Start Your Personal Hedge Fund With Diversification
As we’ve seen this week, technology and strategy have combined to give the power of hedge fund managers to self-directed investors. Automated Trading can give investors continual access to the market; trend following offers an easy-to-maintain strategy.
Hedge fund managers, though, have access to so many more markets, right? They can trade more than just stocks and bonds.
Now, thanks to aggressive online brokers who are eager to expand their offerings, individual investors now can trade all types of assets. It’s pretty safe to say that if a hedge fund can trade it, so can you.
This gives you another took of a hedge fund manager: diversification.
The original idea of a hedge fund was that the manager could “hedge.” He or she could use a variety of assets to ensure that the accounts went up, no matter what the current economic climate was, or how the market was reacting.
Hedge fund managers use a variety of tools to accomplish that. They can use non-correlated assets. For instance, 90 percent of the time, when the dollar moves down, gold moves up. The hedge fund manager, therefore, would employ shorting strategies on the dollar and long strategies on gold.
Another similar tool is diversification. As we discussed earlier in the week, position-sizing is necessary to manage risk. Sometimes, an investor will only have 1 or 2 percent in any one position. It’s necessary, then, to have several investments. Diversification helps spread the risk across a few trades.
Before the choices for diversification were stock and more stock. Now, because of the sweeping power of online trading, more assets than ever are available to the individual trader. Options, futures, currency futures, etc. can be traded.
One of the latest innovations for diversification is the ETF. The exchange traded fund mimics the movements of a variety of indices, markets, and commodity classes. They’re easy to trade. And best of all there are hundred and maybe thousands of these.