How to Build Your Own Hedge Fund

Retail Investing 14 Jul 2006

By: Lewis Braham, Business Week
Published: December 26, 2005

This ariticle in Business Week illustrates clearly how hedging techniques can and will be used by individual investors in their own portfolios and it builds on many of the ideas contained in a post on this blog called “Financial Genomics”. 


“Using mutual funds, you can put together a hedge fund yourself at a lower cost and without having to share your profits. With this personalized approach, you can also manage the fund with taxes in mind.”

“It’s relatively easy to simulate a classic hedge-fund strategy in which a manager invests a portion of his assets in stocks he likes — the long side of the portfolio — and simultaneously shorts or bets against stocks he doesn’t like. For the long side, you could invest 50% of your “hedge fund” stash in a well-regarded mutual fund…then take the other 50% and invest it in one of the 27 short mutual funds available.”

“The biggest additional advantage may be for taxable investors…What’s also important is that in creating your own hedge fund, you can time gains and losses to maximize your tax advantage.”

“Another approach is to go long and short in different market sectors. If you use an index short fund, choose one from a different, less promising sector than your long fund. For instance, since the Federal Reserve started raising rates 18 months ago, real estate investment trusts have trounced bank stocks to the point that many market seers consider REITs expensive and banks cheap. So you could pair top-performing bank-stock fund Senbanc Fund (SENBX ) with the ProFunds Short Real Estate Fund (SRPIX ).”

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