shots, and she was a merciless negotiator. To Buffett, Rose embodied the unwavering courage that makes
a winner out of an underdog.
8. Know When To Quit: Once, when Buffett was a teen, he went to the racetrack. He bet on a race and lost. To recoup his funds, he bet on another race. He
lost again, leaving him with close to nothing. He felt sick -- he had squandered nearly a week's earnings. Buffett never repeated that mistake. Know when to
walk away from a loss, and don't let anxiety fool you into trying again.
9. Assess The Risk: In 1995, the employer of Buffett's son, Howie, was accused by the FBI of price-fixing. Buffett advised Howie to imagine the
worst-and-bast-case scenarios if he stayed with the company. His son quickly realized that the risks of staying far outweighed any potential gains, and he quit
the next day. Asking yourself "and then what?" can help you see all of the possible consequences when you're struggling to make a decision -- and can guide
you to the smartest choice.
10. Know What Success Really Means: Despite his wealth, Buffett does not measure success by dollars. In 2006, he pledged to give away almost his entire
fortune to charities, primarily the Bill and Melinda Gates Foundation. He's adamant about not funding monuments to himself -- no Warren Buffett buildings or
halls. "I know people who have a lot of money," he says, "and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in
the world loves them. When you get to my age, you'll measure your success in life by how many of the people you want to have love you actually do love you.
That's the ultimate test of how you've lived your life."
Financial Glossary
This is a "small-but-friendly" glossary of finance and
investment terms. Some of the definitions have
recommended books and links to articles for more
information.
Click on any term:
10-K
10-Q
12b-1 Fees
401(k)
403(b)
Adjusted Gross Income (AGI)
Alpha
Annual Report
Annuity
Asset
Balance Sheet
Balanced Fund
Beta
Book Value
CODA
Call
Capital Asset Pricing Model (CAPM)
Capital Gain
Capital Gains Tax
Capital Spending
Cash Flow
Cash Flow Statement
Cash and Equivalents
Charge
Compound Annual Growth Rate (CAGR)
Consolidated Financial Statement
Consumer Confidence
Consumer Spending
Convertible Bond
Coupon
Covariance
Current Assets
Current Liabilities
Current Ratio
Current Yield
Currently Taxable Investment
Debt-to-Equity Ratio
Default
Deficit Spending
Depreciation
Dilution
Discount Bond
Discount Rate (Federal Reserve rate)
Discount Rate (present value)
Distribution
Dividend Discount Model
EBIT
EBITDA
EVA
Earnings
Earnings Statement
Earnings Yield
Enterprise Value
Equity
Equivalent Yield
Exchange Traded Fund (ETF)
Federal Reserve
Fiscal Policy
Float
Free Cash Flow
Fundamental
Fundamental Analysis
Goodwill
Gordon Growth Model
Government Spending
Gross Domestic Product (GDP)
Gross Margin
Gross National Product (GNP)
Gross Profit
Gross Revenue
Growth Stock
Hound Dog
IRA
IRS
Income Statement
Index Fund
Inflation
Inventory
Investment
Investment Grade
Junk Bond
Keogh Plan
Liability
Load
Long-term Debt
Market Capitalization
Modern Portfolio Theory
Momentum
Monetary Policy
Monte Carlo Simulation
Municipal Bond
NASD
NOPAT
Net Asset Value (NAV)
Operating Expenses
Operating Income
Operating Margin
Operations
P/E Ratio
P/S Ratio
PEG Ratio
Par Value
Passive Investing
Payroll Tax
Premium Bond
Productivity
Profit Margin
Profitability
Prospectus
Qualified Retirement Plan
Quick Ratio
R-Squared
Recession
Regression
Return on Assets
Return on Equity
Revenue
Roth IRA
Russell 3000
S&P 500
SEP
Salary Reduction Plan
Sales Costs
Sales Revenue
Securities and Exchange
Commission (SEC)
Sell Short
Sharpe Ratio
Short-term Debt
Standard Deviation
Tax-Deferred
Technical Analysis
Tobin Separation Theorem
Trade Deficit
Unemployment Rate
Value Stock
Variable Annuity
Weighted Average Cost of
Capital (WACC)
Wilshire 5000
Yield
Yield to Call
Yield to Maturity (YTM)
Zero Coupon Bond
Discounted cash flow (DCF) technique to value common stock.
DCF techniques are used by investment bankers for merger and acquisition analysis, Wall Street traders to value all types of debt obligations, and Wall Street
analysts to value stock.
Step 1—Forecast Expected Cash Flow: the first order of business is to forecast the expected cash flow for the company based on assumptions regarding the
company's revenue growth rate, net operating profit margin, income tax rate, fixed investment requirement, and incremental working capital requirement.
We describe these variables and how to estimate them in other screens.
Step 2—Estimate the Discount Rate: the next order of business is to estimate the company's weighted average cost of capital (WACC), which is the discount
rate that's used in the valuation process. We describe how to do this using easily observable inputs in other screens.
Step 3—Calculate the Value of the Corporation: the company's WACC is then used to discount the expected cash flows during the Excess Return Period to
get the corporation's Cash Flow from Operations. We also use the WACC to calculate the company's Residual Value. To that we add the value of Short-
Term Assets on hand to get the Corporate Value.
Step 4—Calculate Intrinsic Stock Value: we then subtract the values of the company's liabilities—debt, preferred stock, and other short-term liabilities to get
Value to Common Equity, divide that amount by the amount of stock outstanding to get the per share intrinsic stock value.
How does a corporation make money? It makes money by operating business lines where it manufactures products or provides services. A company
generates revenue by selling its products and services to another party. In generating revenue, a company incurs expenses—salaries, cost of goods sold
(CGS), selling and general administrative expenses (SGA), research and development (R&D). The difference between operating revenue and operating
expense is Operating Income or Net Operating Profit.
To produce revenue a firm not only incurs operating expenses, but it also must invest money in real estate, buildings and equipment, and in working capital
to support its business activities. Also, the corporation must pay income taxes on its earnings. The amount of cash that's left over after the payment of these
investments and taxes is known as Free Cash Flow to the Firm (FCFF).
FCFF is an important measure to stockholders. This is the cash that is left over after the payment of all cash expenses and operating investment required by
the firm. It is the hard cash that is available to pay the company's various claim holders, especially the good guys—the stockholders! The simple equation
used to calculate FCFF is:
FCFF = NOP – Taxes – Net Investment – Net Change in Working Capital
There are five key cash flow measures that are important in estimating the free cash flow to the firm that is used in the DCF approach. Those five cash flow
measures are: the revenue growth rate, the net operating profit margin, the company's income tax rate, net fixed capital investment rate, and incremental
working capital investment rate.
The revenue growth rate is equal to your estimate of the firm's revenue growth rate in percent over the Excess Return Period. Finance Internet sites like
Zack's, First Call, and IBES project revenue growth rates over differing periods. Yahoo Finance and America Online also have growth rates. Warning:
Academic studies have shown that analyst's forecasted growth rates have been upwardly biased.
Net operating profit margin is equal to a firm's operating profits divided by its revenues. A firm's income tax rate is equal to the provision for income taxes
divided by the firm's operating income before provision for taxes. The information necessary to compute NOPM and income tax rate can be found on the
firm's income statement as part of its annual or quarterly reports.
Net fixed investment rate is equal to the company's new investment in plant, property and equipment (PP&E) minus depreciation charges taken. To
calculate this ratio, you need to know the company's investment rate, equal to the firm's yearly investment in PP&E divided by revenues, and the company's
depreciation rate, equal to the firm's depreciation charges divided by revenues. The firm's investment in PP&L and depreciation charges can be found on
its cash flow statement in its annual report.
Incremental working capital investment rate is equal to the change in working capital divided by the change in revenue. Working capital is equal to [(
Accounts Receivable + Inventory) – Accounts Payable]. The firm's accounts payable, inventories, and accounts receivable can be found on its annual
balance sheet in its annual report.
The free cash flow to the firm approach provides for several distinct time periods for estimating cash flow which allow differing value-creating periods for a
corporation's business strategy. In the Excess Return Period, because of a competitive advantage that the firm has, the corporation is able to earn returns on
new investments that are greater than its cost of capital. Classic examples of companies that experienced a significant period of competitive advantage are
IBM in the 1950's and 1960's, Apple Computer in the 1980's, and Microsoft and Intel in the 1990's.
Success invariably attracts competitors whose aggressive practices cut into market share and revenue growth rates, and whose pricing and marketing
activities drive down net operating profit margins. A reduction in NOPM drives return on new investment to levels that approach the corporation's WACC.
When a company loses its competitive advantage and the return from its new investments just equals its WACC, the corporation is investing in business
strategies in which the aggregate net present value is zero (or worse yet, negative—witness IBM in the 1980's and Apple in the 1990's).
The length of the Excess Return Period for the corporation will depend on the particular products being produced, the industry in which the company
operates, and the barriers for competitors to enter the business. Products that have a very high barrier to entry due to patent protection, strong brand names,
or unique marketing channels might have a long Excess Return Period (10 to 15 years or longer). The Excess Return Period for most companies is 5 to 7
years or shorter. All else equal, a shorter Excess Return Period results in a lower stock value.
What do you use as an input for the Excess Return Period? This is your judgment call when valuing a stock. We use what we call the 1-5-7-10 RULE. A
firm's weighted average cost of capital (WACC) is a difficult concept to understand. It may be helpful to think of a company's WACC in relation to the
weighted average return on your own investment portfolio. You may own $10,000 in a money market fund that has an expected yearly return of 6%. You
also may own $10,000 of a preferred stock with an expected return of 8%. And you also may own $80,000 market value of a common stock with an expected
return of 10%. The expected weighted average return of your $100,000 (in total) investment portfolio equals:
Exp. Port. = ($10,000 x .06) + ($10,000 x .08) + ($80,000 x .10) = $9,400 = 9.4%
Return ($100,000) $100,000
A company's WACC is very similar to your investment portfolio's weighted average return as described above. It's simply the weighted average expected cost
for the company's various types of obligations—debt, preferred stock, and common stock—that are issued by the corporation to finance its operations and
investments.
The company's WACC is a very important number, both to the stock market for stock valuation purposes and to the company's management for capital
budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the
company's WACC will generate additional free cash flow and will create positive net present value for stock owners. These corporate investments should
result in an increase in stock prices. These projects are good things! Investments that earn less than the firm's WACC will result in a decrease in stockholder
value and should be avoided by the company.
When you value a stock of a company, the next place that you should visit for information is the company's own corporate Web site. At this site you can get
the corporation's Annual Report, which contains its Income Statement, Balance Sheet, and Cash Flow Statement, and its most recent quarterly earnings
release. This will provide you with the bulk of the information that you need for valuing its stock.
The next set of sites that you should visit are Internet sites devoted to investment information. Some sites are free or partly-free and some provide information
to subscribers only. Good sites to get corporate betas and growth rates are America Online, Microsoft Investor, S&P Personal Wealth and Yahoo Finance. At
most of these sites, either Zack's, First Call, or IBES act as the source of growth rate data Warning: Academic studies have shown that analyst's forecasted
growth rates have been upwardly biased.
Yahoo, AOL, MSN, Market Guide, Hoover's and Bloomberg Finance, among others, act as good sites to get valuation inputs relating to cost of capital, such
as the risk-free Treasury yields, rates associated with preferred stock and corporate debt, shares outstanding, and current stock prices.
We group companies into one of four general categories and Excess Return Periods: (1) the boring companies that operate in a competitive, low-margin
industry in which they have nothing particular going for them—a 1-year Excess Return Period; (2) the decent companies that have a recognizable name and
decent reputation and perhaps a regulatory benefit (e.g. Consolidated Edison)—a 5-year Excess Return Period; (3) the large, economies of scale good
companies with good brand names, marketing channels, and consumer identification (e.g. McDonald's and AT&T)—a 7-year Excess Return Period; and (4)
the knock-em-dead great companies with tremendous marketing power, brand names, and in-place benefits (e.g. Intel, Microsoft, Coca Cola and Disney)—a
10-year Excess Return Period.
We do not believe in going out more than 10-years with an Excess Return Period. Some fundamental stock valuation models, like the dividend discount
model, incorporate earnings and dividend growth in excess of the company's WACC, out to an infinite time period. Cash flow in these models is discounted
until the 'hereafter'. We think that 10 years is a reasonable amount of time to incorporate the product cycles of today's markets.
What happens after the Excess Return Period? Does the company dry up, die, or go bankrupt? NO! For valuation purposes, the company loses its
competitive advantage. This loss of competitive advantage means that the company's stock value will grow only at the market's required rate of return for the
stock. For example, if the common stock price of XYZ Boring Company (which does not pay dividends) is $20, and its required rate of return is 12%, its
stockholders expect it to grow to ($20 * 1.12) = $22.40 after year 1, ($22.40 * 1.12) = $25.08 after year 2, and ($25.08 * 1.12) = $28.06 after year 3. After year
3, in this example, the company should pay all of its free cash flow to stockholders through dividends or share repurchases. The annual rate of return that an
investor expects to earn when investing in shares of a company is known as the cost of common equity. That return is composed of the dividends paid on
the shares and any increase (or decrease) in the market value of the shares. For example, if an investor expects a 10% return from McDonald's stock and she
buys a share at $67.25, her expectation is to receive $6.72 during the year through a combination of dividends (currently $.34 per share during 1998) and
the appreciation of the stock price (presumed to be $6.38 to give her the 10% expected return totaling $6.72) during the year.
Let's now take a look at what rate of return, in general, an investor should expect from a stock. The return expected of any risky common stock should be
composed of at least three different return components: (1) a return commensurate with a risk-free security (Rf); (2) a return that incorporates the market risk
associated with common stocks as a whole (Rm); and (3) a return that incorporates the business and financial risks specific to the stock of the company itself,
known as the company's beta.
The first measure of return (Rf) relates to what market rate of return is currently available from a risk-free security, like the yield associated with a long-term
Treasury Bond. So if the yield on Treasury Bonds is 5%, an investor should expect a return greater than 5% for a common stock.
The second measure of return (Rm) relates to what market returns are currently available from and what risks are associated with stocks in general. There is a
general risk premium (the equity risk premium) associated with the stock market as a whole. That risk premium should be priced into any equity investment.
For example, if you expect to earn 8% on average (from a diversified portfolio) in the stock market and the risk-free rate is 5%, the Equity Risk Premium (Rerp)
would be (Rerp) = (8% - 5%) = 3%.
Equity Risk Premium(Rerp) = Exp. Return on Market(Rm) - Risk Free Rate(Rf)
The third measure of return versus risk (beta) should be related to the specific stock being purchased—how risky is the type of business the firm does and how
risky is the financial structure or leverage of the firm. Beta measures the risk of the company relative to the risk of the stock market in general. With greater
risk, as measured by a larger variability of returns (business or operating risk), the company's should have a larger beta. And with greater leverage (higher debt
to value ratio) increasing financial risk, the company's stock should also have a larger beta. And with a larger beta, an investor should expect a greater
return. The beta of an average risk firm in the stock market is 1.00.
The financial risk model that uses beta as its sole measure of risk ( a single factor model) is called the Capital Asset Pricing Model (CAPM) and is used by
many market analysts in their valuation process. The relationship between risk and return that comes out of that model and the one that is incorporated into
our FCFF analysis and spreadsheet software is:
Exp.(Rs) = (Rf) + beta(Rerp)
which in English translates to "The expected return on a stock (e.g. McDonald's) is equal to the risk free rate (e.g. 5%) plus the specific stock's beta (e.g. 0.97)
times the equity risk premium (e.g. 3.0%)." In numbers it looks like this: Expected Return on McDonald's Stock = 5% + 0.97(3.0%) = 7.91% We always prefer
to buy a stock that is priced below or near its intrinsic value. We do not buy a stock that is trading at a price that we believe is above its value. We
understand the 'momentum trading approach' and know that when the stock market is bullish and a stock's trend is up, the trend can carry an 'overvalued'
stock even higher. This occurs especially with a hot, growth industry like the Internet and with a stock that has a relatively small amount of shares available
for trading.
We strongly believe that there is value to careful stock selection and also believe that an investor should own a diversified portfolio of common stocks. Within
that portfolio the investor should value each stock individually using the DCF valuation technique. When the stock is 'overvalued' and it exceeds its intrinsic
value by more than X% (the investor should pick that percentage, e.g. 15%), he should sell that stock and replace it with another stock that is 'undervalued'
by more than X% (e.g. 15%). The value of any asset is equal to the expected cash flows of the asset, discounted for timing and risk. Future cash flows for
common stock can come from dividends, from the sale or merger of the company (e.g. AOL's merger with Time Warner), from the repurchase of the stock by
the company (e.g. Microsoft and Intel have large share repurchase programs), or from the sale of the stock at market prices.
High Net Worth Individual - HNWI
A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how
rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by
financial institution and region. The categorization is relevant because high net worth individuals generally qualify for separately managed investment
accounts instead of regular mutual funds.
The most commonly quoted figure for membership in the high net worth "club" is $1 million in liquid financial assets. An investor with less than $1 million but
more than $100,000 is considered to be "affluent", or perhaps even "sub-HNWI". The upper end of HNWI is around $5 million, at which point the client is then
referred to as "very HNWI". More than $50 million in wealth classifies a person as "ultra HNWI".
HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These
individuals generally demand (and can justify) personalized services in investment management, estate planning, tax planning, and so on.
High net worth individual
In private banking, a high-net-worth individual (HNWI) is a person with a high net worth. Typically these individuals are defined as having investable assets
(financial assets not including primary residence) in excess of US$1 million. [1][2] The number of high net worth individuals worldwide is estimated at 9.5
million. HNWI wealth totals US$37.2 trillion, representing an 11.4% gain since 2005.[1]
UHNWI
Banking and Finance
Retail
UHNWI refers to Ultra-High-Net-Worth Individuals, individuals or families who have at least US$30 million[1][2] in investable assets. The number of ultra high
net worth individuals worldwide is estimated at about 95,000.[1] The exact dividing lines depend on how a bank wishes to segment its market; for example, the
term Very High Net Worth Individuals [3] can refer to those with assets between $5 million and $50 million, with Ultra High Net Worth Individuals only those
with above $50 million.
Banking and Finance
Most global banks, such as Credit Suisse, Deutsche Bank or UBS, have a separate Business Unit with designated teams consisting of client advisors and
product specialists exclusively for UHNWI. Because of their extreme high net worth and the way their assets were generated, these clients are often considered
to have semi-institutional or institutional like characteristics.
Retail
Brands in various sectors, such as Bentley, Maybach and Rolls-Royce in motoring, actively target UHNWI and HNWI to sell their products. Figures gathered by
Rolls-Royce suggest there are 80,000 people in the UHNWI category around the world.[4] They have, on average, eight cars and three or four homes.
Three-quarters own a jet aircraft and most have a yacht.
Source: Investopedia-Wikipedia
Stock value is derived from a company's long term ability to create cash profits from invested capital; and financial statements are intended to give a
snapshot of how successfully this creation of value is being accomplished. But unless you're a professional accountant, you may find that a look at an annual
report is like a visit to an alien planet; you'll encounter odd terminology, strange calculations, and of course big numbers.
This guide should explain the three important financial statements from the annual report of a fictitious company:
Income Statement: How good the company is at making money
Cash Flow Statement: How they're paying for their operations and their future growth
Balance Sheet: What the company owns and owes
High Net Worth Investors. Due Diligence For High Net Worth Investors
Resource on conducting hedge fund due diligence for high net worth portfolios. It is not a complete guide to conducting this type of due diligence but they
brought up many good points. A hedge fund investment should be utilized to improve the efficient frontier of an accredited investor’s portfolio and protect
against downside risk by the allocation of a segment of the portfolio appropriate to the client’s risk tolerance. Both quantitative and qualitative due diligence
are essential to protect a client’s investment against fraud, divergence from stated strategy, and/or poor investing.
A fund of hedge funds investment can offer diversification, and innate due diligence, within the hedge fund investment by limiting the allocation that any
single fund can hold. A fund of funds downside comes from the layering of fees and the more apparent lack of transparency that’s prevalent with many funds.
In addition, the preeminent hedge funds are often hard to locate because they are often available by referral only.
The correlation of a hedge fund with traditional benchmarks is a vital component in due diligence. One must also be aware that although stated pre-tax
returns of a fund may be appealing, short-term trading can destroy the tax efficiency which is critical to high net worth investors. Research into the operation
of the hedge fund manager and their performance in varying markets and well as tactical ongoing analysis of the fund’s performance are imperative to
quality due diligence.
Hedge Fund Due Diligence: Hedge Fund Due Diligence Guide
New hedge funds are launched daily, which is constantly increasing the importance of conducting formal hedge fund due diligence and determining which
hedge funds are appropriate for you or your firm to invest in becomes increasingly important. Every person or company is going to have different investment
horizons, risk tolerances, strategy preferences, etc, so it is usually more valuable to know the basics of how to evaluate a hedge fund then it is to hear
someone say which hedge funds are "the best." I think giving hedge fund recommendations even to the degree of suggesting exactly how to evaluate a
hedge fund is too close to finance advice to put online but the SEC website does provide this advice in conducting a minimum level of hedge fund due
diligence before investing:
Read a fund's prospectus or offering memorandum and related materials
Understand how a fund's assets are valued
Ask questions about fees
Understand any limitations on your right to redeem your shares
Research the backgrounds of hedge fund managers
Don't be afraid to ask questions
Hedge Funds Due Diligence Articles, Guides & Tools that could be useful while conducting due diligence on hedge fund managers. Hedge fund due
diligence resources.
Hedge Fund Due Diligence Articles
Hedge Fund Regulation Corner | Compliance & Law Notes
SEC on Hedge Fund Regulation
Hedge Fund Risk Analysis
Hedge Fund Fraud | SEC & Hedge Funds Fraud Case
Hedge Fund Due Diligence Tips
The Importance of RFPs in conducting hedge fund due diligence
Hedge Fund Manager Due Diligence
Due Diligence for High Net Worth Clients
Investment Due Diligence
Risks of hedge fund investing & portfolio management
How long should hedge fund due diligence take?
Institutional Hedge Fund Risk Controls
Hedge Fund Due Diligence Questions
Importance of transparency and hedge fund due diligence
Hedge Fund Due Diligence Whitepapers & PowerPoints
Whitepaper on Hedge Fund Operational Risk & Transparency
Alpha through rigorous hedge fund due diligence
In-depth hedge fund risk & due diligence PowerPoint
White Paper on Mitigating Operational Risk During Hedge Fund Due Diligence
Hedge Fund Due Diligence Tools
FINRA Broker Check
Hedge Fund of Fund RFP Example - Used in Institutional Due Diligence Processes
HFN's Guide to Hedge Fund Due Diligence
Book on Hedge Fund Due Diligence
Fund of Fund Due Diligence
Additional Hedge Fund Guide Sections
Hedge Fund Strategy
Hedge Fund Marketing
Hedge Fund Terms
Articles Related to "Hedge Fund Due Diligence"
1. Guide to Investing
2. Hedge Fund Risk Management
3. Hedge Funds FAQ
4. Request for Proposal
Permanent Link: Hedge Fund Due Diligence
Tags: Hedge Fund Due Diligence, Hedge Funds Due Diligence, Hedge Fund Manager Due Diligence, Hedge Fund RFP, Hedge Fund Operational Due
Diligence, Hedge Fund Due Diligence
Questionnaire
Link to This Resource: Hedge Fund Due Diligence http://richard-wilson.blogspot.com/2008/03/hedge-fund-due-diligence.html
Hedge Fund Strategy
Hedge Funds Strategy Guide
The 10-15,000 hedge funds now being managed throughout the world use between 200-400 different hedge fund strategies. How can you keep these all
straight? The short answer is you can't,
However you can find a list of hedge fund strategy definitions here below.
Hedge Fund Strategy Explanations
Emerging Markets
Equity Long Short
Fixed Income Arbitrage Investment Strategy | 1 Page Guide
130/30 Hedge Fund Resources
Global Macro
Global Macro Hedge Funds
Multi Strategy Hedge Fund
Sustainable Investing
Event Driven Hedge Funds
Green Hedge Funds
Art Investment Strategy
African Hedge Funds
130/30 Hedge Funds See Rapid Growth
Top 5 Hedge Fund Strategies
Hedge Fund Investment Strategies
Litigation Funding Hedge Fund Strategy
Short Selling
Emerging Markets Hedge Funds
Risk Arbitrage Hedge Fund Strategy
Hedge Fund Litigation Funding List
Warrant Arbitrage
Arbitrage Investment Strategy
More Hedge Fund Guides
Hedge Fund Terms
Hedge Fund Marketing
Hedge Fund Due Diligence
Articles Related to Hedge Fund Strategy:
1. Hedge Fund Investment Strategies
2. Multi Strategy Hedge Fund
3. Top 5 Hedge Fund Strategies
4. Hedge Fund Jobs
5. Hedge Fund Managers
6. Hedge Fund Research
Permanent Link: Hedge Fund Strategy
Tags: hedge fund strategy, hedge funds strategy, hedge fund strategy guide, hedge fund strategy explanation, hedge funds strategies, hedge fund strategy
information, guide to hedge fund strategies, hedge fund manager strategy, hedge fund investing strategy, information on hedge fund strategy, hedge fund
strategy research, hedge fund strategy due diligence
Link to This Resource: Hedge Fund Strategy
Fund of Hedge Funds Fund of Hedge Funds Update
There has been a lot of talk over the last 2 years and 2 quarters particularly about the death of fund of hedge funds (fofs). Like much other doomsday
discussions regarding the hedge funds we don't see these fund of fund groups going anywhere. In fact, I still think there is room for further growth in the fund
of fund arena as demand from internationally-based investors is increasing as most fund of funds are still currently designed for U.S or EU investors.
The main reason why we think hedge fund of funds will be always around is that many investors have just enough assets to play around in hedge funds. This
requires them to either allocate their funds to a friend or close business partner who runs a single strategy fund or diversify their entry to the hedge fund
market by investing in 3-12 hedge funds at one time. Some of the most popular retail products these days are all in one portfolios whether they be lifestyle
portfolios, all cap separate managed account products, or retirement focussed growth & income mutual funds. Many investors would rather pay an extra layer
of 1% fees in return for a no hassles lower risk exposure to the hedge fund industry.
Another reason why fund of hedge funds will be around for a long time is that 55% of all fof assets are from institutions. The percentage of fund of funds used
in a institutions total portfolio is on the rise, not the decline. This class of investors generally takes a longer view than high net worth individuals or family
offices. It would take several catastrophic events in consecutive quarters or years to stall or create a small decline in the institutional use of hedge fund of
funds.
Read dozens of additional articles like this within the guide to Hedge Fund Terms and Definitions.
- Fund of Hedge Funds. Articles Related to "Fund of Hedge Funds":
Fund of Funds
Hedge Fund Due Diligence
Hedge Fund Performance
9 Hedge Fund Database Tips
Preqin's Hedge Fund Resources
Hedge Fund Employment
CTA Directory
Hedge Fund Database
Fund of Fund Database
Hedge Funds
Related Terms: Fund of Hedge Funds, FoF, Hedge Fund of Fund, Hedge Fund of Funds, Fund of Hedge Funds, Hedge Fund Portfolio, Portfolio of Hedge
Funds, fund of funds hedge funds, fund of funds hedge fund, a hedge fund of funds, funds of hedge funds portfolio, top hedge fund of funds, best fund of
hedge funds, top fund of hedge funds, best hedge fund of funds, fof, fund of hedge fund managers, fund of hedge funds
Below are a collection of useful and interesting news pieces, articles and videos related to hedge funds:
Link 1: Assets of a Brazilian hedge fund sharply drops: Ciano Investimentos Gestao de Recursos Ltda.‘s flagship hedge fund lost 95 percent of its assets to
withdrawals after founder Ilan Goldfajn, a former central bank director, left the company.
Investors withdrew 197.4 million reais ($85 million) Ciano 60 Hedge Fundo de Investimento Multimercado since Nov. 11, a day after Goldfajn departed. The
fund’s value plunged to 10.3 million reais as of Nov. 21, according to the Web site of Brazil’s securities regulator, CVM.
“Some investors withdrew funds because of my decision to leave Ciano,” Goldfajn, 42, said in a telephone interview from Rio de Janeiro. “Because of my
departure, we waived a 10 percent redemption fee.” Source
Link 2: Hedge Funds Search for Assets in Japan
Japan's Ashiya city has been home to the nation's industrial titans since samurai ruled the land more than a century ago. Now it's a feeding ground for hedge
funds tapping the wealth of new multi-millionaires like Kunihisa Sagami.
Sagami, founder of mail-order cosmetics and jewelry supplier Epix, is one of the residents of the gated enclave overlooking the port city of Kobe who are
among the highest taxpayers in Japan.
They're the elite in a nation where households hold a combined $15 trillion in financial assets -- more than the annual gross domestic product of the U.S.
Source
Link 3: Texas Hedge Fund Being Liquidated
Parkcentral Capital Management, an investment firm that manages money for the family of Ross Perot, is liquidating a fixed-income hedge fund because it
is “no longer viable.”
This year through October, Parkcentral Global Hub’s assets fell as much as 40 percent, to $1.5 billion. The fund is selling its remaining holdings to pay
creditors, Eddie Reeves, a spokesman, said Tuesday. Mr. Perot and members of his family were the fund’s biggest investors.
“Parkcentral Global has been impacted dramatically by the unprecedented upheaval of the capital markets in general and the freezing of credit markets in
particular,” Mr. Reeves said. ”The fund is no longer viable.” Source
Link 4: Spitzer's wife to join a hedge fund
The wife of former New York Gov. (and Sheriff of Wall Street) Eliot Spitzer is going to work on Wall Street.
Silda Wall Spitzer, who endured the humiliation of her husband’s resignation amidst a prostitution scandal in March, has joined hedge fund Metropolitan
Capital Advisors (which is technically on Madison Avenue), New York Magazine reports. The $300 million firm is run by CNBC personality Karen Finerman,
whose husband, Lawrence Golub, is a longtime friend of Eliot Spitzer and contributor to his campaigns.
Silda Spitzer will help “recruit new investors” in her new job, which she started last month.
Link 5: Hedge Fund Pacificor Sued
Pacificor has been sued by the former owners of a mortgage lender the California hedge fund bought.
John and Kitty Gaiser have sued the Santa Barbara-based firm and the estate of its former manager, Michael Klein, seeking $30 million. The Gaisers’ lawsuit
says that Pacificor “misused a position of trust and control in order to attempt to take control of and acquire—without compensation—John and Kitty Gaiser’s
ownership of Quality Home Loans,” the Gaisers’ law firm said in a statement.
Link 6: Hedge fund assets stuck within Lehman
Several companies reliant on four US hedge funds face collapse because the funds cannot access shares and loans held at the London arm of Lehman
Brothers, the collapsed bank.
The four funds – whose names were kept secret in a High Court ruling this week – claimed that they were likely to close in mid-December if they failed to get
access to information about their assets frozen at Lehman. The funds made an unsuccessful effort to force the administrators of Lehman, four PwC partners,
to give them details of their assets and how much they owe to Lehman.
Related to Thanksgiving Hedge Fund Linkfest Roundup
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Geographical Guides
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Thanksgiving, Thanks Giving
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GLG Partners Hedge Fund Update
GLG Partners Fund
GLG Partners Hedge Fund Update
Hedge Fund Tracker notes for GLG Partners has been updated. To read the updated profiles see this link: GLG Partners Hedge Fund Tracker Profile Notes
Related to GLG Partners Hedge Fund Update
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manager, GLG Europe, GLG Australia
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Top 4 Hedge Fund Industry Fears | Market Insights
Hedge Fund Fears
The Top 4 Hedge Fund Fears
Over the last 3 months and a series of conversations with hedge fund managers, prime brokerage professionals, administrators and marketers it seems there
are 4 big fears in the industry right now.
Top 4 Hedge Fund Fears
A flat or highly volatile market for a period of more than 18-24 months - effectively wiping out those hedge funds which were hanging on for those greener
pastures of another bull market.
Long-term deterioration of leverage of almost any type. While many hedge funds already use no or close to no leverage many others use large amounts of it
and many funds would be hampered if new regulations are put into place which severely limit their access to it. Read an article on this topic here.
Desperate hedge fund managers committing enough fraud to scare off a large percentage of the High net worth and ultra high net worth investor base. There
is article on my site on ethics located here.
Overbearing regulation which pushes hedge fund activity into Canada, over to London and across the world away from New York. The industry is already
suffering large redemption losses and regulation done the wrong way could stifle further innovation or at least push even more of it offshore. As the recently
hedge fund testimony showed, many hedge funds are open to some forms of regulation or over-sight but these must be done in ways which are sensitive to
the intellectual knowledge and security disclosure concerns specific to this industry. Listen to the recent congressional testimony by hedge fund managers by
clicking here.
Other interesting points that have come out of talking to hedge funds - most expect the markets to stay flat or negative for an additional 6-9 months and the
majority see this to be a huge opportunity for positioning their fund for explosive growth in 2010 and 2011.
Related to Top 4 Hedge Fund Industry Fears | Market Insights
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Leverage By Hedge Funds
Link to This Resource: Top 4 Hedge Fund Industry Fears | Market Insights
Managers | Hedging Skills
Japanese Hedge Funds. Japanese Hedge Fund Managers| Notes
It would seem that choppy markets in Japan over the past several years is now helping hedge funds in this region navigate the current financial crisis. Most of
the funds I know which run funds focusing on Japanese securities also run diversified Asia or China funds which have done very poorly, I would be curious to
see if those managers who run both Japan-specific funds as well as China funds faired better than the average fund in China. Here is the article excerpt:
Japan's hedge fund industry, dominated by so-called long-short funds that bet on rising and falling stock prices, will attract capital on signs they are starting
to outperform peers, Credit Suisse Group AG said.
The 81-fund Eureka hedge Japan Long-Short Equities Index fell 11 percent this year through October, compared with a 21 percent drop for an index that
tracks more than 1,000 global long-short hedge funds and a 40 percent slide by the MSCI World Index, a global benchmark.
``Japanese long-short strategies have weathered reasonably well the market turmoil,'' Boris Arabadjiev, head of alpha strategies at Zurich-based Credit
Suisse's asset management unit, said in an interview in Tokyo yesterday. ``That relative performance has already started to attract capital, and we believe
that it will continue to attract capital. We continue to be favorably disposed to managers investing in Japan.''
This year has been the worst on record for hedge funds, an estimated $1.56 trillion industry, with the average fund losing 16 percent through October,
according to data compiled by Chicago- based Hedge Fund Research Inc. The industry saw net withdrawals of $62.7 billion in October, according to
Eurekahedge Pte., a Singapore-based industry data provider. Read more...
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japan, long short funds in Japan
Link to This Resource: Japanese Hedge Fund Managers | Hedging Skills
10-K
A company's annual report, filed with the SEC. Also see the main article on understanding financial statements.
10-Q
A company's quarterly report, filed with the SEC.
12b-1 Fees
Annual fees charged by mutual funds, specifically used to pay for advertising and promotion. Sometimes called "hidden loads". Even funds classified as "no
load" funds can charge 12b-1 fees.
401(k)
A retirement plan made available by a company to its employees, featuring tax-deferred contributions and growth. The plan may also include matching
contributions by the company. Caveat: many 401(k)s invest in the company's own stock; if the company has a bad enough year you could lose both your job
and your retirement savings. So you need to diversify your retirement account, even if you do take advantage of a 401(k).
403(b)
A retirement plan available to employees of qualifying non-profit organizations, featuring tax-deferred contributions and growth.
Adjusted Gross Income (AGI)
Income (including wages, interest, capital gains, income from retirement accounts, alimony paid to you) adjusted downward by specific deductions
(including contributions to deductible retirement accounts, alimony paid by you); but not including standard and itemized deductions. AGI is the number
you write at the bottom of page 1 of your 1040 form, and then copy again to the top of page 2.
Alpha
Measure of a stock's performance beyond what its beta would predict.
Regression, Alpha, R-Squared
One use of CAPM is to analyze the performance of mutual funds and other portfolios - in particular, to make active fund managers look bad. The technique
is to compare the historical risk-adjusted returns (that's the return minus the return of risk-free cash) of the fund against those of an appropriate index, and
then use least-squares regression to fit a straight line through the data points:
Each data point in this graph shows the risk-adjusted return of the portfolio and that
of the index over one time period in the past. (For example, you might make a graph
like this with twenty data points, showing the annual returns for each of the past
twenty years.)
The general equation of this type of line is
r - Rf = beta x ( Km - Rf ) + alpha
where r is the fund's return rate, Rf is the risk-free return rate, and Km is the return of
the index.
Note that, except for alpha, this is the equation for CAPM - that is, the beta you get
from Sharpe's derivation of equilibrium prices is essentially the same beta you get
from doing a least-squares regression against the data. (Also note that alpha and beta
are standard symbols that statisticians use all the time for this type of regression;
Sharpe and his followers weren't trying to be obscure, as some people like to believe.)
Beta is the slope of this line. Alpha, the vertical intercept, tells you how much better the fund did than CAPM predicted (or maybe more typically, a
negative alpha tells you how much worse it did, probably due to high management fees).
The quality of the fit is given by the statistical number r-squared. An r-squared of 1.0 would mean that the model fit the data perfectly, with the line going
right through every data point. More realistically, with real data you'd get an r-squared of around .85. From that you would conclude that 85% of the fund's
performance is explained by its risk exposure, as measured by beta. (Then you'd punch your fist in the air and say "And the other 15% is due to pure luck!"
MPT never believes in investor skill: an investment's behavior equals that of its asset class, minus management fees, plus-or-minus unpredictable luck.)
Next: three factor regression.
Fama and French Three Factor Model
CAPM uses a single factor, beta, to compare a portfolio with the market as a whole. But more generally, you can add factors to a regression model to give a
better r-squared fit. The best known approach like this is the three factor model developed by Gene Fama and Ken French.
Fama and French started with the observation that two classes of stocks have tended to do better than the market as a whole: (i) small caps and (ii) stocks
with a high book-value-to-price ratio (customarily called "value" stocks; their opposites are called "growth" stocks). They then added two factors to CAPM to
reflect a portfolio's exposure to these two classes:
r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha
Here r is the portfolio's return rate, Rf is the risk-free return rate, and Km is the return of the whole stock market. The "three factor" beta is analogous to the
classical beta but not equal to it, since there are now two additional factors to do some of the work. SMB and HML stand for "small [cap] minus big" and
"high [book/price] minus low"; they measure the historic excess returns of small caps and "value" stocks over the market as a whole. By the way SMB and
HML are defined, the corresponding coefficients bs and bv take values on a scale of roughly 0 to 1: bs = 1 would be a small cap portfolio, bs = 0 would be
large cap, bv = 1 would be a portfolio with a high book/price ratio, etc.
One thing that's interesting is that Fama and French still see high returns as a reward for taking on high risk; in particular that means that if returns increase
with book/price, then stocks with a high book/price ratio must be more risky than average - exactly the opposite of what a traditional business analyst would
tell you. The difference comes from whether you believe in the efficient market theory. The business analyst doesn't believe it, so he would say high
book/price indicates a buying opportunity: the stock looks cheap. But if you do believe in EMT then you believe cheap stocks can only be cheap for a good
reason, namely that investors think they're risky...
Fama and French aren't particular about why book/price measures risk, although they and others have suggested some possible reasons. For example, high
book/price could mean a stock is "distressed", temporarily selling low because future earnings look doubtful. Or, it could mean a stock is capital intensive,
making it generally more vulnerable to low earnings during slow economic times. Those both sound plausible; but they seem to be describing completely
different situations (and what happens when a company that isn't capital intensive becomes "distressed"?) It may be that the success of this model at
explaining past performance isn't due to the significance of any of the three factors taken separately, but in their being different enough that taken together
they do an effective job of "spanning the dimensions" of the market.
(There's actually another interpretation that's so much less cerebral that it's probably correct. The broad market index weights stocks according to their
market capitalization, making it size-biased and valuation blind; so maybe the extra two factors in this model are just a couple of tweaks to adjust for these
two problems. This also explains why momentum is sometimes used as yet another factor: market capitalization shows where the market has been putting its
money for years, while momentum shows where it has been putting it lately; so if you want to take advantage of market efficiency you start with the index
and then tweak it a little with momentum.)
Portfolio Analysis
Like CAPM, the Fama and French model is used to explain the performance of portfolios via linear regression; only now the two extra factors give you two
additional axes, so instead of a simple line the regression is a big flat thing that lives in the fourth dimension.
Even though you can't visualize this regression, you can still solve for its coefficients in a spreadsheet. The result is typically a better fit to the data points
than you get with CAPM, with an r-squared in the mid-ninety percent range instead of the mid eighties.
Investing for the Future
Analysing the past is a job for academics; most people are more interested in investing intelligently for the future. Here the approach is to use software tools
and/or professional
advice to find the exposure to the three factors that's appropriate for you, and then to invest in special index funds that are designed to deliver that level of
the factors. You can try this tool on another website. When you try it you should note that it in fact collapses all risk to the single
factor of volatility, which is typical, and which brings up the earlier question of whether the
additional factors really are measures of risk. In this case, how would you ever help
somebody figure out what their "value tolerance" was? As a matter of fact, what would that
question even mean?
Conclusions
There are two separate messages to take away from this. First, the three factors together
account for practically all of a portfolio's behavior; that's the strongest evidence yet that
mutual funds can't beat indexes. Second, history indicates that small value "just happens"
to deliver higher returns and higher volatility than the stock market as a whole. Assuming the
trend holds, then that's the practical message for investors. In particular, it improves what
felt like a flaw in the Tobin argument: where Tobin said high-risk investors should buy the
total stock market index on margin, Fama and French offer the saner alternative of just
adding some small value to your portfolio.
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Money Market Fund
Mutual funds that are comprised of short term debt securities are known as money market funds. Investor accounts will have money in this type of fund with their
brokerage firm. Money market yields will vary based on the performance of the securities in the account.
Securities in the Account. The Money Market fund will be comprised of short term notes and other early maturing debt. These would include:
Treasury Bills
Municipal Notes
Commercial Paper
Banker's Acceptances (BA's)
Fed Funds
Negotiable CD's
ADR Stock. Foreign stock traded in the US are known as American Depository Receipts or ADR's. An ADR is a negotiable (traded) share of stock of a foreign
company, where the international company has registered an ADR to trade in the united states. Allowing an international company to have a way for it's stock
to trade in america makes it easier on the issuing company. Although the American Depository Receipt must register with the SEC, the issuing foreign company
does not. These can trade OTC or on an exchange. This can give a sense of stability to the stockholder. Although, as with any stock - the risk still lies with the
performance of the stock and the financial well being of the company overseas.
ADR Dividend Declaration and Payout
The securities of the foreign company are deposited in a foreign branch of a US Bank. ADR holders will receive dividends in american dollars based on this
banking and conversion arrangement.
Since this is still considered shares of stock in a company, the corporation will declare and pay it's cash dividend in it's natural currency, whether it is in Yen,
Euro or whatever currency they use. The dividend of the ADR is then converted into american dollars and paid out to the american shareholders.
Many securities investors own American Depository Receipt shares. It can offer you the chance to own stock in an international company, while getting the
comfort of the investment being safekept in the US and traded on US stock exchanges.
All of the Programs posted here are for informational purposes only, and is not a solicitation for the purchase or sale of any securities, nor a solicitation of
investment funds or placement. All of the information do not represent the policies of any bank, financial institution, lender or investor, is not intended as a
confirmation of any transaction, and does not consist of any legal, securities related or tax related advice.
Accredited investor:
An accredited investor is a person or institution that the Securities and Exchange Commission (SEC) defines as being qualified to invest
in unregistered securities, such as privately held corporations, private equity investments, and hedge funds.
The qualification is based on the value of the investor’s assets, or in the case of an individual, annual income.
Specifically, to be an accredited investor you must have a net worth of at least $1 million or a current annual income of at least $200,000 with the
anticipation you’ll earn at least that much next year. If you’re married, that amount is increased to $300,000.
Institutions are required to have assets worth $5 million to qualify as accredited investors. The underlying principal is that investors with these assets have the
sophistication to understand the risks involved in the investment and can afford to lose the money should the investment fail.
Private Placement Investments
Stock offerings offered only to wealthy or seasoned investors are private placements. Under Regulation D of the SEC, these investment offerings can be sold to
no more than 35 non accredited investors. These normally carry a stock holding period requirement.
Brokerage firms that handle wealthy clients that are looking for investment opportunities may offer private placements. The investors would be made aware of
the risks regarding the holding period, after market potential and other risks.
There are many private placement offerings covering a broad spectrum of the investment market.
Assets Management Prospectus. A prospectus is a document that describes the investment being involved. In the case of hedge funds, a prospectus would be
distributed to potential investors informing them about the fund objectives, investment philosophy and risk tolerance as well as fee structure, reinvestment and
divestment. For instance, a hedge fund prospectus may disclose that the fund charges 20-40% of profits (when there are not charges or fees based on the total
assets under management, disregarding the investment performance) as a management fee and only allows capital withdrawals once a year at a set time.
These items are only the most basic, though often most scrutinized, elements of a hedge fund prospectus. Investors must have the choice to discuss the
Prospectus at any time.
Mutual Fund Investment.
An open end fund that is purchased and redeemed with an investment company is a mutual fund. These investments are issuing new shares and are normally
bought paying a sales charge to the company or a selling group member firm.
There are mutual funds invested in every sector of the market and every investment objective. The type of fund you choose should reflect your income needs,
risk tolerance and your current and projected future financial situation
1y Target Est
The 1-year target price estimate represents the median target price as forecast by analysts covering the stock. Data is provided by Thomsonfn.com. More
detailed target estimate data can be found by clicking a company's "research" link..
Div Date
Dividend Pay Date. The date on which the dividend was last paid, or the date on which the next one will be paid.
Dividend (ttm)
All dividends paid out in the last twelve months are added together to create a "Dividend(ttm)". The trailing dividend is then divided by the most recent closing
price to derive the Yield (see Yield). Depending on the dividend history of a particular company, the dividend(ttm) and yield could produce different results
compared to the company's forward dividend which is calculated by multiplying the payment frequency by the most recent dividend.
EPS Est
Current year analyst consensus EPS estimate from Thomson/First Call. More detailed analyst estimates and consensus data can be found by clicking the
"research" link for a symbol.
EPS (ttm)
Earnings Per Share (EPS) is stated for the most recent 12 months (ttm, trailing 12 months). It represents primary earnings from continuing operations
attributable to each share of common stock outstanding, and is calculated by dividing the income from continuing operations by the average number of
shares outstanding during the period (in accordance with generally accepted accounting principles, GAAP). The income is the income or loss that remains
after excluding income or loss from discontinued operations and extraordinary charges or credits that are reported separately (again, per GAAP). Earnings Per
Share is adjusted for stock splits and stock dividends. If data is not available for 12 months or more, "N/A" is displayed for EPS.
Daily updates are received on quarterly EPS data. Most earnings information is received within 48 hours of the company's earnings announcement. Every time
a company declares their earnings, a record is sent for that particular earning figure along with a 12-month rolling EPS.
Ex-Div
The Ex-Dividend Date (without dividend). You need to purchase the stock before this date to receive the current quarter's dividend or stock split.
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
Nasdaq - National Association of Securities Dealers Automatic Quotation System
OTC BB - OTC (Over the Counter) Bulletin Board Market.
Toronto - Toronto Stock Exchange
Alberta - Alberta Stock Exchange
Vancouver - Vancouver Stock Exchange
Last Trade
The time and price of the last trade made for the stock. The date is reported in place of the time if the stock hasn't traded today.
PEG
PEG stands for price/earnings growth and is calculated by dividing the trailing P/E by the projected earnings growth rate (in this case, the 5 year annualized
growth rate). The idea behind the PEG Ratio is to relate price to growth.
P/S
Price to Sales Ratio. This number is the previous closing stock price (see Prev Close) divided by the revenue per share.
Yield
The dividend(ttm) per share divided by the previous closing stock price (see Prev Close), as a percentage (multiplied by 100).
Asset Management: Odit Investment Strategy for Asset Enhancement.
1- Odit uses Arbitrage, simultaneous buying and selling of securities in different markets with the purpose of profiting from the price
difference in the markets, under absolutely controlled circumstances only.
2- Odit strongly avoids Derivatives, a volatile financial instrument whose value depends on or is derived from the performance of a
secondary source such as an underlying bond or currency.
3- Odit hedges, making arrangements to safeguard against loss on an investment, by the use of various techniques: avoiding overvalued
securities and potential bubble bursts, having in mind the intrinsic value of securities, watching historical lows of strong fundamentals
securities, etc.
4- Odit strongly avoids Leverage, the use of credit (such as margin) to improve one’s speculative ability. Odit prefers to increase the rate of
return on an investment, by the use of less risky methods.
5- Odit strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the seller does own the security it is said to be in a
“long position”), and that the seller must borrow. The only exception is when a security is very obviously near of a bubble burst situation.
Usually, the technique is employed when prices are likely to drop. If the price of the security does drop, the seller can make a profit on the
price of the shares sold versus the price of the shares bought to pay back the borrowed shares.
6- Odit can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively undervalued securities. Odit Invests in equities
expected to experience acceleration in growth of earnings per share. Odit hedges watching the best opportunity on undervalued
securities. However Odit avoids shorting of equities unless there are obvious and strong expectation of earnings disappointment.
7- Odit can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying equity, debt, or trade claims at deep discounts of
companies in or facing bankruptcy or reorganization, when there is strong indications that Odit can profit from the market’s lack of
understanding of the true value of the deeply discounted securities and because the majority of institutional investors cannot own below
investment grade securities.
8- Odit can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in equity or debt of emerging (less mature)
markets which tend to have higher inflation and volatile growth. Short selling is not permitted in many emerging markets, and, therefore,
such type of hedging is often not available.
9- Odit can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be mixes and matches hedge funds and other
pooled investment vehicles. This blending of different strategies and asset classes aims to provide a more stable long-term investment
return than any of the individual funds. Volatility depends on the mix and ratio of strategies employed.
10- Odit can invest up to 3/10 of the assets in Income. Investing with primary focus on yield or current income rather than solely on capital
gains. May utilize leverage to buy bonds and sometimes fixed income like RE Notes in order to profit from discounted purchase, principal
appreciation and interest income under absolutely controlled circumstances only.
11- Odit can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from changes in global economies, typically brought
about by shifts in government policy which impact interest rates, in turn affecting currency, stock, and bond markets. Participates in all
major markets -- equities, bonds, currencies and commodities -- though not always at the same time. Uses leverage and derivatives to
accentuate the impact of market moves, under absolutely controlled circumstances only.
12- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage. Attempts to hedge out most market risk by taking
offsetting positions, often in different securities of the same issuer.
13- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities Hedging. Invests equally in long and short equity
portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective stock analysis and stock picking is
essential to obtaining meaningful results. Leverage may be used to enhance returns, under absolutely controlled circumstances only.
14- Odit can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating assets among different asset classes depending on
the manager’s view of the economic or market outlook.
15- Odit can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment theme changes from strategy to strategy as
opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim earnings disappointment, hostile
bids, and other event-driven opportunities. May utilize several of these investing styles at a given time and is not restricted to any particular
investment approach or asset class.
16- Odit strongly avoids Short Selling: Sells securities short in anticipation of being able to re-buy them at a future date at a lower price due
to the manager’s assessment that the securities are overvalued, or the market, or in anticipation of earnings disappointments often due
to accounting irregularities, new competition, change of management, etc. However, Odit can invest, alternatively, up to 1/10 of the assets
in some opportunities, under absolutely controlled circumstances.
17- Odit can invest up to 3/10 of the assets in Value, under certain circumstances. Usually Odit Invests in securities perceived to be selling
at deep discounts to their intrinsic value or their potential worth. Such securities may be out of favor with analysts. Long-term holding,
patience, and strong discipline are often required until the ultimate value is recognized by the market.
Should you decide to contact us for any business opportunity CLICK HERE
Please, include section name as a part of your brief letter's subject.
-- Clients Relation -- Investors Relation -- Financial Analysis -- Legal Issues -- Due Diligence
-- Title Insurance -- Risk Management -- Financial Engineering -- Stock Portfolios -- Bond Portfolios
-- Business Note Portfolios -- Real Estate Note P. -- Gold Portfolios -- Precious Metals P. -- Hedge Funds
Asset Management: Investment Strategy for Asset Enhancement.
1- DGHC uses Arbitrage, simultaneous buying and selling of securities in different markets with the purpose of profiting
from the price difference in the markets, under absolutely controlled circumstances only.
2- DGHC strongly avoids Derivatives, a volatile financial instrument whose value depends on or is derived from the
performance of a secondary source such as an underlying bond or currency.
3- DGHC hedges, making arrangements to safeguard against loss on an investment, by the use of various techniques:
avoiding overvalued securities and potential bubble bursts, having in mind the intrinsic value of securities, watching
historical lows of strong fundamentals securities, etc.
4- DGHC strongly avoids Leverage, the use of credit (such as margin) to improve one’s speculative ability. DGHC prefers
to increase the rate of return on an investment, by the use of less risky methods.
5- DGHC strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the seller does own the security it
is said to be in a “long position”), and that the seller must borrow. The only exception is when a security is very obviously
near of a bubble burst situation. Usually, the technique is employed when prices are likely to drop. If the price of the
security does drop, the seller can make a profit on the price of the shares sold versus the price of the shares bought to
pay back the borrowed shares.
6- DGHC can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively undervalued securities. DGHC
Invests in equities expected to experience acceleration in growth of earnings per share. DGHC hedges watching the best
opportunity on undervalued securities. However DGHC avoids shorting of equities unless there are obvious and strong
expectation of earnings disappointment.
7- DGHC can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying equity, debt, or trade claims at
deep discounts of companies in or facing bankruptcy or reorganization, when there is strong indications that DGHC can
profit from the market’s lack of understanding of the true value of the deeply discounted securities and because the
majority of institutional investors cannot own below investment grade securities.
8- DGHC can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in equity or debt of emerging
(less mature) markets which tend to have higher inflation and volatile growth. Short selling is not permitted in many
emerging markets, and, therefore, such type of hedging is often not available.
9- DGHC can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be mixes and matches hedge
funds and other pooled investment vehicles. This blending of different strategies and asset classes aims to provide a
more stable long-term investment return than any of the individual funds. Volatility depends on the mix and ratio of
strategies employed.
10- DGHC can invest up to 3/10 of the assets in Income. Investing with primary focus on yield or current income rather
than solely on capital gains. May utilize leverage to buy bonds and sometimes fixed income like RE Notes in order to
profit from discounted purchase, principal appreciation and interest income under absolutely controlled circumstances
only.
11- DGHC can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from changes in global economies,
typically brought about by shifts in government policy which impact interest rates, in turn affecting currency, stock, and
bond markets. Participates in all major markets -- equities, bonds, currencies and commodities -- though not always at
the same time. Uses leverage and derivatives to accentuate the impact of market moves, under absolutely controlled
circumstances only.
12- DGHC can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage. Attempts to hedge out most
market risk by taking offsetting positions, often in different securities of the same issuer.
13- DGHC can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities Hedging. Invests equally in
long and short equity portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective
stock analysis and stock picking is essential to obtaining meaningful results. Leverage may be used to enhance returns,
under absolutely controlled circumstances only.
14- DGHC can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating assets among different asset
classes depending on the manager’s view of the economic or market outlook.
15- DGHC can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment theme changes from strategy to
strategy as opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim
earnings disappointment, hostile bids, and other event-driven opportunities. May utilize several of these investing styles
at a given time and is not restricted to any particular investment approach or asset class.
16- DGHC strongly avoids Short Selling: Sells securities short in anticipation of being able to re-buy them at a future
date at a lower price due to the manager’s assessment that the securities are overvalued, or the market, or in
anticipation of earnings disappointments often due to accounting irregularities, new competition, change of
management, etc. However, DGHC can invest, alternatively, up to 1/10 of the assets in some opportunities, under
absolutely controlled circumstances.
17- DGHC can invest up to 3/10 of the assets in Value, under certain circumstances. Usually DGHC Invests in securities
perceived to be selling at deep discounts to their intrinsic value or their potential worth. Such securities may be out of
favor with analysts. Long-term holding, patience, and strong discipline are often required until the ultimate value is
recognized by the market.
Should you decide to contact us for any business opportunity CLICK HERE
See our portfolio: DGHC SP5H Equity Holding (As Of January First, 2009). Profitable equity holding, solid
out-performers, stronger, wider balanced. Not leverage, 50 % less risky. Up To Two Billion USD or larger investment.
Monthly operation expenses: 0.25 % (not from holding, free). Operation expenses & brokerage expenses do not affect the
integrity of the holding, due to the only use of margin to such effect. The Most Conservative (just capital gains, dividends
not included)
Potential Gross Profit At January First, 2010 (%) ----------------------------------------------------------------------------------------- 175.00
January First, 2009: $2,000,000,000.00 >>>>>>>>>>>>>>>>>>>>>>>>>> January First, 2010: $3,500,000,000.00
>>>>>>>Potential Gross Profit One Year Later >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> $1,500,000,000.00 <<<<<<<
Asset Management For Accredited Investors Only. Minimum Amount Per Account: One
Million USD. Unless otherwise agreed the standard holding period is 18 months.
DGHC Global Asset Management is the only global group that charges no management fees (usually
2 % or larger fee) based on the amount of assets under management.
DGHC Asset Management is the only global group who provide not from holding help to Client if Client is in need of
liquidity due to sudden financial problems.
DGHC Asset Management is the only global group who create a Limited Liability Company for the asset management of
each Accredited Investor, as well as the only who appoint the Accredited Investor as Supervisor for the financial
operation, treasury, investment accounts and accountability control of such Limited Liability Company.
DGHC Asset Management is the only global group whose income rely solely on the success of the Client, the Accredited
Investor, regarding the investment made. AlphaOdit considers extremely trustworthy the quality of investment decisions
made by AlphaOdit's experts, so, should AlphaOdit is not able to provide to the Accredited Investor an Annual Return,
the income (contingent fee: performance or incentive) of AlphaOdit will be ZERO.
DGHC Asset Management Annual FEE will be contingent, based on the performance of investments. The only incentive
of AlphaOdit comes from the creation of wealth for the Accredited Investor. That is to say that if there is no Annual
Return, Success, Profit, to the benefit of the Accredited Investor, there will not be any FEE paid to the order of
AlphaOdit.
Contingent FEE Structure: (See Asset Management Contract)
-- Annual Profit up to 20 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 20% of Annual Profit
-- Annual Profit larger than 20 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 25 % of Annual Profit
-- Annual Profit larger than 35 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 30 % of Annual Profit
-- Annual Profit larger than 50 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 35 % of Annual Profit
-- Annual Profit larger than 65 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 40 % of Annual Profit
-- Annual Profit larger than 80 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 45 % of Annual Profit
-- Annual Profit larger than 100 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 50 % of Annual Profit
Note: This is neither an offer nor an advertisement. See disclaimer at left column. Should you decide to contact us for any business opportunity
Money-A
US Government Agency Bonds :
Securities that are issued by government agencies are considered US agency bonds. These debts are issued to raise money for the various functions
the agency engages in. These could include mortgages, farm loans or student loans. Government agency bonds are AAA rated, but most are not
considered direct obligations of the US government. Many are privatized associations set up by the US to offer the various services just
mentioned. GNMA or Ginnie Mae is an agency that is a direct obligation of the government. Since these have the highest credit quality of all
agency bonds, they tend to offer the lowest rate of return - when compared to other federal bonds. Federal Bonds can be issued by: Ginnie Mae
GNMA, Fannie Mae FNMA, Sallie Mae SLMA, Freddie Mac FHLMC. Others bonds are issued by FHLB, FFCB and a few others.
Types of Agency Bonds:
Straight Debt Obligation: Bonds are backed by the full faith and credit of the agency and generally pay interest from a nominal yield every 6
months with a fixed maturity where the par value is redeemed. These are typical structures that are common in other forms of issuers, such as
corporations and municipal issuers.
Pass Through Securities : These bonds are backed by the full faith and credit of the agency as well, but the payments and eventual pay-off rely on the
paying back of mortgage payments issued through the agency. Ginnie Mae or another mortgage issuing agency could issue a pass through to
fund the issuance of mortgages to a group of people. As the homeowner pays back principal and interest back to Ginnie Mae, Fannie Mae, etc, the bond
holders are paid.
Pass Through Bonds or Mortgage Backed: Securities are normally issued as 30 year bonds, but the prepayments made by the mortgage holders or
changes in interest rates will affect the speed of the payments made on the bonds. The holders will receive monthly principal and interest until their
share in the bond is completed. These bonds have a large amount of prepayment (paying too fast) or extension risk (paying too slow), because changes
in interest rates, will have a potential volatile impact on the performance of the bond. Source of this and the following: American Investment
Training, Inc.
Eurodollar Currency - Euro Bonds. U.S dollars held in banks in European countries are known as Eurodollars. The dividend or interest payment on these
securities are made using the US dollars on deposit with European banks. There is also a bond market aspect.
Bonds
The Eurobond market is larger than the U.S Corporate bond market. The Euro Dollar center is in London, where most of the trading is. This bond market is
either denominated in U.S dollars or in foreign currencies like the Euro.
Many Eurobonds are Eurodollar bonds.
Some foreign investors prefer Eurodollar issues because the maturities range from 5-10 years which is shorter and they have better bond call
protection than many US bonds. Euro bonds are also not subject to withholding tax on interest earned. Most Eurodollar bonds are traded in bearer
form. These securities normally pay once per year. US based corporate and agency bonds normally pay semi annually. Euro dollar bonds do not have
to register with the SEC, where corporate securities are not exempt.
Trading - Payments
Companies with offices overseas will use the corporate Eurodollar market as well. Foreign governments can float these bond issues to attract
trading investors outside the country who want payment in the international currency which is American dollars. International agencies can raise
funding in the Eurodollar market. The U.S Government does not issue foreign currency or Eurodollar bonds. They are issued outside the US and are
purchased and traded by people outside the US. Interest payments are made in dollars.
General Obligation Municipal Bonds
Bonds which are backed by the taxing power of a municipality are known as General Obligation or GO Bonds. The issuer raises taxes and sets the
money aside to pay back principal and interest to the municipal bondholders. Taxes used for GO Bonds include: Property, Income, Sales, etc.
Every state and many local areas offer these bonds. The interest earned on them is federally tax free. The tax free yield is higher on municipal
bonds vs. other debt investments.
These are different than Revenue Bonds, which uses non tax dollars to secure the Municipal bond issue.
As with all municipal bond investments, general obligation or GO issues are best suited for people who are not in low tax brackets. The tax rate of the
investor will affect the overall rate of return on these bonds.
Most municipal bonds are callable. The yield may be affected by the G.O. bond being called early or going to maturity. The Yield To Maturity or
Yield To Call should be examined before investing.
All GO bonds are rated by rating agencies. These credit agencies will examine the bond issue and give it a credit rating. AAA is the highest, AA, A and
even Baa are considered investment grade bonds and are safe. In reality, almost 100% of municipal general obligation bonds pay off in full at
maturity. In some cases, the state will back a local government bond in the event the local municipality bond cannot pay. All things being equal,
general obligation securities are considered more secure than revenue bonds because of the tax backing.
Limited Tax Bonds
Issuers can sell bonds backed by limited taxing power on the GO issue.Thus, there is a limited tax rate used to fund the municipal issue. The risk to the
bondholder and general obligation issue is if the municipality cannot raise enough to fund the security.
Mill Rate - Millage
Property taxes can be used on G.O. Munis by using a fixed millage rate to assess the tax used by the town or local authority. This tax backs the G.O.
bond when using property taxes as the main source.
Debt Limit
Some local and state municipal issuers of general obligation securities will have a debt limit that is set to them. This would represent the maximum
allowable bonds they could have issued at any one time or outstanding. If the issuer is at it's limit, it would not be able to issue any new
GO and would then have to sell revenue backed muni bonds.
Zero Coupon Bonds
Bonds that are bought at a deep discount and pay no rate of interest are known as zero coupon bonds. These securities will mature at a larger face value
than the price it was bought at. These investments offer growth within a bond, but they do not offer any current income. These can be found in
funds and annuities, since many of those assets are long term.
Taxation
Tax is normally paid each year on the earned interest from zero coupon bonds. This is also known as phantom income, so there is no taxation
advantage to them unless they are bought into an IRA or other tax deferred account.
Investment Risks
Fiixed income investments and bonds that do not have a coupons or nominal yields have little or no reinvestment risk. The term reinvestment risk refers to
an investor having to deposit or invest their interest payments received from other securities. When interest rates are low, this risk can be amplified.
However with 0 coupon bonds - that issue is minimized by the fact that no payments are received until maturity. Since Zeros are usually longer term - this risk
is even less realized.
Treasury STRIPS are also Zero coupons. T Strips are Government guaranteed bonds that have no interest paid until the end. Also municipalities and
corporations offer them.
How To Calculate Bond Yield
Calculation of bonds rate of return or yield starts with understanding the different rate indicators involved. Bond yields are based on the coupon rate, the
price paid and the maturity length of the investment. The 3 key interest indicators are: Nominal Yield, Current Yield, and Yield to Maturity.
Nominal
The Nominal rate or coupon rate is the fixed interest rate on the bond. This is the rate that the issuer pays to par value. It is fixed, it never changes and it is
only paid to par. Par is the amount of bonds you own. This yield may or may not be your total net rate of return. If the bond was purchased at a premium
(above par), then your overall yield to maturity will be lower than your stated coupon rate. If a bond has a 7% nominal yield or coupon and was purchased at
a premium of $103 ($1030), then your YTM will calculate lower because the 7% interest is only paid to the $1000 par. The $30 premium does not earn
interest and is not redeemable at par. So, a 7% bond at a premium is not really "yielding" 7% in that example. A bond purchased at a discount will have the
reverse effect on yield. The Yield to maturity would be higher for a discount bond, based on the fact that you are still earning interest on par even if
you paid under par. The overall YTM wil calculate higher for a bond.
Current
The current yield on a bond is calculated by dividing the nominal rate by the current market price. Doing this will have a similar result to the yield to
maturity when bonds are bought at premiums or discounts. A premium bond will have a lower current yield compared to it's coupon rate and a discount bond
will have a higher current yield than it's nominal rate.
Yield To Maturity
The most important rate of return indicator is a bond's yield to maturity. The YTM factors is everything to give the true overall yield to an investor. It
examines the nominal yield, current yield and years to maturity. The overall rate of return can be affected by the length of time the bond is held. If a 4
point premium was paid on an 8% bond, but the bond has a maturity of 15 years, that yield will be different than if the bond was only good for 2 years.
How to calculate yield to maturity: This is done by using the key components of a bond: the coupon rate, the price and the years to maturity. A 5% bond
priced at $850 and maturing in 15 years would calculate as follows:
Yearly Coupon Interest = $50 (5% paid to $1000)
Total Discount = $150 ($100 par - cost of $850)
Annual Discount = $10 ($150 total discount divided by 15 years)
Average price - $925 (difference between $850 and $1000 par)
Add the $10 annual discount to the coupon payment of $50. This gives you $60, which is divided by $925 and that will give you the yield to maturity of this
bond - 6.49%
Tax Equivalent Yield Calculator
The after tax yield or tax equivalent is used with Municipal Bonds mostly. Since the interest on municipal bonds are federally tax free, a tax equivalent
yield is needed to compare municipal with other taxable investments that may be in front of an investor. An example we can calculate would be
comparing a 6% municipal with an 8% corporate bond. The tax bracket for this example is 28%. You need to calculate the tax free yield on the municipal
and then compare it to the 8% stated yield on the corporate bond. Municipal yield divided by 100 minus the tax bracket will give you the after tax yield
equivalent. 6% divided by 72 (100-28) will equal 8.33%, which is greater than the 8% corporate bond.
Callable YTC - Call Bonds
Fixed income securities or bonds that are callable may be priced to their yield to call. This date, if called is basically an early maturity for the bondholder.
The one key difference is that notes or bonds that go to maturity always mature to par, so the yield is calculated with that in mind. Callable securities could
be called at different prices than par. The yield to call will be higher than the nominal yield if the bond is called at a price above the price paid by
the investor originally. The YTC will be lower if the reverse is true. Similar to par non callable bonds, if a fixed income investment was bought at par and is
called at par - the yield to call will equal the nominal rate.
BUYING and SELLING NOTE PORTFOLIOS
This business field is very similar to Project Finance (without a long process toward approval). Now, rather than submitting a project to our investors (Real Estate,
Infrastructure, Energy, Mining Projects, etc) we submit a Note larger than Ten Million USD, or a Note Portfolio to them. Some instruments can be verified in
less than a
week, so, we have now a faster process. Other instruments require more time to be verified; however, always the period of time is substantially smaller. We also
avoid several restrictions like those which are imposed by Central Bank of India and other Asian, European and American Central Banks or other authorities,
because the Market of Instruments is one for existing Notes, so the Note Holders have already faced and jumped the obstacles and restrictions of governments
and local rules and regulations.
Due to the situation of the international market, project finance is having a rate of success of 10%; that is to say that only one
out of ten projects is being successfully financed. However, seven out of ten Note Portfolios are being sold or bought. Success increases from 10 % to 70%.
In example; some investors have made the process, they have financed the project (Real Estate, Mining, Energy, Ships, etc) and have the Note. They want to
sell the Note because they need liquidity at that time and are willing to sell the Note at a discount. Our investors buy such Note in order to sell the same at a
smaller discount or in order to hold such Note. They accept any transaction should the Notes prove to be trustworthy after due diligence, and should the
transaction, after payment of fees and taxes, is profitable. So, the key is to detect Sellers or Buyers whose asks or bids are so within the reason that provide a
true business opportunity.
Likewise, our investors can buy or sell treasuries, bonds, preferred stock portfolios, etc, should such portfolios prove to be trustworthy instruments, after due
diligence. We arrange transactions from both sides, from Seller side and from Buyer side.
We continue adding information concerning our business field, please try to review it from time to time.
Type of Notes
Real Estate Based:
Condominium Assessments, Mortgages (1st, 2nd, 3rd), Wrap around mortgages, Balloon Notes / Mortgages, Contracts for Deed, Land Contracts, Tax
Liens/Certificates, Deeds of Trust / Trust, First and Second Liens, Interest only Mortgages, Mortgages from Estates, Condo Assessments, Full or partial Note
purchase, Seasoned or New Notes
VERY IMPORTANT:
-- The Minimum Amount of investment for individuals and companies is FIVE MILLION USD.
-- Transactions are made in the following currencies: Euro (EUR), U.S. Dollars (USD), Japan Yen (JPY), U.K. Pound (GBP) and Switzerland Francs (CHF).
Capital Structures.
Risk managed returns for capital partners and investors. Engineering the proper capital structure for a proposed transaction. Some of the most common capital
structures are:
Equity: Traditional equity investment (entity's ownership) as a partner or stock holder.
We Purchase and Sell Business Note Portfolios, Bond Portfolios and RE Note Portfolios (Commercial Real Estate). Minimum Amount Per
Transaction: Five Million USD. Collaterals Which Are Acceptable: Commercial Real Estate, Infrastructure, Energy, Mining, Oil Refineries, Power Plants, Oil
Tankers, Commercial Ships, Cruise Ships, Cargo Ships, Ethanol Plants, Stone, Gold, Precious Metals, Preferred Equity Titles (Strong Fundamentals Stocks),
Zero Coupon Long Term Government Securities (T-Strips), Medium Term Notes (MTN), Bank Guarantees (BG), Treasuries And Other Financial Instruments.
W A R N I N G: We Neither Buy Nor Sell Derivatives Or Any Tricky Instrument. Should you decide to contact us for purchase or sale
of Note Portfolios CLICK HERE
Investment and Retirement with 401K Accounts
Employer and employee profit sharing plans are known as 401k accounts. They are corporate pension plans where an employee contributes a defined
amount into the 401k and the employer can match a percentage of it. These contributions are normally made with after tax dollar amounts. This is
considered a defined contribution plan.
All contributions made into the account by the company are made in the name of the employee. Should the employee leave, the contributions and the
investment value of the account belong to the employee - perhaps only to a point.
If the employee has not fulfilled their minimum number of years with the company, the company can retract a percentage of the 401k contributions they
made - under the rules of the plan. All money invested by the employee remain with the employee when transferring or rolling over the 401k into another
corporate retirement plan or personal retirement plan.
Vesting. The vesting period in a 401k investment account is the time the employee must fulfill their years to 100% vested. This means all contributions made
by the company under the plan are 100% available to the person should they leave their job. The vesting period under these accounts can vary. Usually this
period runs 5 years.
Investments. The securities account or investments within the 401k are varied with each plan or company. Usually, the employee will have a wide array of
mutual fund or other fund choices to dedicate investment money to. The investor can change the allocation and choices in the 401k as they see fit. Rates of
return and retirement value will vary with the performance of the securities in the investment account.
Investment Money Management
With the amount of full service assets management firms available, many investors are using advisory firms for full money or assets management on their
investments.
A money manager can handle all of investor's financial investments under one umbrella account. A good financial advisor will spread investor assets over a
diversified field of investment choices to create a well diversified portfolio.
Assets Management . Securities and Investment. Trust account set up. Contracts and Fees .
Assets Management can vary with each advisor or money manager. Usually, a full service assets management program is a for fee management based on the
total assets the firm is advising for investor. Many large Assets Managers provide to investors Assets Management based on paying per transaction (commission).
Should a Money Manager is paid on a percentage of assets under management usually there is no monetary incentive for the advisor to do any trading. Should
such Money Manager is paid on a percentage of the profit there is a monetary incentive for the advisor to do any trading which makes sense. There is also a
comfort level should all of investor's assets are managed in one place by a trustworthy Money Manager whose profit rely on investor's profit.
When a financial advisor manages assets for investor, investment in each field can be made with the other investment fields in mind.
Should the Assets Manager is in touch with investor's entire financial situation Assets Manager is able to know how each investment decision affects investor' s
entire investments.
Choosing a Money Manager. When choosing a money manager investor must find such that is willing to do a free review of investor's current assets and/or
investments. This will allow investor to see how deep the money manager do his work and the advice he is giving. It can be very educational, investor is under
no obligation and investor may decide to go with that particular money management firm.
Investment Portfolio Management. Most full service assets management firms offer full or active portfolio management for their investors. The investment
management could include, stocks, bonds, funds, etc. A firm who provide assets management for investor gives such investor a full line of products and allows
the investor to have his entire portfolio managed and kept by such firm.
Active. When an assets manager or advisor is involved in active management, this normally means the investor is frequently investing or changing assets. It
also could mean the firm is involved in every financial assets the client has.
Bonds and Fixed Income Portfolio. Many large investors or institutional clients like Banks and insurance companies have large holdings of bonds and other
fixed income product. The active management of these portfolios include seeing the maturities of these investments, and managing interest rate risk. A good
bond money manager will work to make sure there is limited interest rate exposure and will offer management of the cash flow from these bonds. A fixed
income portfolio specialist will also survey the entire market for the best product available through many broker dealers. This is especially important when
dealing with municipal bonds - since most of those are held by firms in each state. New issues of mortgage backed securities and corporate issues should also
be part of most large bond product holdings.
Proper assets management should be a successful arrangement for the investor and the portfolio manager.
Investments are with qualified businessmen, developers, operators, etc, in transactions where there is a significant opportunity for value creation or cash flow
enhancement.
Preferred Equity
(Preferred Stock): It is best suited for situations where the businessman, developer, etc, lacks the additional equity capital required to bridge the gap between
debt and purchase or development cost. It is typically structured so that the investor receives his investment plus a preferred return and a participation in profits.
Mezzanine Debt:
It provides businessmen, developers, etc, with subordinated debt funding up to approximately 90 % of the value of the property. It is attractive to businessmen,
developers, etc, who want to retain a greater share of the profits. The first mortgage is typically straight debt and the second mortgage is the higher risk and
higher yield instrument, which has either a higher coupon or exit fees. The lender may be the same for both debt instruments or could be two different
lenders. This structure is excellent for developers who want to retain100 % ownership.
Participating Debt:
It leverages the property to 90 % of the cost in a blended first and second mortgage structure. This structure has many of the characteristics as Mezzanine
Debt, but typically there is only one lender.
Development Agreement:
The investor takes the ownership position and through a Development Agreement contracts the developer to build and manage the asset. The developer
receives 25 % to 30 % of the profits. This is suited for developers who have no cash equity of their own.
If you are in the market to sell or buy a note, deed of trust, land contract, promissory note, seller financed note, accounts receivable, lottery winnings or
any other type of debt instrument we, along with a network of private investors are looking to give you the best price for your note. A GLOBAL
NETWORK OF INSTITUTIONAL INVESTORS WHO ARE TOP WORLD BANKS, TRUSTS AND OTHER ENTITIES, WHO SELL AND BUY INSTRUMENTS,
SUCH AS SELLER FINANCED NOTES, PERFORMING NOTES, NON-PERFORMING NOTES, BANK GUARANTEES (BG's) AND MEDIUM TERM NOTES
(MTN's). We can provide the opportunity to sell notes at the highest cash price in the note business. We can help you to sell a note or to buy a note. Are You
Receiving Payments?. If You Want a sum of cash now You can Get the Highest Cash Price for your note!. Should you want to sell a seller financed note,
owner financed, Trust Deed, or land contract, we can provide access to the biggest note buyer and the best note buyer. You can sell to our investors business,
residential and commercial Note portfolios on all types of property along with many other Types of receivables. Upon review, a confidential purchase
proposal will be provided. If you would like to sell your note we can convert all, or just a portion (partial purchase), of your future payments into a significant
sum of cash. When you sell your note our investors will try to minimize all of the transaction expenses. There are entities that claim to be free
transaction providers. There is no free stuff in the business field and, disclosed or undisclosed, always there are fees or costs for seller and buyer. A serious
company will try to minimize such costs but such company will not try to hide the transaction costs. If a company says that seller will have the full sale
proceeds in cash, such company has obtained from seller an additional discount on the note or note portfolio fair market value. If you are in the market to
sell or buy Bulk (REO's) Real Estate Owned, (MTN's) Medium Term Notes, CMO's, Business Notes, etc, we can provide the buyer or seller. New investors and
Note Buyers are welcomed.
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We can provide opportunities for the sale and purchase of notes secured by properties generally known as Real Estate Owned (taken back by a lender).
We can bring together the interested parties: owners, lenders, investors, buyers, sellers and service providers. Every corner could be covered: Brokers,
Agents, Sellers, Buyers, Investors , REO Management, Broker Referral Service, broker/agent network, Vendor Management, Offer Management System
(OMS), Auctions, Settlement Services, Listing Opportunities, BPO Opportunities, access to all the information and resources. We provide serious
investors who have sound financial capabilities the access to REO, Note Portfolios, Builder Buyouts, clients' LOI's, private seller's, seller mandates, clearing
houses, etc. The integrity of the transaction and the client's confidential information is never compromised. Likewise we provide access to sellers that pulls
down from Wall Street Banks and a Wall Street Platform that can compile tapes of any size or match up buyer LOI's with Wall Street fall-outs. Sellers have
implemented the Patiot Act which has substantially changed the REO process. Here are some highlights. All LOI's need to be notarized. Sellers require a
state or government issued ID from all buyers at some time during the transaction. Proofing of funds has substantially changed as well. Buyers need to have
liquid funds in a bank account at the time the tape is ordered and provide the banking coordinates to the seller, i.e. routing and account number. Buyer's can
no longer hard proof through escrow or their attorney. The banks are electronically proofing buyers' bank accounts (a bank cannot ping an escrow account).
Buyers may soft proof (provide the name of banking officer, attorney or escrow officer) in their LOI, but they must have the liquid funds available in their bank
account, and the escrow officer or attorney must be instructed to release the banking coordinates to the seller during hard proofing. All procedures and
forms will be provided. We may begin to work directly with the buyer or mandate. This procedure ensures the confidentiality of the buyer's documents,
facilitates communication, and the fast and timely delivery portfolios.
Our business field is Notes, and we provide the note seller or note buyer the best possible transaction. We deal with all kinds of notes, on all types of
property. We do our Due Diligent part and take an individual approach to business, having in mind the quality of our people and their commitment to
professionalism, integrity, and service. We have a group of global professional associates, who provide excellent service, which includes, Real Estate
Attorney, Corporate Attorney, Real Estate Broker, etc, that can assist in handling any Real Estate or Business Note transactions or to verify confidential
information. We are able to provide a global network of private investors who would like to sell or buy a note portfolio. We can consider Notes or Note
Portfolios from funding of transactions of entities who cannot acquire loans or funding from traditional banks or other financial institutions for development
projects, Investment opportunities, Joint Ventures and Business funding, factoring of account receivables and many other Types of Receivables.
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Methods of Purchasing: Whole note full purchase, Purchase of balloon payments, Multi-stage pay outs
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Instrument Portfolio Purchased: (From $10,000,000). First Mortgages, Second Mortgages, Wrap-Around Mortgages, Contracts For Sale, Lease Purchase
Agreements, Contracts-For-Deed, First & Second Deeds of Trust, Purchase Money Mortgages, Real Estate Lien Notes, Real Estate Land Contracts,
Structured Insurance Settlements, Divorce Settlements Liens
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Investors: Our Investors buy Monthly, Quarterly, Annual, and Interest Only payments, Any Interest Rate, Any term of loan. They purchase worldwide and pay
top dollar. We minimize closing costs and fees. Although our primary business is purchasing notes secured by real estate, We can arrange several
transactions in order to convert virtually any regular cash flow into immediate cash.
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Property Types:
RESIDENTIAL, DUPLEX, TRIPLEX, FOURPLEX, APARTMENTS, INCOME PROPERTIES, IMPROVED LAND, SMALL TRACTS, RECREATIONAL & RESORT,
COMMERCIAL IMPROVED LOTS, MOBILE HOMES WITH LOT, FARM & RANCH, CONDOS, MOTELS, VACANT LAND PORTFOLIOS
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Global Note Selling:
We have a widespread marketing area serving investors worldwide. In fact, we presently have business relations with an important amount of real estate
mortgage investors and business note investors worldwide, as well as several regional and local note purchasers. Each note is reviewed and quoted
individually 72 hours from receiving it. We offer extremely competitive buy rates. Depending on the type of Note we could minimize fees for appraisal,
title insurance, closing and processing. Discounts are determined by several factors, including: Current Market Conditions, Type of Real Estate
Securing the Mortgage, Loan-To-Value Ratio, Discounted Loan-To-Value Ratio, Seasoning, Interest Rate Of Note, Payor's Credit, Verifiable Payment
History, Investor Yield Requirements, Remaining Term To Maturity, Residential / Owner Occupied Versus vs. Non-Owner Occupied, Balloon Maturity, Fair
Market Value, Lien Position
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Buying Mortgage Notes:
Buying mortgage notes. If your documents are inadequate investors and advisors prepare new ones; if there are title problems they get them corrected. They
can take care of the appraisal and handle everything all the way through to the closing. There is no substitute for experience in buying/selling notes
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Selling Mortgage Notes:
Selling mortgage notes and listing mortgage notes. We can get you top dollar by selling your mortgage notes, we call it as we see it and give you the best price
in the marketplace. Investors do all the paperwork necessary to see that your mortgage notes are handled as they should be.
Consumer Based;
Health/Country Club Memberships, Time-Share Memberships, Credit Card Debt/Charge offs, Corporate Retirement Plans, Inheritances, Trust Advances,
Probates, Retail Installment Contracts, Unsecured Non-Performing or Delinquent Debt, Prizes and Awards, Consumer Receivables, License Impound
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Contingency Based:
Corporate Contribution Portfolios, Royalty Payment Portfolios, Commercial Judgment Portfolios, License Fee Portfolios, Consumer Judgment Portfolios,
Franchise Fee Portfolios
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Government Based:
Voluntary Separation Incentive Portfolios, Farm Production Flexibility Contracts, Tax Refund Portfolios, Military Retirement and Disability Pension Portfolios,
Lottery Winning Portfolios
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Business Based:
Commercial Deficiency Portfolios, Chapter 11 Reorganization Plans, Bankruptcy Receivables, Commercial Judgment Portfolios, Equipment Lease Portfolios,
Equipment Timeshares Contracts, Letter of Credit Portfolios, Aerospace Leases, Commission Portfolios, Property Lease Portfolios, Sport Contract Portfolios,
Purchase Order Portfolios, Commercial Lease Portfolios, Seasoned or New Notes, Preferred Equity Titles
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Insurance Based:
Insurance Settlement Portfolios, Land Purchase Assignments, Worker's Compensation Awards, Annuities, Structured Settlement Portfolios
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Other Collateral Based:
Vendor Carry-back Paper, Mobile Home Note Portfolios, RV and Business Vehicle Note Portfolios, Warehouse Inventory Line Portfolios, Seasoned or New Notes,
Business Notes, Aerospace Notes, Equipment Notes, Marine Notes, Collectibles Notes, Automobile Notes
12b 1 plan and Fund. A specific type of mutual fund set up that allows fund companies to assess fees for advertising and other expenses are called 12b 1
fees or 12b. There are specific rules and regulations that 12b 1 fund companies have to comply with. The cost or fee is used to pay the costs associated with
attracting new investors into the fund.
Companies with this type of SEC set up have been around for many years. As with any other investment vehicle, choice in an investors best decision maker.
Some shareholders do not want to pay traditional sales charges, whether front end or back end. There is a strong market for 12b 1 fee structures.
As with any mutual fund plan, the fee involved in these funds should only make up part of your decision to invest. Many 12b 1 mutual funds offer greater
returns than others. Investing in funds should involve many aspects in your decision.
Who is the sponsor or owner of the company?
What are the historical rates of return?
What is the objective of the fund?
Does the 12b fee more than make up for the attractiveness of the mutual fund?
Closed End Fund Investing
Management companies that trade on the secondary market are known as Closed End Funds. These investments are similar to mutual funds, except unlike
mutual funds - they are not issuing new shares in the primary market ongoing. The company does a one time initial public offering and then the shares of the
closed end fund trade Over The Counter or on an exchange.
Trading
To buy shares in a closed end company, you will buy through a broker and pay a commission. These funds are trading in the market, so the buying and
selling of closed end fund shares are the same as buying shares of stock.
The value or price of the traded funds are based on performance of the fund along with supply and demand - just like any other negotiable security.
NAV - Net Asset Value
The true value per share of a closed end fund can be found in it's NAV or Net Asset Value. This is calculated daily and is based on the total net income -
operatating expenses such as costodian banks etc. divided by the number of outstanding shareholders.
Although the NAV is calculated daily and represents the true value of the fund per share, the share price is based on the trading in the market. The trading
price of a closed end fund should trade fairly close to it's NAV.
Closed end funds have an investment advisor that trades the securities and manages the cash in the fund. The advisor has discretionary authority within the
limits of the funds investment objectives. The securities can be composed of stocks, bonds or in the case of a REIT - real estate investments.
Dividends are paid to shareholders and taxable to the shareholders. This also applies to open end mutual funds.
CMO Bonds
Collateralized Mortgage Obligations or CMO's are a series of bonds backed by an agency and their mortgage backed securities. These investments are AAA
rated and pay monthly principal and interest.
Collateralized Mortgage Obligations differ from pass through securities in that they have different types of paying bonds within the CMO. There are many
types and tranches to evaluate - each with it's own bond risk.
A CMO has different payment timing risk depending on the type of bond you own. Some offer more protection than others from prepayment or extension risk.
These bonds have a more predicatable duration to the bondholder vs. a pass through agency bond. Some CMO's can pay off faster than others.
Collateralized Mortgage Obligations are generally meant for institutional investors or wealthy bond investors. The money invested, while earning monthly
income - can take a while if interest rates rise. When interest rates rise, a these bonds will pay slower. The refinancing that normally can happen with
mortgage pools will slow down or stop when interest rates or bond yields rise.
Types
Plain Vanilla
This is a cmo bond that is set up more simply than others - thus the name "plain vanilla". It spreads the principal and interest payments to all tranches. The
principal is apllied to the early tranches first and paying them off the earliest. Plain vanilla Collateralized Mortgage Obligations have prepayment and
extension risk.
PAC - Planned Ammortization Class
A PAC Bond or Planned Ammortization Class CMO has more predicatble cash flows and more certainty of final maturity for the investor. A PAC bond has
certain protections against pre payment risk or extension risk.
TAC BOND Targeted Amortization Class
A TAC Bond also has scheduled cash flows. However, TACs are designed to remain stable at one PSA speed and faster. TAC Bonds are created to protect
against the risk of faster prepayments (“contraction risk”), but typically offer limited protection against slower prepayments (“extension risk”).
Sequential CMO VADM (Very Accurately Defined Maturity)- A VADM has scheduled cash flows within a stated range of prepayments (similar to a PAC Bond).
However, a VADM extends this “guaranteed” cash flow schedule all the way down to 0% PSA (no prepayments at all). Therefore, a VADM has no extension
risk, and a “very accurate; defined maturity.”
Companion or Support Bond -Support Bonds are the other Tranches within a CMO that contains PAC or TAC Tranches. Support Bonds are dedicated to
absorbing excess principal prepayments (under faster PSAs) or giving up needed principal (under slower PSAs) to the PAC or TAC Bonds, in order to maintain
scheduled cash flows. Because of the increased cash flow volatility, Support Bonds offer a higher coupon rate and yield than PACs or TACs.
Floater Tranche
Floaters are a variable rate CMO Tranche. Floaters are quoted at a spread to an index (the LIBOR rate, Cost of Funds Index, or Treasury bond CMT) and will
adjust periodically up or down as the index moves up or down.
Inverse Floater
The Inverse Floater Tranche of a CMO is also an Adjustable Rate Bond. The Inverse Floater moves in the opposite direction of the stated index. Simply put,
if the general level of interest rates goes down, the Inverse Floater’s rate will go up and visa versa.
I.O. (Interest Only Class)
An I.O. receives cash flow exclusively from the interest payments of the underlying Mortgage-Backed Securities (the collateral). An I.O. is purchased at deep
discount to face value.
P.O. Principal Only Class
A P.O. receives cash flow exclusively from the principal payments of the underlying collateral. A P.O. is also purchased at a deep discount to face value.
Z BOND A Z Bond is a “Zero Coupon” or accrual Tranche of a CMO. The Z Bond accrues its interest at the coupon rate but instead of the interest paying out
to the investor, it is reinvested into the principal balance, and then paid out as part of the principal payments. This provides a “compounded interest” effect
on the yield. Z Bonds are purchased at a deep discount to face value.
Commodity Futures Broker
A person who trades on an exchange in futures and commodities for other customers is acting as a futures or commodities broker. Investing in commodities
and futures is not simple. Investors looking to maximize returns in various industries like oil and gas, wheat, and foreign currency need to invest a decent
amount of capital.
A good futures brokerage firm will have done their research and provided you with good trading ideas in this dynamic market.
To trade futures and commodities, you must pass the Series 3.
The salary of a commodities broker is normally commission based.
Commodity Trading System
When you open an account with a futures brokerage firm, you may have access to their trading platforms. These would include ongoing quotes, news and
trade reporting. There are other commodity trading systems on the market. Having a state of the art and accurate futures trading system is very important in
this ever changing, fast moving market.
A firm will go through an approval process for each account to see what level they can begin trading with an advisor or trader and on what system. Margin
limits will apply. Customers will sign a new account stating the level of advisor broker trading they can engage in. Initial deposit minimums in the account is
normal as well.
Investing on the Futures can include wheat, gold, copper, and oil futures. Since contracts are used along with long and short commodity investing, these are
very speculative investments. A broker and trading advisor should be used for any investor beginning to invest in the commodities and futures markets.
Discount Futures Brokerage Firm
There are many discount brokers and traders in the market, but many are for seasoned investors who have experience in these markets. If the person is not a
seasoned trader, having full support and research during trading hours is very important.
Convertible Bond Pricing
A convertible debt that can be converted into shares of common stock is known as a convertible corporate bond. The pricing or conversion ratio is based on
a fixed convert price and the par value amount of bonds owned.
If an investor owns $1000 par value of a corporate bond that has a convertible price of 50 can own 20 shares of stock (1000 divided by 50). The pricing of
these bonds tends to trade near par, since the price or interest rate risk with these bonds is less because of the conversion feature.
Normally when interest rates rise, bond prices go down. That is true with most bonds. Convertible securities offer investors a way out of the bond into stock of
the company. That fact keeps the pricing market fairly stable on these bonds.
Parity Definition
The definition of parity is when the value of the bond is equal to the value of the common stock on a convertible security. Using the above numbers, if the
common stock was selling at $50 a share, a par bond of $1000 is equal (20 shares times 50 = 1000)
If the stock was only selling at $45 a share, the stock value would be $900. The shares would be trading at a discount to parity with the bond or the debt is at
a pricing premium parity to the stock.
Convertible bonds can be an attractive investment for portfolios. They offer guaranteed interest and the ability to own shares in the corporation at a fixed
conversion price, for as long as you own the debt.
Bond Current Yield for Investments
Investments and bonds have several rates of return and yield indicators. One of them is the current yield. To determine current yield, you need to divide the
annual interest payments on a bond and divided them into the current market price. This can also be done with stocks funds that have annual dividends.
The current yield will be lower than the nominal (coupon rate) rate on the bond when the investment is bought at a premium. Since the coupon rate only
pays to par, the premium paid will show a lower current number. If a bond is bought at a discount, the nominal yield will be higher.
Calculation
A bond has a nominal yield or coupon rate of 6%. This is the fixed rate of interest paid to bond investors. If the current price on the bond was $95 or $950,
the current yield can be found by dividing $60 by $950. In this example the calculation would come out to 6.31%.
The current yield is always higher than the coupon rate when the bond is selling at a discount. The bond investor is getting a 6% rate of return on the bond
and will receive par at maturity. This increases the bond yield. The yield to maturity would also be higher. That calculation is handled differently though, as
it will take into account the nominal rate, pricing and years to maturity.
As with any bond, the yield to maturity and yield to call are the most important indicator - when judging total rate of return on a bond.
Dividend Investment Payment
A dividend is a portion of a company's earnings that the board of directors has decided to pay shareholders as a rate of return or yield on the company's net
earnings available for stockholders. Dividend payments can be in stock or in cash.
Common stockholders receive payments based on earnings and are usually paid quarterly or annual. Preferred stockholders normally receive a fixed cash
dividend, similar to bondholders getting interest payments.
Emerging or growth companies normally do not pay high or sometimes any dividends.
Dates
When a company announces an investment dividend payment to shareholders, there are certain dates that get set. The declaration date is when the board
announces a dividend is being paid (cash or stock). The Record date is also set. That is when people must own the stock on (settlement included) to get the
yield payment. The payable date is when the money or stock credit is mailed to shareholders.
Ex Dividend Date
The ex dividend date or ex-date is the first day the stock will trade without the dividend on it. Thus people who wish to get their payment credited, they must
buy the stock no later than 3 business days prior to the record date. The ex-dividend date is 2 business days prior to the record date.
Yield
A stock's yield is based on the share price and the amount of yearly dividend that is paid to shareholders.
Foreign Currency Contract and Option
A contract traded in the interbank market to buy or sell a foreign currency. Trades of these option contracts settle either spot or forward.
In the US, options are traded on all currency except the US Dollar. If a put option was invested on an overseas currency, that means the US investor thinks
that currency will decline vs. the dollar. If the options trader thought the US dollar would fall, he could buy a foreign currency call option against the dollar.
Call and put options have short term expirations. If a currency option was bought, the investor could lose 100% of the premium invested - if the contract was
not exercised or traded prior to the expiration month.
The maximum gain for foreign currency calls is unlimited, since the contract value is based on an increase in the foreign money value.
Puts could gain the full difference between the contract strike price and zero - minus the premium paid. Put options on foreign currency gain when the value
declines.
Futures Forex Trading and trading Strategies. Options Investing Trading.
Hedge Fund Trading
An investment company or mutual fund that engages in aggressive trading and investing strategies to get its rate of return. Hedge funds use techniques such
as short selling of stock and option trading.
Short selling of stock is considered a high risk than long buying, because if the stock rises after it is sold short, the security could lose an unlimited amount of
value. Option contracts can also expire worthless. However, if positioned well in a hedge fund investing portfolio, they can succeed and generate very large
rates of return.
Investing in these pools or to buy these funds can earn investors a very high rate of return, however there are many that do not perform well - especially in
certain stock market years or interest rate cycles. Hedge funds are very sensitive to these changes. Viewing a detailed prospectus on these clubs is a very
important part of deciding to invest in them.
There are brokerage firms and hedge fund trading companies that specialize in them. Over the years many of them have been successful with strong track
records of returns.
Some successful smaller investors have looked into starting their own hedge fund.
Investors should have a large amount of risk capital and disposable securities related assets before trading in these funds. There are specialty firms who
handle large pools of money for investors in this higher risk group. Hedge related pools and money funds generally can out perform the S & P 500 and other
indicators in certain times of bullish periods. These money managers can also report very low or negative trading returns in times of economic downturns and
market corrections.
Index Mutual Fund
There are many funds that are based on the value and appreciation of an index in the market. Examples of what these stock mutual funds focus in on could
be the S&P 100, S&P 500, NASDAQ or other broad based groups.
Broad based funds perform with the market as a whole. Index funds could also be based on a narrow based side of the market. A narrow based index
concentrates on a specific sector of the market, either in industry or geographical location.
These areas could include only Telecommunications, South American Companies, Asian Energy groups of stock, etc.
These index investments tend to move with the market, as the money is invested equally into the stock market of whichever group or objective makes up that
fund strategy.
IRA Retirement Account
A personal investing account where an individual or couple (in separate accounts) can contribute money for their retirement is known as an IRA. An IRA
allows for cash contributions of up to $4000 per year per individual. This contribution amount will increase in the future.
Investing in an IRA is something investors should consider if they do not have a company retirement plan or other vehicle for the future. Early withdrawals
prior to age 59 1/2 are subject to a 10% penalty and the amount withdrawn is taxed as income.
Traditional IRA accounts are tax qualified, which means the contributions are tax deferred and grow tax free. When the money is drawn after retirement age,
it is taxed as income.
Investments
Stocks, bonds, funds and most other negotiable securities are allowed to be purchased through a broker dealer in an IRA. These investments should be
carefully chosen by you and your IRA financial planner.
Types
There are many types of IRA's including: Traditional, Education and Roth.
Rollover
An IRA rollover is when you close out the account and deposit the full proceeds to another retirement plan. This is allowed with certain restrictions. The
rollover must be completed within 60 days and can only be done once a year.
Annuity Funding
An annuity contract used in an IRA must be nontransferable by the owner. The practical effect of this rule is that the annuity cannot be used as collateral for
a loan. That means that an annuity used to fund an IRA cannot be used as security for a loan, either from the insurance company that issued it or from any
other lender. An automatic premium loan would be prohibited and, if taken, could cause the plan to become disqualified. The plan would simply cease to
be an individual retirement annuity. When a plan is disqualified, the funds are immediately subject to income taxation and, if the individual is less than age
59½, a penalty equal to 10 percent of the amount included in the individual’s income may be imposed for premature distribution.
The premium for the annuity used to fund an IRA must not be a fixed premium; instead, any annuity used to fund an IRA must have flexible premiums. The
annual premium may not exceed the maximum permitted contribution. Any dividend payable under the contract must be used to reduce future premiums or
purchase additional benefits.
If the IRA is a traditional IRA, the individual’s entire interest must be distributed by April 1 of the year following the year in which he or she attained age 70½,
or distribution must begin by that date in accordance with required minimum distribution regulations.
Distribution
Withdrawing money from IRA is normally done after age 59 1/2. This amount should be pre-set based on your tax bracket (since you will be paying taxes on
this account), and the amount of money in it. You must take your IRS minimum distribution by age 70 1/2 or a 50% penalty will be assessed for that minimum
amount.
IRA investing should be done after consulting with your financial planner, asset manager or broker dealer.
SEP - Simplified Employee Pension
SEP IRA's are used by small business that wish to have a simpler solution to their employee pension needs vs. 401k accounts and alike.
An employer makes a contribution to an IRA for each employee and takes a deduction for the contribution on the investing portion. An SEP pension account
is available to part time or full time employees if they meet certain requirements related to age and years employed.
Limited Liability Partnership and Investing
To qualify as a limited partnership, the agreement must have at least one general partner and one limited. These investments could be in real estate, oil and
gas or other investment objectives.
The partnership is not a taxable entity. Each partner will be taxed based off of their investment in the agreement. The arrangement among the partners will
normally have an end date where each partner will be paid out - if there is anything to payout.
Limited Partner Liability and Facts
The LP has limited financial exposure. He or she is only at risk to the investment into the partnership. Any debts above and beyond the assets in the
partnership will not be incurred by the limited partner(s).
Investors who get involved in these agreements are looking for tax write offs, with the hope of high capital gains later on.
LP's normally have above average portfolios and can take the risk, both to capital and liquidity during the length of the partnership agreement.
LP's are paid out before General Partners when the partnership is liquidated.
General Partner Facts and Liability
The GP has unlimited personal liability. He or she is the manager or agent for the partnership investments. Should the entity have investment losses or
operating losses above and beyond the cash or assets - the GP can be personally sued.
The GP can also be removed, should he do anything to violate the agreement in any way. A new GP would then be named.
Types of Investment Partnerships
There are a few key areas of investment in these arrangements. The goals vary, but they are largely focused on depreciation, depletion and capital gains.
They include:
Real Estate Investment
Oil and Gas Investment
General Business Investment
Distribution of Investment Assets
When the agreement ends or the entity goes out of business, the partnership must pay off certain creditors and other debts before the principals will be paid.
The order of payout is:
Secured Creditors
General Creditors
Limited Partner
General Partner
The GP's financial interest is always paid out last. Most major brokerage firms and financial advisors can help investors in getting involved in limited liability
companies or other partnerships.
Margin Account - How to Buy or Sell On Margin
Brokerage firms can open an account for their trading customers to buy or sell on margin. This means the firm will allow the customer to borrow against the
firm's assets or collateral to leverage stock or bond trades.
Accounts can be long or short. Long margin accounts allow investors to borrow up to 50% to buy securities. New margin account customers on a first trade,
may be required to deposit more. Once the account is established, the investor must maintain a minimum level of equity value. Should that level fall below
the requirement, the investor will get a margin call on the account. They cannot buy or sell stock during this period, until they deposit cash or fully paid
securities to meet the payment needed.
Short selling must be done on margin. The stock is not owned by the customer when it is sold short, thus the broker or brokerage firm must provide that
leverage. A cash deposit would be required before trading can begin. Minimum equity levels must be kept in the short account as well.
Most broker dealer investors like to have the margin account option available to them. This way, certain trading can be done above their current cash
account position without having to open another account.
Long Margin Example
A customer buy 100 shares of ASD at $80 and wishes to do this trade in his margin account. The requirement would be a 50% deposit from the customer.
Since this trade is valued at $8000 long market value, the deposit required is $4000.
The account breakdown would be as follows:
Long Market Value: $8,000
Debit Balance: $4,000
Equity: $4000
With the stock value at $8,000, the investor has $4,000 in equity. Should the stock vlaue rise in the long margin account, the equity would rise and the debit
balance would remain the same. If the market value of the stock declines in the margin account, the equity would decline as well.
Brokerage firms will have a minimum equity requirement that must be maintained. 25% is the NYSE minimum, but most brokerage require higher
percentages on their margin account customers.
Mortgage Real Estate Investment Trust REIT
A leveraged investment trust that makes loans to builders and mortgage loans to buyers of real estate are known as Mortgage REITS. A REIT is a closed end
fund that invests in real estate activities. They can invest in direct property or mortgage loans and related product. They can trade on a stock exchange or OTC
and pay regular dividends to shareholders.
Most brokerage firms and financial advisor companies have many choices in the Mortgage REIT area or real estate trusts.
Dividends
Since these trusts invest in mortgage related investments, the dividend rate is considered good current income to the investor.
Trading
While the investments withing the mortgage REIT are fixed income and guaranteed, the price value of the trust shares themselves are largely based on supply
and demand within the trading stock market. The real estate market itself is also a major factor. Since this is a generalized industry, all property related
investments tend to move with the broader real estate market itself. The trading value will tend to increase or decrease within that trend.
Taxation
REIT's are regulated under Subchapter M of the IRS code. If the trust qualifies under Subchapter M, it does not pay tax on the distributed net income. The
distributions flow to the shareholders, who then pay the tax on their personal taxation forms.
To qualify as a Mortgage REIT or any real estate investment trust on a taxation basis, they must meet these 4 catagories:
At least 75% of income must be related to real estate or mortgage
At least 75% of the assets must be in real estate
At least 90% of the net investment income must be distributed to REIT holders
Cash dividends paid by Mortgage or other real estate trusts do not qualify for a lower tax rate.
Municipal Bond Investment
People who are looking for tax free yield investing will look to make investments in municipal bonds. The interest earned is federally tax free and the after tax
yeild in normally higher than US Government securities.
The higher the tax bracket of the bond investor, the higher the tax free yield. Investing in these bonds is normally done based on the state the person lives in.
People who buy municipal securities will normally be free from federal, state and local taxation.
Municipal brokers can help customers with investing in them. They are normally offered broker to broker, so many firms will have a list of other firms and their
inventory. Investing in these normally comes down to these important factors:
State issue of the bonds
Tax bracket of the investor
Maturity
Call dates, if any
Rating
Coupon and yield
Coupon or the nominal yield on municipals can be low, but the after tax yield is normally much better. Again, this is based on the income bracket of the
investor.
In State Municipal Issues
Investors should consider buying bonds issued in their own state. This is because most states offer a "triple tax free" incentive to individuals. Municipal bonds
that are bought by in state investors are exempt from federal, state and local tax. If you buy securities outside of your state, you are subject to state and local
taxation. This applies to both General Obligation Bonds and Revenue Bonds.
When you are looking to begin investing in these debts, you should consider this factor.
Callable Muni Bonds
Most Muni bonds are callable. This is because states, cities and other authorities want the fiscal flexibility to call back bonds early. The primary reason for a
bond being called is that interest rates have gone down enough where the current coupon rate or Nominal Yield is considered too high.
When investing in Municipal bonds, buyers should ladder their portfolio where the call dates are spread out or staggered. This allows for greater management
of interest rate risk within their Municipal portfolio.
Callable issued will normally have a higher coupon rate than non call bonds.
Yield and Interest Rate
When investing in these securities, bond yield and interest rate payments need to be looked at. The tax bracket of the investor will create a greater tax free
yield with municipal bond investments. A Muni with a 4% interest rate may have a tax free yield of 6% or more, if the buyer is in a high tax bracket. To
calculate the tax yield, you need to take the states nominal yield or yield to maturity (if purchased above or below par) and divide that by 100 minus your tax
bracket.
Yields on Municipal debt are largely based on the individual and their tax rate.
Bond Rating
All Municipal issues will have a rating attached to the bond. AAA is the highest credit rating in the system. However, bonds that are AA, A or Baa are
considered very safe and investment grade.
Investing in Muni bonds offers income and tax advantages.
No Load Mutual Fund
An open end fund that does not assess a sales charge to investors is known as a no load mutual fund. These become popular years ago as the competition for
mutual fund money grew.
Although some funds do not charge a sales charge, it does not automatically make them the right investment for everyone. Some funds that charge 4% to
buy shares, may be earning 20% a year vs. a no load company earning only 8%.
The no sales fee should only be a factor in your decision to buy the mutual fund.
Most of these companies will charge a redemption fee when the fund is redeemed. Dividend payments and investment objectives could be the same as any
other open or closed end company.
Nominal Bond Yield
The coupon rate on a bond is also known as the nominal yield. The interest payments investors get from their bond investments come from the this yield. This
bond interest yield is the rate the issuer pays to par value (amount of bonds owned). It is fixed and never changes during the life of the investment.
The nominal yield is not always your overall rate of return on a security - it usually is not. When someone buys a bond at a premium, their total rate of return
will be lower than the coupon rate. Since the interest is only paid to par, the premium (amount above par) is lost over the life of the security. This will give the
investor a lower yield to maturity.
Bonds bought at a discount will have a higher YTM, compared to it's nominal.
Call - Callable
Bonds with higher coupon rates also get called first, since their interest rate is higher than the market. When issuers examine their fixed income debt
securities, the true interest cost to them regardless of price is the coupon rate. That is why the higher nominal yield issues will see a call first.
The yield to call is also usually lower with higher coupon issues since those are normally bought at a premium and many bonds are called at par or slightly
over par. If the call price (the price it costs the issuer to redeem) is lower than the price paid by the investor, the yield to call is lower. If a nominal yield is low,
the YTC may not be lower but lower coupon securities are not called as often so the higher yield to call is many times at best hypothetical given the lower
interest rate.
Higher bond coupon rates will provide more current income to the investor, so as far as income - higher is better. As far as yield, it is not always better to
chase the highest nominal coupon.
Online Commodities Broker
People who offer investors the ability to trade commodities and futures online are commodities brokers. These firms allow investors to open online accounts
and begin buying and selling futures contracts and other type of trading. Successful traders will use the experience these brokers have and the systems they
use. This area of the market is very up and down, so experience and risk tolerance is very important.
Using an online broker vs. a full service firm gives investors quick execution, real time quotes and access to the various FOREX and futures exchange markets.
Commodities brokers will normally require an initial account balance before any trading can begin. Many commodities trades require margin deposits. There
are also specific rules and regulations that account holders must abide by when working with these online firms.
Futures Investing- information on profit strategies and futures contract investing mechanisms
Estate Online Broker
Brokers and agents who are licensed to sell real estate often get business online. With many investors and home seekers on the Internet looking for properties,
an online real estate agent can show properties that are priced to sell.
Auctions. Many real estate firms and brokers have begun online auctions of properties to prospects. With technology and streaming video available, online
real estate brokers have new ways of selling commercial or residential properties to the public
Price Earnings Ratio
Many analysts and stock traders look at the price earnings ratio of stocks to judge value when buying. The PE Ratio is calculated by dividing the current
market price by it's earnings per share. This is also known as a stock's multiple and a common financial formula.
When the ratio is higher, it can indicate that a security is over priced, relative to other stocks in it's industry. While this should not be the only investment
indicator a stock investor should look at, it is a true number - combining the real market price and the real earnings on a per share basis.
Multiple
When someone says "We are only interested in stocks with low multiples....", they are focused on the Price Earnings Ratio. A company that is trading at $65
and has an EPS of $1.40, has an approximate PE of 46:1. This may or may not be a good ratio for a particular company. Some industries and sectors have
historic low or high PE's.
Certain industries and stocks will value this number more or less. Start ups and growth companies are less concerned with Prices and Earnings.
In the end, investors should judge these ratios vs. companies in similar industries or type. A technology stock should not be measured against a utility
company only on a PE Ratio basis.
Investing In Preferred Stock
Preferred shares are sold in par value amounts and pay a fixed dividend to all stock owners. Many preferred stocks are convertible into common stock, and are
callable by the issuing company. People who begin buying or investing in preferred shares enjoy a regular dividend payment and the ability to switch to
common shares in the company. The preferred dividend rate is similar to a bond interest payment, although unlike debt payments - the dividend is not an
obligation to the company.
Most of the corporations that issue this type of stock are income based companies. They have the income to make these dividend payments. Buying preferred
stock in a company is an income strategy.
Most dividends are cumulative. This means that if a preferred share has a dividend rate of 6%, but the company only paid 4% one year, they will them owe
you 8% going forward. The amount of the stock dividend that was missed, is made up. Although this is not an obligation. Buying preferred shares gives the
person the chance to get the benefit of fixed income investing, but at a higher rate than a bond.
If the company goes out of business, preferred stockholders are paid ahead of common shareholders. Common shares get paid dividends only after preferred
investors are paid.
Buying this type of stock or investing offers a fixed rate of return, but stockholders are still at risk if the company does not earn any income going forward.
Unlike bond creditors, preferred stock investors cannot make claims on lost money if the company fails.
Private Placement Investments
Stock offerings offered only to wealthy or seasoned investors are private placements. Under Regulation D of the SEC, these investment offerings can be sold to
no more than 35 non accredited investors.
These normally carry a stock holding period requirement.
Brokerage firms that handle wealthy clients that are looking for investment opportunities may offer private placements. The investors would be made aware of
the risks regarding the holding period, after market potential and other risks. There are many private placement offerings covering a broad spectrum of the
investment market.
Real Estate Investment Trust REIT
Funds that specialize in building a portfolio of real estate products and investments, are known as REIT's. These investment companies are closed end funds,
pay high dividends and trade on an exchange or Over The Counter.
What is a REPO Repurchase Agreement?
A Repo is where the federal reserve or a Government securities dealer buy securities from another, promising to sell them back at a higher price on a set date.
Repurchase agreements are source for short term financing for broker dealers. The federal reserve will engage in this repurchase agreements with member
banks.
Municipal Revenue Bonds
Bonds issued by municipalities, such as states, cities and counties where the money raised to pay off the bonds comes from a non-tax revenue source, are
called revenue bonds.
Municipal issuers could include transportation entities and others. Revenue bonds are rated and yield based on their own merit.
Investing in these municipal securities is normally based on the location of the issue, the tax bracket of the investor (for greater tax free yield), maturity and
rating.
Types of Revenue Issues
Transportation - These bonds are issued backed by tolls, fees and other transportation collections.
Utility - These revenue bonds are secured by the income of a public utility.
Industrial - These municipal issues are backed by a corporation's payments back to the municipality.
Revenue bonds should be invested based on the geographical area of the investor. Most states offer municipal buyers triple tax free treatment (no state,
federal or local tax), if the investment is issued in the home state of the buyer. This will increase the overall tax free yield of the municipal bond investor.
Not every brokerage firm offers revenue bonds. The best selection will normally come from municipal bond brokers that hold inventory for these bonds. These
securities are normally traded over the counter OTC between broker to broker. There is usually a mark up for these bonds, not a commission.
Secured Bonds
A secured corporate bond is debt that is backed by a specific asset of the company. These bonds are normally issued by companies who do not want to back
their bond based on their full, faith and credit. These corporate issues could be secured by equipment, real estate, or other collateral - such as stock and
bond holdings.
If the company fails to pay off of the bonds to investors, the assets are liquidated and the investors can claim those proceeds.
These investments can be callable or non callable and are individually rated based on credit quality. Secured bonds will normally rate higher than
debentures of equal specifics because of the guaranteed liquidation to pay off bondholders.
Stock Short Sale
A trader or investor who sells a stock that he does not own, hoping the price falls later on is selling short. This is a risky form of trading, as the market on the
shares could rise on the investor.
The person must buy back or cover the stock, so the investor needs to be careful with watching price movement and direction.
Most broker dealers will permit this practice when it is done in a margin account. The stock trader will put in money above the proceeds of the short sell to
cover the brokerage firm, in case the stock rises.
Selling short should only be for experienced investors and day traders.
Options and Short Sales LONG CALL protects SHORT STOCK
A customer sells 100 shares of XYZ short at $37 and wishes to protect against a sudden increase in the price. A Registered Representative recommends that
the customer Buy 1 XYZ DEC 40 call paying a $200 premium. The Call option gives the holder the right to buy the stock at 40, thus limiting the potential loss
on the stock to 3 points plus the $200 premium. The stock needs to decline at least to $35 to pay for the option and to reach break-even on the short stock
position.
SHORT 100 Shares @ 37
BUY 1 DEC 40 CALL @ 2
The call option protects the short sale until December
The option costs $200 which lowers (more difficult) the break-even needed to $35
Option will expire should the stock decline in the investors favor
Maximum Gain: $3500 (Short sale to decline to “0” minus the premium paid)
Maximum Loss: $500 (Sold short at $37. Option allows for buy at $40 plus the premium paid)
Break-even: $35 (Stock needs to decline 2 points to make up premium paid)
Simplified Employee Pension SEP IRA
A simplified employee pension plan or account that is designed for a small business. A SEP IRA is when the employer of a company opens an IRA for each
employee and makes contributions into the account.
The contribution limits are higher than a regular IRA.
A SEP requires less management and administration than a typical corporate retirement plan, like a 401-k or defined benefit account.
SEPs provide a much simpler alternative to other qualified employer retirement plans and are generally far less costly to install.
Employer contributions, which are discretionary, are tax-deductible to the employer and not included in the employees’ income.
Required minimum distributions of Simplified Employee Plan account balances must begin by age 70½. Funds in a SEP may be rolled over according to
the rules governing rollovers of traditional IRAs.
Distributions
Like traditional IRAs, required distributions from a Simplified Employee Pension plan must begin no later than the employee’s age 70½, even if the individual
is continuing employment. The first distribution can be delayed until April 1 of the year following the year in which the employee turns age 70½. Again, the
individual should know that by waiting until this required beginning date to take the initial minimum required distribution, he or she must also take a second
distribution by December 31 of that same year, resulting in two taxable distributions occurring in the same year, with consequently greater tax liability.
What is a subordinated Debenture?
A bond that issues where the interest is higher than the company's other bonds, but the issue has a lower priority if the company goes out of business is called
a subordinated debenture. The interest paid to this debt is guaranteed, but if the company liquidates, these debts are the lowest creditor priority. Investors
would have to wait for other obligations, including secured and debenture holders to be paid.
T Bill
Treasury Bills are short term Government securities. Their maturities are 1 month, 3 month and 6 months. They are backed by the US Government, thus they
carry no credit risk. T Bills do not pay interest. They are 0 coupon securities. The investor will buy the treasury Bills at a discount price and then mature at a
par value amount. The yield is calculated based on the discount price, the par and the time frame (30, 90 or 180).
These securities are auctioned weekly and bidded on by US Government securities dealers.
T Notes
Treasury Notes are medium term Government securities. Their initial maturities are 2 years, 5 years 10 years. They are backed by the US Government, thus
they carry no credit risk.
T Notes pay interest every 6 months and they are priced in 32nds. Many loans are priced off of the various maturities of these notes.
These securities are auctioned monthly or quarterly and bidded on by US Government securities dealers.
All of these securities are AAA rated. The yield on treasury notes will be lower than corporate bonds and agency securities of the same maturity. Most broker
dealers and brokerage firms can offer investors T-Notes. The minimum investing amount is $1000, but normally the buying of them should be in amounts of
$10,000 or more to make the income worth it.
T Bonds - Trading and Yield
Treasury Bonds are long term Government securities. Their maturities are over 10 years out to 30 years and are often used in block trading. They are backed
by the US Government, thus they carry no credit risk. Their yields reflect interest rates and supply and demand.
T Notes pay interest every 6 months and they are priced in 32nds. Many loans are pissed off of the various maturities of these bonds.
These securities are auctioned semi annually or longer and bidded on by US Government securities dealers.
Yield
The yield on treasury bonds reflect the supply and demand of debt and interest rates long term. Since they are AAA quality, they will yield less than private
debt securities or Government Agency Bonds. Yields will fluctuate as part of the yield curve that other securities and loans are priced off of.
Trading
T Bonds are actively traded in a global market. The brokers who engage in the trading of these securities will normally trade them in large blocks, as the
spreads can be thin for smaller amounts.
US T STRIPS
Treasury STRIPS are 0 coupon long term Government securities. Their maturities are normally over 10 years out to 30 years. They are backed by the US
Government, thus they carry no credit risk. T STRIPS do not pay interest, since they are 0 coupon bonds. They are created from called back treasury notes
and bonds by the US Government. The yield is calculated based on the price paid and par value at redemption.
During times of lower short term interest rates, Strips are more popular. When yield levels are low - especially short term bank rates, reinvesting bond proceeds
is not attractive. T Strips do not have reinvestment risk, because they are zero coupon securities. Reinvestment risk is when you are forced to reinvest
proceeds or interest from one security. During times of low interest yields, having 0 coupon investments works to an investor's benefit - in theory.
UGMA Account
A type of account where a custodian or investment advisor manages and oversees (acts as custodian) an investment account for a minor. The state laws vary
when it comes to taxation and majority age.
Most major brokerage firms and financial advisors can help set up a UGMA account.
The investments cannot be bought on margin and the custodian cannot sell short securities. All securities are bought in a cash account. The custodian does
not have to be a relative or legal guardian to oversee the investment management of a Uniform Gift To Minor trust.
Donor - Custodian
A donor may make a gift to a custodial account for the benefit of a minor child. The parent or custodian may retain responsibility of management of the
assets in the account subject to the terms of the act. The donor may choose to contribute from a number of assets in the UGMA, including stocks, bonds and
mutual funds. The funds can be used for education or other needs.
UIT Trust
A unit investment trust is a non managed investment company, where a set rate of return is calculated based on purchased securities. The UIT will pay
dividends paid to the number of units an investor owns.
When investors buy Mutual Funds or Closed End Funds, they are looking for diversity and professional management from an investment advisor who is
actively trading the account. UIT investments are divided by units and are normally invested in fixed income.
Unit Investment Trusts can perform very well in certain market times and can give a guaranteed rate of return - which is their main appeal.
Types:
Fixed
The trust selects and invests into a portfolio of fixed income securities - including bonds. There is no active trading or management of the securities in the
UIT.
Participating
This is when the money is invested into mutual fund shares to get a more aggressive rate of return.
Unit Investment Trusts were established as non managed investment companies under the investment co. act of 1940. That act defined 3 types:
Management Companies - Open end mutual funds and closed end funds
UIT - Unit Investment Trusts
Face Amount Certificates - These are now obsolete.
Bond Yield To Maturity
This is a bond's total rate of return during the full life of the investment. The yield to maturity factors in the nominal rate or coupon, the price paid and the
length of the maturity.
The YTM is the most important yield indicator for a bond investment. It factors in the nominal yield, bond price and length of maturity held.
When investors buy bonds, the coupon rate is important, but if the bond price is higher than par - the yield to maturity will be lower. If the bond is bought at a
discount, the yield to maturity will be higher.
The nominal yield (coupon) is a fixed rate that is only paid to par value. All bonds redeem at par as well. So, if the investment is purchased below or above
par, the yield will be different.
Premium and Discount Bond Yield
The YTM is actually the current interest rate on a particular bond or similar bonds. If a 7% bond is available, but interest rates are actually only 5%, the
broker or the market will price that bond higher (premium) - to reflect the current interest rate environment. The broker is not going to sell a 7% bond at par
when interest rates are 200 basis points lower. A premium will be the market.
If the interest rate climate on these bonds is 5%, the security will be priced for a yield to maturity of around 5%. So, the investor is really getting a 5% overall
rate of return on this bond, if held to maturity - even though the nominal yield is 7%. Interest is never paid to a premium or discount. It is only paid to par.
If an investor is seeking higher current income, having a higher coupon rate is important. The yield to maturity is not a paying yield, it is an overall rate of
return of the investment.
If a person is not seeking current income, they can choose a below market coupon bond and buy it a discount. Doing this will allow the investor to pay less
and earn less interest, but the overall yield to redemption or maturity will be higher.
YTM uses all the components of a bond investment to come up with a true overall yield on the security.
Bond Yield To Call
If a bond is callable, it is very important to be aware of the yield to call. If the investment is called early at a lower price than what you paid, your YTC will be
lower. If the call price is higher, then yield is higher. Usually it is best for call dates to be as far out as possible for an investor. Normally a called bond is an
unwanted event for an investor. Bonds are usually called when interest rates decline, so an investor will be forced to invest the proceeds elsewhere at lower
rates.
Callable bonds are priced to the call date or the maturity date. Bond brokers will price the bond to the call when it's a premium, and price to the yield to
maturity when it is a discount bond.
Premium and Discount Bonds
The reason for pricing these bonds differently is twofold. A bond is priced at a premium because the Nominal Yield or coupon rate is higher than current
interest rates. Since bonds with higher nominal yields will get called first, it makes sense to price the to the call (ytc). It is also the worse case for the investor.
If the bond is called early, the investor will lose the premium faster than if it went to maturity. The yield will be lower if the investment is finished early.
Discount bonds will have a higher yield if they were called early vs. pricing them to maturity. They are not priced to the call normally. Discount debt has a
lower nominal yield than the market, so they are less likely to see a call date acted on. Discount bonds are priced to a Yield To Maturity.
Assets Management Prospectus. A prospectus is a document that describes the investment being involved. In the case of hedge funds, a prospectus would be
distributed to potential investors informing them about the fund objectives, investment philosophy and risk tolerance as well as fee structure, reinvestment and
divestment. For instance, a hedge fund prospectus may disclose that the fund charges 20-40% of profits (when there are not charges or fees based on the total
assets under management, disregarding the investment performance) as a management fee and only allows capital withdrawals once a year at a set time.
These items are only the most basic, though often most scrutinized, elements of a hedge fund prospectus. Investors must have the choice to discuss the
Prospectus at any time.
Accredited Investors
Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the
registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D,
a company may sell its securities to what are known as "accredited investors."
The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
a bank, insurance company, registered investment company, business development company, or small business investment company;
an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment
adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
a charitable organization, corporation, or partnership with assets exceeding $5 million;
a director, executive officer, or general partner of the company selling the securities;
a business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years
and a reasonable expectation of the same income level in the current year; or
a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Accredited Investor
A term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced
need for the protection provided by certain government filings.
Also known as "qualified purchaser".
In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:
1) earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain
the same level of income.
2) have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
3) be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
These investors are considered to be fully functional without all the restrictions of the SEC.
3C7 Hedge Fund High Net Worth Investor - HNWI Institutional Investor
Qualified Institutional Buyer - QIB Regulation D Retail Investor
Securities and Exchange Commission - SEC Sophisticated Investor
Introduction To Hedge Funds - Part One - Learn everything you need to know about the characteristics and strategies of hedge funds.
Fly High With Angel Investors - When your business needs capital, put your faith in these wealthy investors.
How The Wild West Markets Were Tamed - The average investor can trade stocks with a sense of security thanks to this Lone Ranger.
Hedge Funds' Higher Returns Come At A Price - Learn how hedge funds win big gains for investors
Source: Investopedia
Asset Mix
Asset mix is the allocation of a portfolio between asset classes, it balances return and risk. Returns are a combination of the income from an investment and the
price appreciation over the period. Risk is usually proxied by the "standard deviation" of returns, how much the return changes about the long-term average.
Returns are calculated on a nominal (dollar) basis or as "real" returns, the nominal return less inflation. Inflation is usually taken as the change in the Consumer
Price Index (CPI) over the observation period. Long-term studies have demonstrated that equities have the highest overall returns over longer periods of time,
but they also have the highest volatility. Bonds have lower returns, but greater stability. Cash and short-term securities have very certain returns, but very smaller
long-term returns. Other asset classes such as real estate, mortgages and inflation-linked bonds have different risk and return patterns. To the extent that asset
class returns tend to move together, they are said to be "correlated". The overall risk of the portfolio can be reduced by combining asset classes with differing
return patterns.
Establishing an Investment Policy
A long-term "investment policy" is usually established based on the investor's long-term objectives and constraints of the investor. The return objective is the
key variable. A high return objective can only be obtained by investing in asset classes with a higher return. Based on historical experience, without constraints
equities have by far the highest return. An asset planning study which sought to obtain the highest overall return would recommend an investor's entire portfolio
be invested in equities.
Investor Constraints
Constraints state the risk preferences of the investor. The time horizon of the investor dictates the time frame for the investor's portfolio. For example, since
equities have a high long-term return but higher volatility in the short term, the return from equities very uncertain over shorter time periods. Risk averse
investors (those without the capability of absorbing capital losses) would have a higher cash and short-term component. Investors with a higher tolerance for
capital risk should favour equities. Investors with a high income requirement would tend to favour a higher fixed income weighting.
Market Timing Strategies
Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or bonds, and less risky short term securities like Treasury Bills
based on "technical", "fundamental" or "quantitative" analyses. Reduced to its core proposition, market timing means "buying low and selling high." Identifying
high or "overvalued" versus low or "undervalued" is the complicated thing. Since riskier assets usually have higher returns over longer periods, staying "out of
the market" or invested in less-risky short term securities can mean a considerable sacrifice of overall return.
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial assets like stocks or bonds involves all components of the
human condition; fear, greed, optimism, pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have impact.
Vain attempts to divine the direction and outcomes of "the market" have involved astrology, superstition and the supernatural.
Academics have surrendered unconditionally. After quantitative techniques and supercomputers proved duds in predicting the financial future, the most highly
educated and qualified financial researchers ran up the white flag of the "efficient market". In their rational world, everyone knows everything and it is only
random chance that moves markets in a dice-throwing "stochastic process". Basically, they reasoned, no one could predict the market since there were so
many smart people trying to do it. They then set about proving this, hopefully making their insulated lives easier since they would never have to stick their necks
out with market predictions.
For most investors however, market timing is too attractive to let pass by. If one could participate in all the 25% up years in the stock market and pass by the
-25% years in TBills with a modest 5% return, the rewards would be huge. Even capturing a little of this outperformance would lead to a superb performance
compared to a "passive" or fully invested strategy.
A market timing strategy is conceptually easy to understand. Stay invested when the market is up or flat. Avoid the downturns. The market timer develops signals
to identify what condition a market is in. An overvalued market is called "expensive", "overbought" or "overextended". A normal market is "fairly valued". An
undervalued market is "cheap".
The market timer can use a variety of measures to judge the status of the market. These techniques are a combination of technical, fundamental and
quantitative indicators and measures.
Technical Indicators
The technical indicators are based on "price" and "volume" movements and patterns. The technical analyst looks at the patterns and movements
independently of their causes. It is patterns alone that tells the state of the market. For example, the analyst might see a "topping" pattern developing in the
overall market or one of the important sectors from his charts. A "head and shoulders" formation would see the market index rise steeply, fall and then rise
again. This would be a very "bearish" or negative signal pointing to a large and sudden drop in the market. The analyst might discern the depth of the fall from
the length of the neck or relative height of the shoulders. Other technical indicators involve the "volume" statistics or trading activities of investors. A sudden
drop in trading activity or a large differential between smaller and larger stocks would be an indication of a potentially large move, with the direction
dependent on what "expert" investors are doing compared to individuals.
Fundamental Indicators
Fundamental indicators are financial and economic measures that affect the overall valuation of the market. A good example of this would be money supply.
Generally, a loose monetary policy and expanding money supply indicate healthy financial markets. When monetary policy is tightened, as in 1994, the price
of longer term assets like stocks and bonds fall as money and credit become scarcer. Another fundamental measure would be the dividend yield on stocks, the
dividend divided by the stock price, both the absolute level and the relative level compared to bonds. From a historical standpoint, when the overall dividend
yield on the stock market is below 2%, independent of other factors, this means that the stock market is expensive. When the dividend yield on stocks is low
relative to bond yields, this means investors are willing to pay more for stocks relative to bonds than has generally been the case historically.
Quantitative Measures
Quantitative techniques involve associating different market measures or "variables" in quantitative equations or "models". For example, an analyst might
"build a model" that related the movements in stock prices to money supply, dividend yields and economic activity. From this, he would attempt to identify the
periods when the market had setbacks. The analyst would then develop some "decision rules" or guidelines to dictate his trading positions that would be
programmed into his model. This type of investing is formally called "Tactical Asset Allocation" (TAA). It has become very popular and results in large flows in
modern financial markets.
Does Market Timing Work?
It has become accepted wisdom in financial circles that it is impossible to consistently "time the markets". This has resulted partly from the theoretical
academic arguments that no one can have such an advantage (legally!) in their "efficient markets". In practice, the complexity of modern financial markets
means that it is very, very difficult to predict the vast number of variables that can affect the markets. Who knew that Saddam Hussein planned to invade Kuwait
in 1990 and the price of oil would soar? An investor predicting the unification of Germany and its resultant affect on the capital markets would have been
shipped to the funny farms only a couple of years before it happened.
It is possible to establish a valuation level for the markets, like a stock. Compare these tasks. A small company might have a few competitors, a known product
line and management. The cashflows can be identified and assessed. Even so, where we can value this company, its stock might not be appropriately valued
for years and its future prospects depend on the economy in general. What about the market overall? Who is the management? What matters most, monetary
policy or fiscal policy? What are demographics doing to demand? What about international considerations?
That is why most market mavens have one or two great predictions before they are hopelessly out to lunch in the forecasting wilderness. While it is possible to
tie it all together a few times, it is virtually impossible to do it consistently.
Most good market strategists only try to identify "extremes" when things are very overvalued. They stay invested until these periods, knowing the smaller swings
are "noise" that usually work themselves out. Even so, staying in cash until the eventual crash comes gets harder and harder as the markets run ahead. Usually
the final charge of the bull market results in public "bears" being hopelessly discredited and throwing in the towel at exactly the wrong moment.
Should you time the markets?
Should you time the markets? Only if you have the necessary insight and discipline to know when to"hold" and when to "fold" as the song says. Both of these
are very hard to come by. For most of us, risk is having your money available when you need it. If you can't afford a 30% drop in value, you shouldn't be in
longer term assets in the first place.
If you decide to time the markets, remember one thing. Those who are really good at market timing aren't going to do television and newspaper interviews just
before the crash. You'll only know what they did a few months after the fact. If you can't do it yourself, you probably shouldn't try.
If you only invest in stocks when the guys at work have made lots of money or your GICs aren't paying anything, you probably are doing exactly the wrong thing.
Investing when newspaper headlines are doom and gloom and the boys have been blown away would be a better timing strategy. At the peak, it's impossible to
find a bearish forecast. At the bottom its impossible to see the upside. Source: The Financial Pipeline
Hedge Fund: History and the Definition of a Hedge Fund
The first hedge fund was set up by Alfred W. Jones in 1949. Jones was the first to use short sales and leverage techniques in combination. In 1952, he
converted his general partnership fund into a limited partnership investing with several independent portfolio managers and created the first multi-manager
hedge fund. In the mid 1950's other funds started using the short-selling of shares, although for the majority of these funds the hedging of market risk was not
central to their investment strategy.
In 1966, an article in Fortune magazine about a "hedge fund" run by a certain A. W. Jones shocked the investment community. Apparently, the fund had
outperformed all the mutual funds of its time, even after accounting for a hefty 20% incentive fee. This is because the rate of return was higher on the hedge
fund versus all other mutual funds.
"Hedge fund" is a general, non-legal term that was originally used to describe a type of private and unregistered investment pool that employed sophisticated
hedging and arbitrage techniques to trade in the corporate equity markets. Hedge funds have traditionally been limited to sophisticated, wealthy investors.
Over time, the activities of hedge funds broadened into other financial instruments and activities. Today, the term "hedge fund" refers not so much to
hedging techniques, which hedge funds may or may not employ, as it does to their status as private and unregistered investment pools.
Hedge funds are similar to mutual funds in that they both are pooled investment vehicles that accept investors’ money and generally invest it on a collective
basis. However, they are regulated in significantly different ways. Up until 2005, hedge funds in the United States often relied on Section 4(2) and Rule 506
of Regulation D of the Securities Act of 1933 to avoid having to register their securities with the Securities and Exchange Commission of the United States
(SEC). Further, to avoid regulation regarding mutual funds (a type of “investment company”), hedge funds relied on Sections 3(c)(1) and 3(c)(7) of the
Investment Company Act of 1940. In short, hedge funds escaped most U.S. regulation directed at other investment vehicles such as mutual funds.
European nations regulate hedge funds by either regulating the type of investor who can invest in a hedge fund or by regulating the minimum subscription
level required to invest in a hedge fund. In the years to come, experts are predicting the rise of an alternative regulatory framework that will be tiered yet
flexible.
The “Hedge Fund Rule” and the Effect on Hedge Fund Clients
The increasing incidence of hedge fund fraud (which exceeded $1 billion in recent years) prompted the SEC to introduce regulations aimed at protecting
the security markets. In addition to fraud, the SEC was also concerned with the increasing growth of hedge funds and wanted to find a way to police the $870
billion wrapped up in the hedge fund business. During the 1990s and the early 2000s, hedge funds experienced a five-fold increase in size. Additionally,
wealthy individuals were no longer the only investors in hedge funds; instead, pensions, universities, charities, and endowments began to place their money
in hedge funds. In order to protect these investors, the SEC revised the Investment Advisors Act of 1940 to create the “hedge fund rule.”
The hedge fund rule, effective February 2005, adopted the interpretation of “client” to mean shareholders, limited partners, members, or beneficiaries of the
funds. (Sec. 203(b)(3) of the Investment Advisors Act of 1940). This interpretation required hedge fund advisers previously exempt from registration, since they
had less than 15 “clients” under the previous interpretation, to register with the SEC. According to the SEC, mandatory registration was expected to have a
number of benefits such as serving as a deterrent to fraud, providing it with examination authority, fostering strong compliance practices and raising standards
for investments in hedge funds. However, in June 2006, a D.C. Circuit Court case ruled that the SEC’s interpretation of “client” was incorrect and that clients
of hedge fund managers only include the funds they manage, not the individual investors of the funds. Therefore, hedge fund managers who manage fewer
than 15 funds are once again exempt from SEC registration. (Goldstein v. SEC)
Hedge funds are also exempt from other requirements that apply to mutual funds for the protection of investors, such as regulations requiring a certain degree
of liquidity, regulations requiring that mutual fund shares be redeemable at any time, regulations protecting against conflicts of interest, regulations to assure
fairness in the pricing of fund shares, disclosure regulations, and regulations limiting the use of leverage. These exemptions permit hedge funds to engage in
leveraging and other sophisticated investment techniques to a much greater extent, which typically allows them to generate higher returns than other
investment vehicles. Of course, like mutual funds, hedge funds are subject to the anti-fraud provisions of U.S. federal securities laws.
Facts about Hedge Funds
Estimated to be a $1 trillion worldwide industry and growing at about 20% per year, with approximately 8350 active hedge funds in the world.
Includes a variety of investment strategies, some of which use leverage while others are more conservative and employ little or no leverage. Many hedge
fund strategies seek to reduce market risk specifically by shorting equities or derivatives.
Their returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities.
The popular misconception is that all hedge funds are volatile -- that they all use risky techniques and strategies and place large “bets” on stocks, currencies,
bonds, commodities, and gold, while using lots of leverage. In reality, less than 5% of hedge funds are of this sort. Most hedge funds use derivatives only for
hedging or don’t use derivatives at all, and many use no leverage.
Classification of Hedge Funds:
It is important to understand the differences between the various hedge fund strategies because all hedge funds are not the same -- investment returns,
volatility, and risk vary enormously among the different hedge fund strategies. Some strategies which are not correlated to equity markets are able to deliver
consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds.
Growth Fund Definition: The definition of a growth fund is a mutual or other fund that has it's core investments in emerging or growth companies. These funds
and the stocks within it do not pay high dividends, but offer the chance for high capital gains later on. These funds are usually more turbulent in up and down
years for the stock market. A growth fund is best for younger people or investors willing to assume some degree of risk.
Most portfolios should have some balance of these types of mutual funds. One of the characteristics of the stocks in growths are low dividend pay out ratios.
Since these stocks are normally emerging companies, the profit or net income that would normally go to shareholders in blue chip stocks - will be reinvested
into the growth fund itself. This helps explain the full definition of this type.
Trading. Trading growth type stock funds will depend on whether they are closed end or open end mutual funds. Closed end funds trade in the secondary
market, so there is no sales charge to worry about - only a commission. Open end stock funds are not meant for active trading. They are issued as new issues
and are then bought and sold directly with the growth fund itself. A sales charge may apply to each purchase.
Mutual growth investments are prices daily - once a day, to it's Net Asset Value. Any trading that is done during the day will be filled at the close of business
day. This makes it difficult to actively trade. Exchange traded funds (ETF's) allow for more active trading of growths.
Online Broker
Since the increase in Internet stock and investment trading, online stockbrokers and traders have become a source for people looking for quick execution and
low commission charges. Investment and stock firms have put major money and effort into gaining an online share of the market. For investors and traders, it
gives them the ability to trade more actively and buy and sell for less.
Most of these firms are not there to give personal advice or explain the risks associated with certain investments. If an investor is seeking more service and
willing to maybe pay a little more commission, then working with a full service brokerage firm might make more sense.
Some Online brokerage firms will provide trading platforms and software, along with real time quotes and fast execution.
Accredited investor
The examples and perspective in this article or section may not represent a worldwide view of the subject.
Accredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments, limited
partnerships, hedge funds, and angel investor networks. The term generally includes wealthy individuals and organizations such as a corporation, endowment,
or retirement plans.
In the United States, for an individual to be considered an accredited investor, they must have a net worth of at least one million US dollars or have made at
least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year.
This rule came into effect in 1933 by way of the Securities Act of 1933. In Canada, the same prerequisites apply, however one's net worth must be a minimum
of one million dollars not including the value of the principal residence.
U.S. criteria. The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
a bank, insurance company, registered investment company, business development company, or small business investment company;
an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment
adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
a charitable organization, corporation, or partnership with assets exceeding $5 million;
a director, executive officer, or general partner of the company selling the securities;
a business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and
a reasonable expectation of the same income level in the current year; or
a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.
Proposed new accredited investor class for hedge funds. At an open meeting on December 13, 2006, the U.S. Securities and Exchange Commission (SEC)
voted to propose a change to the definition of "accredited investor" that, if adopted, would apply to offers and sales of securities issued by hedge funds and
other private investment pools to "accredited natural persons". The proposal requires "accredited natural person" to be both "accredited investors" under the
existing standards and own not less than $2.5 million in investments (as currently defined in the Investment Company Act for purposes of the Section 3(c)(7)
exemption) on the date an investment is made. The $2.5 million test will be periodically adjusted for inflation.
The SEC release estimates that the accredited natural person definition, if adopted as proposed, would significantly reduce the number of U.S. households that
are eligible to invest in private investment vehicles. By the SEC Staff’s calculation, approximately 8.47% of U.S. households currently qualify for accredited
investor status under Regulation D. The Staff estimates that this percentage would drop to approximately 1.3% with respect to investments in private investment
vehicles if the accredited natural person standard is adopted.
Reference: U.S. Securities and Exchange Commission on Accredited Investors. Category: Investment, Source: Wikipedia
A hedge fund is a private investment fund open to a limited range of investors that is permitted by regulators to undertake a wider range of activities than
other investment funds and also pays a performance fee to its investment manager. Each fund will have its own strategy which determines the type of
investments and the methods of investment it undertakes. Hedge funds as a class invest in a broad range of investments extending over shares, debt,
commodities and so forth.
As the name implies, hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of
methods, most notably short selling. However, the term "hedge fund" has come to be applied to many funds that do not actually hedge their investments, and
in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing return.
Hedge funds are typically open only to a limited range of professional or wealthy investors. This provides them with an exemption in many jurisdictions from
regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity of interests in the fund. A hedge fund will typically commit
itself to a particular investment strategy, investment types and leverage levels via statements in its offering documentation, thereby giving investors some
indication of the nature of the fund.
The net asset value of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Hedge funds dominate certain
specialty markets such as trading within derivatives with high-yield ratings and distressed debt.
History
Sociologist, author, and financial journalist Alfred W. Jones is credited with the creation of the first hedge fund in 1949. Jones believed that price
movements of an individual asset could be seen as having a component due to the overall market and a component due to the performance of the asset
itself. In order to neutralize the effect of overall market movement he balanced his portfolio by buying assets whose price he expected to be stronger than the
market and selling short assets he expected to be weaker than the market. He saw that price movements due to the overall market would be cancelled out
because if the overall market rose the loss on shorted assets would be cancelled by the additional gain on assets bought and vice-versa. Because the effect is
to 'hedge' that part of the risk due to overall market movements this became known as a hedge fund.
Industry size
Estimates of industry size vary widely due to the lack of central statistics; the lack of a single definition of hedge funds; and the rapid growth of the industry. As
a general indicator of scale the industry may have managed around $2.5 trillion at its peak in the summer of 2008. The credit crunch has caused assets
under management (AUM) to fall sharply through a combination of trading losses and the withdrawal of assets from funds by investors.
Fees
A hedge fund manager will typically receive both a management fee and a performance fee (also known as an incentive fee). Performance fees are closely
associated with hedge funds, and are intended to be an incentive for the investment manager to produce the largest returns he can. A typical manager will
charge fees of "2 and 20", which refers to a management fee of 2% of the fund's net asset value (or "NAV") per annum and a performance fee of 20% of the
fund's profit (being the increase in its NAV).
Fees are payable by the fund to the investment manager. They are therefore taken directly from the assets that the investor holds in the fund.
Management fees
As with other investment funds, the management fee is calculated as a percentage of the fund's net asset value (the total of the investors' capital accounts) at
the time when the fee becomes payable. Management fees typically range from 1% to 4% per annum, with 2% being the standard figure. Therefore, if a
fund has $1 billion of assets at year-end and charges a 2% management fee, the management fee will be $20 million. Management fees are usually
expressed as an annual percentage but are both calculated and paid monthly (or sometimes quarterly or weekly) at annualized rates.
Performance fees
One of the defining characteristics of hedge funds are performance fees (also known as incentive fees) which give a share of positive returns to the manager.
The manager's performance fee is calculated as a percentage of the fund's profits, counting both unrealized profits and actual realized trading profits.
Performance fees exist because investors are usually willing to pay managers more generously when the investors have themselves made money. Thus, the
performance fee is extremely lucrative for managers who perform well.
Typically, hedge funds charge from 20% of gross returns as a performance fee. However, the range is wide with highly regarded managers charging higher
fees. In particular, Steven Cohen's SAC Capital Partners charges a 3% management fee and a 35-50% performance fee, while Jim Simons' Renaissance
Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund.
Performance fees are intended to align the interests of manager and investor better than flat fees that are payable even when performance is poor. However,
performance fees are better for investors as said by many people, including notable investor Warren Buffett, should the portfolio is widely diversified and
managers do not take excessive risk rather than targeting high long-term returns. In an attempt to control this problem, fees are usually limited by a high water
mark and sometimes limited by a hurdle rate. Alternatively a "claw-back" provision may be included, whereby the investment manager might be required to
return performance fees when the value of the fund drops.
High water marks
A high water mark (also known as a loss carryforward provision) is often applied to a performance fee calculation. This means that the manager only receives
performance fees on the value of the fund that exceeds the highest net asset value it has previously achieved. For example, if a fund were launched at a
NAV (net asset value) per share of $100, which then rose to $130 in its first year, a performance fee would be payable on the $30 return for each share. If the
next year it dropped to $120, no fee is payable. If in the third year the NAV per share rises to $143, a performance fee will be payable only on the $13 return
from $130 to $143 rather than on the full return from $120 to $143.
This measure is intended to link the manager's interests more closely to those of investors and to reduce the incentive for managers to seek volatile trades. If a
high water mark is not used, a fund that ends alternate years at $100 and $110 would generate performance fee every other year, enriching the manager but
not the investors.
The mechanism does not provide complete protection to investors: an unscrupulous manager who has lost a significant percentage of the fund's value may
close the fund and start again with a clean slate, rather than continue working for no performance fee until the loss has been made good. This tactic is
dependent on the manager's ability to persuade investors to trust him or her with their money in the new fund.
Hurdle rates
Some managers specify a hurdle rate, signifying that they will not charge a performance fee until the fund's annualized performance exceeds a benchmark
rate, such as T-bill yield, LIBOR or a fixed percentage. This links performance fees to the ability of the manager to provide a higher return than an
alternative, usually lower risk, investment.
With a "soft" hurdle, a performance fee is charged on the entire annualized return if the hurdle rate is cleared. With a "hard" hurdle, a performance fee is
only charged on returns above the hurdle rate. Prior to the credit crisis of 2008 demand for hedge funds tended to outstrip supply, making hurdle rates
relatively rare.
Withdrawal/Redemption fees
Some managers charge investors a fee if they withdraw money from the fund before a certain period of time, typically one year, has elapsed since the money
was invested. The purpose is to encourage long-term investment in the fund: as a fund's investments need to be liquidated to raise cash for withdrawals, the
fee allows the fund manager to reduce the turnover of its own investments and invest in more complex, longer-term strategies. The fee may also dissuade
investors from withdrawing funds after periods of poor performance.
This fee is typically called a withdrawal fee where the fund is a limited partnership and a redemption fee where the fund is a corporate entity; it is also
sometimes known as a surrender charge.
Strategies
Hedge funds employ many different trading strategies, which are classified in many different ways, with no standard system used. Each strategy can be said to
be built from a number of different elements:
Style: global macro, directional, event driven, relative value (arbitrage), managed futures (CTA)
Market: equity, fixed income, commodity, currency
Instrument: long/short, futures, options
Exposure: directional, market neutral
Sector: emerging market, technology, healthcare etc.
Method: discretionary/qualitative (where the individual investments are selected by managers), systematic/quantitative (or "quant" - where the investments are
selected according to numerical methods using a computerized system)
Diversification: multi manager, multi strategy, multi fund, multi market
The four main strategy groups are based on the investment style and have their own risk and return characteristics. The most common label for a hedge fund
is "long/short equity", meaning that the fund takes both long and short positions in shares traded on public stock exchanges.
Global macro
(Macro, Trading) Anticipate to global macroeconomic events using all markets and instruments.
Discretionary macro - trading is done by investment managers instead of generated by software.
Systematic macro - trading is done purely mathematically, generated by software without human intervention.
Commodity Trading Advisors (CTA, Managed futures, Trading) - trading in futures (or options contracts) in commodity markets.
Systematic diversified - trading in diversified markets.
Systematic currency - trading in currency markets.
Trend following - profit from long-term or short-term trends.
Non-trend following (Counter trend) - profit from trend reversals.
Multi strategy - combination of discretionary and systematic macro.
Directional
(Equity hedge) Hedged investments with exposure to the equity market.
Long / short equity (Equity hedge) - long equity positions hedged with short sales of stocks or stock market index options.
Emerging markets - specialized in emerging markets, such as China, India etc.
Sector funds - expertise in niche areas such as technology, healthcare, biotechnology, pharmaceuticals, energy, basic materials.
Fundamental growth - invest in companies with more earnings growth than the broad equity market.
Fundamental value - invest in undervalued companies.
Quantitative Directional - equity trading using quantitative techniques.
Short bias - take advantage of declining equity markets using short positions.
Multi strategy - diversification through different styles to reduce risk.
Event driven
(Special situations) Exploit pricing inefficiencies caused by anticipated specific corporate events.
Distressed securities (Distressed debt) - specialized in companies trading at discounts to their value because of (potential) bankruptcy.
Merger arbitrage (Risk arbitrage) - exploit pricing inefficiencies between merging companies.
Special situations - specialized in restructuring companies or companies engaged in a corporate transaction.
Multi strategy - diversification through different styles to reduce risk.
Credit arbitrage - specialized in corporate fixed income securities.
Regulation D - specialized in private equities.
Activist - take large positions in companies and use the ownership to be active in the management
Relative value
(Arbitrage, Market neutral) Exploit pricing inefficiencies between related assets that are mispriced.
Fixed income arbitrage - exploit pricing inefficiencies between related fixed income securities.
Equity market neutral (Equity arbitrage) - being market neutral by maintaining a close balance between long and short positions.
Convertible arbitrage - exploit pricing inefficiencies between convertible securities and the corresponding stocks.
Fixed Income corporate - fixed income arbitrage strategy using corporate fixed income instruments.
Asset-backed securities (Fixed Income asset backed) - fixed income arbitrage strategy using asset-backed securities.
Credit long / short - as long / short equity but in credit markets instead of equity markets.
Statistical arbitrage - equity market neutral strategy using statistical models.
Volatility arbitrage - exploit the change in implied volatility instead of the change in price.
Yield alternatives - non fixed income arbitrage strategies based on the yield instead of the price.
Multi strategy - diversification through different styles to reduce risk.
Regulatory Arbitrage - the practice of taking advantage of regulatory differences between two or more markets.
Under certain circumstances an investor can completely hedge the risks of an investment, leaving pure profit. For example, at one time it was possible for
exchange traders to buy shares of, say, IBM on one exchange and simultaneously sell them on another exchange, leaving pure profit. Competition among
investors has leached away such profits, leaving hedge fund managers with trades that are partially hedged, at best. These trades still contain residual risks
which can be considerable.
Miscellaneous
Fund of hedge funds (Multi manager) - a hedge fund with a diversified portfolio of numerous underlying hedge funds to reduce risk.
Fund of fund of hedge funds (F3, F cube) - ultra diversified by investing in other funds of hedge funds.
Multi strategy - a hedge fund exploiting a combination of different hedge fund strategies to reduce market risk.
Multi manager - a hedge fund where the investment is spread along separate sub managers investing in their own strategy.
130-30 funds - unhedged equity fund with 130% long and 30% short positions, the market exposure is 100%.
Long only absolute return funds - partly hedged fund excluding short selling but allow derivatives.
Hedge fund risk
Investing in certain types of hedge fund can be a riskier proposition than investing in a regulated fund, despite a "hedge" being a means of reducing the risk
of a bet or investment. Many hedge funds have some of these characteristics:
Leverage - in addition to money invested into the fund by investors, a hedge fund will typically borrow money, with certain funds borrowing sums many times
greater than the initial investment. If a hedge fund has borrowed $9 for every $1 received from investors, a loss of only 10% of the value of the investments of
the hedge fund will wipe out 100% of the value of the investor's stake in the fund, once the creditors have called in their loans. In September 1998, shortly
before its collapse, Long Term Capital Management had $125 billion of assets on a base of $4 billion of investors' money, a leverage of over 30 times. It also
had off-balance sheet positions with a notional value of approximately $1 trillion.
Short selling - due to the nature of short selling, the losses that can be incurred on a losing bet are theoretically limitless, unless the short position directly
hedges a corresponding long position. Therefore, where a hedge fund uses short selling as an investment strategy rather than as a hedging strategy it can
suffer very high losses if the market turns against it. Ordinary funds very rarely use short selling in this way.
Appetite for risk - hedge funds are culturally more likely than other types of funds to take on underlying investments that carry high degrees of risk, such as
high yield bonds, distressed securities and collateral backed debt obligations based on sub-prime mortgages.
Lack of transparency - hedge funds are secretive entities with few public disclosure requirements. It can therefore be difficult for an investor to assess trading
strategies, diversification of the portfolio and other factors relevant to an investment decision.
Lack of regulation - hedge funds are not subject to as much oversight from financial regulators as regulated funds, and therefore some may carry undisclosed
structural risks.
Investors in hedge funds are, in most countries, required to be sophisticated investors who will be aware of the risk implications of these factors. They are
willing to take these risks because of the corresponding rewards: leverage amplifies profits as well as losses; short selling opens up new investment
opportunities; riskier investments typically provide higher returns; secrecy helps to prevent imitation by competitors; and being unregulated reduces costs and
allows the investment manager more freedom to make decisions on a purely commercial basis.
Hedge fund structure
A hedge fund is a vehicle for holding and investing the funds of its investors. The fund itself has no employees and no assets other than its investment
portfolio and cash, while its investors are its clients. The portfolio is managed by the hedge fund manager, which is the actual business and has employees.
Saying a person works at a hedge fund is not technically correct, they work at the hedge fund manager.
Many service providers assist the hedge fund and hedge fund manager. The primary ones are:
Prime broker – prime brokerage services include lending money, acting as counter-party to derivative contracts, lending securities for the purpose of short
selling, trade execution, clearing and settlement. Until recently Prime brokers were typically large investment banks.
Administrator – the administrator typically deals with the issue and redemption of interests and shares, and calculates the net asset value of the fund. In some
funds, particularly in the U.S. some of these functions are performed by the hedge fund manager, a practice that gives rise to a potential conflict of interest
inherent in having the investment manager both determine the NAV and benefit from its increase through performance fees. Outside of the U.S. regulations
often require this role to be taken by a third party.
Distributor - the distributor is responsible for marketing the fund to potential investors. Frequently this role is taken by the hedge fund manager.
Domicile
The specific legal structure of a hedge fund – in particular its domicile and the type of legal entity used – is usually determined by the tax environment of
the fund’s expected investors. Regulatory considerations will also play a role. Many hedge funds are established in offshore tax havens so that the fund can
avoid paying tax on the increase in the value of its portfolio. An investor will still pay tax on any profit he makes when he realizes its investment, and the
investment manager, usually based in a major financial centre, will pay tax on the fees that he receives for managing the fund.
At end of 2007, 52% of the number of hedge funds were registered offshore. The most popular offshore location was the Cayman Islands (57% of number of
offshore funds), followed by British Virgin Islands (16%) and Bermuda (11%). The other offshore centers are the Isle of Man and Mauritius. The US was the
most popular onshore location (with funds mostly registered in Delaware) accounting for 65% of the number of onshore funds, followed by Europe with 31%.
Manager locations
In contrast to the funds themselves, hedge fund managers are primarily located onshore in order to draw on the major pools of financial talent and to be
close to investors. With the bulk of hedge fund investment coming from the US East coast – principally New York City and the Gold Coast area of Connecticut
– this has become the leading location for hedge fund managers. It was estimated there were 7,000 hedge funds in the United States in 2004.
London is Europe’s leading centre for hedge fund managers, with three-quarters of European hedge fund investments, about $400bn (£200bn), at the end of
2007. Australia was the most important centre for the management of Asia-Pacific hedge funds, with managers located there accounting for approximately a
quarter of the $140bn of hedge fund assets managed in the Asia-Pacific region in 2008.
The legal entity
Limited partnerships are principally used for hedge funds aimed at US-based investors who pay tax, as the investors will receive relatively favorable tax
treatment in the US. The general partner of the limited partnership is typically the investment manager (though is sometimes an offshore corporation) and the
investors are the limited partners. Offshore corporate funds are used for non-US investors and US entities that do not pay tax (such as pension funds), as such
investors do not receive the same tax benefits from investing in a limited partnership. Unit trusts are typically marketed to Japanese investors. Other than
taxation, the type of entity used does not have a significant bearing on the nature of the fund.
Many hedge funds are structured as master/feeder funds. In such a structure the investors will invest into a feeder fund which will in turn invest all of its assets
into the master fund. The assets of the master fund will then be managed by the investment manager in the usual way. This allows several feeder funds (e.g.
an offshore corporate fund, a US limited partnership and a unit trust) to invest into the same master fund, allowing an investment manager the benefit of
managing the assets of a single entity while giving all investors the best possible tax treatment.
The investment manager, which will have organized the establishment of the hedge fund, may retain an interest in the hedge fund, either as the general
partner of a limited partnership or as the holder of “founder shares” in a corporate fund. Founder shares typically have no economic rights, and voting rights
over only a limited range of issues, such as selection of the investment manager – most of the fund’s decisions are taken by the board of directors of the fund,
which is nominally independent but often appears loyal to the investment manager.
Open-ended nature
Hedge funds are typically open-ended, in that the fund will periodically issue additional partnership interests or shares directly to new investors, the price of
each being the net asset value (“NAV”) per interest/share. To realize the investment, the investor will redeem the interests or shares at the NAV per
interest/share prevailing at that time. Therefore, if the value of the underlying investments has increased (and the NAV per interest/share has therefore also
increased) then the investor will receive a larger sum on redemption than it paid on investment. Investors do not typically trade shares among themselves and
hedge funds do not typically distribute profits to investors before redemption. This contrasts with a closed-ended fund, which has a limited number of shares
which are traded among investors, and which distributes its profits.
Listed funds
Corporate hedge funds often list their shares on smaller stock exchanges, such as the Irish Stock Exchange, as this provides a low level of regulatory oversight
that is required by some investors. Shares in the listed hedge fund are not generally traded on the exchange.
A fund listing is distinct from the listing or initial public offering (“IPO”) of shares in an investment manager. Although widely reported as a "hedge-fund IPO",
the IPO of Fortress Investment Group LLC was for the sale of the investment manager, not of the hedge funds that it managed.
Regulatory Issues
The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject.
Part of what gives hedge funds their competitive edge, and their cachet in the public imagination, is that they straddle multiple definitions and categories;
some aspects of their dealings are well-regulated, others are unregulated or at best quasi-regulated.
US regulation
The typical public investment company in the United States is required to be registered with the U.S. Securities and Exchange Commission (SEC). Mutual
funds are the most common type of registered investment companies. Aside from registration and reporting requirements, investment companies are subject
to strict limitations on short-selling and the use of leverage. There are other limitations and restrictions placed on public investment company managers,
including the prohibition on charging incentive or performance fees.
Although hedge funds fall within the statutory definition of an investment company, the limited-access, private nature of hedge funds permits them to operate
pursuant to exemptions from the registration requirements. The two major exemptions are set forth in Sections 3(c)1 and 3(c)7 of the Investment Company
Act of 1940. Those exemptions are for funds with 100 or fewer investors (a "3(c) 1 Fund") and funds where the investors are "qualified purchasers" (a "3(c) 7
Fund"). A qualified purchaser is an individual with over US$5,000,000 in investment assets. (Some institutional investors also qualify as accredited investors
or qualified purchasers.) A 3(c)1 Fund cannot have more than 100 investors, while a 3(c)7 Fund can have an unlimited number of investors. However, a 3(c)7
fund with more than 499 investors must register its securities with the SEC. Both types of funds can charge performance or incentive fees.
In order to comply with 3(c)(1) or 3(c)(7), hedge funds are sold via private placement under the Securities Act of 1933. Thus interests in a hedge fund cannot
be offered or advertised to the general public, and are normally offered under Regulation D. Although it is possible to have non-accredited investors in a
hedge fund, the exemptions under the Investment Company Act, combined with the restrictions contained in Regulation D, effectively require hedge funds to
be offered solely to accredited investors. An accredited investor is an individual person with a minimum net worth of US $1,000,000 or, alternatively, a
minimum income of US$200,000 in each of the last two years and a reasonable expectation of reaching the same income level in the current year. For
banks and corporate entities, the minimum net worth is $5,000,000 in invested assets.
The regulatory landscape for Investment Advisors is changing, and there have been attempts to register hedge fund investment managers. There are
numerous issues surrounding these proposed requirements. One issue of importance to hedge fund managers is the requirement that a client who is charged
an incentive fee must be a "qualified client" under Advisers Act Rule 205-3. To be a qualified client, an individual must have US$750,000 in assets invested
with the adviser or a net worth in excess of US$1.5 million, or be one of certain high-level employees of the investment adviser.
For the funds, the trade-off of operating under these exemptions is that they have fewer investors to sell to, but they have few government-imposed restrictions
on their investment strategies. The presumption is that hedge funds are pursuing more risky strategies, which may or may not be true depending on the fund,
and that the ability to invest in these funds should be restricted to wealthier investors who are presumed to be more sophisticated and who have the financial
reserves to absorb a possible loss.
In December 2004, the SEC issued a rule change that required most hedge fund advisers to register with the SEC by February 1, 2006, as investment advisers
under the Investment Advisers Act. The requirement, with minor exceptions, applied to firms managing in excess of US$25,000,000 with over 15 investors.
The SEC stated that it was adopting a "risk-based approach" to monitoring hedge funds as part of its evolving regulatory regimen for the burgeoning industry.]
The rule change was challenged in court by a hedge fund manager, and in June 2006, the U.S. Court of Appeals for the District of Columbia overturned it
and sent it back to the agency to be reviewed. See Goldstein v. SEC.
Although the SEC is currently examining how it can address the Goldstein decision, commentators have stated that the SEC currently has neither the staff
nor expertise to comprehensively monitor the estimated 8,000 U.S. and international hedge funds. See New Hedge Fund Advisor Rule. One of the
Commissioners, Roel Campos, has said that the SEC is forming internal teams that will identify and evaluate irregular trading patterns or other phenomena
that may threaten individual investors, the stability of the industry, or the financial world. "It's pretty clear that we will not be knocking on [hedge fund] doors
very often," Campos told several hundred hedge fund managers, industry lawyers and others. And even if it did, "the SEC will never have the degree of
knowledge or background that you do."
In February 2007, the President's Working Group on Financial Markets rejected further regulation of hedge funds and said that the industry should instead
follow voluntary guidelines.
Comparison to private equity funds
Hedge funds are similar to private equity funds in many respects. Both are lightly regulated, private pools of capital that invest in securities and compensate
their managers with a share of the fund's profits. Most hedge funds invest in relatively liquid assets, and permit investors to enter or leave the fund, perhaps
requiring some months notice. Private equity funds invest primarily in very illiquid assets such as early-stage companies and so investors are "locked in" for
the entire term of the fund. Hedge funds often invest in private equity companies' acquisition funds.
Between 2004 and February 2006 some hedge funds adopted 25 month lock-up rules expressly to exempt themselves from the SEC's new registration
requirements and cause them to fall under the registration exemption that had been intended to exempt private equity funds.
Comparison to U.S. mutual funds
Like hedge funds, mutual funds are pools of investment capital (i.e., money people want to invest). However, there are many differences between the two,
including:
Mutual funds are regulated by the SEC, while hedge funds are not
A hedge fund investor must be an accredited investor with certain exceptions (employees, etc.)
Mutual funds must price and be liquid on a daily basis
Some hedge funds that are based offshore report their prices to the Financial Times, but for most there is no method of ascertaining pricing on a regular
basis. Additionally, mutual funds must have a prospectus available to anyone that requests one (either electronically or via US postal mail), and must
disclose their asset allocation quarterly, while hedge funds do not have to abide by these terms.
Hedge funds also ordinarily do not have daily liquidity, but rather "lock up" periods of time where the total returns are generated (net of fees) for their investors
and then returned when the term ends, through a pass-through requiring CPAs and US Tax W-forms. Hedge fund investors tolerate these policies because
hedge funds are expected to generate higher total returns for their investors versus mutual funds.
Recently, however, the mutual fund industry has created products with features that have traditionally only been found in hedge funds.
Mutual funds have appeared which utilize some of the trading strategies noted above. Grizzly Short Fund (GRZZX), for example, is always net short, while
Arbitrage Fund (ARBFX) specializes in merger arbitrage. Such funds are SEC regulated, but they offer hedge fund strategies and protection for mutual fund
investors.
Also, a few mutual funds have introduced performance-based fees, where the compensation to the manager is based on the performance of the fund.
However, under Section 205(b) of the Investment Advisers Act of 1940, such compensation is limited to so-called "fulcrum fees". Under these arrangements,
fees can be performance-based so long as they increase and decrease symmetrically.
For example, the TFS Capital Small Cap Fund (TFSSX) has a management fee that behaves, within limits and symmetrically, similarly to a hedge fund "0
and 50" fee: A 0% management fee coupled with a 50% performance fee if the fund outperforms its benchmark index. However, the 125 bp base fee is
reduced (but not below zero) by 50% of under-performance and increased (but not to more than 250 bp) by 50% of out-performance.
Offshore regulation
Many offshore centers are keen to encourage the establishment of hedge funds. To do this they offer some combination of professional services, a favorable
tax environment, and business-friendly regulation. Major centers include Cayman Islands, Dublin, Luxembourg, British Virgin Islands and Bermuda. The
Cayman Islands have been estimated to be home to about 75% of world’s hedge funds, with nearly half the industry's estimated $1.225 trillion AUM.
Hedge funds have to file accounts and conduct their business in compliance with the requirements of these offshore centres. Typical rules concern
restrictions on the availability of funds to retail investors (Dublin), protection of client confidentiality (Luxembourg) and the requirement for the fund to be
independent of the fund manager.
Many offshore hedge funds, such as the Soros funds, are structured as mutual funds rather than as limited partnerships.
Proposed US regulation
Hedge funds are exempt from regulation in the United States. Several bills have been introduced in the 110th Congress (2007-08), however, relating to such
funds. Among them are:
S. 681, a bill to restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation;
H.R. 3417, which would establish a Commission on the Tax Treatment of Hedge Funds and Private Equity to investigate imposing regulations;
S. 1402, a bill to amend the Investment Advisors Act of 1940, with respect to the exemption to registration requirements for hedge funds; and
S. 1624, a bill to amend the Internal Revenue Code of 1986 to provide that the exception from the treatment of publicly traded partnerships as corporations
for partnerships with passive-type income shall not apply to partnerships directly or indirectly deriving income from providing investment adviser and related
asset management services.
S. 3268, a bill to amend the Commodity Exchange Act to prevent excessive price speculation with respect to energy commodities. The bill would give the
federal regulator of futures markets the resources to detect, prevent, and punish price manipulation and excessive speculation.
None of the bills has received serious consideration yet.
Hedge Fund Indices
There are a many indices that track the hedge fund industry, and these fall into three main categories. In their historical order of development they are Non-
investable, Investable and Clone.
In traditional equity investment, indices play a central and unambiguous role. They are widely accepted as representative, and products such as futures and
ETFs provide investable access to them in most developed markets. However hedge funds are illiquid, heterogeneous and ephemeral, which makes it hard to
construct a satisfactory index. Non-investable indices are representative, but due to various biases their quoted returns may not be available in practice.
Investable indices achieve liquidity at the expense of limited representativeness. Clone indices seek to replicate some statistical properties of hedge funds
but are not directly based on them. None of these approaches is wholly satisfactory.
Non-investable indices
Non-investable indices are indicative in nature, and aim to represent the performance of some database of hedge funds using some measure such as mean,
median or weighted mean from a hedge fund database. The databases have diverse selection criteria and methods of construction, and no single database
captures all funds. This leads to significant differences in reported performance between different indices.
Although they aim to be representative, non-investable indices suffer from a lengthy and largely unavoidable list of biases.
Funds’ participation in a database is voluntary, leading to self-selection bias because those funds that choose to report may not be typical of funds as a
whole. For example, some do not report because of poor results or because they have already reached their target size and do not wish to raise further money.
The short lifetimes of many hedge funds means that there are many new entrants and many departures each year, which raises the problem of survivorship
bias. If we examine only funds that have survived to the present, we will overestimate past returns because many of the worst-performing funds have not
survived, and the observed association between fund youth and fund performance suggests that this bias may be substantial.
When a fund is added to a database for the first time, all or part of its historical data is recorded ex-post in the database. It is likely that funds only publish
their results when they are favorable, so that the average performances displayed by the funds during their incubation period are inflated. This is known as
"instant history bias” or “backfill bias”.
Investable indices
Investable indices are an attempt to reduce these problems by ensuring that the return of the index is available to shareholders. To create an investable
index, the index provider selects funds and develops structured products or derivative instruments that deliver the performance of the index. When investors
buy these products the index provider makes the investments in the underlying funds. This makes an investable index similar in some ways to a fund of hedge
funds portfolio.
Only Hedge Funds that agree to accept investments on terms acceptable to the constructor of the index are included in the index, so that the provider can
sell products based on it. This guarantees that the indices are investable, which is an attractive property for an index because it makes the index more
relevant to the choices available to investors in practice.
However, investable indices do not represent the total universe of hedge funds. Most seriously they may under-represent the more successful managers
because these may find the index terms unattractive, for example due to reduced fees or onerous redemption terms being demanded by the provider.
Clone indices
The most recent addition to the field approach the problem in a different manner. Instead of reflecting the performance of actual hedge funds they take a
statistical approach to the analysis of historic hedge fund returns, and use this to construct a model of how hedge fund returns respond to the movements of
various investable financial assets. This model is then used to construct an investable portfolio of those assets. This makes the index investable, and in
principle they can be as representative as the hedge fund database from which they were constructed.
Unfortunately they rely on a statistical modelling process. As clone indices have are relatively short history it is not yet possible to know how reliable this
process will be in practice.
Debates and controversies
Systemic risk
Hedge funds came under heightened scrutiny as a result of the failure of Long-Term Capital Management (LTCM) in 1998, which necessitated a bailout
coordinated (but not financed) by the U.S. Federal Reserve. Critics have charged that hedge funds pose systemic risks highlighted by the LTCM disaster. The
excessive leverage (through derivatives) that can be used by hedge funds to achieve their return is outlined as one of the main factors of the hedge funds'
contribution to systemic risk.
The ECB (European Central Bank) issued a warning in June 2006 on hedge fund risk for financial stability and systemic risk: "... the increasingly similar
positioning of individual hedge funds within broad hedge fund investment strategies is another major risk for financial stability which warrants close
monitoring despite the essential lack of any possible remedies. This risk is further magnified by evidence that broad hedge fund investment strategies have
also become increasingly correlated, thereby further increasing the potential adverse effects of disorderly exits from crowded trades." However the ECB
statement has been disputed by parts of the financial industry.
The potential for systemic risk was highlighted by the near-collapse of two Bear Stearns hedge funds in June 2007. The funds invested in mortgage-backed
securities. The funds' financial problems necessitated an infusion of cash into one of the funds from Bear Stearns but no outside assistance. It was the largest
fund bailout since Long Term Capital Management's collapse in 1998. The U.S. Securities and Exchange commission is investigating.
Transparency
As private, lightly regulated partnerships, hedge funds are not obliged to disclose their activities to third parties. This is in contrast to a regulated mutual fund
(or unit trust) which will typically have to meet regulatory requirements for disclosure. An investor in a hedge fund usually has direct access to the investment
advisor of the fund, and may enjoy more personalized reporting than investors in retail investment funds. This may include detailed discussions of risks
assumed and significant positions. However, this high level of disclosure is not available to non-investors, contributing to hedge funds' reputation for secrecy,
while several hedge funds are offer very limited transparency even to investors.
Some hedge funds, mainly American, do not use third parties either as the custodian of their assets or as their administrator (who will calculate the NAV of
the fund). This can lead to conflicts of interest, and in extreme cases can assist fraud. In a recent example, Kirk Wright of International Management
Associates has been accused of mail fraud and other securities violations[37] which allegedly defrauded clients of close to $180 million.
Market capacity
The rather disappointing hedge fund performance of the past five years calls into question the alternative investment industry's value proposition. Alpha
appears to have been becoming rarer for two related reasons. First, the increase in traded volume may have been reducing the market anomalies that are a
source of hedge fund performance. Second, the remuneration model is attracting more managers, which may dilute the talent available in the industry,
though these causes are disputed
U.S. Investigations
In June 2006. the Senate Judiciary Committee began an investigation into the links between hedge funds and independent analysts
The SEC is also focusing resources on investigating insider trading by hedge funds.
Performance measurement
The issue of performance measurement in the hedge fund industry has led to literature that is both abundant and controversial. Traditional indicators
(Sharpe, Treynor, Jensen) work best when returns follow a symmetrical distribution. In that case, risk is represented by the standard deviation. Unfortunately,
hedge fund returns are not normally distributed, and hedge fund return series are auto-correlated. Consequently, traditional performance measures suffer from
theoretical problems when they are applied to hedge funds, making them even less reliable than is suggested by the shortness of the available return series.
Innovative performance measures have been introduced in an attempt to deal with this problem: Modified Sharpe ratio by Gregoriou and Gueyie (2003),
Omega by Keating and Shadwick (2002), Alternative Investments Risk Adjusted Performance (AIRAP) by Sharma (2004), and Kappa by Kaplan and Knowles
(2004). However, there is no consensus on the most appropriate absolute performance measure, and traditional performance measures are still widely used in
the industry.
Value in mean/variance efficient portfolios
According to Modern Portfolio Theory, rational investors will seek to hold portfolios that are mean/variance efficient (that is, portfolios offer the highest level
of return per unit of risk, and the lowest level of risk per unit of return). One of the attractive features of hedge funds (in particular market neutral and similar
funds) is that they sometimes have a modest correlation with traditional assets such as equities. This means that hedge funds have a potentially quite
valuable role in investment portfolios as diversifiers, reducing overall portfolio risk.
However, there are three reasons why one might not wish to allocate a high proportion of assets into hedge funds. These reasons are:
Hedge funds are highly individual and it is hard to estimate the likely returns or risks;
Hedge funds’ low correlation with other assets tends to dissipate during stressful market events, making them much less useful for diversification than they may
appear; and Hedge fund returns are reduced considerably by the high fee structures that are typically charged.
Several studies have suggested that hedge funds are sufficiently diversifying to merit inclusion in investor portfolios, but this is disputed for example by Mark
Krtitzman who performed a mean-variance optimization calculation on an opportunity set that consisted of a stock index fund, a bond index fund, and ten
hypothetical hedge funds. The optimizer found that a mean-variance efficient portfolio did not contain any allocation to hedge funds, largely because of the
impact of performance fees. To demonstrate this, Kritzman repeated the optimization using an assumption that the hedge funds incurred no performance
fees. The result from this second optimization was an allocation of 74% to hedge funds.
The other factor reducing the attractiveness of hedge funds in a diversified portfolio is that they tend to under-perform during equity bear markets, just when
an investor needs part of their portfolio to add value. For example, in January-September 2008, the Credit Suisse/Tremont Hedge Fund Index was down
9.87%. According to the same index series, even "dedicated short bias" funds had a return of -6.08% during September 2008. In other words, even though
low average correlations may appear to make hedge funds attractive this may not work in turbulent period, for example around the collapse of Lehman
Brothers in September 2008.
Impact on other investment sectors
The hedge fund remuneration structure is attractive to all investment managers generally, which tends to blur the definition of hedge funds. Indeed, it has
been joked that hedge funds are best viewed "... not as a unique asset class or investment strategy, but as a unique “fee structure“".
Hedge fund data
Top performing
The top 50 performing hedge funds, based on average annual return over the previous three years, were ranked by Barron's Online in October 2007 (Hedge
Fund 50). The top 10 are as follows:
RAB Special Situations Fund (RAB Capital, London) - 47.69%
The Children's Investment Fund (TCI), (The Children's Investment Fund Management, London) - 44.27%
Highland CDO Opportunity Fund (Highland Capital Management, Dallas) - 43.98%
BTR Global Opportunity Fund, Class D (Salida Capital, Toronto) - 43.42%
SR Phoenicia Fund (Sloane Robinson, London) - 43.10%
Atticus European Fund (Atticus Management, New York) - 40.76%
Gradient European Fund A (Gradient Capital Partners, London) - 39.18%
Polar Capital Paragon Absolute Return Fund (Polar Capital Partners, London) - 38.00%
Paulson Enhanced Partners Fund (Paulson & Co., New York) - 37.97%
Firebird Global Fund (Firebird Management, New York) - 37.18%
Because of the unavailability of reliable figures, the top 50 list excludes funds such as Renaissance Technologies' Renaissance Medallion Fund and ESL
Investments' ESL Partners (each thought to have returned an average of over 35% in the previous 3 years) and funds by SAC Capital and Appaloosa
Management, which might otherwise have made the list.
The list also excludes funds with a net asset value of less than $250 million. The returns are net of fees.
Highest-earning managers
A manager's earnings from a hedge fund are his share of the performance fee plus 100% of the capital gains on his own equity stake in the fund. Exact
figures are not made publicly available, meaning that all reported figures are estimations, but several publications publish annual lists of top earning hedge
fund managers.
Trader Monthly's list of top 10 earners among hedge fund managers in 2007 was:
John Paulson, Paulson & Co. - $3 billion+
Philip Falcone, Harbinger Capital Partners - $1.5-$2 billion
Jim Simons, Renaissance Technologies - $1 billion
Steven A. Cohen, SAC Capital Advisors - $1 billion
Ken Griffin, Citadel Investment Group - $1–$1.5 billion
Chris Hohn, The Children's Investment Fund Management (TCI) - $800–$900 million
Noam Gottesman, GLG Partners - $700–$800 million
Alan Howard, Brevan Howard Asset Management - $700–$800 million
Pierre Lagrange, GLG Partners - $700–$800 million
Paul Tudor Jones, Tudor Investment Corp. - $600–$700 million
Trader Monthly's top 3 in 2006 were:
John D. Arnold, Centaurus Energy - $1.5-$2 billion
Jim Simons, Renaissance Technologies - $1.5-$2 billion
Eddie Lampert, ESL Investments - $1-$1.5 billion
Trader Monthly's top 3 in 2005 were:
T. Boone Pickens, BP Capital Management - $1.5 billion+
Steven A. Cohen, SAC Capital Advisers - $1 billion+
Jim Simons, Renaissance Technologies - $900 million-$1 billion
In comparison, Institutional Investor's list of top 3 earners among hedge fund managers in 2007 were:
John Paulson, Paulson & Co. - $3.7 billion
George Soros, Soros Fund Management - $2.9 billion
Jim Simons, Renaissance Technologies - $2.8 billion
Institutional Investor's 2005 top earner was Jim Simons with $1.6 billion, and their 2004 top earner was Edward Lampert of ESL Investments, who earned
$1.02 billion during the year.
Largest by assets
Single manager funds as of March 5, 2008:
Name AUM
JP Morgan $44.7bn
Farallon Capital $36bn
Bridgewater Associates $36bn
Renaissance Technologies $34bn
Och-Ziff Capital Management $33.2bn
Goldman Sachs Asset Management $32.5bn
DE Shaw $32.2bn
Paulson and Company $29bn
Barclays Global Investors $18.9bn
Man Investments $18.8bn
ESL Investments $17.5bn
Notable companies
Amaranth Advisors
Bernard L. Madoff Investment Securities LLC ( MADOFF GOT INVOLVED IN AN UNFORGIVABLE FRAUD)
Bridgewater Associates
Citadel Investment Group
D.E. Shaw
Fortress Investment Group
Goldman Sachs Asset Management
Long Term Capital Management
Man Group
Moore Capital Management
RAB Capital
Renaissance Technologies
Soros Fund Management
The Children's Investment Fund Management (TCI)
Bear Stearns Asset Management
Related topics:
130-30 funds
Securities lending
Mutual funds
Mutual-fund scandal (2003)
Finance
Financial markets
Financial regulation
Global assets under management
Securities
Taxation of private equity and hedge funds
Trading strategy
Fund derivatives
Commodity pool
Derivatives market
Investment fund
Venture capital
References
^ "Hedge Funds Do About 60% Of Bond Trading, Study Says", The Wall Street Journal (August 30, 2007). Retrieved on 19 December 2007. Durbin Hunter
^ a b AIMA Roadmap to Hedge Funds
^ http://www.compoundinghappens.com/performance_fees.htm CompoundingHappens.com Performance fees page
^ http://www.compoundinghappens.com/performance_fees.htm CompoundingHappens.com Performance fees page
^ http://www.nytimes.com/2007/03/04/business/yourmoney/04stra.html?ref=yourmoney New York Times, "2 + 20, And Other Hedge Math", Mark Hulbert,
March 4 2007.
^ Hedge Fund Math: Why Fees Matter (Newsletter), Epoch Investment Partners Inc.
^ Forbes 400 Richest Americans: Stephen A. Cohen
^ Loomis, Carol J. "Buffett's Big Bet", Fortune Magazine, June 9 2008.
^ Hedge Funds: Fees Down? Close Shop
^ Hedge Funds: Fees Down? Close Shop
^ http://riskinstitute.ch/146490.htm Lessons from the Collapse of Hedge Fund, Long-Term Capital Management
^ Hedge Funds, pg 7 International Financial Services London
^ http://sec.gov/rules/final/ia-2333.htm#IA
^ Hedge Funds, pg 2 International Financial Services London
^ Fortress files for first US hedge fund IPO, Marketwatch
^ FORTRESS INVESTMENT GROUP LLC, SEC Registration Statement
^ The Investment Company Act of 1940
^ The Investment Company Act of 1940
^ http://www.hedgefundworld.com/forming_a_hedge_fund.htm
^ a b General Rules and Regulations promulgated under the Securities Act of 1933
^ Rules and Regulations promulgated under the Investment Advisers Act of 1940
^ Registration Under the Advisers Act of Certain Hedge Fund Advisers
^ Registration Under the Advisers Act of Certain Hedge Fund Advisers
^ Officials Reject More Oversight of Hedge Funds
^ Working Group Releases Common Approach to Private Pools of Capital Guidance on hedge fund issues focuses on systemic risk, investor protection
^ The Investment Advisers Act of 1940
^ http://www.tfscapital.com/products/mutual/files/Prospectus.pdf
^ Institutional Investor, May 15, 2006, Article Link, although statistics in the Hedge Fund industry are notoriously speculative
^ http://www.ustreas.gov/press/releases/reports/hedgfund.pdf
^ ECB Financial Stability Review June 2006, p. 142
^ Gary Duncan (2006-06-02). "ECB warns on hedge fund risk", The Times. Retrieved on 1 May 2007.
^ edhec-risk.com
^ Blowing up the Lab on Wall Street
^ Times Online, "SEC Probing Bear Stearns hedge funds," June 27, 2007
^ SEC v. Kirk S. Wright, International Management Associates, LLC; International Management Associates Advisory Group, LLC; International Management
Associates Platinum Group, LLC; International Management Associates Emerald Fund, LLC; International Management Associates Taurus Fund, LLC;
International Management Associates Growth & Income Fund, LLC; International Management Associates Sunset Fund, LLC; Platinum II Fund, LP; and
Emerald II Fund, LP, Civil Action
^ Hedge fund manager faces fraud charges
^ Géhin and Vaissié, 2006, The Right Place for Alternative Betas in Hedge Fund Performance: an Answer to the Capacity Effect Fantasy, The Journal of
Alternative Investments, Vol. 9, No. 1, pp. 9-18
^ Scrutiny Urged for Hedge Funds
^ "Testimony Concerning Insider Trading by Linda Chatman Thomsen", Securities and Exchange Commission (September 26, 2006). Retrieved on 19
December 2007.
^ "Hedge Funds to Face More Scrutiny From U.S. Market Regulators", Bloomberg News (December 5, 2006). Retrieved on 19 December 2007.
^ CompoundingHappens.com page on “Portfolio Risk Measurement and Management”
^ ’’Portfolio Efficiency with Performance Fees’’, Economics and Political Strategy (newsletter), February 2007, Peter L. Bernstein Inc.
^ Hulbert, Mark ‘’2 + 20, and Other Hedge Fund Math’’, New York Times, March 4, 2007.
^ "Absolute Returns? What Has Been Happening to Hedge Funds?", CompoundingHappens.com
^ Credit Suisse/Tremont Hedge Index web page
^ http://allaboutalpha.com/blog/2008/09/25/annus-horribilis-for-hedge-funds-illustrates-benefits-of-performance-based-fees/ All about Alpha: Annus horribilis
for hedge funds illustrates benefits of performance-based fees
^ High Performance - Barron's Online
^ "Trader Monthly's Top 100 for 2007 Unveiled". 1440 Wall Street, April 7, 2008. Retrieved on May 25, 2008.
^ Traders Monthly. Top Hedge Fund Earners of 2005.
^ "Best-Paid Hedge Fund Managers". Institutional Investor, Alpha magazine, May 25, 2008. Retrieved on May 25, 2008.
^ "$363M is average pay for top hedge fund managers". Institutional Investor, Alpha magazine (USA TODAY article, May 26, 2006). Retrieved on May 25,
2008.
^ The Billion Dollar Man: Edward Lampert Leads Institutional Investor's Alpha's Ranking of the World's 25 Highest-Paid Hedge Fund Managers in 2004.
^ http://www.ft.com/cms/s/0/077f79ee-ea57-11dc-b3c9-0000779fd2ac.html?dlbk
Links
Center for International Securities and Derivatives Markets at the University of Massachusetts Amherst is a research center specializing in hedge fund research
Hedge Fund Research Initiative of the International Center for Finance at the Yale School of Management
The Hedge Fund Journal - covers the European hedge fund industry; from London, UK. Source: Wikipedia
Stock, Stock Market and Trading
XXX Inc (XXXX) (NASDAQ). Confidence: High (VP7, SS375) (SR1); Price: $2.41, EPS last 12 months: $0.20 / 12-08: $0.23 / 12-09: $0.27, EPS
Growth Next Five Years: 40.00 %,
Number of Analysts: 10; Mean: n/a, Return on Equity: 29.38 %; Net Profit Margin: 19.29 %, Debt to Equity Ratio: 0.0; P/E Ratio: 12.00 ; Internet Service
Providers: 26.50,
Price Target: $375.09; Rate of Return: 15,563 %
Name & Symbol IV CP PT Return
Cubist Pharmac.(CBST) 25.45 18.75 67.67 361
Previous Day's Closing Price >= 1, Book Value/Share >= Previous Day's Closing Price, P/E Ratio: Current <= 10, EPS Growth Next Yr >= 20,
EPS Growth Next 5 Yr Display Only,
Current Yr Growth Rate Display Only, Avg. Daily Vol. Last Qtr. >= 100,000, Return on Equity >= 12, Net Profit Margin >= 10, Debt/Equity Ratio <= 0.5,
Symbol, Company Name, (Jan/09) Price, Book Value, P/E Ratio, EPS Gr Next Yr, ROE, N Profit M
BLDPD, Ballard Power Systems Inc 1.04 1.76 2.90 42.60 17.47 59.62
CPSL, China Precision Steel Inc 1.25 2.65 3.60 20.90 17.22 18.18
POWR, Power Secure International Inc 3.27 4.15 3.10 38.60 29.83 12.42
SWKS, Skyworks Solutions 4.11 5.70 6.40 39.40 12.83 12.91
RICK, Ricks Cabaret International Inc 4.11 8.76 4.30 41.50 14.95 12.73
GCOM, Globecomm Systems Inc 5.36 7.37 4.40 69.30 18.13 12.63
BMA, Banco Macro SA, 10.82 11.72 3.90 22.10 24.42 27.63
HURC, Hurco Cos Inc 12.95 19.23 3.70 25.00 20.37 10.05
RTI, RTI International Metals, Inc 13.53 27.00 4.30 28.40 13.17 12.33
CRDN, Ceradyne Inc 22.55 23.72 5.20 22.90 20.81 16.48
AXS, Axis Capital Holdings Ltd 26.69 33.34 8.60 62.20 12.31 18.53
PTP, Platinum Underwriters Hldgs Ltd 30.56 37.15 7.20 24.10 13.45 20.13
Fundamental Screens: Fundamental screens focus on sales, profits, and other business factors of the underlying companies.
Cheapest Stocks of Large, Growing Companies: Stocks of companies with market caps greater than $5 billion that are expected to grow earnings at least 20%
next year but have price/earnings ratios less than 20 and price/sales ratios less than 1.5.
Highest-Yielding S&P 500 Stocks: Stocks of companies in the Standard & Poor's 500 Index that have the highest dividend yields. These are often considered
the index's most undervalued stocks because their prices are low relative to their dividends.
Dogs of the Dow: Stocks in the Dow Jones Industrial Average with the highest dividend yield lowest price/earnings ratio and lowest price.
Contrarian Strategy: This approach is based on the idea that the market will eventually rediscover out-of-favor stocks and bring the high-flyers back down. It
looks for medium to large cap stocks with low price/earnings ratios and a potentially strong financial condition.
GARP Go-Getters: This screen, based on the so-called "growth at a reasonable price" approach, focuses on finding opportunities at modest risk in smaller
capitalization stocks.
Great Expectations: This screen is biased toward smaller companies and looks across all sectors for beaten-up stocks with a lot of potential growth ahead. The
screen may be particularly useful for "value" investors.
Institutional Ownership Up Last Month: Stocks whose ownership by professional investors has increased based on SEC filings made in the past month. Excludes
micro cap stocks and those trading below $3.
Institutional Ownership Down Last Month: Stocks whose ownership by professional investors has declined based on SEC filings made in the past month.
Excludes micro cap stocks and those trading below $3.
Righteous Rockets: Companies that appear undervalued, are profitable and have relatively low debt -- making them "righteous" -- but that are also fast growing
and have begun to see significant stock price appreciation -- making them "rockets".
SAPI Slugs: This simple but effective value screen presents a pure yield play. It is similar but potentially superior to the better-known Dogs of the Dow screen in
that it draws from a wider pool of large stocks and includes a secondary financial-strength overlay.
Technical Screens: Technical screens search for stocks based on patterns in their price or volume. (Source: MSN Money)
New 52-Week Highs: Stocks that during today's trading have recorded their highest intraday price in the past 52 weeks.
New 5-Year Highs: Stocks that during today's trading have recorded their highest intraday price in the past five years.
New 52-Week Lows: Stocks that during today's trading have recorded their lowest intraday price in the past 52 weeks.
New 5-Year Lows: Stocks that during today's trading have recorded their lowest intraday price in the past five years.
Intraday High-Volume Gainers: Stocks that have gained 3% or more in today's trading on at least double the average trading volume of the past quarter.
One-Week High-Volume Gainers: Stocks that have gained 5% or more in the past week with two-week average trading volume at least double the average
volume of the past quarter.
One-Month High-Volume Gainers: Stocks that have gained 10% or more in the past month with one-month average trading volume at least double the
average volume of the past quarter.
Intraday High-Volume Losers: Stocks that have lost 3% or more in today's trading on at least double the average trading volume of the past quarter.
One-Week High-Volume Losers: Stocks that have lost 5% or more in the past week with two-week average trading volume at least double the average volume
of the past quarter.
One-Month High-Volume Losers: Stocks that have lost 10% or more in the past month with one-month average trading volume at least double the average
volume of the past quarter.
Gapping Up Today: This screen typically uncovers stocks that have jumped higher because of a news event. It seeks a low price today that is at least 5%
above the previous day's close.
Gapping Down Today: This screen typically uncovers stocks whose price has gone down because of a news event. It seeks a high price today that is at least
5% below the previous day's close.
Crossed Above 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that have moved above
their 50-day moving average today -- a bullish sign.
Crossed Above 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that crossed above their
200-day moving average today --a bullish sign.
Closed Above 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed above their
50-day moving average in the most recent session -- a bullish sign.
Closed Above 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed above their
200-day moving average in the most recent session -- a bullish sign.
Crossed Below 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that have moved below
their 50-day moving average today -- a bearish sign.
Crossed Below 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that crossed below their
200-day moving average today -- a bearish sign.
Closed Below 50-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed below their
50-day moving average in the most recent session -- a bearish sign.
Closed Below 200-Day MA Today: Moving averages quickly show whether a stock is trending higher or lower. This screen finds stocks that closed below their
200-day moving average in the most recent session -- a bearish sign.
This Year's Winners: Quickly scours the market for the stocks with the biggest percentage gains year-to-date.
This Year's Losers: Quickly scours the market for the stocks with the biggest percentage losses year-to-date.
Stock market. The Stock Market. The Stock Market (distributor).
A stock market, or equity market, is a private or public market for the trading of company stock and derivatives of company stock at an agreed price; these are
securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. The world derivatives market has been
estimated at about $480 trillion face or nominal value, 12 times the size of the entire world economy. It must be noted though that the value of the derivatives
market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an
actual value. Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and
sellers of the organizations to a listing of stocks and securities together. The stock market in the United States includes the trading of all securities listed on the
NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB and Pink Sheets. European examples of stock exchanges include
the London Stock Exchange, the Deutsche Börse and the Paris Bourse, now part of Euronext.
Trading
The London Stock Exchange. Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based
anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Some exchanges are physical locations where
transactions are carried out on a trading floor, by a method known as open outcry. This type of auction is used in stock exchanges and commodity exchanges
where traders may enter "verbal" bids and offers simultaneously. The other type of stock exchange is a virtual kind, composed of a network of computers where
trades are made electronically via traders.
Actual trades are based on an auction market paradigm where a potential buyer bids a specific price for a stock and a potential seller asks a specific price for
the stock. (Buying or selling at
market means you will accept any ask price or bid price for the stock, respectively.) When the bid and ask prices match, a sale takes place on a first come first
served basis if there are multiple bidders or askers at a given price.
The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The
exchanges provide real-time trading information on the listed securities, facilitating price discovery.
New York Stock Exchange. The New York Stock Exchange is a physical exchange, also referred to as a listed exchange — only stocks listed with the
exchange may be traded. Orders enter by way of exchange members and flow down to a floor broker, who goes to the floor trading post specialist for that stock
to trade the order. The specialist's job is to match buy and sell orders using open outcry. If a spread exists, no trade immediately takes place, in this case the
specialist should use his/her own resources (money or stock) to close the difference after his/her judged time. Once a trade has been made the details are
reported on the "tape" and sent back to the brokerage firm, which then notifies the investor who placed the order. Although there is a significant
amount of human contact in this process, computers play an important role, especially for so-called "program trading".
The NASDAQ is a virtual listed exchange, where all of the trading is done over a computer network. The process is similar to the New York Stock Exchange.
However, buyers and sellers are electronically matched. One or more NASDAQ market makers will always provide a bid and ask price at which they will always
purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange. It was automated in the late 1980s. Prior to the 1980s, it consisted of
an open outcry exchange. Stockbrokers met on the trading floor or the Palais Brongniart. In 1986, the CATS trading system was introduced, and the order
matching process was fully automated.
From time to time, active trading (especially in large blocks of securities) have moved away from the 'active' exchanges. Securities firms, led by UBS AG,
Goldman Sachs Group Inc. and Credit Suisse Group, already steer 12 percent of U.S. security trades away from the exchanges to their internal systems. That
share probably will increase to 18 percent by 2010 as more investment banks bypass the NYSE and NASDAQ and pair buyers and sellers of securities
themselves, according to data compiled by Boston-based Aite Group LLC, a brokerage-industry consultant.
Now that computers have eliminated the need for trading floors like the Big Board's, the balance of power in equity markets is shifting. By bringing more
orders in-house, where clients can move big blocks of stock anonymously, brokers pay the exchanges less in fees and capture a bigger share of the $11 billion
a year that institutional investors pay in trading commissions.
Market participants
Many years ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, with long family histories (and emotional ties) to
particular corporations. Over time, markets have become more "institutionalized"; buyers and sellers are largely institutions (e.g., pension funds, insurance
companies, mutual funds, index funds, exchange traded funds, hedge funds, investor groups, banks and various other financial institutions). The rise of the
institutional investor has brought with it some improvements in market operations. Thus, the government was responsible for "fixed" (and exorbitant) fees being
markedly reduced for the 'small' investor, but only after the large institutions had managed to break the brokers' solid front on fees they then went to
'negotiated' fees, but only for large institutions. However, corporate governance (at least in the West) has been very much adversely affected by the rise of
(largely 'absentee') institutional 'owners'.
History
Historian Fernand Braudel suggests that in Cairo in the 11th century, Muslim and Jewish merchants had already set up every form of trade association and
had knowledge of many methods of credit and payment, disproving the belief that these were originally invented later by Italians. In 12th century France the
courratiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also
traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Bruges commodity traders gathered inside the house
of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but
actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred [2]; the Van der Beurze had Antwerp, as most of the
merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened
in Ghent and Amsterdam.
In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors
intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th
century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. The Dutch later started
joint stock companies, which let shareholders invest in business ventures and get a share of their profits or losses. In 1602, the Dutch East India Company
issued the first shares on the Amsterdam Stock Exchange. It was the first company to issue stocks and bonds.
The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have been the first stock exchange to introduce continuous trade in the early 17th
century. The Dutch "pioneered short selling, option trading, debt-equity swaps, merchant banking, unit trusts and other speculative instruments, much as we
know them" (Murray Sayle, "Japan Goes Dutch", London Review of Books XXIII.7, April 5, 2001). There are now stock markets in virtually every developed and
most developing economies, with the world's biggest markets being in the United States, Canada, China (Hong Kong), India, UK, Germany, France and Japan.
The Bombay Stock Exchange in India. Importance of stock market
Function and purpose
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital
for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly
and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.
History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of
social mood. An economy where the stock market is on the rise is considered to be an up coming economy. In fact, the stock market is often considered the
primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the
control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the reason of central
banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a
security. This eliminates the risk to an individual buyer or seller that the counter-party could default on the transaction.
The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and
services as well as employment. In this way the financial system contributes to increased prosperity.
Relation of the stock market to the modern financial system
The financial system in most western countries has undergone a remarkable transformation. One feature of this development is dis-intermediation. A portion
of the funds involved in saving and financing flows directly to the financial markets instead of being routed via the traditional bank lending and deposit
operations. The general public' s heightened interest in investing in the stock market, either directly or through mutual funds, has been an important
component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in
many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial
wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal
now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment
of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher
proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European
Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured)
bank deposits to more risky securities of one sort or another.
The stock market, individual investors, and financial risk
Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked
contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but
also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is
certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property,
i.e., real estate and collectibles).
With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking
each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and
often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then
plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes
there appears to be no rhyme or reason to the market, only folly.
This is a quote from the preface to a published biography about the long-term value-oriented stock investor Warren Buffett. Buffett began his career with
$100, and $105,000 from seven limited partners consisting of Buffett ' s family and friends. Over the years he has built himself a multi-billion dollar fortune.
The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st.
The behavior of the stock market.
From experience we know that investors may temporarily pull financial prices away from their long term trend level. Over-reactions may occur—so that
excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. New theoretical and empirical arguments
have been put forward against the notion that financial markets are efficient.
According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as profits or dividends, ought to affect share prices. (But this
largely theoretic academic viewpoint also predicts that little or no trading should take place—contrary to fact—since prices are already at or near
equilibrium, having priced in all public knowledge.) But the efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when
the Dow Jones index plummeted 22.6 percent—the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall
dramatically even though, to this day, it is impossible to fix a definite cause: a thorough search failed to detect any specific or unexpected development that
might account for the crash. It also seems to be the case more generally that many price movements are not occasioned by new information; a study of the
fifty largest one-day share price movements in the United States in the post-war period confirms this.[4] Moreover, while the EMH predicts that all price
movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock
market to trend over time periods of weeks or longer.
Various explanations for large price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use
of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact.
Other research has shown that psychological factors may result in exaggerated stock price movements. Psychological research has demonstrated that people
are predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just noise. (Something like seeing familiar shapes in clouds or ink
blots.) In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably
driving the price up). A period of good returns also boosts the investor's self-confidence, reducing his (psychological) risk threshold.
Another phenomenon—also from psychology—that works against an objective assessment is group thinking. As social animals, it is not easy to stick to an
opinion that differs markedly from that of a majority of the group. An example with which one may be familiar is the reluctance to enter a restaurant that is
empty; people generally prefer to have their opinion validated by those of others in the group. In one paper the authors draw an analogy with gambling. In
normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different
players. In times of market stress, however, the game becomes more like poker (herding behavior takes over). The players now must give heavy weight to the
psychology of other investors and how they are likely to react psychologically.
The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the
period running up to the recent Nasdaq crash, less than 1 percent of the analyst's recommendations had been to sell (and even during the 2000 - 2002 crash,
the average did not rise above 5%). The media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of
money could be quickly earned in the so-called new economy stock market. (And later amplified the gloom which descended during the 2000 - 2002 crash,
so that by summer of 2002, predictions of a DOW average below 5000 were quite common.)
Irrational behavior
Sometimes the market tends to react irrationally to economic news, even if that news has no real effect on the technical value of securities itself. Therefore,
the stock market can be swayed tremendously in either direction by press releases, rumors, euphoria and mass panic.
Over the short-term, stocks and other securities can be battered or buoyed by any number of fast market-changing events, making the stock market difficult to
predict. Emotions can drive prices up and down. People may not be as rational as they think. Behaviorists argue that investors often behave irrationally when
making investment decisions thereby incorrectly pricing securities, which causes market inefficiencies, which, in turn, are opportunities to make money.
Crashes
The examples and perspective in this article or section may not represent a worldwide view of the subject. Please improve this article or discuss the issue on
the talk page.
Robert Shiller's plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates, from Irrational Exuberance, 2d ed.[8] In the preface to
this edition, Shiller warns, "The stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing
[2005], in the mid-20s, far higher than the historical average. . . . People still place too much confidence in the markets and have too strong a belief that
paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad
outcomes." Price-Earnings ratios as a predictor of twenty-year returns based upon the plot by Robert Shiller (Figure 10.1,[8] source). The horizontal axis shows
the real price-earnings ratio of the S&P Composite Stock Price Index as computed in Irrational Exuberance (inflation adjusted price divided by the prior ten-
year mean of inflation-adjusted earnings). The vertical axis shows the geometric average real annual return on investing in the S&P Composite Stock Price
Index, reinvesting dividends, and selling twenty years later. Data from different twenty year periods is color-coded as shown in the key. See also ten-year
returns. Shiller states that this plot "confirms that long-term investors—investors who commit their money to an investment for ten full years—did do well when
prices were low relative to earnings at the beginning of the ten years. Long-term investors would be well advised, individually, to lower their exposure to the
stock market when it is high, as it has been recently, and get into the market when it is low." Main article: Stock market crash A stock market crash is often
defined as a sharp dip in share prices of equities listed on the stock exchanges. In parallel with various economic factors, a reason for stock market crashes is
also due to panic. Often, stock market crashes end speculative economic bubbles.
There have been famous stock market crashes that have ended in the loss of billions of dollars and wealth destruction on a massive scale. An increasing
number of people are involved in the stock market, especially since the social security and retirement plans are being increasingly privatized and linked to
stocks and bonds and other elements of the market. There have been a number of famous stock market crashes like the Wall Street Crash of 1929, the stock
market crash of 1973–4, the Black Monday of 1987, the Dot-com bubble of 2000.
One of the most famous stock market crashes started October 24, 1929 on Black Thursday. The Dow Jones Industrial lost 50% during this stock market crash. It
was the beginning of the Great Depression. Another famous crash took place on October 19, 1987 – Black Monday. On Black Monday itself, the Dow Jones
fell by 22.6% after completing a 5 year continuous rise in share prices. This event not only shook the USA, but quickly spread across the world. Thus, by the
end of October, stock exchanges in Australia lost 41.8%, in Canada lost 22.5%, in Hong Kong lost 45.8%, and in Great Britain lost 26.4%. The names “Black
Monday” and “Black Tuesday” are also used for October 28-29, 1929, which followed Terrible Thursday, the starting day of the stock market crash in 1929.
The crash in 1987 raised some puzzles-–main news and events did not predict the catastrophe and visible reasons for the collapse were not identified. This
event raised questions about many important assumptions of modern economics, namely, the theory of rational human conduct, the theory of market
equilibrium and the hypothesis of market efficiency. For some time after the crash, trading in stock exchanges worldwide was halted, since the exchange
computers did not perform well owing to enormous quantity of trades being received at one time. This halt in trading allowed the Federal Reserve system and
central banks of other countries to take measures to control the spreading of worldwide financial crisis. In the United States the SEC introduced several new
measures of control into the stock market in an attempt to prevent a re-occurrence of the events of Black Monday. Computer systems were upgraded in the
stock exchanges to handle larger trading volumes in a more accurate and controlled manner. The SEC modified the margin requirements in an attempt to
lower the volatility of common stocks, stock options and the futures market. The New York Stock Exchange and the Chicago Mercantile Exchange introduced
the concept of a circuit breaker. The circuit breaker halts trading if the Dow declines a prescribed number of points for a prescribed amount of time.
New York Stock Exchange (NYSE) circuit breakers
% drop time of drop close trading for
10% drop before 2PM one hour halt
10% drop 2PM - 2:30PM half-hour halt
10% drop after 2:30PM market stays open
20% drop before 1PM halt for two hours
20% drop 1PM - 2PM halt for one hour
20% drop after 2PM close for the day
30% drop any time during day close for the day
Stock market index
The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the
S&P, the FTSE and the Euronext indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to
the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment.
Derivative instruments: Derivative (finance)
Financial innovation has brought many new financial instruments whose pay-offs or values depend on the prices of stocks. Some examples are exchange-
traded funds (ETFs), stock index and stock options, equity swaps, single-stock futures, and stock index futures. These last two may be traded on futures
exchanges (which are distinct from stock exchanges—their history traces back to commodities futures exchanges), or traded over-the-counter. As all of these
products are only derived from stocks, they are sometimes considered to be traded in a (hypothetical) derivatives market, rather than the (hypothetical) stock
market.
Leveraged strategies
Stock that a trader does not actually own may be traded using short selling; margin buying may be used to purchase stock with borrowed funds; or, derivatives
may be used to control large blocks of stocks for a much smaller amount of money than would be required by outright purchase or sale.
Short selling
In short selling, the trader borrows stock (usually from his brokerage which holds its clients' shares or its own shares on account to lend to short sellers) then sells
it on the market, hoping for the price to fall. The trader eventually buys back the stock, making money if the price fell in the meantime or losing money if it
rose. Exiting a short position by buying back the stock is called "covering a short position." This strategy may also be used by unscrupulous traders to
artificially lower the price of a stock. Hence most markets either prevent short selling or place restrictions on when and how a short sale can occur. The
practice of naked shorting is illegal in most (but not all) stock markets.
Margin buying
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it to rise. Most industrialized countries have regulations that require that if
the borrowing is based on collateral from other stocks the trader owns outright, it can be a maximum of a certain percentage of those other stocks' value. In
the United States, the margin requirements have been 50% for many years (that is, if you want to make a $1000 investment, you need to put up $500, and
there is often a maintenance margin below the $500). A margin call is made if the total value of the investor's account cannot support the loss of the trade.
(Upon a decline in the value of the margined securities additional funds may be required to maintain the account's equity, and with or without notice the
margined security or any others within the account may be sold by the brokerage to protect its loan position. The investor is responsible for any shortfall
following such forced sales.) Regulation of margin requirements (by the Federal Reserve) was implemented after the Crash of 1929. Before that, speculators
typically only needed to put up as little as 10 percent (or even less) of the total investment represented by the stocks purchased. Other rules may include the
prohibition of free-riding: putting in an order to buy stocks without paying initially (there is normally a three-day grace period for delivery of the stock), but then
selling them (before the three-days are up) and using part of the proceeds to make the original payment (assuming that the value of the stocks has not
declined in the interim).
New issuance: Thomson Financial league tables
Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a 29.8% increase over the $389 billion raised in 2003. Initial public
offerings (IPOs) by US issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe, Middle East and Africa (EMEA) increased by
333%, from $ 9 billion to $39 billion.
Investment strategies: Stock valuation
One of the many things people always want to know about the stock market is, "How do I make money investing?" There are many different approaches; two
basic methods are classified as either fundamental analysis or technical analysis. Fundamental analysis refers to analyzing companies by their financial
statements found in SEC Filings, business trends, general economic conditions, etc. Technical analysis studies price actions in markets through the use of
charts and quantitative techniques to attempt to forecast price trends regardless of the company's financial prospects. One example of a technical strategy is
the Trend following method, used by John W. Henry and Ed Seykota, which uses price patterns, utilizes strict money management and is also rooted in risk
control and diversification. Additionally, many choose to invest via the index method. In this method, one holds a weighted or unweighted portfolio consisting
of the entire stock market or some segment of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this strategy is to maximize
diversification, minimize taxes from too frequent trading, and ride the general trend of the stock market (which, in the U.S., has averaged nearly 10%/year,
compounded annually, since World War II).
Taxation: Capital gains tax
According to much national or state legislation, a large array of fiscal obligations are taxed for capital gains. Taxes are charged by the state over the
transactions, dividends and capital gains on the stock market, in particular in the stock exchanges. However, these fiscal obligations may vary from jurisdiction
to jurisdiction because, among other reasons, it could be assumed that taxation is already incorporated into the stock price through the different taxes
companies pay to the state, or that tax free stock market operations are useful to boost economic growth.
Balance sheet Dead cat bounce Modeling and analysis of financial markets Shareholders' equity Stock exchange Stock investor Stock market index Stock
market cycles Stock market bubble Stock market crash Stock market boom Securities regulation in the United States Trader (finance)
References
^ Alternative Stock Library (2008-02-14). "Japan Might Be Extremely Profitable Investment". Alternative Stock Library. Retrieved on 2008-02-25.
^ Hagstrom, Robert G. (2001). The Essential Buffett: Timeless Principles for the New Economy. New York: John Wiley & Sons. ISBN 0-471-22703-X.
^ Cutler, D. Poterba, J. & Summers, L. (1991). "Speculative dynamics". Review of Economic Studies 58: 520–546.
^ Tversky, A. & Kahneman, D. (1974). "Judgement under uncertainty: heuristics and biases". Science 185: 1124–1131. doi:10.1126/science.185.4157.1124.
^ Stephen Morris and Hyun Song Shin, Oxford Review of Economic Policy, vol. 15, no 3, 1999.
^ Sergey Perminov, Trendocracy and Stock Market Manipulations (2008, ISBN 9781435752443).
^ a b c Shiller, Robert (2005). Irrational Exuberance (2d ed.). Princeton University Press. ISBN 0-691-12335-7.
^ Chris Farrell. "Where are the circuit breakers". Retrieved on 2008-10-16.
Links: quotations related to Stock market Look up, Stock market, Stock exchanges, Stocks investing
Stock market: Types of stocks Stock · Common stock · Preferred stock · Outstanding stock · Treasury stock · Authorised stock · Restricted stock · Concentrated
stock · Golden share
Participants Investor · Stock trader/investor · Market maker · Floor trader · Floor broker · Broker-dealer. Exchanges Stock exchange · List of stock exchanges ·
Over-the-counter
Stock valuation Gordon model · Dividend yield · Earnings per share · Book value · Earnings yield · Beta · Alpha · CAPM · Arbitrage pricing theory
Financial ratios P/CF ratio · P/E · PEG · Price/sales ratio · P/B ratio · D/E ratio · Dividend payout ratio · Dividend cover · SGR · ROIC · ROCE · ROE · ROA ·
EV/EBITDA · RSI · Sharpe ratio ·
Treynor ratio · Cap rate
Trading theories Efficient market hypothesis · Fundamental analysis · Technical analysis · Modern portfolio theory · Post-modern portfolio theory · Mosaic
theory
Related terms: Dividend · Stock split · Reverse stock split · Growth stock · Speculation · Trade · IPO · Market trends · Short Selling · Momentum · Day trading ·
Swing trading · DuPont Model ·
Dark liquidity · Market depth . Stock market.
How Stocks and the Stock Market Work by Marshall Brain. 01 April 2000. HowStuffWorks.com.
Corporations, Shareholders, Stock Prices, Stock Averages and Brokers, Financial Planning articles, How Securities Work: NYSE
The stock market appears in the news every day. You hear about it any time it reaches a new high or a new low, and you also hear about it daily in
statements like "The Dow Jones Industrial Average rose 2 percent today, with advances leading declines by a margin of..."
Obviously, stocks and the stock market are important, but you may find that you know very little about them. What is a stock? What is a stock market? Why do
we need a stock market? Where does the stock come from to begin with, and why do people want to buy and sell it? If you have questions like these, then this
article will open your eyes to a whole new world!
Determining Value
Let's say that you want to start a business, and you decide to open a restaurant. You go out and buy a building, buy all the kitchen equipment, tables and
chairs that you need, buy your supplies and hire your cooks, servers, etc. You advertise and open your doors.
Let's say that:
You spend $500,000 buying the building and the equipment. In the first year, you spend $250,000 on supplies, food and the payroll for your employees. At
the end of your first year, you add up all of the money you have received from customers and find that your total income is $300,000. Since you have made
$300,000 and paid out the $250,000 for expenses, your net profit is: $300,000 (income) - $250,000 (expense) = $50,000 (profit). At the end of the second
year, you bring in $325,000 and your expenses remain the same, for a net profit of $75,000. At this point, you decide that you want to sell the business. What
is it worth?.
More on Investing: Determine Your Net Worth, Investment Scams, Arbitrage
One way to look at it is to say that the business is "worth" $500,000. If you close the restaurant, you can sell the building, the equipment and everything else
and get $500,000. This is a simplification, of course -- the building probably went up in value, and the equipment went down because it is now used. Let's
just say that things balance out to $500,000. This is the asset value, or book value, of the business -- the value of all of the business's assets if you sold them
outright today.
But what if you keep it going? Read on to find out. Selling Shares
If you keep the restaurant going, it will probably make at least $75,000 this year -- you know that from your history with the business. Therefore, you can think
of the restaurant as an investment that will pay out something like $75,000 in interest every year. Looking at it that way, someone might be willing to pay
$750,000 for the restaurant, as a $75,000 return per year on a $750,000 investment represents a 10-percent rate of return. Someone might even be willing to
pay $1,500,000, which represents a 5-percent rate of return, or more if he or she thought that the restaurant's income would grow and increase earnings over
time at a rate faster than the rate of inflation.
The restaurant's owner, therefore, will set the price accordingly. You might price the restaurant at $1,500,000. What if 10 people come to you and say, "Wow,
I would like to buy your restaurant but I don't have $1,500,000." You might want to somehow divide your restaurant into 10 equal pieces and sell each piece
for $150,000. In other words, you might sell shares in the restaurant.
Then, each person who bought a share would receive one-tenth of the profits at the end of the year, and each person would have one out of 10 votes in any
business decisions. Or, you might divide ownership up into 1,500 shares and sell each share for $1,000 to make the price something that more people could
afford. Or, you might divide ownership up into 3,000 shares, keep 1,500 for yourself, and sell the remaining shares for $500 each. That way, you retain a
majority of the shares (and therefore the votes) and remain in control of the restaurant while sharing the profit with other people. In the meantime, you get to
put $750,000 in the bank when you sell the 1,500 shares to other people.
Stock, at its core, is really that simple. It represents ownership of a company's assets and profits. A dividend on a share of stock represents that share's portion
of the company's profits, generally dispersed yearly. If the restaurant has 10 owners, each owning one share of stock, and the restaurant makes $75,000 in
profit during the year, then each owner gets a dividend of $7,500. A large company like IBM has millions of shares of stock outstanding -- about 1.7 billion in
February 2004 (see Quicken: International Business Machines for details). In this case, the total profits of the company are divided by 1.7 billion and sent to
the shareholders as dividends.
One measure of the value of a company, at least as far as investors are concerned, is the product of the number of outstanding shares multiplied by the share
price. This value is called the capitalization of the company.
A Stock Exchange
If I am a private citizen who owns a restaurant, and I am selling my restaurant stock to other private citizens in the community, I might do the whole
transaction by word-of-mouth, or by placing an ad in the newspaper. This makes selling the stock easy for me. However, it creates a problem down the line for
investors who want to sell their stock in the restaurant. The seller has to go out and find a buyer, which can be hard. A "stock market" solves this problem.
Stocks in publicly traded companies are bought and sold at a stock market (also known as a stock exchange). The New York Stock Exchange (NYSE) is an
example of such a market. In your neighborhood, you have a "supermarket" that sells food. The reason you go the supermarket is because you can go to one
place and buy all of the different types of food that you need in one stop -- it's a lot more convenient than driving around to the butcher, the dairy farmer, the
baker, etc. The NYSE is a supermarket for stocks. The NYSE can be thought of as a big room where everyone who wants to buy and sell shares of stocks can
go to do their buying and selling.
The exchange makes buying and selling easy. You don't have to actually travel to New York to visit the New York Stock Exchange -- you can call a stock
broker who does business with the NYSE, and he or she will go to the NYSE on your behalf to buy or sell your stock. If the exchange did not exist, buying or
selling stock would be a lot harder. You would have to place a classified ad in the newspaper, wait for a call and haggle on a price whenever you wanted to
sell stock. With an exchange in place, you can buy and sell shares instantly.
The stock exchange has an interesting side effect. Because all the buying and selling is concentrated in one place, it allows the price of a stock to be known
every second of the day. Therefore, investors can watch as a stock's price fluctuates based on news from the company, media reports, national economic
news and lots of other factors. Buyers and sellers take all of these factors into account. So, for example, when the FAA (Federal Aviation Administration) shut
down the company ValuJet for a month in June 1996, the value of the stock plummeted.
Investors could not be sure that the airline represented a going concern and began selling, driving the price down. The asset value of the company acted as
a floor on the share price.
The price of a stock also reflects the dividend that the stock pays, the projected earnings of the company in the future, the price of tea in China (especially
Lipton stock) and so on.
Corporations. Any business that wants to sell shares of stock to a number of different people does so by turning itself into a corporation. The process of turning
a business into a corporation is called incorporating.
If you start a restaurant by taking your own money to buy the building and the equipment, then what you have done is formed a sole proprietorship. You own
the entire restaurant yourself -- you get to make all of the decisions and you keep all of the profit. If three people pool their money together and start a
restaurant as a team, what they have done is formed a partnership. The three people own the restaurant themselves, sharing the profit and decision-making.
A corporation is different, and it is a pretty interesting concept. A corporation is a "virtual person." That is, a corporation is registered with the government, it
has a social security number (known as a federal tax ID number), it can own property, it can go to court to sue people, it can be sued and it can make
contracts. By definition, a corporation has stock that can be bought and sold, and all of the owners of the corporation hold shares of stock in the corporation
to represent their ownership. One incredibly interesting characteristic of this "virtual person" is that it has an indefinite and potentially infinite life span.
There is a whole body of law that controls corporations -- these laws are in place to protect the shareholders and the public. These laws control a number of
things about how a corporation operates and is organized. For example, every corporation has a board of directors (if all of the shares of a corporation are
owned by one person, then that one person can decide that there will only be one person on the board of directors, but there is still a board). The
shareholders in the company meet every year to vote on the people for the board. The board of directors makes the decisions for the company. It hires the
officers (the president and other major officers of the company), makes the company's decisions and sets the company's policies. The board of
directors can be thought of as the brain of the virtual person.
Shareholders
From this description, you can see that a corporation has a group of owners -- the shareholders. The owners elect a board of directors to make the company's
major decisions. The owners of a corporation become owners by buying shares of stock in the corporation. The board of directors decides how many total
shares there will be. For example, a company might have one million shares of stock. The company can either be privately held or publicly held. In a
privately held company, the shares of stock are owned by a small number of people who probably all know one another. They buy and sell their shares
amongst themselves. A publicly held company is owned by thousands of people who trade their shares on a public stock exchange.
One of the big reasons why corporations exist is to create a structure for collecting lots of investment dollars in a business. Let's say that you would like to start
your own airline. Most people cannot do this, because an airplane costs millions of dollars. An airline needs a whole fleet of planes and other equipment,
plus it has to hire a lot of employees. A person who wants to start an airline will therefore form a corporation and sell stock in order to collect the money
needed to get started.
A corporation is an easy way to gather large quantities of investment capital -- money from investors. When a corporation first sells stock to the public, it does
so in an IPO (Initial Public Offering). The company might sell one million shares of stock at $20 a share to raise $20 million very quickly (that is a
simplification -- the brokerage house in charge of the IPO will extract its fee from the $20 million, but let's ignore that here). The company then invests the
$20 million in equipment and employees. The investors (the shareholders who bought the $20 million in stock) hope that with the equipment and employees,
the company will make a profit and pay a dividend.
Another reason that corporations exist is to limit the liability of the owners to some extent. If the corporation gets sued, it is the corporation that pays the
settlement. The corporation may go out of business, but that is the worst that can happen. If you are a sole proprietor who owns a restaurant and the restaurant
gets sued, you are the one who is being sued. "You" and "the restaurant" are the same thing. If you lose the suit then you, personally, can lose everything you
own in the process.
Stock Prices. Let's say that a new corporation is created and in its IPO it raises $20 million by selling one million shares for $20 a share. The corporation buys
its equipment and hires its employees with that money. In the first year, when all the income and expenses are added up, the company makes a profit of $1
million. The board of directors of the company can decide to do a number of things with that $1 million:
It could put it in the bank and save it for a rainy day. It could decide to give all of the profits to its shareholders, so it would declare a dividend of $1 per share.
It could use the money to buy more equipment and hire more employees to expand the company. It could pick some combination of these three options. If a
company traditionally pays out most its profits to its shareholders, it is generally called an income stock. The shareholders get income from the company's
profits. If the company puts most of the money back into the business, it is called a growth stock. The company is trying to grow larger by increasing the
amount of equipment and the number of people who run it.
Stock Prices: Income vs. Growth
The price of an income stock tends to stay fairly flat. That is, from year to year, the price of the stock tends to remain about the same unless profits (and
therefore dividends) go up. People are getting their money each year and the business is not growing. This would be the case for stock in a single restaurant
that distributes all of its profits to the shareholders each year.
Let's say that the single restaurant decides, for several years, to save its profits, and eventually it opens a second restaurant. That is the behavior of a growth
company. The value of the stock rises because, when the second restaurant opens, there is twice as much equipment and twice as much profit being earned
by the company. In a growth stock, the shareholders do not get a yearly dividend, but they own a company whose value is increasing. Therefore, the
shareholders can get more money when they sell their shares -- someone buying the stock would see the increasing book value of the company (the value of
the buildings, equipment, etc.) and the increasing profit that the company is earning and, based on these factors, pay a higher price for the stock.
In a publicly traded company, all of the financial information about the company is public. The Securities and Exchange Commission (SEC) is in charge of
collecting this information and making it available to investors. Shareholders also use a number of other indicators to determine how much a stock is worth.
One simple indicator is the price/earnings ratio. This is the price of the stock divided by the earnings per share. There are all sorts of indicators like these, as
well as a great deal of other financial information available on any stock. You can look up all of it on the Web in thousands of different places -- see the links
at the end of this article for details.
Stock Averages and Brokers
Every day on the news you hear about the Dow Jones Industrial Average, and other averages like the S&P 500 or The Russell 2000. These are broad market
averages designed to tell you how companies traded on the stock market are doing in general. For example, the Dow Jones Industrial Average is simply the
average value of 30 large, industrial stocks. Big companies like General Motors, Goodyear, IBM and Exxon are the companies that make up this index. The
S&P 500 is the average value of 500 large companies. The Russel 2000 index averages the values of 2,000 smaller companies.
What these averages tell you is the general health of stock prices as a whole. If the economy is "doing well," then the prices of stocks as a group tend to rise in
what is referred to as a "bull market." If it is "doing poorly," prices as a group tend to fall in what is called a "bear market." The averages reveal these
tendencies in the market as a whole.
There are three big stock exchanges in the United States:
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
NASDAQ - National Association of Securities Dealers
A company "lists" its stock on an exchange. For example, the NYSE has about 3,000 companies listed. According to the NYSE: At the end of November,
1998, there were 3,104 companies with stock listed on the NYSE. These companies had over 236 billion shares worth a total of $10.1 trillion available for
trading on the Exchange, giving the NYSE the world's largest market capitalization (in global market-value terms, the total global value of the NYSE-listed
companies exceeded $12.8 trillion). Anyone who wants to buy or sell stock in any of these 3,000 or so companies goes to the New York Stock Exchange to do
it. Of course, no one wants to fly to New York to buy or sell their shares. A person therefore calls a stock broker in a firm that is authorized to trade at the
exchange. There are dozens of such brokerage houses, including such familiar names as Merrill Lynch, Charles Schwab and Morgan Stanley. When you call
up a broker at one of these companies, he or she relays your trade to the floor of the appropriate exchange, and a representative of the company (or, more
commonly, a computer representing the company) makes the trade on your behalf. You pay the broker a commission (generally $10 to $100 per trade,
depending on the broker) to provide this service to you. Today, you can also participate in online trading.
Stocks that are not listed on an exchange are sold Over The Counter (OTC). OTC stocks are generally in smaller, riskier companies. Usually, an OTC stock is
stock in a company that does not meet the requirements of an exchange. For lots more information on stock, the stock market and related topics, check out
the links on the next page.
How Investment Scams Work by John Barrymore. Top 10 Investment Scams . Why Do Investment Scams Work?. Avoiding Investment Scams
Ted and Sharon Bitter were victims of investment scammer Martin Frankel, who stole millions of dollars through fraudulent activities. You get a phone call
from a Mr. Davis of Mutual Systems, Inc. Surely you've heard of Mutual Systems? Of course you have.
Mr. Davis is a nice man. He's concerned about your finances, and he asks if you've given any thought to your financial future. He would love to help you out,
and he happens to have some hot, top-secret, inside information about a mobile device that Mutual Systems is releasing soon, a product that will change the
way you see the world. He tells you the stock is cheap right now, and you have to act now or you'll miss out on making a lot of money -- money that will help
secure your future.
"You can't lose," Mr. Davis says. But you do.
You weren't the only person Mr. Davis called that day. Mr. Davis and his associates contacted hundreds of other people. And even though Mutual Systems is
a legitimate company, its stock is not heavily traded. As it happens, the value of a so-called "thinly traded" stock is easy to boost with a burst of buyer action.
And after the value does indeed skyrocket, the scammers quickly sell their shares. The value of the stock plummets, and there goes your money.
Protect Yourself. How Pyramid Schemes Work. How Identity Theft Works. Identity Theft Quiz. Investing Quiz.
Most investment scams use the same basic principles: promises of great profit, assurances of no risk and assertions of urgency and secrecy. The con artist is
likable, friendly and professional. A lot of people think they can spot a scam from a mile away. But most scams aren't as obvious as the pushy salesman
calling out of the blue or the notorious Nigerian bank account scheme. Every year, Americans lose billions of dollars to scams of every size and shape
[source: National Futures Association]. Every citizen is a potential target.
So what schemes are lurking out there? Why do they succeed time and time again? How do you avoid them?
First, let's take a look at the top 10 investment scams.
Pump and Dump
Mr. Davis' scheme is called a pump-and-dump scam. It's so named because the burst of buyers "pumps" up the value of the stock. When the stock value peaks,
the scammers "dump" their stocks, which often causes the value to drop sharply [source: U.S. Securities and Exchange Commission].
Top 10 Investment Scams: Investment scams come in all shapes and sizes. Con artists often mix and match features of various scams to concoct a swindle
that is hard to detect. Below are descriptions of 10 common scams.
Affinity Scams: For better or worse, humans have a tendency to listen to people with whom they have something in common. Scammers depend on this trait.
They join hobbyist groups and religious groups, or trade on ethnic similarities.
Unlicensed Sales: Unlicensed brokers or sales agents approach you with financial advice or an investment opportunity. An unlicensed insurance agent might
sell fake insurance policies. Or, worse, you could seek advice from an unlicensed broker at a disreputable firm.
The Ponzi Scheme: The Ponzi money-shifting scheme consists of paying initial investors with the funds provided by later investors. As in affinity scams, Ponzi
scammers often target groups of people. Since these schemes rely on trust and word of mouth, initiating the scam in a group allows the con artist to spread it
quickly. Charles Ponzi. Charles Ponzi was an early 20th century Italian immigrant to the United States. Ponzi invited people to invest in International Postal
Reply Coupons. He promised extremely high returns. All he really did was take investors' money and deal out small payments to earlier investors. All told,
Ponzi cheated his victims of $10 million.
Internet Scams: Internet scams include e-mail offers and spurious Web sites promoting investment opportunities in nonexistent companies or products. Chat
rooms, newsgroups and bulletin boards are also common playgrounds for con artists. Schemers use multiple user names to endorse the company with false
testimonials, creating the illusion of legitimacy.
Promissory Note Scams: A promissory note is a written agreement to pay back a loan with a certain amount of interest. Scammers offer an opportunity to
invest in high-yield promissory notes, which work much like bonds. But the scammer never actually loans money to a third party. He simply takes the investor's
money. Or he does make the loan, but he pays the investor less than promised.
Prime Bank Scams: The fraudster offers investment opportunities through "prime banks," overseas institutions normally accessible only to the upper crust of
society. Unfortunately, these banks don't exist.
Unsuitable Investments: Fakers recommend investments that aren't suitable to the investor's financial situation. A common variation is the long-term
investment pushed on someone for whom a short-term investment would be better.
Senior Scams: Seniors often live alone, depend on others for care and worry about how their retirement savings will support them. Many seniors are eager to
believe the confident man who can dispel these fears with his sound advice and exciting opportunities. These scams include life insurance fraud and
unsuitable investments.
Commodity Scams: These schemes include investments in gold, silver, rare coins and gems. Con artists have recently capitalized on the political
circumstances that have driven up the cost of oil and natural gas. The same circumstances make investments in alternative energy quite attractive. Just
because it sounds good for the environment doesn't mean it can't be a scam.
Investment Seminars: The scammer invites a hundred people to a seminar, where she presents an unbeatable investment opportunity. You must sign up right
then and there. You can't sign up later because she is leaving town in two hours. So is your money.
Why do these schemes work? . Unfortunately, our instincts sometimes work against us. Learn more on the next page. Cons rely on basic principles of human
behavior for their schemes to succeed.
Risk: Most people are afraid to take risks. How much are you willing to gamble on a high-stakes poker game? What are your chances versus your possible
profit?. Con artists know you're afraid of risk. They'll tell you there is little or no risk in an opportunity that could yield untold riches. If there's no risk, why not
jump on in?
Greed: Most people have a tendency to believe that the grass really is greener on the other side of the fence. "If only I knew how to get past the fence," you
say, gazing longingly at that new sports car or the pile of gold coins. Con artists are greedy, for sure, but, more importantly, they know that you are greedy, too.
They know they can mesmerize you with promises of great riches and future security.
Urgency and Scarcity: "Act now and you'll receive…". "Memorial Day Weekend Sale.". "Clearance Sale -- Sunday Only!". An important principle of sales is
the limited-time, limited-supply offer: urgency and scarcity. Con artists use urgency and scarcity to lure their victims quickly, before the victims have a chance
to do any research or background checks on the legitimacy of the investment opportunity. "There's only room for a few more investors," Mr. Jones says. "If you
don't give me a check today, I can't guarantee you any share of the profits.". You don't want to miss the train to the greener side. And the greener side is
where the train is headed, right? Mr. Jones said so...
William Fogwell and his investment firm, Hobbs-Melville, swindled investors of more than $150 million.
Politeness: When a friend kindly offers to cook you dinner, and past experience has shown that he can't tell a skillet from a spatula, what do you say? You
don't want to hurt your friend's feelings, after all. Unfortunately, your fear of hurting someone's feelings works to a scammer ' s advantage. Yes, you're unsure
about investing in this beach front property in Montana, but Mr. Jones is such a nice young man. And he did drive all the way out to your house to talk to you,
not to mention comp your ticket to the investment seminar.
Trust: When you go to a play, and one of the actresses doesn't know her lines, you lose confidence in the actress's character. You cease to believe. The same
principle applies to the confidence man. People tend to trust a person who seems to know what he's talking about and has full confidence in his plan. After
all, not only are our emotions swayed by confidence and charisma, we are taught to trust experts. And if you tell a con artist, "No, I'm not investing," the con
won't reply, "You're right. You got me." The con will say, "Well, I'll just take the opportunity to someone who is interested in making money." And you start to
rethink your decision.
The Unconfident Man: A clever scammer can use an apparent lack of confidence to get your money. At first, Mr. Jones presents an opportunity to invest in a
biopharmaceutical company that is developing a cancer treatment. "But cancer is such a clever disease," Mr. Jones says. "I just don't think we'll ever be able
to beat it." He doesn't seem too confident in the investment opportunity. What you don't know is that Mr. Jones knows that one of your close relatives recently
died of cancer. He is depending on your desire to invest in the cure to work in tandem with his apparent lack of confidence in the investment opportunity.
"No, this is a great opportunity!" you say, playing right into his hands.
How can you spot a scheme? How do you know if you're already the victim of a scam? Send me your bank account number, and then go to the next page.
Avoiding Investment Scams
Here are some tips to help you steer clear of investment scams.
Don't judge a book by its cover. Salespeople are trained to be professional and charismatic. Con artists are salespeople, too; they just happen to also be
criminals. They depend on you to be polite and to not interrupt them, hang up on them or delete their email. Educate yourself. Scams succeed mostly with
people who have little investment experience or knowledge. Consult a professional financial adviser. Consult your friends and family. While you're starry-eyed
with the potential profit at your fingertips, others are more likely to have an objective viewpoint. Trust only professional, licensed brokers and sales agents.
Don't trust "top-secret insider information" and "hot tips." Don't rush to invest after receiving a single phone call, attending a single seminar, or meeting with
the salesperson a single time. However exciting the prospect may be, do not "act now" or "act before it's too late." Ask the salesperson for a prospectus, a
breakdown of the investment's procedures, risks and potential. Don't trust the "high returns, no risk" guarantee. An investment is a risk, just like playing roulette
(but hopefully with better odds). No investment is a sure thing. Don't trust a salesperson who tells you not to tell anyone about the investment. Always question
"secret" investment opportunities. Research every investment opportunity. Investigate the company, the product, the security, and/or the stock. Use resources
available at the Financial Industry Regulatory Authority and the Securities and Exchange Commission to investigate the company and/or salesperson. If you
are thinking of investing in a company not registered with the SEC, make sure you conduct a thorough background check on the company. Take extra
precautions when presented with an overseas investment opportunity. Steer clear of opportunities that claim to be tax-free investments. Investment returns,
like all legitimate ways to make money, are subject to taxes. When you make an investment, make the check payable to a company, never an individual
salesperson. After making an investment, examine your investment reports and make sure no unauthorized transactions are being conducted. Ask questions of
your adviser/broker/sales agent. Get answers. If your financial adviser or broker is slow to respond, gives vague answers, or denies your requests to withdraw
money from the investment when you have a right to do so, contact the authorities. Don't sign anything you don't understand. Have a lawyer review any
contracts you are asked to sign. Be wary of very quick returns on an investment. Scammers often lure cautious investors by sending a few small payments early
on to encourage them to invest more.
If you are the victim of a scam, the best thing you can do is report it. Scammers depend on your uncertainty and embarrassment at being swindled to keep
the scam going. Don't be embarrassed -- even the best get taken. If there's a time not to sit around and feel ashamed, it's when you suspect you're getting
robbed blind.
William Clark and his wife were victims of financial-planning fraud.
What Was That Nigerian Scam You Mentioned?: A deeply troubled official of the Nigerian government e-mails you. He wants to transfer several million
dollars into your bank account so that he can leave Nigeria with his fortune undetected. As a reward for your help, he'll give you a large portion of the money.
All you have to do is give him your banking information, including your account number. And of course you have to send him a small fee to cover the costs of
the transfer -- consider it an investment in both your futures.
Intrinsic Value .
1. The actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both
tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in
order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value.
2. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price
and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero.
1. For example, value investors that follow fundamental analysis look at both qualitative (business model, governance, target market factors etc.) and
quantitative (ratios, financial statement analysis, etc.) aspects of a business to see if the business is currently out of favor with the market and is really worth
much more than its current valuation.
2. Intrinsic value in options is the in-the-money portion of the option's premium. For example, If a call options strike price is $15 and the underlying stock's
market price is at $25, then the intrinsic value of the call option is $10. An option is usually never worth less than what an option holder can receive if the
option is exercised.
In finance, intrinsic value refers to the value of a security which is intrinsic to or contained in the security itself. It is also frequently called fundamental value.
It is ordinarily calculated by summing the future income generated by the asset according to a criterion of present value.
1 Options 2 Equity 3 Real Estate
Options
An option is said to have intrinsic value if the option is in-the-money. When out-of-the-money, its intrinsic value is zero.
The intrinsic value for an in-the-money option is calculated as the absolute value of the difference between the current price (S) of the underlying and the
strike price (K) of the option, floored to zero.
For a call option
IVcall = max{0,S − K}
while for a put option
IVput = max{0,K − S}
For example, if the strike price for a call option is USD 1 and the price of the underlying is USD 1.20, then the option has an intrinsic value of USD 0.20.
The total value of an option is the sum of its intrinsic value and its time value.
Equity
In valuing equity, securities analysts may use fundamental analysis - as opposed to technical analysis - to estimate the intrinsic value of a company. Here the
"intrinsic" characteristic considered is the expected cash flow production of the company in question. Intrinsic value is therefore defined to be the present
value of all expected future net cash flows to the company; it is calculated via discounted cash flow valuation. See Valuation using discounted cash flows;
John Burr Williams: Theory
As opposed to the book value, or break-up value, of a business, the intrinsic value is the value of a business' ongoing operations. Warren Buffett is known for his
ability to calculate the intrinsic value of a business, and then buy that business at a discount to its intrinsic value.
Examples of 'Equity' includes Ordinary Shares and Preference Shares.
Real Estate
In valuing real estate, a similar approach may be used. The 'intrinsic value' of real estate is therefore defined as the net present value of all future net cash
flows which are foregone by buying a piece of real estate instead of renting it in perpetuity. These cash flows would include rent, inflation, maintenance and
property taxes. This calculation can be done using the gordon model.
Source: Wikipedia-Investopedia
An intrinsic theory of value is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item
itself. Most such theories look to the
process of producing an item, and the costs involved in that process, as a measure of the item's intrinsic value.
For instance, the labor theory of value - the most influential of the intrinsic theories - holds that the value of an item comes from the amount of labor spent
producing said item. For example, if a chair is produced by two workers in 6 hours, then that chair is worth 2 x 6 = 12 man-hours (this is a simplified case; the
labor theory of value takes into consideration only the "necessary" amount of labor that must go into the production of an item, which may be less than the
actual expended labor due to inefficiency). Present value is the value on a given date of a future payment or series of future payments, discounted to reflect
the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means
to compare cash flows at different times on a meaningful "like to like" basis.
1 Calculation
1.1 Technical details
2 Choice of interest rate
3 Annuities, perpetuities and other common forms
Calculation
The most commonly applied model of the time value of money is compound interest. To someone who can lend or borrow for years at an interest rate per
year (where interest of "5 percent" is expressed fully as 0.05), the present value of the receiving monetary units years in the future is: This is also found from
the formula for the future value with negative time. The purchasing power in today's money of an amount C of money, t years into the future, can be
computed with the same formula, where in this case i is an assumed future inflation rate. The expression enters almost all calculations of present value.
Where the interest rate is expected to be different over the term of the investment, different values for may be included; an investment over a two year period
would then have PV of:
Technical details
Present value is additive. The present value of a bundle of cash flows is the sum of each one's present value. In fact, the present value of a cashflow at a
constant interest rate is mathematically the same as the Laplace transform of that cashflow evaluated with the transform variable (usually denoted "s") equal to
the interest rate. For discrete time, where payments are separated by large time periods, the transform reduces to a sum, but when payments are ongoing on
an almost continual basis, the mathematics of continuous functions can be used as an approximation.
Choice of interest rate
The interest rate used is the risk-free interest rate. If there are no risks involved in the project, the expected rate of return from the project must equal or exceed
this rate of return or it would be better to invest the capital in these risk free assets. If there are risks involved in an investment this can be reflected through the
use of a risk premium. The risk premium required can be found by comparing the project with the rate of return required from other projects with similar risks.
Thus it is possible for investors to take account of any uncertainty involved in various investments.
Annuities, perpetuities and other common forms
Many financial arrangements (including bonds, other loans, leases, salaries, membership dues, annuities, straight-line depreciation charges) stipulate
structured payment schedules, which is to say payment of the same amount at regular time intervals. The term "annuity" is often used to refer to any such
arrangement when discussing calculation of present value. The expressions for the present value of such payments are summations of geometric series.
A cash flow stream with a limited number (n) of periodic payments (C), receivable at times 1 through n, is an annuity. Future payments are discounted by the
periodic rate of interest (i). The present value of this ordinary annuity is determined with this formula:
A periodic amount receivable indefinitely is called a perpetuity, although few such instruments exist. The present value of a perpetuity can be calculated by
taking the limit of the above formula as n approaches infinity. The bracketed term reduces to one leaving:
The first formula is found from subtracting from the latter result the present value of a perpetuity delayed n periods.
These calculations must be applied carefully, as there are underlying assumptions:
That it is not necessary to account for price inflation, or alternatively, that the cost of inflation is incorporated into the interest rate. That the likelihood of
receiving the payments is high — or, alternatively, that the default risk is incorporated into the interest rate. See time value of money for further discussion.
Buffett's Value Formula (?)
Warren Buffett hasn't exactly published his formula for what he calls the intrinsic value of a company, but he has dropped a number of hints. He apparently
multiplies estimated future earnings by a confidence margin between zero and a hundred percent (a bird in the bush being worth 0.5 birds in the hand, and
all that; bush birds are the earnings you hope for, and hand birds are the earnings you're confident will materialize). He then compares these probable
earnings with something he has total confidence in, by using a U.S. treasury yield as his discount rate. In calculator form it looks like this:
Earnings. Earnings per share (last 12 months): $
Growth Assumptions. Earnings are expected to grow at a rate of % annually for the next years, before leveling off to an annual growth rate of % thereafter.
Confidence Margin. How confident are you that these expected future earnings will really materialize? %
Discount Rate. Best available return that you have 100% confidence in (like a Treasury bond): %
Results. Stock Value per share: $ , Find EPS , Ticker:
This calculator doesn't use fancier math than the original one did. Its advantage is that it forces you to be explicit about your earnings expectations. It also
automatically provides you with a hard-headed investment strategy: always invest in government bonds, unless you can find something else you are confident
will yield more cash. One other hint that Buffett has dropped over the years is that he can estimate value in his head in about five seconds; so whatever he
does he keeps it simple, slugger.
Warren Buffett: How He Does It
Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by
2005? By comparison, $10,000 in the S&P 500 would have grown to only about $500,000. Whether you like him or not, Buffett's investment strategy is
arguably the most successful ever. With a sustained compound return this high for this long, it's no wonder Buffett's legend has swelled to mythical proportions.
But how the heck did he do it? In this article, we'll introduce you to some of the most important tenets of Buffett's investment philosophy.
Buffett's Philosophy
Warren Buffett descends from the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on
their intrinsic worth. When discussing stocks, determining intrinsic value can be a bit tricky as there is no universally accepted way to obtain this figure. Most
often intrinsic worth is estimated by analyzing a company's fundamentals. Like bargain hunters, value investors seek products that are beneficial and of high
quality but underpriced. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter,
the value investor tries to find those items that are valuable but not recognized as such by the majority of other buyers.
Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the efficient market hypothesis, but they do trust
that the market will eventually start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't
concerned with the supply and demand intricacies of the stock market. In fact, he's not really concerned with the activities of the stock market at all. This is
the implication this paraphrase of his famous quote : "In the short term the market is a popularity contest; in the long term it is a weighing machine."(see What
Is Warren Buffett's Investing Style?)
He chooses stocks solely on the basis of their overall potential as a company - he looks at each as a whole. Holding these stocks as a long-term play, Buffett
seeks not capital gain but ownership in quality companies extremely capable of generating earnings. When Buffett invests in a company, he isn't concerned
with whether the market will eventually recognize its worth; he is concerned with how well that company can make money as a business.
Buffett's Methodology
Here we look at how Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence
and its price. Keep in mind that these are not the only things he analyzes but rather a brief summary of what Buffett looks for:
1. Has the company consistently performed well?
Sometimes return on equity (ROE) is referred to as "stockholder's return on investment". It reveals the rate at which shareholders are earning income on their
shares. Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry.
ROE is calculated as follows: = Net Income / Shareholder's Equity
Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to get a good idea of historical
performance.
2. Has the company avoided excess debt?
The debt/equity ratio is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being
generated from shareholders' equity as opposed to borrowed money. The debt/equity ratio is calculated as follows = Total Liabilities / Shareholders' Equity
This ratio shows the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt - rather than equity - is
financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors
sometimes use only long-term debt instead of total liabilities in the calculation above.
3. Are profit margins high? Are they increasing?
The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is
calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high
profit margin indicates the company is executing its business well, but increasing margins means management has been extremely efficient and successful at
controlling expenses.
4. How long has the company been public?
Buffett typically considers only companies that have been around for at least 10 years. As a result, most of the technology companies that have had their
initial public offerings (IPOs) in the past decade wouldn't get on Buffett's radar (not to mention the fact that Buffett will invest only in a business that he fully
understands, and he admittedly does not understand what a lot of today's technology companies actually do). It makes sense that one of Buffet's criteria is
longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. Never underestimate the value of
historical performance, which demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that the past
performance of a stock does not guarantee future performance - the job of the value investor is to determine how well the company can perform as well as it
did in the past. Determining this is inherently tricky, but evidently Buffett is very good at it.
5. Do the company's products rely on a commodity?
Initially you might think of this question as a radical approach to narrowing down a company. Buffett, however, sees this question as an important one. He
tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on a commodity
such as oil and gas. If the company does not offer anything different than another firm within the same industry, Buffett sees little that sets the company apart.
Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage. The wider the moat, the tougher it is
for a competitor to gain market share.
6. Is the stock selling at a 25% discount to its real value?
This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of
value investing, and Buffett's most important skill. To check this, an investor must determine the intrinsic value of a company by analyzing a number of
business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation
value - what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand
name, which is not directly stated on the financial statements.
Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his
measurement of intrinsic value is at least 25% higher than the company's market capitalization, Buffett sees the company as one that has value. Sounds easy,
doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his
criteria, we have no way of knowing exactly how he gained such precise mastery of calculating value. (To learn more about the value investing strategy of
selecting stocks, check out our Guide To Stock-Picking Strategies.)
Conclusion
As you have probably noticed, Buffett's investing style, like the shopping style of a bargain hunter, reflects a practical, down-to-earth attitude. Buffett maintains
this attitude in other areas of his life: he doesn't live in a huge house, he doesn't collect cars and he doesn't take a limousine to work. The value-investing style
is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2004, he holds the title of the second-richest man in the
world, with a net worth of more $40 billion (Forbes 2004). Do note that the most difficult thing for any value investor, including Buffett, is in accurately
determining a company's intrinsic value. by Investopedia Staff,
Warren Buffett Investment Approach
Buffett's philosophy on business investing is a modification of the value investing approach of his mentor Benjamin Graham. Graham bought companies
because they were cheap compared to their intrinsic value. He was of the belief that as long as the market undervalued them relative to their intrinsic value
he was making a solid investment. He reasoned that the market will eventually realize it has undervalued the company and will correct its course regardless of
what type of business the company was in. In addition he believes that the business has to have solid economics behind it.
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The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:
Is the company in an industry of good economics, i.e., not an industry competing on price points.
Does the company have a consumer monopoly or brand name that commands loyalty?
Can any company with an abundance of resources compete successfully with the company?
Are the earnings on an upward trend with good and consistent margins?
Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average?
Is ROE consistent over its history, more than 12%, and high compared to the industry average? Or does the company have high and consistent Return on
Total Capital?
Does the company retain earnings for growth?
The business should not have high maintenance cost of operations, low capital expenditure or investment cash outflow. This is not the same as investing to
expand capacity.
Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
Is the company free to adjust prices for inflation?
Buffett's next concern would be when to buy. He does not hurry to invest in businesses with undiscernible value. He will wait for market corrections or
downturns to buy solid businesses at reasonable prices, since stock-market downturns present buying opportunities. He is conservative when greed and
speculation is rampant in the market and he is greedy and aggressive when others are fearing for their capital. This contrarian strategy is what led Buffett's
company through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on
potential opportunities during the same period.
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Then he asks at what price is the business a bargain, and his answer typically is when it provides a higher rate of compounded return relative to other available
investment opportunities.
Buffett has coined the term "economic moat," preferring to acquire companies that possess sustainable competitive advantages over their competitors.
Warren Buffett's letters to shareholders are a very valuable source in understanding his investment style and outlook. Warren Buffett Management Style
Buffett views himself as a capital allocator above anything else. His primary responsibility is to allocate capital to businesses with good economics and keep
their existing management to lead the company.
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When Buffett acquires a controlling interest in a business, he makes clear to the owner the following:
He will not interfere with the running of the company.
He will make the hiring and compensation a decision of the top executive.
Capital allocated to the business will have a price tag (a hurdle rate) attached. This process is to motivate owners to send excess capital that does not return
more than its cost to Berkshire headquarters rather than investing it at low returns. This cash is then free to be invested in opportunities that offer higher returns.
Buffett's hands-off approach has held strong appeal and created room for his managers to perform as owners and ultimate decision makers of their businesses.
This acquisition strategy enabled. Buffett to buy companies at fair prices because the sellers wanted room to operate independently after selling.
Besides his skills in managing Berkshire's cash flow, Buffett is skilled in managing the company's balance sheet. Since taking over Berkshire Hathaway, Buffett
has weighed every decision against its impact on the balance sheet. He has succeeded in building Berkshire into one of the eight companies (as of 005) that
are still rated by Moody's as Aaa, the highest credit rating achievable and thus with the lowest cost of debt. Buffett takes comfort in the knowledge that, for the
foreseeable future, his company will not be one of those shaken by economic or natural catastrophes. He repeated over the years that his catastrophe
insurance operation is the only one he knew that can keep the checks clearing during financial turmoil.
With an estimated fortune of $62 billion, Warren Buffett is the richest man in the entire world. In 1962, when he began buying stock in Berkshire Hathaway, a
share cost $7.50. Today, Buffett, 78, is Berkshire's chairman and CEO, and one share of the company's class A stock worth close to $119,000. He credits his
astonishing success to several key strategies, which he has shared with writer Alice Schroeder. She spend hundreds of hours interviewing the Sage of Omaha
for the new authorized biography. The Snowball. Here are some of Buffett's money-making secrets -- and how they could work for you.
1. Reinvest Your Profits: When you first make money, you may be tempted to spend it. Don't. Instead, reinvest the profits. Buffett learned this early on. In high
school, he and a pal bought a pinball machine to pun in a barbershop. With the money they earned, they bought more machines until they had eight in
different shops. When the friends sold the venture, Buffett used the proceeds to buy stocks and to start another small business. By age 26, he'd amassed
$174,000 -- or $1.4 million in today's money. Even a small sum can turn into great wealth.
2. Be Willing To Be Different: Don't base your decisions upon what everyone is saying or doing. When Buffett began managing money in 1956 with $100,000
cobbled together from a handful of investors, he was dubbed an oddball. He worked in Omaha, not Wall Street, and he refused to tell his parents where he was
putting their money. People predicted that he'd fail, but when he closed his partnership 14 years later, it was worth more than $100 million. Instead of
following the crowd, he looked for undervalued investments and ended up vastly beating the market average every single year. To Buffett, the average is just
that -- what everybody else is doing. to be above average, you need to measure yourself by what he calls the Inner Scorecard, judging yourself by your own
standards and not the world's.
3. Never Suck Your Thumb: Gather in advance any information you need to make a decision, and ask a friend or relative to make sure that you stick to a
deadline. Buffett prides himself on swiftly making up his mind and acting on it. He calls any unnecessary sitting and thinking "thumb sucking." When people
offer him a business or an investment, he says, "I won't talk unless they bring me a price." He gives them an answer on the spot.
4. Spell Out The Deal Before You Start: Your bargaining leverage is always greatest before you begin a job -- that's when you have something to offer that the
other party wants. Buffett learned this lesson the hard way as a kid, when his grandfather Ernest hired him and a friend to dig out the family grocery store after a
blizzard. The boys spent five hours shoveling until they could barely straighten their frozen hands. Afterward, his grandfather gave the pair less than 90 cents to
split. Buffett was horrified that he performed such backbreaking work only to earn pennies an hour. Always nail down the specifics of a deal in advance -- even
with your friends and relatives.
5. Watch Small Expenses: Buffett invests in businesses run by managers who obsess over the tiniest costs. He one acquired a company whose owner counted
the sheets in rolls of 500-sheet toilet paper to see if he was being cheated (he was). He also admired a friend who painted only on the side of his office
building that faced the road. Exercising vigilance over every expense can make your profits -- and your paycheck -- go much further.
6. Limit What You Borrow: Living on credit cards and loans won't make you rich. Buffett has never borrowed a significant amount -- not to invest, not for a
mortgage. He has gotten many heart-rendering letters from people who thought their borrowing was manageable but became overwhelmed by debt. His
advice: Negotiate with creditors to pay what you can. Then, when you're debt-free, work on saving some money that you can use to invest.
7. Be Persistent: With tenacity and ingenuity, you can win against a more established competitor. Buffett acquired the Nebraska Furniture Mart in 1983
because he liked the way its founder, Rose Blumkin, did business. A Russian immigrant, she built the mart from a pawnshop into the largest furniture store in
North America. Her strategy was to undersell the big shots, and she was a merciless negotiator. To Buffett, Rose embodied the unwavering courage that makes
a winner out of an underdog.
8. Know When To Quit: Once, when Buffett was a teen, he went to the racetrack. He bet on a race and lost. To recoup his funds, he bet on another race. He
lost again, leaving him with close to nothing. He felt sick -- he had squandered nearly a week's earnings. Buffett never repeated that mistake. Know when to
walk away from a loss, and don't let anxiety fool you into trying again.
9. Assess The Risk: In 1995, the employer of Buffett's son, Howie, was accused by the FBI of price-fixing. Buffett advised Howie to imagine the
worst-and-bast-case scenarios if he stayed with the company. His son quickly realized that the risks of staying far outweighed any potential gains, and he quit
the next day. Asking yourself "and then what?" can help you see all of the possible consequences when you're struggling to make a decision -- and can guide
you to the smartest choice.
10. Know What Success Really Means: Despite his wealth, Buffett does not measure success by dollars. In 2006, he pledged to give away almost his entire
fortune to charities, primarily the Bill and Melinda Gates Foundation. He's adamant about not funding monuments to himself -- no Warren Buffett buildings or
halls. "I know people who have a lot of money," he says, "and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in
the world loves them. When you get to my age, you'll measure your success in life by how many of the people you want to have love you actually do love you.
That's the ultimate test of how you've lived your life."
Financial Glossary
This is a "small-but-friendly" glossary of finance and
investment terms. Some of the definitions have
recommended books and links to articles for more
information.
Click on any term:
10-K
10-Q
12b-1 Fees
401(k)
403(b)
Adjusted Gross Income (AGI)
Alpha
Annual Report
Annuity
Asset
Balance Sheet
Balanced Fund
Beta
Book Value
CODA
Call
Capital Asset Pricing Model (CAPM)
Capital Gain
Capital Gains Tax
Capital Spending
Cash Flow
Cash Flow Statement
Cash and Equivalents
Charge
Compound Annual Growth Rate (CAGR)
Consolidated Financial Statement
Consumer Confidence
Consumer Spending
Convertible Bond
Coupon
Covariance
Current Assets
Current Liabilities
Current Ratio
Current Yield
Currently Taxable Investment
Debt-to-Equity Ratio
Default
Deficit Spending
Depreciation
Dilution
Discount Bond
Discount Rate (Federal Reserve rate)
Discount Rate (present value)
Distribution
Dividend Discount Model
EBIT
EBITDA
EVA
Earnings
Earnings Statement
Earnings Yield
Enterprise Value
Equity
Equivalent Yield
Exchange Traded Fund (ETF)
Federal Reserve
Fiscal Policy
Float
Free Cash Flow
Fundamental
Fundamental Analysis
Goodwill
Gordon Growth Model
Government Spending
Gross Domestic Product (GDP)
Gross Margin
Gross National Product (GNP)
Gross Profit
Gross Revenue
Growth Stock
Hound Dog
IRA
IRS
Income Statement
Index Fund
Inflation
Inventory
Investment
Investment Grade
Junk Bond
Keogh Plan
Liability
Load
Long-term Debt
Market Capitalization
Modern Portfolio Theory
Momentum
Monetary Policy
Monte Carlo Simulation
Municipal Bond
NASD
NOPAT
Net Asset Value (NAV)
Operating Expenses
Operating Income
Operating Margin
Operations
P/E Ratio
P/S Ratio
PEG Ratio
Par Value
Passive Investing
Payroll Tax
Premium Bond
Productivity
Profit Margin
Profitability
Prospectus
Qualified Retirement Plan
Quick Ratio
R-Squared
Recession
Regression
Return on Assets
Return on Equity
Revenue
Roth IRA
Russell 3000
S&P 500
SEP
Salary Reduction Plan
Sales Costs
Sales Revenue
Securities and Exchange
Commission (SEC)
Sell Short
Sharpe Ratio
Short-term Debt
Standard Deviation
Tax-Deferred
Technical Analysis
Tobin Separation Theorem
Trade Deficit
Unemployment Rate
Value Stock
Variable Annuity
Weighted Average Cost of
Capital (WACC)
Wilshire 5000
Yield
Yield to Call
Yield to Maturity (YTM)
Zero Coupon Bond
Discounted cash flow (DCF) technique to value common stock.
DCF techniques are used by investment bankers for merger and acquisition analysis, Wall Street traders to value all types of debt obligations, and Wall Street
analysts to value stock.
Step 1—Forecast Expected Cash Flow: the first order of business is to forecast the expected cash flow for the company based on assumptions regarding the
company's revenue growth rate, net operating profit margin, income tax rate, fixed investment requirement, and incremental working capital requirement.
We describe these variables and how to estimate them in other screens.
Step 2—Estimate the Discount Rate: the next order of business is to estimate the company's weighted average cost of capital (WACC), which is the discount
rate that's used in the valuation process. We describe how to do this using easily observable inputs in other screens.
Step 3—Calculate the Value of the Corporation: the company's WACC is then used to discount the expected cash flows during the Excess Return Period to
get the corporation's Cash Flow from Operations. We also use the WACC to calculate the company's Residual Value. To that we add the value of Short-
Term Assets on hand to get the Corporate Value.
Step 4—Calculate Intrinsic Stock Value: we then subtract the values of the company's liabilities—debt, preferred stock, and other short-term liabilities to get
Value to Common Equity, divide that amount by the amount of stock outstanding to get the per share intrinsic stock value.
How does a corporation make money? It makes money by operating business lines where it manufactures products or provides services. A company
generates revenue by selling its products and services to another party. In generating revenue, a company incurs expenses—salaries, cost of goods sold
(CGS), selling and general administrative expenses (SGA), research and development (R&D). The difference between operating revenue and operating
expense is Operating Income or Net Operating Profit.
To produce revenue a firm not only incurs operating expenses, but it also must invest money in real estate, buildings and equipment, and in working capital
to support its business activities. Also, the corporation must pay income taxes on its earnings. The amount of cash that's left over after the payment of these
investments and taxes is known as Free Cash Flow to the Firm (FCFF).
FCFF is an important measure to stockholders. This is the cash that is left over after the payment of all cash expenses and operating investment required by
the firm. It is the hard cash that is available to pay the company's various claim holders, especially the good guys—the stockholders! The simple equation
used to calculate FCFF is:
FCFF = NOP – Taxes – Net Investment – Net Change in Working Capital
There are five key cash flow measures that are important in estimating the free cash flow to the firm that is used in the DCF approach. Those five cash flow
measures are: the revenue growth rate, the net operating profit margin, the company's income tax rate, net fixed capital investment rate, and incremental
working capital investment rate.
The revenue growth rate is equal to your estimate of the firm's revenue growth rate in percent over the Excess Return Period. Finance Internet sites like
Zack's, First Call, and IBES project revenue growth rates over differing periods. Yahoo Finance and America Online also have growth rates. Warning:
Academic studies have shown that analyst's forecasted growth rates have been upwardly biased.
Net operating profit margin is equal to a firm's operating profits divided by its revenues. A firm's income tax rate is equal to the provision for income taxes
divided by the firm's operating income before provision for taxes. The information necessary to compute NOPM and income tax rate can be found on the
firm's income statement as part of its annual or quarterly reports.
Net fixed investment rate is equal to the company's new investment in plant, property and equipment (PP&E) minus depreciation charges taken. To
calculate this ratio, you need to know the company's investment rate, equal to the firm's yearly investment in PP&E divided by revenues, and the company's
depreciation rate, equal to the firm's depreciation charges divided by revenues. The firm's investment in PP&L and depreciation charges can be found on
its cash flow statement in its annual report.
Incremental working capital investment rate is equal to the change in working capital divided by the change in revenue. Working capital is equal to [(
Accounts Receivable + Inventory) – Accounts Payable]. The firm's accounts payable, inventories, and accounts receivable can be found on its annual
balance sheet in its annual report.
The free cash flow to the firm approach provides for several distinct time periods for estimating cash flow which allow differing value-creating periods for a
corporation's business strategy. In the Excess Return Period, because of a competitive advantage that the firm has, the corporation is able to earn returns on
new investments that are greater than its cost of capital. Classic examples of companies that experienced a significant period of competitive advantage are
IBM in the 1950's and 1960's, Apple Computer in the 1980's, and Microsoft and Intel in the 1990's.
Success invariably attracts competitors whose aggressive practices cut into market share and revenue growth rates, and whose pricing and marketing
activities drive down net operating profit margins. A reduction in NOPM drives return on new investment to levels that approach the corporation's WACC.
When a company loses its competitive advantage and the return from its new investments just equals its WACC, the corporation is investing in business
strategies in which the aggregate net present value is zero (or worse yet, negative—witness IBM in the 1980's and Apple in the 1990's).
The length of the Excess Return Period for the corporation will depend on the particular products being produced, the industry in which the company
operates, and the barriers for competitors to enter the business. Products that have a very high barrier to entry due to patent protection, strong brand names,
or unique marketing channels might have a long Excess Return Period (10 to 15 years or longer). The Excess Return Period for most companies is 5 to 7
years or shorter. All else equal, a shorter Excess Return Period results in a lower stock value.
What do you use as an input for the Excess Return Period? This is your judgment call when valuing a stock. We use what we call the 1-5-7-10 RULE. A
firm's weighted average cost of capital (WACC) is a difficult concept to understand. It may be helpful to think of a company's WACC in relation to the
weighted average return on your own investment portfolio. You may own $10,000 in a money market fund that has an expected yearly return of 6%. You
also may own $10,000 of a preferred stock with an expected return of 8%. And you also may own $80,000 market value of a common stock with an expected
return of 10%. The expected weighted average return of your $100,000 (in total) investment portfolio equals:
Exp. Port. = ($10,000 x .06) + ($10,000 x .08) + ($80,000 x .10) = $9,400 = 9.4%
Return ($100,000) $100,000
A company's WACC is very similar to your investment portfolio's weighted average return as described above. It's simply the weighted average expected cost
for the company's various types of obligations—debt, preferred stock, and common stock—that are issued by the corporation to finance its operations and
investments.
The company's WACC is a very important number, both to the stock market for stock valuation purposes and to the company's management for capital
budgeting purposes. In an analysis of a potential investment by the company, investment projects that have an expected return that is greater than the
company's WACC will generate additional free cash flow and will create positive net present value for stock owners. These corporate investments should
result in an increase in stock prices. These projects are good things! Investments that earn less than the firm's WACC will result in a decrease in stockholder
value and should be avoided by the company.
When you value a stock of a company, the next place that you should visit for information is the company's own corporate Web site. At this site you can get
the corporation's Annual Report, which contains its Income Statement, Balance Sheet, and Cash Flow Statement, and its most recent quarterly earnings
release. This will provide you with the bulk of the information that you need for valuing its stock.
The next set of sites that you should visit are Internet sites devoted to investment information. Some sites are free or partly-free and some provide information
to subscribers only. Good sites to get corporate betas and growth rates are America Online, Microsoft Investor, S&P Personal Wealth and Yahoo Finance. At
most of these sites, either Zack's, First Call, or IBES act as the source of growth rate data Warning: Academic studies have shown that analyst's forecasted
growth rates have been upwardly biased.
Yahoo, AOL, MSN, Market Guide, Hoover's and Bloomberg Finance, among others, act as good sites to get valuation inputs relating to cost of capital, such
as the risk-free Treasury yields, rates associated with preferred stock and corporate debt, shares outstanding, and current stock prices.
We group companies into one of four general categories and Excess Return Periods: (1) the boring companies that operate in a competitive, low-margin
industry in which they have nothing particular going for them—a 1-year Excess Return Period; (2) the decent companies that have a recognizable name and
decent reputation and perhaps a regulatory benefit (e.g. Consolidated Edison)—a 5-year Excess Return Period; (3) the large, economies of scale good
companies with good brand names, marketing channels, and consumer identification (e.g. McDonald's and AT&T)—a 7-year Excess Return Period; and (4)
the knock-em-dead great companies with tremendous marketing power, brand names, and in-place benefits (e.g. Intel, Microsoft, Coca Cola and Disney)—a
10-year Excess Return Period.
We do not believe in going out more than 10-years with an Excess Return Period. Some fundamental stock valuation models, like the dividend discount
model, incorporate earnings and dividend growth in excess of the company's WACC, out to an infinite time period. Cash flow in these models is discounted
until the 'hereafter'. We think that 10 years is a reasonable amount of time to incorporate the product cycles of today's markets.
What happens after the Excess Return Period? Does the company dry up, die, or go bankrupt? NO! For valuation purposes, the company loses its
competitive advantage. This loss of competitive advantage means that the company's stock value will grow only at the market's required rate of return for the
stock. For example, if the common stock price of XYZ Boring Company (which does not pay dividends) is $20, and its required rate of return is 12%, its
stockholders expect it to grow to ($20 * 1.12) = $22.40 after year 1, ($22.40 * 1.12) = $25.08 after year 2, and ($25.08 * 1.12) = $28.06 after year 3. After year
3, in this example, the company should pay all of its free cash flow to stockholders through dividends or share repurchases. The annual rate of return that an
investor expects to earn when investing in shares of a company is known as the cost of common equity. That return is composed of the dividends paid on
the shares and any increase (or decrease) in the market value of the shares. For example, if an investor expects a 10% return from McDonald's stock and she
buys a share at $67.25, her expectation is to receive $6.72 during the year through a combination of dividends (currently $.34 per share during 1998) and
the appreciation of the stock price (presumed to be $6.38 to give her the 10% expected return totaling $6.72) during the year.
Let's now take a look at what rate of return, in general, an investor should expect from a stock. The return expected of any risky common stock should be
composed of at least three different return components: (1) a return commensurate with a risk-free security (Rf); (2) a return that incorporates the market risk
associated with common stocks as a whole (Rm); and (3) a return that incorporates the business and financial risks specific to the stock of the company itself,
known as the company's beta.
The first measure of return (Rf) relates to what market rate of return is currently available from a risk-free security, like the yield associated with a long-term
Treasury Bond. So if the yield on Treasury Bonds is 5%, an investor should expect a return greater than 5% for a common stock.
The second measure of return (Rm) relates to what market returns are currently available from and what risks are associated with stocks in general. There is a
general risk premium (the equity risk premium) associated with the stock market as a whole. That risk premium should be priced into any equity investment.
For example, if you expect to earn 8% on average (from a diversified portfolio) in the stock market and the risk-free rate is 5%, the Equity Risk Premium (Rerp)
would be (Rerp) = (8% - 5%) = 3%.
Equity Risk Premium(Rerp) = Exp. Return on Market(Rm) - Risk Free Rate(Rf)
The third measure of return versus risk (beta) should be related to the specific stock being purchased—how risky is the type of business the firm does and how
risky is the financial structure or leverage of the firm. Beta measures the risk of the company relative to the risk of the stock market in general. With greater
risk, as measured by a larger variability of returns (business or operating risk), the company's should have a larger beta. And with greater leverage (higher debt
to value ratio) increasing financial risk, the company's stock should also have a larger beta. And with a larger beta, an investor should expect a greater
return. The beta of an average risk firm in the stock market is 1.00.
The financial risk model that uses beta as its sole measure of risk ( a single factor model) is called the Capital Asset Pricing Model (CAPM) and is used by
many market analysts in their valuation process. The relationship between risk and return that comes out of that model and the one that is incorporated into
our FCFF analysis and spreadsheet software is:
Exp.(Rs) = (Rf) + beta(Rerp)
which in English translates to "The expected return on a stock (e.g. McDonald's) is equal to the risk free rate (e.g. 5%) plus the specific stock's beta (e.g. 0.97)
times the equity risk premium (e.g. 3.0%)." In numbers it looks like this: Expected Return on McDonald's Stock = 5% + 0.97(3.0%) = 7.91% We always prefer
to buy a stock that is priced below or near its intrinsic value. We do not buy a stock that is trading at a price that we believe is above its value. We
understand the 'momentum trading approach' and know that when the stock market is bullish and a stock's trend is up, the trend can carry an 'overvalued'
stock even higher. This occurs especially with a hot, growth industry like the Internet and with a stock that has a relatively small amount of shares available
for trading.
We strongly believe that there is value to careful stock selection and also believe that an investor should own a diversified portfolio of common stocks. Within
that portfolio the investor should value each stock individually using the DCF valuation technique. When the stock is 'overvalued' and it exceeds its intrinsic
value by more than X% (the investor should pick that percentage, e.g. 15%), he should sell that stock and replace it with another stock that is 'undervalued'
by more than X% (e.g. 15%). The value of any asset is equal to the expected cash flows of the asset, discounted for timing and risk. Future cash flows for
common stock can come from dividends, from the sale or merger of the company (e.g. AOL's merger with Time Warner), from the repurchase of the stock by
the company (e.g. Microsoft and Intel have large share repurchase programs), or from the sale of the stock at market prices.
High Net Worth Individual - HNWI
A classification used by the financial services industry to denote an individual or a family with high net worth. Although there is no precise definition of how
rich somebody must be to fit into this category, high net worth is generally quoted in terms of liquid assets over a certain figure. The exact amount differs by
financial institution and region. The categorization is relevant because high net worth individuals generally qualify for separately managed investment
accounts instead of regular mutual funds.
The most commonly quoted figure for membership in the high net worth "club" is $1 million in liquid financial assets. An investor with less than $1 million but
more than $100,000 is considered to be "affluent", or perhaps even "sub-HNWI". The upper end of HNWI is around $5 million, at which point the client is then
referred to as "very HNWI". More than $50 million in wealth classifies a person as "ultra HNWI".
HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These
individuals generally demand (and can justify) personalized services in investment management, estate planning, tax planning, and so on.
High net worth individual
In private banking, a high-net-worth individual (HNWI) is a person with a high net worth. Typically these individuals are defined as having investable assets
(financial assets not including primary residence) in excess of US$1 million. [1][2] The number of high net worth individuals worldwide is estimated at 9.5
million. HNWI wealth totals US$37.2 trillion, representing an 11.4% gain since 2005.[1]
UHNWI
Banking and Finance
Retail
UHNWI refers to Ultra-High-Net-Worth Individuals, individuals or families who have at least US$30 million[1][2] in investable assets. The number of ultra high
net worth individuals worldwide is estimated at about 95,000.[1] The exact dividing lines depend on how a bank wishes to segment its market; for example, the
term Very High Net Worth Individuals [3] can refer to those with assets between $5 million and $50 million, with Ultra High Net Worth Individuals only those
with above $50 million.
Banking and Finance
Most global banks, such as Credit Suisse, Deutsche Bank or UBS, have a separate Business Unit with designated teams consisting of client advisors and
product specialists exclusively for UHNWI. Because of their extreme high net worth and the way their assets were generated, these clients are often considered
to have semi-institutional or institutional like characteristics.
Retail
Brands in various sectors, such as Bentley, Maybach and Rolls-Royce in motoring, actively target UHNWI and HNWI to sell their products. Figures gathered by
Rolls-Royce suggest there are 80,000 people in the UHNWI category around the world.[4] They have, on average, eight cars and three or four homes.
Three-quarters own a jet aircraft and most have a yacht.
Source: Investopedia-Wikipedia
Stock value is derived from a company's long term ability to create cash profits from invested capital; and financial statements are intended to give a
snapshot of how successfully this creation of value is being accomplished. But unless you're a professional accountant, you may find that a look at an annual
report is like a visit to an alien planet; you'll encounter odd terminology, strange calculations, and of course big numbers.
This guide should explain the three important financial statements from the annual report of a fictitious company:
Income Statement: How good the company is at making money
Cash Flow Statement: How they're paying for their operations and their future growth
Balance Sheet: What the company owns and owes
High Net Worth Investors. Due Diligence For High Net Worth Investors
Resource on conducting hedge fund due diligence for high net worth portfolios. It is not a complete guide to conducting this type of due diligence but they
brought up many good points. A hedge fund investment should be utilized to improve the efficient frontier of an accredited investor’s portfolio and protect
against downside risk by the allocation of a segment of the portfolio appropriate to the client’s risk tolerance. Both quantitative and qualitative due diligence
are essential to protect a client’s investment against fraud, divergence from stated strategy, and/or poor investing.
A fund of hedge funds investment can offer diversification, and innate due diligence, within the hedge fund investment by limiting the allocation that any
single fund can hold. A fund of funds downside comes from the layering of fees and the more apparent lack of transparency that’s prevalent with many funds.
In addition, the preeminent hedge funds are often hard to locate because they are often available by referral only.
The correlation of a hedge fund with traditional benchmarks is a vital component in due diligence. One must also be aware that although stated pre-tax
returns of a fund may be appealing, short-term trading can destroy the tax efficiency which is critical to high net worth investors. Research into the operation
of the hedge fund manager and their performance in varying markets and well as tactical ongoing analysis of the fund’s performance are imperative to
quality due diligence.
Hedge Fund Due Diligence: Hedge Fund Due Diligence Guide
New hedge funds are launched daily, which is constantly increasing the importance of conducting formal hedge fund due diligence and determining which
hedge funds are appropriate for you or your firm to invest in becomes increasingly important. Every person or company is going to have different investment
horizons, risk tolerances, strategy preferences, etc, so it is usually more valuable to know the basics of how to evaluate a hedge fund then it is to hear
someone say which hedge funds are "the best." I think giving hedge fund recommendations even to the degree of suggesting exactly how to evaluate a
hedge fund is too close to finance advice to put online but the SEC website does provide this advice in conducting a minimum level of hedge fund due
diligence before investing:
Read a fund's prospectus or offering memorandum and related materials
Understand how a fund's assets are valued
Ask questions about fees
Understand any limitations on your right to redeem your shares
Research the backgrounds of hedge fund managers
Don't be afraid to ask questions
Hedge Funds Due Diligence Articles, Guides & Tools that could be useful while conducting due diligence on hedge fund managers. Hedge fund due
diligence resources.
Hedge Fund Due Diligence Articles
Hedge Fund Regulation Corner | Compliance & Law Notes
SEC on Hedge Fund Regulation
Hedge Fund Risk Analysis
Hedge Fund Fraud | SEC & Hedge Funds Fraud Case
Hedge Fund Due Diligence Tips
The Importance of RFPs in conducting hedge fund due diligence
Hedge Fund Manager Due Diligence
Due Diligence for High Net Worth Clients
Investment Due Diligence
Risks of hedge fund investing & portfolio management
How long should hedge fund due diligence take?
Institutional Hedge Fund Risk Controls
Hedge Fund Due Diligence Questions
Importance of transparency and hedge fund due diligence
Hedge Fund Due Diligence Whitepapers & PowerPoints
Whitepaper on Hedge Fund Operational Risk & Transparency
Alpha through rigorous hedge fund due diligence
In-depth hedge fund risk & due diligence PowerPoint
White Paper on Mitigating Operational Risk During Hedge Fund Due Diligence
Hedge Fund Due Diligence Tools
FINRA Broker Check
Hedge Fund of Fund RFP Example - Used in Institutional Due Diligence Processes
HFN's Guide to Hedge Fund Due Diligence
Book on Hedge Fund Due Diligence
Fund of Fund Due Diligence
Additional Hedge Fund Guide Sections
Hedge Fund Strategy
Hedge Fund Marketing
Hedge Fund Terms
Articles Related to "Hedge Fund Due Diligence"
1. Guide to Investing
2. Hedge Fund Risk Management
3. Hedge Funds FAQ
4. Request for Proposal
Permanent Link: Hedge Fund Due Diligence
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Diligence, Hedge Fund Due Diligence
Questionnaire
Link to This Resource: Hedge Fund Due Diligence http://richard-wilson.blogspot.com/2008/03/hedge-fund-due-diligence.html
Hedge Fund Strategy
Hedge Funds Strategy Guide
The 10-15,000 hedge funds now being managed throughout the world use between 200-400 different hedge fund strategies. How can you keep these all
straight? The short answer is you can't,
However you can find a list of hedge fund strategy definitions here below.
Hedge Fund Strategy Explanations
Emerging Markets
Equity Long Short
Fixed Income Arbitrage Investment Strategy | 1 Page Guide
130/30 Hedge Fund Resources
Global Macro
Global Macro Hedge Funds
Multi Strategy Hedge Fund
Sustainable Investing
Event Driven Hedge Funds
Green Hedge Funds
Art Investment Strategy
African Hedge Funds
130/30 Hedge Funds See Rapid Growth
Top 5 Hedge Fund Strategies
Hedge Fund Investment Strategies
Litigation Funding Hedge Fund Strategy
Short Selling
Emerging Markets Hedge Funds
Risk Arbitrage Hedge Fund Strategy
Hedge Fund Litigation Funding List
Warrant Arbitrage
Arbitrage Investment Strategy
More Hedge Fund Guides
Hedge Fund Terms
Hedge Fund Marketing
Hedge Fund Due Diligence
Articles Related to Hedge Fund Strategy:
1. Hedge Fund Investment Strategies
2. Multi Strategy Hedge Fund
3. Top 5 Hedge Fund Strategies
4. Hedge Fund Jobs
5. Hedge Fund Managers
6. Hedge Fund Research
Permanent Link: Hedge Fund Strategy
Tags: hedge fund strategy, hedge funds strategy, hedge fund strategy guide, hedge fund strategy explanation, hedge funds strategies, hedge fund strategy
information, guide to hedge fund strategies, hedge fund manager strategy, hedge fund investing strategy, information on hedge fund strategy, hedge fund
strategy research, hedge fund strategy due diligence
Link to This Resource: Hedge Fund Strategy
Fund of Hedge Funds Fund of Hedge Funds Update
There has been a lot of talk over the last 2 years and 2 quarters particularly about the death of fund of hedge funds (fofs). Like much other doomsday
discussions regarding the hedge funds we don't see these fund of fund groups going anywhere. In fact, I still think there is room for further growth in the fund
of fund arena as demand from internationally-based investors is increasing as most fund of funds are still currently designed for U.S or EU investors.
The main reason why we think hedge fund of funds will be always around is that many investors have just enough assets to play around in hedge funds. This
requires them to either allocate their funds to a friend or close business partner who runs a single strategy fund or diversify their entry to the hedge fund
market by investing in 3-12 hedge funds at one time. Some of the most popular retail products these days are all in one portfolios whether they be lifestyle
portfolios, all cap separate managed account products, or retirement focussed growth & income mutual funds. Many investors would rather pay an extra layer
of 1% fees in return for a no hassles lower risk exposure to the hedge fund industry.
Another reason why fund of hedge funds will be around for a long time is that 55% of all fof assets are from institutions. The percentage of fund of funds used
in a institutions total portfolio is on the rise, not the decline. This class of investors generally takes a longer view than high net worth individuals or family
offices. It would take several catastrophic events in consecutive quarters or years to stall or create a small decline in the institutional use of hedge fund of
funds.
Read dozens of additional articles like this within the guide to Hedge Fund Terms and Definitions.
- Fund of Hedge Funds. Articles Related to "Fund of Hedge Funds":
Fund of Funds
Hedge Fund Due Diligence
Hedge Fund Performance
9 Hedge Fund Database Tips
Preqin's Hedge Fund Resources
Hedge Fund Employment
CTA Directory
Hedge Fund Database
Fund of Fund Database
Hedge Funds
Related Terms: Fund of Hedge Funds, FoF, Hedge Fund of Fund, Hedge Fund of Funds, Fund of Hedge Funds, Hedge Fund Portfolio, Portfolio of Hedge
Funds, fund of funds hedge funds, fund of funds hedge fund, a hedge fund of funds, funds of hedge funds portfolio, top hedge fund of funds, best fund of
hedge funds, top fund of hedge funds, best hedge fund of funds, fof, fund of hedge fund managers, fund of hedge funds
Below are a collection of useful and interesting news pieces, articles and videos related to hedge funds:
Link 1: Assets of a Brazilian hedge fund sharply drops: Ciano Investimentos Gestao de Recursos Ltda.‘s flagship hedge fund lost 95 percent of its assets to
withdrawals after founder Ilan Goldfajn, a former central bank director, left the company.
Investors withdrew 197.4 million reais ($85 million) Ciano 60 Hedge Fundo de Investimento Multimercado since Nov. 11, a day after Goldfajn departed. The
fund’s value plunged to 10.3 million reais as of Nov. 21, according to the Web site of Brazil’s securities regulator, CVM.
“Some investors withdrew funds because of my decision to leave Ciano,” Goldfajn, 42, said in a telephone interview from Rio de Janeiro. “Because of my
departure, we waived a 10 percent redemption fee.” Source
Link 2: Hedge Funds Search for Assets in Japan
Japan's Ashiya city has been home to the nation's industrial titans since samurai ruled the land more than a century ago. Now it's a feeding ground for hedge
funds tapping the wealth of new multi-millionaires like Kunihisa Sagami.
Sagami, founder of mail-order cosmetics and jewelry supplier Epix, is one of the residents of the gated enclave overlooking the port city of Kobe who are
among the highest taxpayers in Japan.
They're the elite in a nation where households hold a combined $15 trillion in financial assets -- more than the annual gross domestic product of the U.S.
Source
Link 3: Texas Hedge Fund Being Liquidated
Parkcentral Capital Management, an investment firm that manages money for the family of Ross Perot, is liquidating a fixed-income hedge fund because it
is “no longer viable.”
This year through October, Parkcentral Global Hub’s assets fell as much as 40 percent, to $1.5 billion. The fund is selling its remaining holdings to pay
creditors, Eddie Reeves, a spokesman, said Tuesday. Mr. Perot and members of his family were the fund’s biggest investors.
“Parkcentral Global has been impacted dramatically by the unprecedented upheaval of the capital markets in general and the freezing of credit markets in
particular,” Mr. Reeves said. ”The fund is no longer viable.” Source
Link 4: Spitzer's wife to join a hedge fund
The wife of former New York Gov. (and Sheriff of Wall Street) Eliot Spitzer is going to work on Wall Street.
Silda Wall Spitzer, who endured the humiliation of her husband’s resignation amidst a prostitution scandal in March, has joined hedge fund Metropolitan
Capital Advisors (which is technically on Madison Avenue), New York Magazine reports. The $300 million firm is run by CNBC personality Karen Finerman,
whose husband, Lawrence Golub, is a longtime friend of Eliot Spitzer and contributor to his campaigns.
Silda Spitzer will help “recruit new investors” in her new job, which she started last month.
Link 5: Hedge Fund Pacificor Sued
Pacificor has been sued by the former owners of a mortgage lender the California hedge fund bought.
John and Kitty Gaiser have sued the Santa Barbara-based firm and the estate of its former manager, Michael Klein, seeking $30 million. The Gaisers’ lawsuit
says that Pacificor “misused a position of trust and control in order to attempt to take control of and acquire—without compensation—John and Kitty Gaiser’s
ownership of Quality Home Loans,” the Gaisers’ law firm said in a statement.
Link 6: Hedge fund assets stuck within Lehman
Several companies reliant on four US hedge funds face collapse because the funds cannot access shares and loans held at the London arm of Lehman
Brothers, the collapsed bank.
The four funds – whose names were kept secret in a High Court ruling this week – claimed that they were likely to close in mid-December if they failed to get
access to information about their assets frozen at Lehman. The funds made an unsuccessful effort to force the administrators of Lehman, four PwC partners,
to give them details of their assets and how much they owe to Lehman.
Related to Thanksgiving Hedge Fund Linkfest Roundup
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Thanksgiving, Thanks Giving
Link to This Resource: Hedge Fund
GLG Partners Hedge Fund Update
GLG Partners Fund
GLG Partners Hedge Fund Update
Hedge Fund Tracker notes for GLG Partners has been updated. To read the updated profiles see this link: GLG Partners Hedge Fund Tracker Profile Notes
Related to GLG Partners Hedge Fund Update
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Tags: GLG Partners, Hedge Fund Notes, GLG Funds, GLG Fund, GLG Partners New York, GLG Partners Assets, GLG Partners AUM, GLG Hedge Fund
manager, GLG Europe, GLG Australia
Link to This Resource: GLG Partners Hedge Fund Update
Top 4 Hedge Fund Industry Fears | Market Insights
Hedge Fund Fears
The Top 4 Hedge Fund Fears
Over the last 3 months and a series of conversations with hedge fund managers, prime brokerage professionals, administrators and marketers it seems there
are 4 big fears in the industry right now.
Top 4 Hedge Fund Fears
A flat or highly volatile market for a period of more than 18-24 months - effectively wiping out those hedge funds which were hanging on for those greener
pastures of another bull market.
Long-term deterioration of leverage of almost any type. While many hedge funds already use no or close to no leverage many others use large amounts of it
and many funds would be hampered if new regulations are put into place which severely limit their access to it. Read an article on this topic here.
Desperate hedge fund managers committing enough fraud to scare off a large percentage of the High net worth and ultra high net worth investor base. There
is article on my site on ethics located here.
Overbearing regulation which pushes hedge fund activity into Canada, over to London and across the world away from New York. The industry is already
suffering large redemption losses and regulation done the wrong way could stifle further innovation or at least push even more of it offshore. As the recently
hedge fund testimony showed, many hedge funds are open to some forms of regulation or over-sight but these must be done in ways which are sensitive to
the intellectual knowledge and security disclosure concerns specific to this industry. Listen to the recent congressional testimony by hedge fund managers by
clicking here.
Other interesting points that have come out of talking to hedge funds - most expect the markets to stay flat or negative for an additional 6-9 months and the
majority see this to be a huge opportunity for positioning their fund for explosive growth in 2010 and 2011.
Related to Top 4 Hedge Fund Industry Fears | Market Insights
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Fund Marketing and Sales Advice
Top Hedge Fund Managers
Hedge Fund Startup Tools
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Leverage By Hedge Funds
Link to This Resource: Top 4 Hedge Fund Industry Fears | Market Insights
Managers | Hedging Skills
Japanese Hedge Funds. Japanese Hedge Fund Managers| Notes
It would seem that choppy markets in Japan over the past several years is now helping hedge funds in this region navigate the current financial crisis. Most of
the funds I know which run funds focusing on Japanese securities also run diversified Asia or China funds which have done very poorly, I would be curious to
see if those managers who run both Japan-specific funds as well as China funds faired better than the average fund in China. Here is the article excerpt:
Japan's hedge fund industry, dominated by so-called long-short funds that bet on rising and falling stock prices, will attract capital on signs they are starting
to outperform peers, Credit Suisse Group AG said.
The 81-fund Eureka hedge Japan Long-Short Equities Index fell 11 percent this year through October, compared with a 21 percent drop for an index that
tracks more than 1,000 global long-short hedge funds and a 40 percent slide by the MSCI World Index, a global benchmark.
``Japanese long-short strategies have weathered reasonably well the market turmoil,'' Boris Arabadjiev, head of alpha strategies at Zurich-based Credit
Suisse's asset management unit, said in an interview in Tokyo yesterday. ``That relative performance has already started to attract capital, and we believe
that it will continue to attract capital. We continue to be favorably disposed to managers investing in Japan.''
This year has been the worst on record for hedge funds, an estimated $1.56 trillion industry, with the average fund losing 16 percent through October,
according to data compiled by Chicago- based Hedge Fund Research Inc. The industry saw net withdrawals of $62.7 billion in October, according to
Eurekahedge Pte., a Singapore-based industry data provider. Read more...
Related to Japenese Hedge Fund Managers | Hedging Skills
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Tags: Japanese hedge Funds, Japanese Hedge Fund Managers, Japan Hedge Fund Industry, Japanese Managers, Japanese funds, Money management
japan, long short funds in Japan
Link to This Resource: Japanese Hedge Fund Managers | Hedging Skills
10-K
A company's annual report, filed with the SEC. Also see the main article on understanding financial statements.
10-Q
A company's quarterly report, filed with the SEC.
12b-1 Fees
Annual fees charged by mutual funds, specifically used to pay for advertising and promotion. Sometimes called "hidden loads". Even funds classified as "no
load" funds can charge 12b-1 fees.
401(k)
A retirement plan made available by a company to its employees, featuring tax-deferred contributions and growth. The plan may also include matching
contributions by the company. Caveat: many 401(k)s invest in the company's own stock; if the company has a bad enough year you could lose both your job
and your retirement savings. So you need to diversify your retirement account, even if you do take advantage of a 401(k).
403(b)
A retirement plan available to employees of qualifying non-profit organizations, featuring tax-deferred contributions and growth.
Adjusted Gross Income (AGI)
Income (including wages, interest, capital gains, income from retirement accounts, alimony paid to you) adjusted downward by specific deductions
(including contributions to deductible retirement accounts, alimony paid by you); but not including standard and itemized deductions. AGI is the number
you write at the bottom of page 1 of your 1040 form, and then copy again to the top of page 2.
Alpha
Measure of a stock's performance beyond what its beta would predict.
Regression, Alpha, R-Squared
One use of CAPM is to analyze the performance of mutual funds and other portfolios - in particular, to make active fund managers look bad. The technique
is to compare the historical risk-adjusted returns (that's the return minus the return of risk-free cash) of the fund against those of an appropriate index, and
then use least-squares regression to fit a straight line through the data points:
Each data point in this graph shows the risk-adjusted return of the portfolio and that
of the index over one time period in the past. (For example, you might make a graph
like this with twenty data points, showing the annual returns for each of the past
twenty years.)
The general equation of this type of line is
r - Rf = beta x ( Km - Rf ) + alpha
where r is the fund's return rate, Rf is the risk-free return rate, and Km is the return of
the index.
Note that, except for alpha, this is the equation for CAPM - that is, the beta you get
from Sharpe's derivation of equilibrium prices is essentially the same beta you get
from doing a least-squares regression against the data. (Also note that alpha and beta
are standard symbols that statisticians use all the time for this type of regression;
Sharpe and his followers weren't trying to be obscure, as some people like to believe.)
Beta is the slope of this line. Alpha, the vertical intercept, tells you how much better the fund did than CAPM predicted (or maybe more typically, a
negative alpha tells you how much worse it did, probably due to high management fees).
The quality of the fit is given by the statistical number r-squared. An r-squared of 1.0 would mean that the model fit the data perfectly, with the line going
right through every data point. More realistically, with real data you'd get an r-squared of around .85. From that you would conclude that 85% of the fund's
performance is explained by its risk exposure, as measured by beta. (Then you'd punch your fist in the air and say "And the other 15% is due to pure luck!"
MPT never believes in investor skill: an investment's behavior equals that of its asset class, minus management fees, plus-or-minus unpredictable luck.)
Next: three factor regression.
Fama and French Three Factor Model
CAPM uses a single factor, beta, to compare a portfolio with the market as a whole. But more generally, you can add factors to a regression model to give a
better r-squared fit. The best known approach like this is the three factor model developed by Gene Fama and Ken French.
Fama and French started with the observation that two classes of stocks have tended to do better than the market as a whole: (i) small caps and (ii) stocks
with a high book-value-to-price ratio (customarily called "value" stocks; their opposites are called "growth" stocks). They then added two factors to CAPM to
reflect a portfolio's exposure to these two classes:
r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha
Here r is the portfolio's return rate, Rf is the risk-free return rate, and Km is the return of the whole stock market. The "three factor" beta is analogous to the
classical beta but not equal to it, since there are now two additional factors to do some of the work. SMB and HML stand for "small [cap] minus big" and
"high [book/price] minus low"; they measure the historic excess returns of small caps and "value" stocks over the market as a whole. By the way SMB and
HML are defined, the corresponding coefficients bs and bv take values on a scale of roughly 0 to 1: bs = 1 would be a small cap portfolio, bs = 0 would be
large cap, bv = 1 would be a portfolio with a high book/price ratio, etc.
One thing that's interesting is that Fama and French still see high returns as a reward for taking on high risk; in particular that means that if returns increase
with book/price, then stocks with a high book/price ratio must be more risky than average - exactly the opposite of what a traditional business analyst would
tell you. The difference comes from whether you believe in the efficient market theory. The business analyst doesn't believe it, so he would say high
book/price indicates a buying opportunity: the stock looks cheap. But if you do believe in EMT then you believe cheap stocks can only be cheap for a good
reason, namely that investors think they're risky...
Fama and French aren't particular about why book/price measures risk, although they and others have suggested some possible reasons. For example, high
book/price could mean a stock is "distressed", temporarily selling low because future earnings look doubtful. Or, it could mean a stock is capital intensive,
making it generally more vulnerable to low earnings during slow economic times. Those both sound plausible; but they seem to be describing completely
different situations (and what happens when a company that isn't capital intensive becomes "distressed"?) It may be that the success of this model at
explaining past performance isn't due to the significance of any of the three factors taken separately, but in their being different enough that taken together
they do an effective job of "spanning the dimensions" of the market.
(There's actually another interpretation that's so much less cerebral that it's probably correct. The broad market index weights stocks according to their
market capitalization, making it size-biased and valuation blind; so maybe the extra two factors in this model are just a couple of tweaks to adjust for these
two problems. This also explains why momentum is sometimes used as yet another factor: market capitalization shows where the market has been putting its
money for years, while momentum shows where it has been putting it lately; so if you want to take advantage of market efficiency you start with the index
and then tweak it a little with momentum.)
Portfolio Analysis
Like CAPM, the Fama and French model is used to explain the performance of portfolios via linear regression; only now the two extra factors give you two
additional axes, so instead of a simple line the regression is a big flat thing that lives in the fourth dimension.
Even though you can't visualize this regression, you can still solve for its coefficients in a spreadsheet. The result is typically a better fit to the data points
than you get with CAPM, with an r-squared in the mid-ninety percent range instead of the mid eighties.
Investing for the Future
Analysing the past is a job for academics; most people are more interested in investing intelligently for the future. Here the approach is to use software tools
and/or professional
advice to find the exposure to the three factors that's appropriate for you, and then to invest in special index funds that are designed to deliver that level of
the factors. You can try this tool on another website. When you try it you should note that it in fact collapses all risk to the single
factor of volatility, which is typical, and which brings up the earlier question of whether the
additional factors really are measures of risk. In this case, how would you ever help
somebody figure out what their "value tolerance" was? As a matter of fact, what would that
question even mean?
Conclusions
There are two separate messages to take away from this. First, the three factors together
account for practically all of a portfolio's behavior; that's the strongest evidence yet that
mutual funds can't beat indexes. Second, history indicates that small value "just happens"
to deliver higher returns and higher volatility than the stock market as a whole. Assuming the
trend holds, then that's the practical message for investors. In particular, it improves what
felt like a flaw in the Tobin argument: where Tobin said high-risk investors should buy the
total stock market index on margin, Fama and French offer the saner alternative of just
adding some small value to your portfolio.
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Accredited Investors' s Assets. Minimum Investment 1 Million USD. No Fee, Profit Share Only. Secrecy. We Manage Assets Of Accredited
Investors. Minimum 1 Million USD. No Fees. Profit Share Only. Top Secrecy. Safe. High Potential Profit. No Management Fee.
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Money Market Fund
Mutual funds that are comprised of short term debt securities are known as money market funds. Investor accounts will have money in this type of fund with their
brokerage firm. Money market yields will vary based on the performance of the securities in the account.
Securities in the Account. The Money Market fund will be comprised of short term notes and other early maturing debt. These would include:
Treasury Bills
Municipal Notes
Commercial Paper
Banker's Acceptances (BA's)
Fed Funds
Negotiable CD's
ADR Stock. Foreign stock traded in the US are known as American Depository Receipts or ADR's. An ADR is a negotiable (traded) share of stock of a foreign
company, where the international company has registered an ADR to trade in the united states. Allowing an international company to have a way for it's stock
to trade in america makes it easier on the issuing company. Although the American Depository Receipt must register with the SEC, the issuing foreign company
does not. These can trade OTC or on an exchange. This can give a sense of stability to the stockholder. Although, as with any stock - the risk still lies with the
performance of the stock and the financial well being of the company overseas.
ADR Dividend Declaration and Payout
The securities of the foreign company are deposited in a foreign branch of a US Bank. ADR holders will receive dividends in american dollars based on this
banking and conversion arrangement.
Since this is still considered shares of stock in a company, the corporation will declare and pay it's cash dividend in it's natural currency, whether it is in Yen,
Euro or whatever currency they use. The dividend of the ADR is then converted into american dollars and paid out to the american shareholders.
Many securities investors own American Depository Receipt shares. It can offer you the chance to own stock in an international company, while getting the
comfort of the investment being safekept in the US and traded on US stock exchanges.
All of the Programs posted here are for informational purposes only, and is not a solicitation for the purchase or sale of any securities, nor a solicitation of
investment funds or placement. All of the information do not represent the policies of any bank, financial institution, lender or investor, is not intended as a
confirmation of any transaction, and does not consist of any legal, securities related or tax related advice.
Accredited investor:
An accredited investor is a person or institution that the Securities and Exchange Commission (SEC) defines as being qualified to invest
in unregistered securities, such as privately held corporations, private equity investments, and hedge funds.
The qualification is based on the value of the investor’s assets, or in the case of an individual, annual income.
Specifically, to be an accredited investor you must have a net worth of at least $1 million or a current annual income of at least $200,000 with the
anticipation you’ll earn at least that much next year. If you’re married, that amount is increased to $300,000.
Institutions are required to have assets worth $5 million to qualify as accredited investors. The underlying principal is that investors with these assets have the
sophistication to understand the risks involved in the investment and can afford to lose the money should the investment fail.
Private Placement Investments
Stock offerings offered only to wealthy or seasoned investors are private placements. Under Regulation D of the SEC, these investment offerings can be sold to
no more than 35 non accredited investors. These normally carry a stock holding period requirement.
Brokerage firms that handle wealthy clients that are looking for investment opportunities may offer private placements. The investors would be made aware of
the risks regarding the holding period, after market potential and other risks.
There are many private placement offerings covering a broad spectrum of the investment market.
Assets Management Prospectus. A prospectus is a document that describes the investment being involved. In the case of hedge funds, a prospectus would be
distributed to potential investors informing them about the fund objectives, investment philosophy and risk tolerance as well as fee structure, reinvestment and
divestment. For instance, a hedge fund prospectus may disclose that the fund charges 20-40% of profits (when there are not charges or fees based on the total
assets under management, disregarding the investment performance) as a management fee and only allows capital withdrawals once a year at a set time.
These items are only the most basic, though often most scrutinized, elements of a hedge fund prospectus. Investors must have the choice to discuss the
Prospectus at any time.
Mutual Fund Investment.
An open end fund that is purchased and redeemed with an investment company is a mutual fund. These investments are issuing new shares and are normally
bought paying a sales charge to the company or a selling group member firm.
There are mutual funds invested in every sector of the market and every investment objective. The type of fund you choose should reflect your income needs,
risk tolerance and your current and projected future financial situation
1y Target Est
The 1-year target price estimate represents the median target price as forecast by analysts covering the stock. Data is provided by Thomsonfn.com. More
detailed target estimate data can be found by clicking a company's "research" link..
Div Date
Dividend Pay Date. The date on which the dividend was last paid, or the date on which the next one will be paid.
Dividend (ttm)
All dividends paid out in the last twelve months are added together to create a "Dividend(ttm)". The trailing dividend is then divided by the most recent closing
price to derive the Yield (see Yield). Depending on the dividend history of a particular company, the dividend(ttm) and yield could produce different results
compared to the company's forward dividend which is calculated by multiplying the payment frequency by the most recent dividend.
EPS Est
Current year analyst consensus EPS estimate from Thomson/First Call. More detailed analyst estimates and consensus data can be found by clicking the
"research" link for a symbol.
EPS (ttm)
Earnings Per Share (EPS) is stated for the most recent 12 months (ttm, trailing 12 months). It represents primary earnings from continuing operations
attributable to each share of common stock outstanding, and is calculated by dividing the income from continuing operations by the average number of
shares outstanding during the period (in accordance with generally accepted accounting principles, GAAP). The income is the income or loss that remains
after excluding income or loss from discontinued operations and extraordinary charges or credits that are reported separately (again, per GAAP). Earnings Per
Share is adjusted for stock splits and stock dividends. If data is not available for 12 months or more, "N/A" is displayed for EPS.
Daily updates are received on quarterly EPS data. Most earnings information is received within 48 hours of the company's earnings announcement. Every time
a company declares their earnings, a record is sent for that particular earning figure along with a 12-month rolling EPS.
Ex-Div
The Ex-Dividend Date (without dividend). You need to purchase the stock before this date to receive the current quarter's dividend or stock split.
NYSE - New York Stock Exchange
AMEX - American Stock Exchange
Nasdaq - National Association of Securities Dealers Automatic Quotation System
OTC BB - OTC (Over the Counter) Bulletin Board Market.
Toronto - Toronto Stock Exchange
Alberta - Alberta Stock Exchange
Vancouver - Vancouver Stock Exchange
Last Trade
The time and price of the last trade made for the stock. The date is reported in place of the time if the stock hasn't traded today.
PEG
PEG stands for price/earnings growth and is calculated by dividing the trailing P/E by the projected earnings growth rate (in this case, the 5 year annualized
growth rate). The idea behind the PEG Ratio is to relate price to growth.
P/S
Price to Sales Ratio. This number is the previous closing stock price (see Prev Close) divided by the revenue per share.
Yield
The dividend(ttm) per share divided by the previous closing stock price (see Prev Close), as a percentage (multiplied by 100).
Asset Management: Odit Investment Strategy for Asset Enhancement.
1- Odit uses Arbitrage, simultaneous buying and selling of securities in different markets with the purpose of profiting from the price
difference in the markets, under absolutely controlled circumstances only.
2- Odit strongly avoids Derivatives, a volatile financial instrument whose value depends on or is derived from the performance of a
secondary source such as an underlying bond or currency.
3- Odit hedges, making arrangements to safeguard against loss on an investment, by the use of various techniques: avoiding overvalued
securities and potential bubble bursts, having in mind the intrinsic value of securities, watching historical lows of strong fundamentals
securities, etc.
4- Odit strongly avoids Leverage, the use of credit (such as margin) to improve one’s speculative ability. Odit prefers to increase the rate of
return on an investment, by the use of less risky methods.
5- Odit strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the seller does own the security it is said to be in a
“long position”), and that the seller must borrow. The only exception is when a security is very obviously near of a bubble burst situation.
Usually, the technique is employed when prices are likely to drop. If the price of the security does drop, the seller can make a profit on the
price of the shares sold versus the price of the shares bought to pay back the borrowed shares.
6- Odit can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively undervalued securities. Odit Invests in equities
expected to experience acceleration in growth of earnings per share. Odit hedges watching the best opportunity on undervalued
securities. However Odit avoids shorting of equities unless there are obvious and strong expectation of earnings disappointment.
7- Odit can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying equity, debt, or trade claims at deep discounts of
companies in or facing bankruptcy or reorganization, when there is strong indications that Odit can profit from the market’s lack of
understanding of the true value of the deeply discounted securities and because the majority of institutional investors cannot own below
investment grade securities.
8- Odit can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in equity or debt of emerging (less mature)
markets which tend to have higher inflation and volatile growth. Short selling is not permitted in many emerging markets, and, therefore,
such type of hedging is often not available.
9- Odit can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be mixes and matches hedge funds and other
pooled investment vehicles. This blending of different strategies and asset classes aims to provide a more stable long-term investment
return than any of the individual funds. Volatility depends on the mix and ratio of strategies employed.
10- Odit can invest up to 3/10 of the assets in Income. Investing with primary focus on yield or current income rather than solely on capital
gains. May utilize leverage to buy bonds and sometimes fixed income like RE Notes in order to profit from discounted purchase, principal
appreciation and interest income under absolutely controlled circumstances only.
11- Odit can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from changes in global economies, typically brought
about by shifts in government policy which impact interest rates, in turn affecting currency, stock, and bond markets. Participates in all
major markets -- equities, bonds, currencies and commodities -- though not always at the same time. Uses leverage and derivatives to
accentuate the impact of market moves, under absolutely controlled circumstances only.
12- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage. Attempts to hedge out most market risk by taking
offsetting positions, often in different securities of the same issuer.
13- Odit can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities Hedging. Invests equally in long and short equity
portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective stock analysis and stock picking is
essential to obtaining meaningful results. Leverage may be used to enhance returns, under absolutely controlled circumstances only.
14- Odit can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating assets among different asset classes depending on
the manager’s view of the economic or market outlook.
15- Odit can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment theme changes from strategy to strategy as
opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim earnings disappointment, hostile
bids, and other event-driven opportunities. May utilize several of these investing styles at a given time and is not restricted to any particular
investment approach or asset class.
16- Odit strongly avoids Short Selling: Sells securities short in anticipation of being able to re-buy them at a future date at a lower price due
to the manager’s assessment that the securities are overvalued, or the market, or in anticipation of earnings disappointments often due
to accounting irregularities, new competition, change of management, etc. However, Odit can invest, alternatively, up to 1/10 of the assets
in some opportunities, under absolutely controlled circumstances.
17- Odit can invest up to 3/10 of the assets in Value, under certain circumstances. Usually Odit Invests in securities perceived to be selling
at deep discounts to their intrinsic value or their potential worth. Such securities may be out of favor with analysts. Long-term holding,
patience, and strong discipline are often required until the ultimate value is recognized by the market.
Should you decide to contact us for any business opportunity CLICK HERE
Please, include section name as a part of your brief letter's subject.
-- Clients Relation -- Investors Relation -- Financial Analysis -- Legal Issues -- Due Diligence
-- Title Insurance -- Risk Management -- Financial Engineering -- Stock Portfolios -- Bond Portfolios
-- Business Note Portfolios -- Real Estate Note P. -- Gold Portfolios -- Precious Metals P. -- Hedge Funds
Asset Management: Investment Strategy for Asset Enhancement.
1- DGHC uses Arbitrage, simultaneous buying and selling of securities in different markets with the purpose of profiting
from the price difference in the markets, under absolutely controlled circumstances only.
2- DGHC strongly avoids Derivatives, a volatile financial instrument whose value depends on or is derived from the
performance of a secondary source such as an underlying bond or currency.
3- DGHC hedges, making arrangements to safeguard against loss on an investment, by the use of various techniques:
avoiding overvalued securities and potential bubble bursts, having in mind the intrinsic value of securities, watching
historical lows of strong fundamentals securities, etc.
4- DGHC strongly avoids Leverage, the use of credit (such as margin) to improve one’s speculative ability. DGHC prefers
to increase the rate of return on an investment, by the use of less risky methods.
5- DGHC strongly avoids Short Sale, a sale of a security that the seller does n’t own (if the seller does own the security it
is said to be in a “long position”), and that the seller must borrow. The only exception is when a security is very obviously
near of a bubble burst situation. Usually, the technique is employed when prices are likely to drop. If the price of the
security does drop, the seller can make a profit on the price of the shares sold versus the price of the shares bought to
pay back the borrowed shares.
6- DGHC can invest up to 3/10 of the assets in Aggressive Growth concerning exclusively undervalued securities. DGHC
Invests in equities expected to experience acceleration in growth of earnings per share. DGHC hedges watching the best
opportunity on undervalued securities. However DGHC avoids shorting of equities unless there are obvious and strong
expectation of earnings disappointment.
7- DGHC can invest, alternatively, up to 1/10 of the assets in Distressed Securities, buying equity, debt, or trade claims at
deep discounts of companies in or facing bankruptcy or reorganization, when there is strong indications that DGHC can
profit from the market’s lack of understanding of the true value of the deeply discounted securities and because the
majority of institutional investors cannot own below investment grade securities.
8- DGHC can invest, alternatively, up to 1/10 of the assets in Emerging Markets, investing in equity or debt of emerging
(less mature) markets which tend to have higher inflation and volatile growth. Short selling is not permitted in many
emerging markets, and, therefore, such type of hedging is often not available.
9- DGHC can invest, alternatively, up to 1/10 of the assets in Fund of Funds which could be mixes and matches hedge
funds and other pooled investment vehicles. This blending of different strategies and asset classes aims to provide a
more stable long-term investment return than any of the individual funds. Volatility depends on the mix and ratio of
strategies employed.
10- DGHC can invest up to 3/10 of the assets in Income. Investing with primary focus on yield or current income rather
than solely on capital gains. May utilize leverage to buy bonds and sometimes fixed income like RE Notes in order to
profit from discounted purchase, principal appreciation and interest income under absolutely controlled circumstances
only.
11- DGHC can invest, alternatively, up to 1/10 of the assets in Macro. Aims to profit from changes in global economies,
typically brought about by shifts in government policy which impact interest rates, in turn affecting currency, stock, and
bond markets. Participates in all major markets -- equities, bonds, currencies and commodities -- though not always at
the same time. Uses leverage and derivatives to accentuate the impact of market moves, under absolutely controlled
circumstances only.
12- DGHC can invest, alternatively, up to 1/10 of the assets in Market Neutral - Arbitrage. Attempts to hedge out most
market risk by taking offsetting positions, often in different securities of the same issuer.
13- DGHC can invest, alternatively, up to 1/10 of the assets in Market Neutral - Securities Hedging. Invests equally in
long and short equity portfolios generally in the same sectors of the market. Market risk is greatly reduced, but effective
stock analysis and stock picking is essential to obtaining meaningful results. Leverage may be used to enhance returns,
under absolutely controlled circumstances only.
14- DGHC can invest, alternatively, up to 1/10 of the assets in Market Timing, allocating assets among different asset
classes depending on the manager’s view of the economic or market outlook.
15- DGHC can invest, alternatively, up to 1/10 of the assets in Opportunistic. Investment theme changes from strategy to
strategy as opportunities arise to profit from events such as IPOs, sudden price changes often caused by an interim
earnings disappointment, hostile bids, and other event-driven opportunities. May utilize several of these investing styles
at a given time and is not restricted to any particular investment approach or asset class.
16- DGHC strongly avoids Short Selling: Sells securities short in anticipation of being able to re-buy them at a future
date at a lower price due to the manager’s assessment that the securities are overvalued, or the market, or in
anticipation of earnings disappointments often due to accounting irregularities, new competition, change of
management, etc. However, DGHC can invest, alternatively, up to 1/10 of the assets in some opportunities, under
absolutely controlled circumstances.
17- DGHC can invest up to 3/10 of the assets in Value, under certain circumstances. Usually DGHC Invests in securities
perceived to be selling at deep discounts to their intrinsic value or their potential worth. Such securities may be out of
favor with analysts. Long-term holding, patience, and strong discipline are often required until the ultimate value is
recognized by the market.
Should you decide to contact us for any business opportunity CLICK HERE
See our portfolio: DGHC SP5H Equity Holding (As Of January First, 2009). Profitable equity holding, solid
out-performers, stronger, wider balanced. Not leverage, 50 % less risky. Up To Two Billion USD or larger investment.
Monthly operation expenses: 0.25 % (not from holding, free). Operation expenses & brokerage expenses do not affect the
integrity of the holding, due to the only use of margin to such effect. The Most Conservative (just capital gains, dividends
not included)
Potential Gross Profit At January First, 2010 (%) ----------------------------------------------------------------------------------------- 175.00
January First, 2009: $2,000,000,000.00 >>>>>>>>>>>>>>>>>>>>>>>>>> January First, 2010: $3,500,000,000.00
>>>>>>>Potential Gross Profit One Year Later >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> $1,500,000,000.00 <<<<<<<
Asset Management For Accredited Investors Only. Minimum Amount Per Account: One
Million USD. Unless otherwise agreed the standard holding period is 18 months.
DGHC Global Asset Management is the only global group that charges no management fees (usually
2 % or larger fee) based on the amount of assets under management.
DGHC Asset Management is the only global group who provide not from holding help to Client if Client is in need of
liquidity due to sudden financial problems.
DGHC Asset Management is the only global group who create a Limited Liability Company for the asset management of
each Accredited Investor, as well as the only who appoint the Accredited Investor as Supervisor for the financial
operation, treasury, investment accounts and accountability control of such Limited Liability Company.
DGHC Asset Management is the only global group whose income rely solely on the success of the Client, the Accredited
Investor, regarding the investment made. AlphaOdit considers extremely trustworthy the quality of investment decisions
made by AlphaOdit's experts, so, should AlphaOdit is not able to provide to the Accredited Investor an Annual Return,
the income (contingent fee: performance or incentive) of AlphaOdit will be ZERO.
DGHC Asset Management Annual FEE will be contingent, based on the performance of investments. The only incentive
of AlphaOdit comes from the creation of wealth for the Accredited Investor. That is to say that if there is no Annual
Return, Success, Profit, to the benefit of the Accredited Investor, there will not be any FEE paid to the order of
AlphaOdit.
Contingent FEE Structure: (See Asset Management Contract)
-- Annual Profit up to 20 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 20% of Annual Profit
-- Annual Profit larger than 20 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 25 % of Annual Profit
-- Annual Profit larger than 35 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 30 % of Annual Profit
-- Annual Profit larger than 50 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 35 % of Annual Profit
-- Annual Profit larger than 65 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 40 % of Annual Profit
-- Annual Profit larger than 80 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 45 % of Annual Profit
-- Annual Profit larger than 100 % >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Contingent FEE: 50 % of Annual Profit
Note: This is neither an offer nor an advertisement. See disclaimer at left column. Should you decide to contact us for
any business opportunity
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