I had a strange dream last night. I dreamt that I was a fundmanager and I tried to outperform the market. If I am correct, half of the hedgefunds underperform the S&P. I didn't want to make huge gains, I only wanted to make a few % more, than the S&P index by the end of the year. Since I was also lazy in my dream, I didn't want to do too much work or research or trades. That's how my dream went: 1. I had 1 million dollars in my hedgefund. I put 90% of it in a CD that gives 4.5%, thus I was guaranteed 4% return on my 1 million. 2. The rest of the money I put in a future brokeraccount and I bought 16 ES futures at the very first day of the year. 3. For the rest of the year, I didn't do anything, except I had to roll over the futures 3 times, at expiration. 4. By the end of the year, my hedgefund performed exactly like the S&P plus I had 4% extra from the CD. Thus I outperformed the market by 4% moving my money only 5 times. Now that was just a dream. More astute readers of ET might notice that there was a slight problem with the plan, namely that index futures depreciate by time compared to the index. The rate of depreciation is about 3 ES points per month. Mind you, if you let your ES futures lose 36 points a year, at the current level of S&P that is still only 3%, thus you still have a built in 1 % extra gain, compared to the S&P. But if you want to stick to the S&P +4% profittarget, you only have to do is to time the market 1-2 times a year and you will get your needed 36 ES points. If you don't know how to do that, PM me and I might dream it up for you. So again, the plan in short for fundmanagers: 1. Put 90% of AUM into CDs, yielding at least 4.5% 2. Buy 16 times AUM (in millions) number of ES contracts. 3. At expiration, keep rolling over to the next futures. 4. At year's end send me a card for Christmas.... After ten years, depending on the market conditions, your fund might not going to make lots of money, but you will be among the I guess less than 10% of the fundmanagers, who outperformed the market 10 years in a row.
How do you account for your annual 1-2% Management Fee and incentive fee? What about your monthly Administrative costs to calculate and send out shareholder statements and independent NAV calculation? How about the cost of your annual audit to partners/shareholders? What about the amortization of your Fund startup costs? Any legal fees attributable to the partnership? How about your fees and other direct expenses related to running the Fund? Are you running a charitable organization? Nice concept in theory.
There's nothing special about this. It has been known and used for years. However, typically you wouldn't use futures, but you would use options. The reason being that with futures you can lose more than you have, with long options you cannot. This is the most basic structure of a capital guaranteed product - you invest the majority of money into a risk free interest bearing instrument and then use the remaining portion to purchase options.
Since you were short.......you would now be up 14%. Just saw you have to be long....why? I like this idea in that it gives you $40k or so to trade risk free, but why would you have to be long?
Then the fund would lose only -6%. I didn't say the fund will stay positive, I said it would outperform the S&P....
So essentially your dream was about you wanting to invest other people's money in CDs. I think you just want to be a bank teller. Half the time the SP will go up, half the time it will go down.
Because we follow the market. Whereever it goes, so goes the fund. Now I didn't exactly say that the fund has to be long ALL the time. I mentioned that a few times a year we have to time the market, thus getting out at possible pullback or even playing short, to make up for the 36 ES points difference. There can be another way to make up the difference, playing slightly more then 16 ctrs per millions. Of course bigger leverage is a double edged sword, thus if the market goes down, you would lose more than the % move, so you have to time more carefully the pullbacks. By the way the S& P just went negative again for the year, so it is a good time to play the strategy and get in longs with a few ES futures. Since we passed the first half of the year, we only need to make up 18 pts....
Quote from ImamicPH: So essentially your dream was about you wanting to invest other people's money in CDs. I think you just want to be a bank teller. Of course not. 2 years ago when the S&P went up 8.9%, the fund would have made almost 13%, that is way better than your average CD. Half the time the SP will go up, half the time it will go down. Sure, but when it goes down, the fund goes down LESS. Ponderable: How many of the funds can say they outperformed the S&P 10 years in a row? I guessed 10% but the real number is probably closer to 5%. Any correct data on the question is welcomed...