Portable Alpha Daily

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Thursday, September 21, 2006

Manage Your Own Hedge Fund

With all of the coverage lately about Amaranth or MotherRock, I keep waiting for someone in the media to pose the question…why invest in hedge funds? A simple question indeed, but in my opinion it no longer has a simple answer.

Think about the investments hedge funds use to generate alpha: commodities, futures, currencies, options, leverage and shorts. Aren’t these “alternative” investments available to everyone these days in the form of ETF’s and in some cases mutual funds? Don’t they basically achieve the same thing? Isn’t it possible to employ hedge fund strategies within smaller, more liquid portfolios? I think the answer to all three questions is “yes,” and a growing number within the investment industry feel the same.

One of my favorite, newly discovered blogs is All About Alpha, which collects and discusses articles that cover just about every aspect of “alpha.” Alpha Male, the blog publisher, recently included an article titled “Portable Alpha: A Glimpse At the Future” by Milton Ezrati, which basically argues that portable alpha can be generated without having to use hedge funds. That belief, shared by myself of course, is the reason we created Alpha Advisor Service, LLC – to provide investors with a practical approach of creating portable alpha without hedge funds.

You might be asking, so if the tools are the same, isn’t it worth paying a hedge fund manager to do the dirty work? I’m not so sure anymore. To be fair, I have a certain degree of admiration for the Brian Hunter’s of the world. Not only do they possess the intelligence needed to be successful investors, but they have the fortitude (read: guts) to make spectacularly big bets. There are only a handful of investors willing to be levered 5:1 long natural gas. But there’s so much money chasing the returns hedge funds are capable of providing, that often times the managers cross the line between investors and market movers. At that point, very bad things happen for all involved.

Short-Term Technical Indicators – Seven of the short-term, technical indicators strengthened overnight while one remained unchanged. Five indicators are higher than last week’s levels, while all eight are stronger than both last month’s and last year’s values. We’re getting closer to breaking through the recent DJIA and S&P 500 highs of early May 2006. Currently, two of the three indicators would support a new high within the S&P 500 while only one would support a new high within the DJIA.

Long-Term Market Model – Bullish since August 23rd.

Investor Sentiment – There was a significant retreat in the VIX as well as all three Put / Call ratios. The Index Put / Call ratio, which I discussed yesterday, made its way back down to 1.77 from 3.16. The VXN increased moderately however.

Asset Allocation – 75% to 85% invested within the actively-managed portion of the overall investment portfolio. 15% to 25% in cash or bonds.

Beta Exposure and Portable Alpha Generation

Top Rated Major Market Derivative – Russell 2000 (IWM)

Top Rated Style-Box Derivative – Morningstar Small Cap Core (JKJ)

Top Rated Sector Derivative – iShares Goldman Sachs Software (IGV)

Today’s Top “Buy” Recommended Stocks
  • NVR Inc. (NVR)
  • Piper Jaffray Companies (PJC)
  • Veritas DGC Inc. (VTS)
  • Sequa Corp. (SQA-A)
  • Sears Holding Corp. (SHLD)
  • American Eagle Outfitters (AEOS)
Today’s Top “Buy” Recommended Fidelity Select Mutual Funds
  • Fidelity Select Brokerage & Investment (FSLBX)
  • Fidelity Select Software & Computer (FSCSX)
  • Fidelity Select Telecommunications (FSTCX)
  • Fidelity Select Retailing (FSRPX)
  • Fidelity Select Computers (FDCPX)


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