Date: Fri, 7 Nov 2003 18:37:14 CST
From: Tad Borek 
Newsgroups: misc.invest.financial-plan
Subject: Re: Value of Hedge Funds
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Mike Gorund wrote:
> I wrote
>>These things are getting way too much airtime IMO...Why bother?
> 
> Because of the hedge aspect. Most mutual funds hope to make money in a
> rising market but offer zero protection (hedging) in a falling market.
> I'm also interested in the Rydex product (called Sphinx, btw) after
> being burned in regular stock mutual funds during the 2000-2002 bear
> market.

I hear you, but that's also why I think they've been misrepresented. The 
S&P hedge fund index, the basis of the Rydex fund you mentioned, 
includes funds using nine categories of strategies, only a couple of 
which I consider true hedges. To me you end up with a pretty arbitrary 
index when you include things like distressed securities, merger 
arbitrage, market timing models, & the like. So it has an unknown effect 
on your portfolio and you're back to an active management piece in the 
mix, only it's illiquid, is a bit of an unknown, & has higher costs than 
anything else you invest in.

More fundamentally I think there are easier ways to provide protection 
against a falling market, if that's what's wanted - basic 
diversification. If 2000-2002 was terrible then the portfolio didn't 
include value stocks, bonds or REITs, all of which can be held at 
extremely low cost. I'd look to that kind of addition first, and 
consider most HF investments to be in the speculative layer of a 
portfolio. And remember '98-'00 returns would have been leaned out if 
your stock investments had been hedged so it's a mixed blessing.

Another alternative to look at is the Gatway mutual fund
> [GATEX] (no affiliation with Gateway computer.) The fund buys stocks
> to match the SP500 index then writes covered calls against the
> individual stocks. They also buy puts. The steady cash flow from sales
> of calls and the puts buffer losses if the equities should fall in
> value. It's a conservative approach that gives some upside potential
> in a bull market but limits losses in a bear market. Expenses are
> reasonable. There was an article in last week's Barrons on this fund.
> YTD it's up about 9 or 10%.

That's a bit different, when you focus on a specific fund/strategy - and 
I guess there are plenty of ways to skin a cat. I do the risk reduction 
by mixing in other asset classes, but you can do the covered call kind 
of approach too. Either has a similar effect. Something like GATEX does 
have costs that wouldn't be there with a simple balanced allocation (eg 
VBINX or some mix of the S&P and cash/short bonds).

-Tad