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Thursday, June 24, 2010

How To Choose The Best Niche To Market?

When starting out in the online business world, one of the very first things you will need to tackle is choosing the best niche to market. Without a niche, you may not exactly have a concrete plan how you can make money online with a web business, as you may not exactly have something that you will market. This is why before you fuss about your marketing techniques and whatnots, you should first think about which niche to pursue.

Now, this may sound simple, but if you really want to profit from this venture you're looking at, you may need to think thoroughly about how you will choose your niche. This is because with the right one, you can guarantee yourself profits, while failure to find the right one may end up not so well for you.

So, how do you choose the best niche? Here are some tips:

1. Start with something you are passionate about. The great thing about the make money online scene is that there are a lot of fields that you can focus in, giving you tons of options in which items or services to sell. If you started with your passion, you can instantly start learning about ways to properly market your products, instead of spending a lot of time learning the ropes in your niche. Starting with your passion gives you a better edge, as you may already know a thing or two about it, making you a great source of information that people will surely find useful.

2. If you don't want to use the first tip, you can always search for a niche with high demand. All you need to do here is conduct a simple research and learn about what people need and want. Some of the high demand niches today have something to do with weight loss or making money through the web. However, if you're going for this method of choosing your area, make sure to choose one that is not totally swamped that competition is all over, or else your chances of making a sale would be slim.

3. make sure to offer something that will help people solve their problems. One of the biggest rules in the make money online scene would be to always make a point to sell items that will answer other people's problems. This will guarantee you sales and also help you build a solid and loyal following.

These are just the most basic tips in choosing a niche to market. Keep in mind that it is still up to you which one to go for.

Monday, June 21, 2010

Key Factor : Geo-Politics

Do you hate the business section? Do your eyes glaze over at the mere mention of economic data and mind-numbing accounting numbers? Fear not. The currency market is the only market in the world that can be successfully traded on political news as well as economic releases. Because currencies represent countries rather than companies, they are political as well as economic assets and are therefore very responsive to any disturbance in the political landscape.

The key to understanding speculative behavior with respect to any geopolitical unrest is that speculators run first and ask questions later. In other words, whenever investors fear any threat to their capital, they will quickly retreat to the sidelines until they are certain that the political risk has disappeared. Therefore, the general rule of thumb in the currency market is that politics almost always trumps economics. The history of FX is littered with examples of political trades. Let’s take a look at some examples over the past few years.

No-Confidence Vote Depresses Loonie

The end of May 2005 was not a happy time for the Liberal Party government of Canada’s Prime Minister, Paul Martin. After having guided the country to its best economic performance in 30 years, Martin was facing the fight of his life as his party prepared for a no-confidence vote stemming from accusations of past Liberal Party corruption.

Meanwhile, Canada’s economy was becoming a star performer, spurred by the massive rises in the price of oil. As the number one exporter of crude to the US, Canada was benefiting mightily from this newfound wealth. Yet despite the great economic news, the Canadian dollar remained weak against the greenback as traders worried about the implications of the fall of the Liberals.

On May 26, 2005, Martin’s government survived the no-confidence vote and theCanadian dollar rallied, causing the USD/CAD* to plunge 200 points in less than a week as the market once again focused on Canada’s stellar economic fundamentals.

BoJ Governor Fukui Responsible for Floundering Yen

At the beginning of June 2006, Bank of Japan Governor Fukui revealed to the Diet that he had invested 10 million yen in 1999 in a fund founded by financier Yoshiaki Murakami. Murakami was later indicted on charges of insider trading and although Fukui was not involved in any illegal activity, the mere appearance of impropriety in image-conscious Japan greatly damaged his reputation.

As the principal of Japan’s monetary policy during its recovery from a decade-long battle with deflation, Fukui was considered one of the most powerful men in the currency markets. His forced resignation would do great damage to the prospects of further recovery in Japan.

Meanwhile, Japanese economic data continued to show stellar economic performance as exports and business investment continued to grow, unemployment reached decade-long lows, and consumer sentiment improved. Talk spread through the markets that Japan would soon abandon its zero-interest rate policy and would actually have positive interest rates for the first time this century.

Despite all the positive speculation, the yen floundered, continuing to decline against the dollar as traders feared that Fukui would have to step down. Fukui stolidly refused, and as the furor passed and the market realized that he would stay on, the yen’s strength returned, showing once again that when it comes to currencies, politics can often be more important than economics.

If you enjoy predicting changes to the political landscape, your talents could be well utilized as a Forex trader. Recently, we predicted a strengthening of the Canadian dollar and earned close to 70 points in less than 24 hours. At 10 to 1 leverage you could have profited along with us, making a 7% return or $700 on a $10,000 trade.

How OPEC Made Us 70 Points

Geopolitical risk can mean wars, terrorist attacks, or missile launches, but it can also relate to milder yet still politically powerful events such as G7 meetings and OPEC announcements. In October 2006, Saudi Arabia announced that they would back OPEC’s plans to cut oil production by one million barrels a day after oil prices dropped more than 10% in just seven trading days. The cuts were to take effect on November 1, 2006, with more to come in December.

As Canada is a major exporter and producer of oil, we believed that this policy change would be very positive for the Canadian dollar. Therefore we went short the US dollar and long the Canadian on October 19, 2006. Over the next 24 hours, based upon the geopolitical theme, we earned close to 70 points on the trade.

Key Factor : Economic Growth

The next factor you need to consider when predicting a country's currency movements is its economic growth. The stronger the economy, the greater the possibility that the central bank will raise its interest rates to tame the growth of inflation. And the higher a country's interest rates, the bigger the likelihood that foreign investors will invest in a country's financial markets. More foreign investors means a greater demand for the country's currency. A greater demand results in an increase in a currency's value.

Hence, a ripple effect: economic growth inspires higher interest rates inspires more foreign investment inspires greater currency demand which inspires an increase in the currency's value.

How Anemic Economic Growth Crashed EUR/USD 2,000 Points

For a good example of the impact of economic growth on the direction of currency rates, let’s look at the EUR/USD from 2005 to 2006. Economic growth is best measured by a country's Gross Domestic Product, or GDP. The United States and Eurozone represent two of the most prosperous regions in the world with GDPs running at $13 trillion and $11 trillion respectively.

In 2005 and 2006, the difference in growth rates between the two major economic powers was clearly reflected in currency movements. In 2005, the Eurozone lagged significantly behind the United States in economic growth, averaging an anemic 1.5% rate throughout the year while the US expanded at a healthy 3% rate. Consequently, investment capital flowed from Europe to the US and the EUR/USD dropped by nearly 2,000 basis points by the end of 2005. In 2006, however, Eurozone growth perked up while US growth began to slow. At the end of 2006, Eurozone GDP actually overtook US growth rates, causing the EUR/USD to rally.

We've used GDP's to forecast trends on several more Forex trades in the past. One great example is our November 14, 2006, United States dollar/ Japanese yen trade (USD/JPY).

67 Points in Four Hours

In the middle of November 2006, hurt by the contraction in its housing sector, the US economic data began to deteriorate. Rumor had it that the US might lower interest rates in the first quarter of 2007, which would encourage foreign investors to look elsewhere.

Meanwhile, the Japanese economy was buoyed by the weak yen that made Japanese products affordable internationally and helped spur double digit growth in exports. On November 14, 2006, the Japanese GDP printed at much better than expected -- 2% versus the 1% forecast. We decided to take advantage of the strength of the Japanese economic growth vs. the relatively weak economic outlook in the US, so we went short USD/JPY at 117.82. As we hoped, that morning, in sharp contrast to Japan, US retail sales produced very weak numbers and the USD/JPY pair collapsed. We were able to collect 67 points on the trade in less than four hours.

Key Factor : Interest Rates

Key Factor 1. Interest Rates.
We use two methods to profit from the difference in countries' interest rates:

  • interest income
  • capital appreciation

Generating interest income.

Every currency in the world comes attached with an interest rate that is set by its country’s central bank. All things being equal, you should always buy currencies from countries with high-interest rates and finance these purchases with currency from countries with low-interest rates.

For example, as of the fall of 2006, interest rates in the United States stood at 5.25%, while rates in Japan were set at .25%. You could have taken advantage of this rate difference by borrowing a large sum of Japanese yen, exchanging it for US dollars, and using the US dollars to purchase bonds or CDs at the US 5.25% rate. In other words, you could have borrowed money at .25%, lent it out at 5.25%, and made a 5% return. Or you could save yourself all the hassle of becoming a money lender by simplytrading the currency pair to affect the same transaction.

Generating income from capital appreciation.

As a country's interest rate rises, the value of the country's currency also tends to rise -- this phenomenon gives you a chance to profit from your currency's increased value, or capital appreciation.

In the case of the USD/JPY spread in 2005 and 2006, as the US interest rates stayed higher than Japan's, the dollar continued to increase in value. Investors who traded yen for dollars gained from interest income (as explained in the section above) as well as the US dollar's capital appreciation.

Interest Rates Spark a 700 Point Rally

Another great example of the power of interest rates in the currency market occurred in August of 2006. At that time, the Bank of England surprised the market by raising its short-term rates from 4.5% to 4.75%. Interest rates for Japan were still at a low .25%.

The rise in England's interest rates widened the interest rate differential on the popular GBP/JPY cross from 425 basis points to 450 basis points. Investment money flowed into Great Britain as traders bought up pounds to take advantage of the new spread. As the demand for the GBP increased, the value of the GBP increased, and the spread between the currencies increased. This domino effect lead to a 700-point rallyin the GBP/JPY over the next three weeks.

80 Points in Less than 24 Hours

More recently, we have used interest rate differentials to successfully predict several profitable trades for Forex Advisor members.

The concept of interest rates can be used to trade currencies using both long- and short-term perspectives. On a long-term basis, we look for major themes. On a short-term basis, we look for surprises in the news that shift the market’s interest rate expectations. We were able to make two winning trades based on short-term interest rate flows in the Australian dollar/Japanese yen (AUD/JPY) currency pair on January 24, 2007.

The trigger for our trade was the surprise drop in Australian consumer prices during the fourth quarter. The market was looking for hot inflation numbers but instead they received cold ones. Low inflation numbers meant the central bank of Australia was not likely to raise interest rates as expected. This news sent the Australian dollar tumbling hard against the Japanese yen, as traders speculated that the interest rate differential between the two currencies would no longer grow.

The first trade we made on January 24 banked us 45 points. We took profit before the currency pair retraced and then sold it again when it showed further signs of weakness. The second January 24 trade produced an additional 35 points for a total of 80 points.

Five Key Factors that Move the Forex Markets -- and How to Profit from Them

Hi! We're Boris Schlossberg and Kathy Lien, and we've been making people money in Forex for over a decade. As Directors of Currency Research at GFT and contributors, we've seen our share of wins and losses... Thankfully, over the years, we've also been able to learn from our less glamorous predictions and come up with a currency trading system that has earned us a very respectable success rate on Forex trades.

Today, we're sharing our Forex trading system with you. We're going to show you how to analyze the movements of any currency pair using a simple checklist of five key currency-moving factors. These are the same factors that we use to analyze our own Forex picks.

Why Forex?

Although trading currencies originated as a way to purchase foreign goods and services, investors soon learned that there are huge speculative returns to be made by predicting the value of international currencies. Today, those who use the Forex market as an investment vehicle outnumber those who trade currencies to expedite world trade. In fact, as of December 2006, 80% of all trades in the currency market are made by investors or investment entities out to make a quick return on their extra cash.

The Forex market is the most prolific market in the world, attracting trillions of dollars per day from central banks, corporations, hedge funds, and individual speculators. This fast-paced market operates 24/7, 5 days a week, beginning with trade in Wellington, New Zealand, and continuing on to Sydney, Australia; Tokyo, Japan; London, England; and New York, New York before the whole cycle begins again.

Forex is exciting, and with the right guidance and a bit of luck you can earn 500%, 600%, even 2000% returns. But Forex is not for everyone. If you prefer the penny slots to the high roller tables, then the high-stakes world of Forex trading is probably not for you. Forex is best traded with money you have allocated as risk capital -- money you don't need for day to day expenses.

So, if you'd like to spice up your more secure investments with a pinch of adrenalin and a dash of risk, try a few Forex trades. But first, let us show you how you can gain an edge in the market with the...

Five Keys to Predicting Forex Market Movements
To profit from the fascinating world of international trade, you must have a firm grip on the key factors that affect a currency's value. When making our trades, we analyze five key factors. In order of importance, they are:

  • Interest Rates
  • Economic Growth
  • Geo-Politics
  • Trade and Capital Flows
  • Merger and Acquisition Activity

If you can predict how each of these factors affect your currency trades, you have the foundation to make serious returns.

Thursday, June 17, 2010

Reo Investing: Why The Reo Boom?

REO properties are coming on the market faster than ever and investors and non-investors alike are taking notice of all the great deals! These properties are proving to be the true "deep discount" properties on the market making them a great option for investors or simply a great deal for would be home owners. So you may be asking "Why now? The real estate market has been down for several years." Understanding marketconditions, how the market got to where it is and where it is possible going next is vital to your investing career and your success. There are several reasons we are seeing a huge influx of REO properties hit the market right now. Didn't See it Coming First and foremost, like most people, the banks didn't see this market coming. Sure, some predicted a "hiccup" in the market, but most had no idea how big or how long that "hiccup" would be or last. And, it took some time for them to really start to realize that they had a real problem on their hands. Overload of Defaulted Loans Once the banks realized that they had a real problem, they got overloaded with defaulted loans and simply were shell-shocked. The solution initially was to do nothing. They were simply in denial. Thought they could ride it out the Storm Another big factor is that they figured they would be able to simply ride out the storm. Why spend all the time, money, and resource to "take action" when the storm will just blow over. Well, the storm didn't just blow over and they eventually realized they would have to deal with the "bad child". Simply Didn't Have the Staff or Processes Once the banks decided to jump into action, they quickly realized the where jumping right into the middle of a huge black whole. They didn't have the process, staff, or even the knowledge to process the backlog of defaults they already had in hand; all while still be flooded with new defaults every day. Waiting for Someone Else to Save the Day: As with many folks, they figured someone else; mainly the federal government, would come in and save the day. As we all found out, that did not happen and the problem only kept getting worse. So now that we know how we got here, what will happen next? No one can truly predict the future but it does appear that banks are finally processing and completing the foreclosure process and taking the properties back at a much faster rate than over the last few years. Meaning, more REO deals will continue to hit the market at a feverish rate and should provide an ongoing funnel of great deals.

Wednesday, June 9, 2010

10 Tips For The Long-Term Investor

While it may be true that in the stock market there is no rule without an exception, there are some principles that are tough to dispute. Let's review 10 general principles to help investors get a better grasp of how to approach the market from a long-term view. Every point embodies some fundamental concept every investor should know.

Sell the losers and let the winners ride!

Time and time again, investors take profits by selling their appreciated investments, but they hold onto stocks that have declined in the hope of a rebound. If an investor doesn't know when it's time to let go of hopeless stocks, he or she can, in the worst-case scenario, see the stock sink to the point where it is almost worthless. Of course, the idea of holding onto high-quality investments while selling the poor ones is great in theory, but hard to put into practice.

Don't chase a "hot tip"

Whether the tip comes from your brother, your cousin, your neighbor or even your broker, you shouldn't accept it as law. When you make an investment, it's important you know the reasons for doing so; do your own research and analysis of any company before you even consider investing your hard-earned money. Relying on a tidbit of information from someone else is not only an attempt at taking the easy way out, it's also a type of gambling. Sure, with some luck, tips sometimes pan out. But they will never make you an informed investor, which is what you need to be to be successful in the long run.

Don't sweat the small stuff

As a long-term investor, you shouldn't panic when your investments experience short-term movements. When tracking the activities of your investments, you should look at the big picture. Remember to be confident in the quality of your investments rather than nervous about the inevitable volatility of the short term. Also, don't overemphasize the few cents difference you might save from using a limit versus market order.

Granted, active traders will use these day-to-day and even minute-to-minute fluctuations as a way to make gains. But the gains of a long-term investor come from a completely different market movement - the one that occurs over many years - so keep your focus on developing your overall investment philosophy by educating yourself.

Don't overemphasize the P/E ratio

Investors often place too much importance on the price-earnings ratio (P/E ratio). Because it is one key tool among many, using only this ratio to make buy or sell decisions is dangerous and ill-advised. The P/E ratio must be interpreted within a context, and it should be used in conjunction with other analytical processes. So, a low P/E ratio doesn't necessarily mean a security is undervalued, nor does a high P/E ratio necessarily mean a company is overvalued.

Resist the lure of penny stocks

A common misconception is that there is less to lose in buying a low-priced stock. But whether you buy a $5 stock that plunges to $0 or a $75 stock that does the same, either way you've lost 100% of your initial investment. A lousy $5 company has just as much downside risk as a lousy $75 company. In fact, a penny stock is probably riskier than a company with a higher share price, which would have more regulations placed on it.

Pick a strategy and stick with it

Different people use different methods to pick stocks and fulfill investing goals. There are many ways to be successful and no one strategy is inherently better than any other. However, once you find your style, stick with it. An investor who flounders between different stock-picking strategies will probably experience the worst, rather than the best, of each. Constantly switching strategies effectively makes you a market timer, and this is definitely territory most investors should avoid. Take Warren Buffett's actions during the dotcom boom of the late '90s as an example. Buffett's value-oriented strategy had worked for him for decades, and - despite criticism from the media - it prevented him from getting sucked into tech startups that had no earnings and eventually crashed.

Focus on the future

The tough part about investing is that we are trying to make informed decisions based on things that are yet to happen. It's important to keep in mind that even though we use past data as an indication of things to come, it's what happens in the future that matters most.

A quote from Peter Lynch's book "One Up on Wall Street" (1990) about his experience with Subaru demonstrates this: "If I'd bothered to ask myself, 'How can this stock go any higher?' I would have never bought Subaru after it already went up twentyfold. But I checked the fundamentals, realized that Subaru was still cheap, bought the stock, and made sevenfold after that." The point is to base a decision on future potential rather than on what has already happened in the past.

Adopt a long-term perspective

Large short-term profits can often entice those who are new to the market. But adopting a long-term horizon and dismissing the "get in, get out and make a killing" mentality is a must for any investor. This doesn't mean that it's impossible to make money by actively trading in the short term. But, as we already mentioned, investing and trading are very different ways of making gains from the market. Trading involves very different risks that buy-and-hold investors don't experience. As such, active trading requires certain specialized skills.

Be open-minded

Many great companies are household names, but many good investments are not household names. Thousands of smaller companies have the potential to turn into the large blue chips of tomorrow. In fact, historically, small-caps have had greater returns than large-caps; over the decades from 1926-2001, small-cap stocks in the U.S. returned an average of 12.27% while the Standard & Poor's 500 Index (S&P 500) returned 10.53%.

This is not to suggest that you should devote your entire portfolio to small-cap stocks. Rather, understand that there are many great companies beyond those in the Dow Jones Industrial Average (DJIA), and that by neglecting all these lesser-known companies, you could also be neglecting some of the biggest gains.

Be concerned about taxes, but don't worry

Putting taxes above all else is a dangerous strategy, as it can often cause investors to make poor, misguided decisions. Yes, tax implications are important, but they are a secondary concern. The primary goals in investing are to grow and secure your money. You should always attempt to minimize the amount of tax you pay and maximize your after-tax return, but the situations are rare where you'll want to put tax considerations above all else when making an investment decision.


There are exceptions to every rule, but we hope that these solid tips for long-term investors and the common-sense principles we've discussed benefit you overall and provide some insight into how you should think about investing.

Hedging Turns absolute Positive returns

Hedge Definition:

An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, 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).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

Hedge funds are like mutual funds in two respects: (1) they are pooled investment vehicles (i.e. several investors entrust their money to a manager) and (2) they invest in publicly traded securities. But there are important differences between a hedge fund and a mutual fund. These stem from and are best understood in light of the hedge fund's charter: investors give hedge funds the freedom to pursue absolute return strategies.

Mutual Funds Seek Relative Returns
Most mutual funds invest in a predefined style, such as "small cap value", or into a particular sector, such as the technology sector. To measure performance, the mutual fund's returns are compared to a style-specific index or benchmark. For example, if you buy into a "small cap value" fund, the managers of that fund may try to outperform the S&P Small Cap 600 Index. Less active managers might construct the portfolio by following the index and then applying stock-picking skills to increase (overweigh) favored stocks and decrease (underweigh) less appealing stocks.

A mutual fund's goal is to beat the index or "beat the bogey", even if only modestly. If the index is down 10% while the mutual fund is down only 7%, the fund's performance would be called a success. On the passive-active spectrum, on which pure index investing is the passive extreme, mutual funds lie somewhere in the middle as they semi-actively aim to generate returns that are favorable compared to a benchmark.

Hedge Funds Actively Seek Absolute Returns
Hedge funds lie at the active end of the investing spectrum as they seek positive absolute returns, regardless of the performance of an index or sector benchmark. Unlike mutual funds, which are "long-only" (make only buy-sell decisions), a hedge fund engages in more aggressive strategies and positions, such as short selling, trading in derivative instruments like options and using leverage (borrowing) to enhance the risk/reward profile of their bets.

This activeness of hedge funds explains their popularity in bear markets. In a bull market, hedge funds may not perform as well as mutual funds, but in a bear market - taken as a group or asset class - they should do better than mutual funds because they hold short positions and hedges. The absolute return goals of hedge funds vary, but a goal might be stated as something like "6-9% annualized return regardless of the market conditions".

Investors, however, need to understand that the hedge fund promise of pursuing absolute returns means hedge funds are "liberated" with respect to registration, investment positions, liquidity and fee structure. First, hedge funds in general are not registered with the SEC. They have been able to avoid registration by limiting the number of investors and requiring that their investors be accredited, which means they meet an income or net worth standard. Furthermore, hedge funds are prohibited from soliciting or advertising to a general audience, a prohibition that lends to their mystique.

In hedge funds, liquidity is a key concern for investors. Liquidity provisions vary, but invested funds may be difficult to withdraw "at will". For example, many funds have a lock-out period, which is an initial period of time during which investors cannot remove their money.

Lastly, hedge funds are more expensive even though a portion of the fees are performance-based. Typically, they charge an annual fee equal to 1% of assets managed (sometimes up to 2%), plus they receive a share - usually 20% - of the investment gains. The managers of many funds, however, invest their own money along with the other investors of the fund and, as such, may be said to "eat their own cooking".

Three Broad Categories and Many Strategies
Most hedge funds are entrepreneurial organizations that employ proprietary or well-guarded strategies. The three broad hedge fund categories are based on the types of strategies they use:

1. Arbitrage Strategies
Arbitrage is the exploitation of an observable price inefficiency and, as such, pure arbitrage is considered riskless. Consider a very simple example. Say Acme stock currently trades at $10 and a single stock futures contract due in six months is priced at $14. The futures contract is a promise to buy or sell the stock at a predetermined price. So, by purchasing the stock and simultaneously selling the futures contract, you can, without taking on any risk, lock in a $4 gain before transaction and borrowing costs.

In practice, arbitrage is more complicated, but three trends in investing practices have opened up the possibility of all sorts of arbitrage strategies: the use of (1) derivative instruments, (2) trading software, and (3) various trading exchanges (for example, electronic communication networks and foreign exchanges make it possible to take advantage of "exchange arbitrage", the arbitraging of prices among different exchanges).

Only a few hedge funds are pure arbitrageurs, but when they are, historical studies often prove they are a good source of low-risk reliably-moderate returns. But, because observable price inefficiencies tend to be quite small, pure arbitrage requires large, usually leveraged investments and high turnover. Further, arbitrage is perishable and self-defeating: if a strategy is too successful, it gets duplicated and gradually disappears.

Most so-called arbitrage strategies are better labeled "relative value". These strategies do try to capitalize on price differences, but they are not risk free. For example, convertible arbitrage entails buying a corporate convertible bond, which can be converted into common shares, while simultaneously selling short the common stock of the same company that issued the bond. This strategy tries to exploit the relative prices of the convertible bond and the stock: the arbitrageur of this strategy would think the bond is a little cheap and the stock is a little expensive. The idea is to make money from the bond's yield if the stock goes up but also to make money from the short sale if the stock goes down. However, as the convertible bond and the stock can move independently, the arbitrageur can lose on both the bond and the stock, which means the position carries risk.

2. Event-Driven Strategies
Event-driven strategies take advantage of transaction announcements and other one-time events. One example is merger arbitrage, which is used in the event of an acquisition announcement and involves buying the stock of the target company and hedging the purchase by selling short the stock of the acquiring company. Usually at announcement, the purchase price that the acquiring company will pay to buy its target exceeds the current trading price of the target company. The merger arbitrageur bets the acquisition will happen and cause the target company's price to converge (rise) to the purchase price that the acquiring company pays. This also is not pure arbitrage. If the market happens to frown on the deal, the acquisition may unravel and send the stock of the acquirer up (in relief) and the target company's stock down (wiping out the temporary bump) which would cause a loss for the position.

There are various types of event-driven strategies. One other example is "distressed securities", which involves investing in companies that are reorganizing or have been unfairly beaten down. Another interesting type of event-driven fund is the activist fund, which is predatory in nature. This type takes sizable positions in small, flawed companies and then uses its ownership to force management changes or a restructuring of the balance sheet.

3. Directional or Tactical Strategies
The largest group of hedge funds uses directional or tactical strategies. One example is the macro fund, made famous by George Soros and his Quantum Fund, which dominated the hedge fund universe and newspaper headlines in the 1990s. Macro funds are global, making "top-down" bets on currencies, interest rates, commodities or foreign economies. Because they are for "big picture" investors, macro funds often do not analyze individual companies.

Here are some other examples of directional or tactical strategies:
Long/short strategies combine purchases (long positions) with short sales. For example, a long/short manager might purchase a portfolio of core stocks that occupy the S&P 500 and hedge by selling (shorting) S&P 500 Index futures. If the S&P 500 goes down, the short position will offset the losses in the core portfolio, limiting overall losses.

Market neutral strategies are a specific type of long/short with the goal to negate the impact and risk of general market movements, trying to isolate the pure returns of individual stocks. This type of strategy is a good example of how hedge funds can aim for positive, absolute returns even in a bear market. For example, a market neutral manager might purchase Lowe's (NYSE:LOW) and simultaneously short Home Depot (NYSE:HD), betting that the former will outperform the latter. The market could go down and both stocks could go down along with the market, but as long as Lowe's outperforms Home Depot, the short sale on Home Depot will produce a net profit for the position.

Dedicated short strategies specialize in the short sale of over-valued securities. Because losses on short-only positions are theoretically unlimited (because the stock can rise indefinitely), these strategies are particularly risky. Some of these dedicated short funds are among the first to foresee corporate collapses - the managers of these funds can be particularly skilled at scrutinizing company fundamentals and financial statements in search of red flags.

You should now have a firm grasp of the differences between mutual and hedge funds and understand the various strategies hedge funds implement to try to achieve absolute returns.

Hedging Tips

Why Start A Hedge Fund?
There are many reasons why starting a hedge fund is the new American dream. Here are some of the most popular:

  • Almost everyone has read the news stories about the few hedge fund managers who have earned over $1 billion a year running their funds.
  • Hedge funds grace the cover of mainstream media newspapers and magazines on an almost-daily basis.
  • The secretive and exclusive nature of hedge funds has a draw, compared to many other areas of finance and investing, which can at times seem mundane.

With a little bit of capital it is relatively easy to start a hedge fund. However, implementing risk controls, growing assets, hiring staff and running the organization as a profitable business while producing positive performance is very challenging.

Between 4% and 10% of all hedge funds fail or close down each year, and countless others are half-started, abandoned or re-shaped into private investment pools for friends and family. This is not to say that starting a hedge fund is a bad idea, but it is important to realize that it is a very challenging endeavor - one that must be approached with the same long-term perspective required for running a business.

Seven Tips for Hedge Fund Startups
If you are set on starting a hedge fund, there are dozens of factors that will determine your success. Here are seven tips or crucial areas of your new venture that you should be cognizant of and think through before showing any potential investors or partners your business plan for your fund.

1. Competitive Advantage
Your hedge fund must have a
competitive advantage over others in the market. This may be a marketing advantage, information advantage, trading advantage, or resource advantage. A marketing advantage could be close career-long relationships with hundreds of high net worth investors or family offices. An example of a resource advantage would be if you work for a large asset-management firm that would like to heavily invest in launching a hedge fund.

2. Strategy Definition
Some hedge fund startups underestimate the importance of clearly defining their fund's
investment strategy.

  • What is your strategy, and how will you define and explain your investment process to your own team and initial investors? Developing a repeatable, defendable, profitable investment process after taking the costs of running a hedge fund into consideration can be difficult.
  • Ideas which have not been tested in the real markets don't hold very much water with investors and consultants, who see hundreds of wannabe hedge fund managers a year.
  • It will help to do some hedge fund performance research if you haven't already and know which strategies are currently doing well, which are not and why this may be the case.
  • Are you launching your fund at a time when your strategy is in very high demand, or has the pendulum swung the other way for the time being?

Start building a list of the other hedge funds that run the same strategy as your firm and conduct as much competitive intelligence on them as you are able to, ethically and legally.

3. Capitalization And Seed Capital
It is important that your new hedge fund be well capitalized. The amount of assets your fund will need to manage to become profitable will depend on three things:

  • team size
  • investment partners
  • unique cost structure

Some hedge fund managers claim profitability with less than $10 million in assets under management, while others claim that you must manage $110-125 million in assets to be considered a serious business venture that has some long-term prospects for survival. The number is probably somewhere in the middle, but everyone's business is unique, and due to performance fees you can sometimes see large profits with relatively low asset levels.

4. Marketing And Sales Plan
Like any business, nothing happens until a sale is made. It is important to develop a sales plan for raising assets before you open your doors for business. One of the first steps in doing so will be deciding where you will try to raise assets. There are many potential sources of investors, including:

Small hedge fund startups typically try to develop long-term relationships with seed capital providers, family and friends and high net worth individuals (directly or through their financial advisors). Working with institutional-quality investors who might eventually invest $25-100 million at a time can be difficult until you have a two-to-three year track record and well over $100 million in total assets under management.

Some marketing and sales activities to complete and create before launching your fund include:

  • newsletters
  • website
  • database-population process
  • two-page marketing piece
  • 20-page PowerPoint presentation
  • professional logo
  • letterhead
  • business cards
  • folders with logos for presentations

Many of these are Business 101-type details, but they are often overlooked or poorly executed. Anyone who can really help your business grow sees hundreds, if not thousands, of hedge fund managers a year and it is easy for them to see which managers have invested their time and effort and which have thrown something together at the last minute. All marketing and sales materials should be produced under the direction of your chief compliance officer or compliance consultant, as there are many limitations and details that need to be approved and reviewed.

5. Risk Management
Risk management is an important piece of the puzzle is when running a successful hedge fund. Your firm must come up with a concrete and competitive method for managing both business and portfolio risk or you will come off as not being serious about your business or long-term growth goals. There are many consultants and consulting firms that do nothing but advise hedge funds on portfolio and operational risk-management issues.

6. Compliance And Legal Assistance
Hiring great legal counsel should be seen as an investment. An experienced hedge fund lawyer can help you avoid pitfalls and build relationships and invite you to networking events such as private-capital introduction dinners. It will also show others in the industry that you are investing in your own business because you aim to be in the industry for the long haul.

7. Deciding On Prime Brokerage
Many startup hedge fund managers underestimate the importance of choosing a
prime brokerage firm, which can act as a partner to their business. The prime broker is such an integral part of how your hedge fund will trade and operate that you should take several weeks or months to evaluate your options and weigh the costs and benefits of doing business with the various firms you meet with.

It is usually wise to choose a prime brokerage team that is very motivated to serve your needs, but not so small that they physically cannot meet all of your trading and prime brokerage requirements. While capital-introduction services can be a great thing for your prime broker to offer, know that they often require a nine- to 12-month track record at a minimum before they can do much for you beyond helping explore seed capital sources. Once your team has proven itself, a good prime broker will help make introductions if you have great performance and a solid team behind the portfolio.

starting a hedge fund is a challenging endeavor that takes a multi-year commitment to refining your strategy, building a team, and finding both trading and marketing niches where your firm can profitably operate. While many hedge funds fail before they become large enough to be viable businesses, following the tips above will help save you time and gain some early momentum in marketing your portfolio.