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You’ve probably heard about hedge funds, those super-secretive private pools where millionaires stash their money. Yes, sometimes they blow up. But many hedge funds have a long history of good returns in all market conditions. They do this by combining sophisticated trading techniques with long and short positions in various markets. The problem is that the best hedge funds aren’t available to everyday investors in small amounts. Words: 1078
In further edited excerpts from the original article* Ron Rowland (www.moneyandmarkets.com) goes on to say that while he can’t change that he can point to some ETFs that try to use similar strategies:
“Alternative” is the name often used with this category of ETFs because they typically do not take a “traditional” approach to stock, bond, and commodity investing.
“130/30” ETFs
Some employ a “130/30” approach that involves using leverage to combine a 130 percent long position with a 30 percent short position. 130/30 works like this. Say you have $1 million to invest. You borrow another $300,000 and invest $1.3 million in stocks you think will go up. At the same time, you enter a short sale of $300,000 in stocks you think will go down. In this scenario your net position is 100 percent long — but if you pick the right stocks, your longs will go up and your shorts will go down. You’ll make money on both sides of the market. This is a simple variation of what many hedge funds do (with far greater leverage in some cases).
Two ETFs attempt to implement this sort of program for you — choosing the stocks to buy and short and giving it to you in one neat package:
1. ProShares Credit Suisse 130/30 (CSM)
2. First Trust Enhanced 130/30 (JFT)
So far their track record is mixed but this category of ETFs hasn’t been around long enough to make a firm judgment yet.
Hedge Fund Replication ETFs
Another group of ETFs that uses a variety of strategies like long/short, global macro, merger arbitrage, and more. Such ETFs are too new to have developed a track record and trading is often spotty. They may catch on with investors over time, but for now I would suggest that you only window shop — it’s nice to see what’s out there, but maybe not a good idea to plunk down your hard-earned cash just yet.
Here are some ETFs to look at if you want to get a better understanding of this category:
1. iShares Diversified Alternative Trust (ALT)
2. IQ Hedge Macro Tracker (MCRO)
3. IQ Hedge Multi-Strategy Tracker (QAI)
4. IQ ARB Merger Arbitrage (MNA)
5. IQ CPI Inflation Hedged (CPI)
Buy/Write ETFs
In an investment technique known as “covered call writing” you buy a stock and then sell an equivalent amount of call options against it and then one of 3 things can happen:
a) if the stock goes up and stays there until your options expire, your shares will be “called” away from you at the prearranged strike price you picked. So in effect, you’ll be forced to sell at a profit. Maybe the stock will go up even more after you sell it but no one ever went broke by grabbing a gain.
b) the stock could go down, and you’ll keep it or sell it at a loss but your loss will be reduced by the amount of the income you received from selling options that expire worthless. Selling options can put extra cash in your pocket.
c) the stock could go sideways. Then you have neither profit nor loss on your shares, but you’ll get to keep the option-selling income and you’ll still have your stock and can do the same thing all over again!
This strategy is great for income-seeking investors who don’t want to desert the stock market completely. It’s also tailor-made for range-bound, choppy market conditions.
Here are some ETFs and ETNs (exchange traded notes) that apply the covered call technique to the S&P 500 and Nasdaq 100 Indexes:
1. PowerShares S&P 500 Buy/Write (PBP)
2. iPath CBOE S&P 500 Buy/Write ETN (BWV)
3. PowerShares Nasdaq 100 Buy/Write (PQBW)
VIX ETNs
When people say the market is “volatile” they usually mean “It’s going down!” However, volatility really means movement – in either direction. A volatile market is one that is likely to make a big move in the near future. Whether that move will be up or down is a different question.
Volatility is very important to futures and options traders. That’s why they developed ways to measure it, including the Volatility Index, or VIX. The VIX is a metric that expresses the amount people are willing to pay for call and put options on the S&P 500. In practice, the VIX is a kind of “fear gauge” for the stock market. It tends to be low when investors are optimistic about stocks, and tends to surge higher when they are overwhelmed with fear. Extremes at either end can be a good, contrarian market timing indicator.
Barclays, under the iPath brand name, offers a pair of ETNs that attempt to track VIX futures for either the short-term or medium-term. Here are the names and tickers:
1. iPath S&P 500 VIX Short-Term Futures ETN (VXX)
2. iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)
Everywhere you turn in the markets, there’s confusion, risk … and uncertainty. You want to protect the capital you have while positioning yourself to profit at the same time … but you don’t know how, or where, or with whom.
Keep in mind that ETNs have some unique characteristics that make them riskier than ETFs in certain ways. Nonetheless, they can be very useful tools. Most important though is that these ETNs can go up when the stock market is falling. That’s a nice capability to have in today’s wacky market.
*http://www.moneyandmarkets.com/alternative-etfs-offer-more-ways-to-profit-37675 (Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. To view archives or subscribe, visit http://www.moneyandmarkets.com.)
Editor’s Note:
– The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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