May 31, 2008, 6:00 am

Financial Ramblings – I’m not There Edition

by: The Financial Blogger    Category: Financial Planning

I am actually writing this financial ramblings in advance as I am returning from my frugal vacation on May 30th. Then, I figured I would not have enough time (and energy!) to write a post upon my arrival. So I wish I had good weather and a great time with my family 😀


Summer is going to be a rough financial time for our family as my wife maternity leaves allocations end in June but she only starts working the last week of August. We wanted her to spend summer with our two kids before she goes back to work. Let just say that it’s a good thing that our company is creating an alternative source of income!

I hope that you enjoyed our guest writers last week and I want to thank them for responding so quickly to my request. So a big thank you to Frugal Trader at milliondollarjourney.com, to Jonathan at masteryourcard.com, to Mike (my Canadian English alter-ego in Toronto!) from four-pillars.ca and my best friend, Pete, partner in M-35.

I find that the temptation of spending money over summer time is always greater. It’s warm and sunny and you always feel like doing something or eating out. I honestly don’t have any tricks to stop my wallet popping out of my pocket so if you do, please help me 😀 In the meantime, I’ll go buy ice cream… I’ll be right back!

Well that was not much for today, but I really feel that I am off today :-D. I swear I will be back with a great post next Monday!

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May 30, 2008, 6:00 am

What Is A Hedge Fund Part 2

by: The Financial Blogger    Category: Investment, Market and Risk

 

Yesterday, I wrote about the main definition of a Hedge Fund. Today, we will go a little bit deeper into different types of Hedge Funds.

So here a few types of hedge funds models that are used:

-Market neutral: Basically these funds will generally have about the same proportion of stocks long or short. They will generally not have an exposure to the market in general and will instead have “bets”. Let’s say they have Walmart against Target. They do not really care if one does well or not, or how the economy performs. The most important aspect is to have Walmart outperform Target. It’s certainly a risky strategy but you only need to win a certain majority of these “bets” to come out on top. Not much cash is required for such funds relative to their positions since they are shorting as well (something to be discussed in a future column).

-Global macro: Global Macro funds are generally trying to gather an image of the global economy. They will also be placing relative bets, but generally not on specific companies. Rather, they will invest according to specific scenarios, for example what would happen in a economic slowdown such as we are currently seeing. We could expect Gold to outperform the US dollar for example so it would be possible to take that position. Then we could say that the Canadian economy will suffer more than the French economy for example from a US slowdown (not seeing this so far though!!!!) and go short TSX (Toronto stock exchange) vs CAC40 (index for French markets). There are many many examples. The toughest in such a strategy is to maintain the positions when the market is not going in your direction as bubbles can go on for a while and you will be losing money until the market reverses in your direction (just think of someone who shorted crude oil a few months ago).

-Event driven: Basically these funds will bet on specific market events. For example, they could have bought shares of Yahoo! expecting or hoping that someone (such as Microsoft) would make an offer and that the Yahoo! shares would go up. In such funds, having inside information is key.

Over the past few years, Hedge funds have been transformed significantly as many new funds have entered the markets and very important sums of money have flown towards these non traditional funds. It will be an interesting ride for these funds as they continue to seek high returns as well as escape laws that currently apply to traditional funds.

So that’s it for now, I hope to get a chance to return to TFB soon!

 


 

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May 29, 2008, 6:00 am

What Is A Hedge Fund Part 1

by: The Financial Blogger    Category: Investment, Market and Risk

Hello TheFinancialBlogger.com readers, I hope you are doing well. Wondering who I am? Well, you’ve actually read a bit about me if you are a reader of TFB. My best friend is your host, Mike. He has been my best friend for over 5 years now, and I now consider myself part of his family (especially since being asked to be his son’s William godfather). Over the years, we’ve been great friends and recently we started discussing a project called M35, that you have read a little about and will about a whole lot more in coming months as we go from a small private company to hopefully something much bigger in the future. As the co-admin of the blog, I have been a lot more invisible to you guys, working more on programming, and on our other projects. But with Mike on vacations, he asked me to do a guest post, which I will do right now. I might be starting my own blog in a few months so we’ll see.

Compared to Mike (who has an excellent perespective of personal finances, tax impacts, strategies to increase returns with leverage), I am very specialised. I work in the investment field, studied it (both in school and finishing my 3 CFA exams), and so my articles will be a lot more related to the investment field. I work in the hedge fund (for your info, a hedge fund is a fund that compared to traditional funds such as mutual funds, is allowed and usually will use relative strategies..more on that later) industry and am able to see a lot of the different strategies that are used right now to generate alpha. Alpha is return that is generated above of what is expected given a given amount of risk.

So I will discuss a few strategies used, but before beginning, here is the definition from investopedia of “hedge fund”:

“An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).”

Basically, the main difference is that these funds are mostly unregulated. They are thus only available to qualified investors (usually the criteria is to have at least 1M in liquid assets although over the years, it seems to be easier to get in the funds through indirect methods). Another main caracteristic is that the managers of such funds generally have a lot of liberty. They can often trade any type of product (listed or not) on any exchange in the world or in any asset class (credit, interest, commodity, equity, fx).

These funds are generally recognized by their fee structure as well, the tradition 1-20. What? 1-20??? Yes! 1% is the fee that will not vary no matter how poorly or great your manager performs, it is 1% of invested assets (which is not that much compared to other investment vehicules such as mutual funds or even ETF’s). The real difference and incentive for the manager lies in the incentive fee, the 20%. Basically when you invest in these funds, you are charged 20% of the performance of the fund. Sounds a lot? It is. But some of the best hedge funds in the industry are still closed to new investments so it probably is because investors don’t mind giving up 20% of an excellent performance (as well, many hedge fund consider asset growth to be a problem above a certain point as they need to find a lot more market opportunities to generate the same return).

 

Tomorrow, I will write about 3 different types of Hedge Funds. See ya!

 

 

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May 28, 2008, 6:00 am

How To Manage Your Smith Manoeuvre Risk

by: The Financial Blogger    Category: Smith Manoeuvre

This guest post was written by Mike from Quest For Four Pillars, a blog about personal finance and more. Feel free to visit his site and subscribe to his feed.


There is a popular financial strategy known as the Smith Manoeuvre which basically involves borrowing money to buy investments and then using the proceeds of the investments to pay down your mortgage. You don’t pay down your total debt but rather you slowly convert it from non-deductible to deductible debt in order to get a tax rebate on the interest.


I am a fan of borrowing money to buy investments, however I don’t bother with the true Smith Manoeuvre since it is designed to maximize the financial benefits of your advisor. I put together an investment plan a while ago which uses leverage and it has been quite successful so far. The plan is very basic – borrow money from my home equity line of credit and buy blue chip Canadian dividend stocks. One of the key differences between my plan and the Smith Manoeuvre is that I limit how much I can borrow according to a simple risk analysis exercise. Most SM advisors want their clients to borrow the maximum 80% of the appraised value of their home in order to maximize the advisor’s profits. The problem with this “strategy” is that it might leave the client over-exposed to interest rate risk.
Basically what I did to determine how much I was willing to borrow for my leveraged investment strategy was the following:

  1. Calculate the maximum monthly payment I was willing to pay for my mortgage and leveraged loan.
  2. Assume that in a worst case scenario I can increase the amortization of my mortgage and HELOC to 25 years.
  3. Calculate the amount of total debt which if set to a 25 year amortization, gives me the monthly payment amount from #1.
  4. Subtract the mortgage from the total debt calculated in #3.

You can see my proper analysis in this post for a detailed example.
This particular exercise only looks at interest rate risk which is one of the biggest problems with borrowing to invest. You always have to consider that if interest rates go up a lot then you will have to come up with more money to pay the interest payments.




If you liked this post then please check out Quest For Four Pillars or subscribe to his feed for plenty more just like it!

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May 27, 2008, 6:00 am

Easing the Credit Card Sting After Tax Month – Now Is the Time to Set Some Resolutions for the New Tax Year

by: The Financial Blogger    Category: Pay off your Debts,Personal Finance

This is guest post done by Jonathan from Masteryourcard.com. Please make sure to visit his blog and register for it’s RSS feed!


When the New Year rolls in, you may spend the first few hours of it
nursing the effects of the last few hours of the year that just was. When you think about it, the weeks after tax season are just like a new financial year – you have just paid your taxes, all your payments to the government are squared up, and you have a whole new taxable year in front of you.

Unfortunately, the hangover can be just as bad as it was January 1. If you have just barely paid your taxes and your returns were not what you thought they were, you might have been relying on your credit card a little more than you should have been. Maybe you even had to borrow to pay your taxes. Fear not. It’s a whole new year and just a few resolutions can make next year’s tax season far less painful:

1. Pay yourself first.

Sure, it’s a cliché, but setting aside even a very modest nest egg can ease a lot of those little financial emergencies – and no, we don’t mean a shoe sale at the mall. Set up a savings account and have 10% of your income automatically deducted into it. You won’t miss 10% but you’ll sure be grateful for your forethought if you owe Uncle Sam something next year or if you find yourself unable to make payments on your credit cards.

2. Close up some accounts.

If you have three checking accounts, you arepaying three times the fees. If you have three credit cards, you are paying more interest than someone with one. Keep the accounts you have had longest (this is important to keep your credit good) but close down any accounts you don’t need. You will save a lot of money – which you should re-invest in your savings account.

3. Start reading the paperwork.

Dig out your credit card agreement from the bird cage, start reading your credit card statements each month and order up your credit report once a year (it’s free). It’s not exactly thrilling reading – make a pot of coffee – but it is important to know what is going on with your finances. Is your credit card agreement favorable to you or could you get a better deal elsewhere? Are you noticing unrecognized charges on your credit card accounts? Call up your credit card company and investigate. Are you noticing unrecognized accounts on your credit score? Identity theft can happen to anyone, toots, so make sure you call up your credit bureau immediately if you notice anything amiss.

4. Start paying down your credit cards and other debts.

Lots of debt drives down your credit score and all those payments cut into your paycheck, which is no fun. Paying just the minimum on your debts will not get you anywhere, so come up with a plan of attack. If you have lots of credit cards and other types of debt, consider consolidating all your debt into one larger debt – with the lowest interest rate you can find, of course. Then start paying off at least 50% more than the minimum payment each month. Don’t you feel lighter already?

Don’t use the new financial year as a time to reflect on the mistakes you made over the last 12 months, use it as an opportunity to plan for how you’ll do better over the next 12.

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