ETFs-Create Your Own Hedge Fund.

There is an interesting report currently out written by SEI and Greenwich Associates. The document, called “The Era of the Investor” discusses the current state of the Hedge Fund industry and where it is going. contains results from the firms’ second annual survey of institutional investors (conducted in November 2009) and is sure to generate a lot of press in the next few days.

This report was analyzed over at Seeking Alpha by Christopher Holt. Here are a few of the pertinent headlines.

-95% of the 96 institutional investors surveyed this year said they would either increase or maintain their hedge fund allocations over the next year.

-“Diversification” remains the #1 reason to invest in hedge funds – followed closely by “absolute returns”.

-During 2009, transparency rose in importance with over 70% of respondents said they now request “more detailed information from managers than they did a year ago.”

-Since last year, “poor performance” has been overtaken by transparency and liquidity as the main sources of “concerns” about investing in hedge funds.

-The report says that “fee pressures have intensified”

As to the why for hedge funds here is the Holt's primary observation.

"While “diversification” remains the #1 reason to invest in hedge funds,....this year, “absolute returns” ranked only a couple of percentage points behind."

Of course it is our main thesis that many hedge fund strategies can be replicated for individuals by strategies using ETFs. In fact we employ just such these strategies in many of the ways that we position portfolios especially in some of our more aggressive programs. After all, ETFs give investors many of the main objectives that institutional investors said they prized in the survey. They certainly provide diversification and they generally have low fees. Their investments to the extent one understands their underlying index are transparent and because they trade on exchanges they are in general pretty liquid.

In fact an investor that would have owned from December 31, 2008 to December 31, 2009 just the Nasdaq 100 ETF {QQQQ} and the S&P 500 Spyder {SPY} last year would have returned 40.36% which far exceed the S&P 500's 26.5% return and the 19.6% estimated average return for US pension funds.* There are many other strategies that can be adopted with ETFs that also give hedge fund like returns. If you are interested in hearing what we try to do in this area let us know.+

**Long ETFs related to the S&P 500 in client accounts. Long ETFS related to the NASDAQ 100 in client and personal accounts.

*Source for this total return information came from the S&P Spyders website and the Invesco Powershares website. Source for estimated pension returns; Pensions & Investments; January 25, 2010, p.3. Please note that this example refers to a very simple example where an investor would have employed a simple buy and hold strategy with just two securities. This example also assumes that an investor held no cash or other securities in this hypothetical portfolio. Cash holdings in this portfolio would have likely resulted in a portfolio that did not return the above stated amount. It should also be noted that a portfolio that employed this strategy would have suffered a substantial draw down in last years first quarter before beginning a recovery in early March. Nothing here should be understood as a guarantee that such results could occur in the future or that any individual portfolio could have returned this exact amount last year as commissions, size of the portfolio and exact purchase price could have impacted the final return. Please do not emulate such a strategy until you have discussed this with your own financial advisor or initiated some investment research of your own.

+Lumen Capital Management maintains a portfolio strategy for more aggressive investors that mimics certain hedge fund strategies generally with ETFs. This portfolio is not suited for all individual investors. While we have every confidence in our ability to add long term value to this portfolio, nothing here should be construed that these strategies will be able to remain effective on an ongoing basis.

The Era of the Investor