Hedge Funds and ETF's

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tommog

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Hi,

Hedge funds are off limits to most private investors because usually the minimum you're allowed to deposit is at least 500k. However i was wondering if anyone knows if there are ETF's that mimick the performance of certain funds, thus allowing you to invest smaller amounts. Its the equivilent of not have enough money to buy a FTSE future contract in order to hold for a year so buy 2k of a FTSE ETF. Only instead of not having enough money to buy futures contracts you dont have enough to buy into a fund so trade an ETF tracker of the fund. Hope this is clear
 
well i've been a professional trader for 4 years, ive made some decent money and want to put my savings to work. For me the trading game is changing, maybe i can't adapt as well as i should but every trading floor ive worked on for the past few years is having higher and higher failure rates, there are lots of reasons for this but thats another thread...

I have some money behind me and i want to make it work for me outside the realms of trading and want to start building up an investment portfolio, it isnt get rich quick but i want to start building for the future. But i want to be a little more proactive than dumping a load of cash in a "safe" bond and earning 5% a year, id rather spend that 5% on a sports car at least id get some enjoyment from it. Im looking for longer term investments that are outside the slow cautious route of most investment vehicle so hedge funds. Unfortunately i dont have 5 million behind me to spread amoung 10 funds hence my original quesion
 
Retail hedge funds are going to be big soon. Lines are all getting very blurred these days. Watch this space.....
 
yup ETF hedgies will be a big industry i think, im pretty sure i heard about an ETF of hedge fund sectors, so the etf tracks the convertable arbitrage fund sector, or the trend following sector or the mean reversion sector etc etc. Anyone know any more about that?
 
you mean because the HF industry has returned poorly on average arabian? is that the basis of your q?
 
Here are some of my objections:

1. Even *less* transparency
2. How liquid are these ETFs going to be? Most hedge funds have tie in periods. What happens if the market maker in the ETF has a whole load redeemed during a crisis and is unable to exit the hedge funds? Does it go bust making the ETFs worthless?
3. All this new money going into hedge funds is going to result in less attractive opportunities, resulting either in higher leverage or lower returns - the latter making chasing these decreasing returns pointless, the former leading to a huge systemic blow up at some point in the future.
4. Taken to the absolute logical conclusion the end result is going to be an entire market Markowitz efficient ETF including stuff like stamp collecting which will essentially be a proxy for world wealth. Minus commission. That's really not very far off just buying a stock market index fund, except it will be more expensive :)


Personally the more money that goes into my markets the more I can make, so I'm not complaining but this is going to end in tears.
 
thats a fair point arabianights,

however i think with the explosion of retail trading and general market awarness people are looking for more control over their investments and also more flexibilty. So where 10 years ago people would hand over their retirement fund to a wealth manager who would try and get you an alpha return of 4% a year people are more likely to want to get involved with alternative slightly riskier forms of investing.

I think a lot of people will get stung for the reasons you highlighted, but isnt that the case with any form of speculation?
 
Yup, but most forms of speculation the risks are a lot more apparent, or if they're not then only 'professionals' have undiluted access.

The only sector I would consider would be managed futures types myself, although again I'm not sure what those will look like if too much money flows in.
 
i agree with your principle that the more money that flows into something the worse the returns are, as traders we see that happen at an evolutionary rate far quicker than most other industries.
 
arabianights said:
again I ask what the point is
Click to expand...

As Tom said, in the old days hedge fund access wasn't made available to all. But this isn't just a money thing. The main obstacle to offering hedge funds to retail investors, at least in countries such as the UK where we have a very high level of financial regulation, is the level of protection afforded to the smaller investor. The sort of trading engaged in by the average hedge fund is simply not something that can be easily explained to the average smaller investor in language simple enough that the hedge fund marketer can truthfully say they have discharged theit fiduciary responsibility to make sure that that investor has an adequate understanding of the risks involved.

Hedge funds get round this in two principal ways;

1) Offshore location;
2) Offering their services only to people with larger amounts of money to invest, who they can have classified as 'intermediate' or 'expert' customers. This of course is a bit of an over-simplification, but you get the broad idea.

But the large institutions know that with interest rates and equity yields where they are, risk appetite amongst the smaller investor is naturally changing, and as a result there will certainly be a drift towards the availability of less traditional investment products for the smaller investor in the years to come. Only question is, how much and how fast.

So in answer to Arabian's question - a higher risk / reward profile than a defensive pension fund. Because that's what people want (providing they don't lose money of course) ;)

GJ
 
And people want to sell these products as it means more commisions/capital. Back to the short-term risk taking for big profits.
 
why is this such an outrageous idea? ETF's essentially give your man in the street access to leveraged derivatives and hedge funds are similar (depending on style of HF). All this would do is give access to hedge fund performances to non-high net worth individuals.

the one barrier I can see is the cost of investing in HF's. The management/performance fees are typically huge, especially for the historically consistent hedge fund managers.
 
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