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Krystof Huang

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  • Are VQT And PHDG Investments Or Hedging Tools? [View article]
    Jonathan, I think I see your point. Short-selling SPY is disadvantaged, but going long on VIX is also disadvantaged. So I am not sure about this but in theory, if VEQTOR works then the shorting of ETFs might work with the same mechanism. In addition, if you replace VIX with short-selling then you eliminate counterparty risk.

    Also as I think you will agree, mainly for clarification to readers...
    * Short-term TIPS ETFs are probably safer than cash or T-bills.
    * Going short on SPY is less disadvantaged than going long on SH.

    P.S. Sorry about the long posts (wish I could edit) but also would like to mention that I have decided against increasing the VEQTOR:SPY ratio. It makes more sense to increase the SPY:VEQTOR ratio to 3:1 or 4:1. This sufficiently cuts most downturns to 1/3 or 1/2--and SPY will outperform VEQTOR most of the time--so SPY or any favorite standard ETFs should be emphasized. The following have high volume and consistently outperform: XRT, QQQ, PKW, IJR.
    Nov 18 11:23 PM | Likes Like |Link to Comment
  • The Federal Reserve Is Monetizing A Staggering Amount Of U.S. Government Debt [View article]
    To Mr. Kramer,

    I suspect you know what you are talking about. I am a trader, not an economist. My working hypothesis is that the stock market has been in a bubble for 200 years. When the P/E ratio varies from 10 times a company's worth to 100 times a company's worth, what else are we supposed to call it? How about, "normal." Obviously, the only reason anyone ever buys a stock is the religious faith that some sucker is going to pay more later.

    A year ago today, this website and every financial website was peppered with tacky ads from Stansberry Research, warning that the US dollar was about to stop being the reserve currency, so get out of the US dollar markets and get into the Euro-based markets! The exact opposite happened. Not because Stansberry was essentially wrong about the US being weak, but because the Euro-based sector was more-weak.

    During the Reagan era, radicals like Ross Perot warned that the federal debt was headed for infinity. During the Reagan era, it was politically impossible to take up this message among both republicans and democrats. Today everyone is claiming this message, and holding up Ronald Reagan as their patron saint of deficit reduction.

    If not for people like Ross Perot and the Tea Party, deficit reduction might never have become fashionable. They serve a constructive purpose. They might even be correct that it is better to risk a government shutdown and bankruptcy today, rather than put the jar of poop on the shelf and allow it to ferment.

    However by the same token, how can we take them seriously about repealing Obamacare, when they only say repeal, repeal, they never say replace, replace? Sure Obamacare has problems. But the way to repeal it is to introduce a Republicare to replace it. Put up or shut up. Otherwise they are just people who want to break the speed limit and argue with the cop that the speeding sign was invalid.

    Now what is the essential argument of this Michael Snyder? He mainly just repeats this several times: ""The mere suggestion that the flow of easy money would start to slow down a little bit was enough to send the market into deep convulsions.""

    Isn't that self-contradictory? Snyder is saying that the stock market is substantially propped up by federal money. He fails to give us 3-dimensional facts and figures. Then he supports this by saying that a "suggestion" by the government affects the stock market. Oh, so is it the actual dollars that support the stock market, or is it the "belief" of investors that these dollars are doing something?

    I do not claim to understand economics. Snyder does but seems to be contradicting himself. So I was relieved to find another lawyer with what seems to be a more well-rounded perspective. Thank you.
    Nov 17 06:21 PM | 1 Like Like |Link to Comment
  • Are VQT And PHDG Investments Or Hedging Tools? [View article]
    Looking into DeepValue's question caused me to learn more than expected.

    As briefly mentioned under "caveats" above, VEQTOR is not always successful. A serious long-term loss is unlikely--but never say never. What happened in 2008 was assumed to be impossible by most brokers who until then routinely advised buy-and-hold. Similarly, like all long-short systems, VEQTOR is vulnerable to the S&P whipsawing and/or consistently losing just less than will significantly trigger the hedge mechanism.

    The long-term graph on Fred Piard's website shows a gradual 2-year downturn for VEQTOR from 2004 to 2006. A 1:1 ratio with SPY probably would have caused about zero net gain. (Note. I mistakenly said above that VEQTOR was proven back to 2002 but its history only goes to 2004.)

    Much worse, from September 2007 to September 2008, and again from January to March of 2009, VEQTOR and the S&P both experienced net losses of about -20%. So if these two periods had happened without the intervening success periods, there could have been a net loss of -40% for any combination of VEQTOR and SPY.

    During the same 2007-2008 scenario, TLT gained about +10%. However during the 2009 scenario, TLT lost about -15%. So, additional hedging with US Treasuries is very prudent but does not always protect you either.

    Also, a 5-year setting with "compare to S&P" at currently gives an excellent view of the weakness of VEQTOR during a bull market. In spite of successfully capitalizing on the -20% S&P downturn in 2011, VEQTOR is significantly underperforming for 2009-2014. I.e. like most long-short systems, VEQTOR alone actually demands a 2008-level crash every 20 years or so in order to outperform the market.

    Consequently, for maximum return vs. risk, you might as well accept that there will be losses and should not attempt to hedge fully against pro-S&P losses. I would suggest to consider getting an ultra-low-cost or no-cost trading account and rebalancing quarterly to monthly between:

    2/4 high-performance high-volatility index ETFs such as IJR. (Or to reduce volatility consider SPHD but it cannot be traded frequently due to high spread.)
    2/12 PHDG
    1/12 VQT
    1/4 individually-bought US Treasury ladder with emphasis on TIPS
    Nov 17 09:25 AM | 1 Like Like |Link to Comment
  • Are VQT And PHDG Investments Or Hedging Tools? [View article]
    Elliott Orsillo and Jonathan Selsick have touched on important VEQTOR issues that are both basic and potentially confusing. I am replying with a question mark (?) because I am not certain of all the nuances myself.

    1. The VEQTOR is called a "dynamic index" because it is not a simple combination of SPY and VXX. (?)

    As Fred Piard has mentioned, going long on VIX (=VXX) has a serious contango problem, causing an inevitably negative benefit/cost ratio. VEQTOR seems to have overcome this problem with daily adjustments based on a complex algorithm. I am not clear how this works. However, the proof of the pudding is that VEQTOR went up significantly in 2002 and 2008--and in 2011 when the S&P dropped -20%--and also does as well as the average long-short fund during bull markets. This is a very unique, very difficult and very invaluable achievement.

    After browsing the "methodology," I would consult a mathematics professor before attempting to DIY the VEQTOR. In addition, I am not yet clear about the exact instruments and trading costs, which might be unfeasible for individual investors.

    2. Nonetheless I heartily encourage Jonathan Selsick's initiatives to develop hedging methods that emphasize T-bills. Derivatives are the standard method for shorting the market--but if anything happens to the underwriters--while most people are losing their life savings--derivatives are far less likely to inspire popular support than scapegoating and lynch mobs. T-bills will receive the exact opposite in absolute political sympathy. Their only weakness is an inflationary recession. T-bill risk is largely (though not entirely) overcome by emphasizing TIPS.

    However... as a hedging mechanism, T-bills can fail to move inversely to the market for months at a stretch. Also, you need a lot of T-bills to hedge a little equities. This can possibly be done with margin or with short-puts on T-bill ETFs. However, the US government might someday be forced to delay its debt repayments. The holders of individually-bought TIPS can ride this out but the buyers of T-bill ETFs might need a lifetime to recover their losses. I.e. to use T-bills for hedging might compromise their value as safe havens. Moreover, I doubt that the most perfect timing and leveraging of T-bills can compare in net gains to using the same skills with a Veqtor-based system.

    Nonetheless, a good system utilizing T-bills is certainly invaluable. Everyone should consider allocating about 1/3 portfolio to individually-bought TIPS and T-bills so as to (a) earn guaranteed profits and also (b) hedge against equity losses and also (c) safeguard equity gains.
    Nov 17 01:13 AM | Likes Like |Link to Comment
  • Top Hedge Fund Guru Holdings In An ETF Wrapper [View article]
    Thank you for the fine pick. I am adding GURU to my favorites: PHDG, IJR, SPHD. PHDG is a hedging ETF. IJR and SPHD both consistently outperform the S&P 500 to the same degree--IJR with high volatility and SPHD with low volatility. GURU is also volatile but so far has consistently much better performance.

    Unfortunately, the spread on GURU seems totally outrageous. ALFA has a similar concept and a less outrageous spread but not the same level of performance. So, GURU seems worth a try but any trading would have to be very patiently and craftily done.
    Nov 15 11:25 PM | Likes Like |Link to Comment
  • Thinking Of Investing With A Hedge Fund? Consider These ETFs Instead [View article]
    Mr. Shaefer is doing well to warn people that the average hedge fund certainly is not what most people believe.

    However, I would like to point out that to condemn an entire group based on its average is an incomplete reasoning that is often used against mutual funds, against investing in general and against anything in general. Also, although past performance does not predict future performance, performance is a major criterion. When we condemn hedge funds based on lackluster performance, we are using that same criterion.

    The average mutual fund is terrible, the average hedge fund is terrible, and the average investment analyst is terrible.

    What is really different about hedge funds is not even mentioned in this article. This is that whereas mutual funds are considered expensive if their management costs are 2%--hedge funds are considered normal if they charge 20% profit-sharing on top of that 2%. I am starting a hedge fund myself, and was taken aback after calculating the effect of a 20% profit-sharing fee. The fact that hedge funds generally do about the same as index funds after paying such a fee actually speaks well of the skill of hedge fund managers. Ultimately however, this fee structure forces many hedge fund managers to take a boom-or-bust approach. I have decided to have 10% profit-sharing, of which 1/4 is donated to charity, and all of which may be waived if not well-justified by performance.

    Also, many institutions and individuals judge a hedge fund largely by how big it is. This basically guarantees that performance cannot be much better than a mutual fund--and basically erases the advantage of a hedge fund which is its smaller size and ability to make fast decisions in limited markets. Quoting Warren Buffett, "It's a huge structural advantage not to have a lot of money."

    Also, the minimum requirement for hedge fund investing is to have $1 million. However the minimum investment in most hedge funds is also $1 million, which makes no sense for this risk level unless you have at least $10 million and preferably $20 million. For this risk level, it only makes sense to make several relatively small investments and rebalance annually between them.

    Hedge fund investors--as well as mutual fund investors--should seek out funds that are below-average in size, below-average in fees and above-average in performance. And never put more than 10% of your eggs in one basket.

    However, I do agree with Mr. Shaefer that it is possible to use a simple ETF strategy to do much better than the average hedge fund and a lot more safely. Although my favorite combination would be PHDG, IJR, SPLV and SPHD.
    Nov 15 06:43 PM | Likes Like |Link to Comment
  • The Unintended Consequences Of Hedge Fund Fees [View article]
    Thank you for the clarifications Ted. Further clarifying your clarifications...

    1) Yes, as you seem to imply, it is ironic that the laws intended to protect hedge fund investors are often responsible for reducing hedge fund selection to a game of blind-man's-bluff. As a hedge fund manager, until I am guided step-by-step to do otherwise by a lawyer, I have decided never to publish performance graphs on the official website--and except on the official website, never publicly to name my hedge fund or any hedge fund.

    However, Bloomberg does write about "The 100 Top-Performing Large Hedge Funds." So it is possible to write about performance. Although, note the qualifier "large," which automatically makes them all mediocre performers.

    Barron's and others do have more intelligent articles with emphasis on 3-year performance. However, my point is that the predominance of golly-wow Bloomberg-type journalism implies that the average hedge fund investor is probably anything-but more sophisticated than the average chaser of last year's hot mutual fund. Therefore, small wonder if many hedge funds are inherently designed to burn bright and self destruct.

    2) Until relatively recently, minimally-regulated hedge funds were limited to 35 investors. That was a serious discouragement against accepting $50k minimums. However, with today's 100-investor allowance, after achieving $5 million AUM, I will easily afford to start more hedge funds and increase my minimum. I cannot increase the minimum for existing investors but I can ask them to move to the other fund. Meanwhile, instead of selling my soul to seed providers, I can offer symbiotic relationships to my early investors: low fees for them, free seeds for me. Also, if my seeds do what seeds should do, the $5 million AUM will become $10 million within a few years--due to investment gains as well as eager add-ins. Also, I prefer never to need to worry about the consequences of one or two big investors bailing out on me.

    Experts and articles have advised me to list an official minimum of at least $100k and only to make temporary exceptions for $50k investments. However for small hedge funds like mine, I believe the insistence on high minimums is overly based on past tradition.

    Meanwhile the small millionaire who considers investing in hedge funds might consider the following. High-gain equity investing is highly volatile, but in the end is a very positive-sum game for investors, much like roulette for casinos. Operating one high-limit roulette wheel might risk "breaking the bank"--but operating ten low-limit wheels will generate consistent profits like a steadily overflowing kettle of popcorn. Hedge fund investors can mimic the same effect with 2% to 5% allocations in as few as 3 hedge funds--if they annually rebalance by reducing the one that has risen the most above allocation. (And for this reason both managers and investors should avoid having lock-up periods--which are yet another way for hedge funds to insult the hands that feed them.)

    Therefore in my small opinion, for hedge fund investors with less than $3 million net worth, it makes sense to make only $50k-$100k investments in each of 3-6 hedge funds, 1-2 of which have high emphasis on market hedging aka short-selling aka negative-beta. The difficult part is in finding good hedge funds that emphasize hedging. The best-performing aka "most worth-their-fees" hedge funds will not emphasize hedging. Therefore I do not emphasize hedging myself. However I do know of some promising "hedge funds that hedge." Effective hedging also can be achieved simply by investing in the ETFs PHDG and VQT.

    So, I am defying some of the standard expert advice for starting hedge funds. It is much too early to tell whether or not my ideas will fly. I am perhaps overly optimistic about the rational capabilities of hedge fund investors. However, let us be clear about who the experts are. The big money is in institutional investors. Large institutions have good reasons for investing only in large hedge funds. Meanwhile, the usual professional investor is accustomed to paying out at least $36k annually for desk and secretary. In contrast, I might be content with being their secretary--if only I could do my work without having them around.
    Nov 15 01:39 PM | Likes Like |Link to Comment
  • The Unintended Consequences Of Hedge Fund Fees [View article]
    I am pleased to find a financial manager who is critical of hedge fund fees. I am just starting a small hedge fund myself, and here are some of my own small opinions.

    * Hedge funds often seem to amount to a gimmick for ripping off the "small millionaire"--who has attained some measure of financial success and who might tend to assume that part of the fruits of this success is investing in hedge funds. A net worth of $1 million is normally required to become a hedge fund investor. However, the standard minimum investment in hedge funds is also $1 million. With the fundamentally unregulated and high-risk nature of hedge funds, $1 million investments certainly do not make sense unless you have at least $10 million.

    * Also, if you Google for a "list of the best hedge funds," what you end up with is mainly inane Bloomberg articles about the "100 biggest hedge funds" and "100 most wealthy hedge fund managers," etc., etc. It seems much harder to find sensible articles about good investments for hedge funds than for mutual funds. In spite of the fact that hedge fund investors are legally defined as "sophisticated," it seems that even the most reputable financial source on the planet is catering to a pervasively low mentality among hedge fund investors.

    * However, after also reading how-to articles about managing hedge funds, I am beginning to see method in the madness. In addition to a mousetrap for small millionaires, the outrageous performance fees of hedge funds may provide commissions to the advisers who are in positions to steer institutions to them.

    * My 3-month old incubator fund's graph line was already establishing clear superiority up-up-and-away from the S&P 500. (As to be expected because my strategy is essentially a hedged and leveraged version of index investing.) But then I added 20% performance fees to the graph. Clunk! (The 2% management fee was no such problem.)

    * Consequently, I will declare a 10% performance fee--and give side letters reducing this to 5% for the first investors--and will accept minimum investments of $50k. I think this is the smart thing to do for small hedge funds. I also think that the smart thing for the small millionaire is to seek out the smallest (not the biggest) hedge funds who will accept $50k to $250k investments and might also charge smaller performance fees.

    * I am also writing into my hedge fund a requirement that 1/4 of all performance fees will be donated to fully-disclosed environmental and charity organizations. I will work with my investors to include their favorite charities.

    In my opinion, even in the rare cases when performance fees are actually justified by performance, the only way really to justify performance fees is to make them substantially for-charity. Then come what may, the wealthy investor can consider that such hedge funds are performing the double-duty of satisfying their desire to take on calculated gambles for high performance, plus taking care of a substantial portion of any desire to donate to charity.
    Nov 14 05:28 PM | Likes Like |Link to Comment
  • Are VQT And PHDG Investments Or Hedging Tools? [View article]
    Re the use of margin, it seems to me that Fred is cleverly implying, imagine if you invested in the S&P but eliminated all major losses? Then during the rebound period of 2009-2012, instead of merely breaking even, you would have gained 100%. VQT/PHDG achieves the neutralize-major-loss portion of this scenario--but does not achieve equal-to-S&P gains during the rebound period. So, Fred has implied, possibly we might use margin to increase VQT/PHDG until it at least equals the S&P during both bear and bull markets.

    Also, if trading fees are negligible, you can improve gains by rebalancing VQT/PHDG and SPY (or any favorite index fund) quarterly instead of annually. If you work this out on a spreadsheet, you might discover that you no longer feel any need to accept any margin risk whatsoever.

    The repercussions of a collapse of derivatives would be unimaginable, and for that reason is unlikely to happen, and if it happens is unlikely to be much worse than the collapse of non-derivative investments. However there just might be a selective collapse that just might affect VQT/PHDG. Nobody really knows.

    In my opinion, even if VQT/PHDG do someday cause me to lose half my money, they are likely to enable me to double my money long before then. However by the same token, why borrow money, if I can soon increase my own money to the same level, simply by rebalancing quarterly?

    As a rule, I suggest never to invest more than 20% of net worth in any single fund, and more ideally to keep single investments down to 5% of net worth. However, if your investment income is small in comparison to salary income, investing heavily in VQT/PHDG might be less risky than never having significant savings, and also is far less risky than making unhedged investments in index funds, as many people do. VQT/PHDG will maybe lose seriously in the next serious recession. With unhedged index investing, there is no maybe about the losing. However once again, I would be cautious about adding margin risk on top of investing heavily in VQT/PHDG.
    Nov 10 05:37 PM | 1 Like Like |Link to Comment
  • Are VQT And PHDG Investments Or Hedging Tools? [View article]
    I am glad that Loop2080 brought attention to SPLV. This is an interesting consideration. By itself, SPLV is certainly not equivalent to PHDG + SPY. The "best case scenario" for SPLV in another 2008-level crash is that it will "maybe" lose a bit less than the S&P-500. Meanwhile PHDG almost certainly goes up during a 2008-level crash. So with a 50-50 mix of PHDG + SPY you can expect to experience only 1/2 to 1/4 of the maximum drawdown (MDD).

    In my opinion, "volatility measurements" such as Sharpe, Sortino or standard deviation can be useful for initial screening, and some are better than others, but in the final analysis all are deceptive. Do we really care if an investment occasionally drops -50% for one hour while we are sleeping? No. What we really care about is how badly an investment might drop during the next 2008-level crash. When records do not go back that far, I look at the 2011 MDD (in relation to about -20% for the S&P).

    On the other hand, PHDG + SPLV seems a very serious consideration. Performance-wise, if you simply replace SPY with SPLV, you probably have nothing to lose except volatility. I also like the fact that SPLV does not use any derivatives.

    However, SPHD seems even better, based on the "Low Volatility High Dividend Index" SP5LVHD. Firstly, the emphasis on dividends offers a more concrete hedge against losses. Secondly, the net 5-year performance for SP5LVHD seems to be flying steadily higher than the S&P 500 as well as beating the high-performance high-volatility S&P 600. In comparison, the SPLV index (SP5LVI) seems always to equal the S&P 500 in the long run. (The official information page at enables instant 5-year comparisons: )
    Nov 10 04:05 PM | 1 Like Like |Link to Comment
  • 5 Common 'Junk' Bond Investing Mistakes [View article]
    Dear Money Madam,

    I appreciate your comments. However, please correct me if I am wrong, but I do not think a bond market crash can have the impact of a stock market crash. Because with bonds, there seems always the alternative of buying individually and then having the failsafe of holding to maturity. The primary risk for a well-constructed bond portfolio seems to be a risk of massive bankruptcies created by a broad-based economic crash. I suspect that such a crash and its ability instantly to destabilize the planet is created almost entirely by the existence of stocks--and that stocks are in essence a pyramid scheme added to bonds.

    Conversely, not speaking philosophically but about the way things are, "dividend stocks" were once believed to deliver market-like returns with bond-like security. In 2008 this all fell apart. So philosophically I would like to believe in "income investing"--but after considering all of the risks and alternatives in today's world, "income investing" no longer seems to add up. I buy TIPS for security, I trend-trade ETFs for cautious gains, and I cautiously dabble in options to leverage those gains. Then I add the above-mentioned hedging ETFs for win-win insurance. Corporate bonds seem neither here nor there, taking up space in the portfolio that could have been used for security or for gains, meanwhile delivering neither--somewhat like a railing that looks solid but is not safe to lean on.
    Nov 5 02:30 AM | Likes Like |Link to Comment
  • 5 Common 'Junk' Bond Investing Mistakes [View article]
    This is a valuable article for explaining the problems of junk bond trading which is sometimes over-touted. And I also appreciate Money Madam countering with her pro-bond experience.

    Philosophically, I believe that stock markets should not exist. Bonds are sufficient for economic development and, unlike stocks, bonds do not necessitate a vicious cycle of inflation. Inflation is invisible taxation which causes anyone who does not invest to be robbed blind. Bonds also do not repeatedly destabilize the planet with stock market crashes. The stock market is an inane slow-motion pyramid scheme which should be limited to Las Vegas tournaments.

    Millions of people believe they are doing something against corporate feudalism by "Occupying Wall Street" or recycling soda cans. All of this would become inconsequential compared to the following measure: a slight increase in the long-term tax rate for equities coupled with an equal decrease for taxes on corporate bonds. There is not much hope for civilization unless some nation someday phases-out the stock market and phases-in corporate bonds.

    Meanwhile however, except perhaps for a few aficionados such as Money Madam, corporate bonds are in-between US Treasuries and long-short equity systems in gain potential. In addition, corporate bonds are not nearly as safe as US Treasuries and also do not exhibit market-inverse behavior. US Treasuries are an effective hedge against the stock market, while corporate bonds are not.

    Therefore, instead of investing in any corporate bonds whatsoever, I would say simply adjust your ratio of equities to US Treasuries. The higher risk of equities can also effectively be moderated by allocating 1/3 of equities to the two new VIX-based hedging ETPs that will gain in both up and down markets.

    Nonetheless, I certainly would encourage some small fiddling with High Yield corporate bonds--which might pay off someday. The caveats explained in this article are sure to be helpful.
    Nov 3 11:04 AM | 1 Like Like |Link to Comment
  • Danger Zone: Consumer Discretionary Mutual Fund Managers And ETF Providers [View article]
    How can you be so harsh about those nice people? Ha ha. Well said. Sock it to em.
    Nov 2 08:45 AM | Likes Like |Link to Comment
  • Why This Rally Proved More Sustainable [View article]
    I like your method of analyzing the market Ploutos. I also like the added perspectives of all the comments here, especially by samretlew: "All rallies end badly." I follow the school of thought that generally assumes that it is futile to try to predict the market. However it is important to have opinions. For example the average person seemed to fear that the recent "government shut-down" was going to shut down the economy. In my opinion the so-called shut-down was obviously a superficial buying opportuntity and I kept my hedges low.

    So I do like learning more from people like Ploutos. Ploutos also has a refreshing take as opposed to the standard financial wizards on CNN who all seem presumptively to refer to the current recovery as "fragile."

    Here is my own take. The relative strength of the post-2008 S&P 500 recovery is not because the USA economy is most-strong, but because the USA economy is least-weak.

    When looking for places to put their money, investors in South America, Asia and Europe are saying to themselves, consciously or subconsciously, "Hmmm... I want to get back into the market but am shell-shocked from investing in my own region. And my region cannot recover unless the USA continues to recover. And if recovery falters the USA is doing so much less-badly." And meanwhile the USA investors who like to invest in other regions are thinking similarly. So more money ends up in the S&P 500, not because it is a great place to invest, but because it is the least-miserable place to invest. Next time it might go another way.
    Oct 30 10:48 AM | Likes Like |Link to Comment
  • Are VQT And PHDG Investments Or Hedging Tools? [View article]
    Mr. Piard, this is an excellent addition to your work which introduced me to these excellent ETPs. These are now my own #1 suggestions, including references to your website.

    On television a few weeks ago, a so-called expert suggested that people who only have $5,000 should put half of it in the stock market and keep half of it out due to the prevailing uncertainty. My suggestion is, on the contrary, there is no need to hold out. If you only have $500 to $3,500, perhaps consider putting it all on PHDG. If you have $3,500 to $5,000, then consider putting the minimum requirement of $2,500 into the leading available long-short fund MFADX, and the remainder in PHDG.

    Long-short funds generally lose about half as much as the S&P during S&P downturns, while PHDG/VQT generally go up during S&P downturns. Also, most long-short funds do not make any more than PHDG/VQT during bull runs. However, there are a few long-shorts that will do much better than PHDG/VQT in the long term. So, a scaredy-cat investor might do a 1:1 ratio of long-only ETFs to PHDG/VQT. Or a 2:1 ratio of long-short mutual funds to PHDG/VQT.

    * As Mr. Piard's studies have clarified, PHDG and VQT are not always successful. Sometimes they can lose significantly.
    * Most long-short funds are terrible performers. My current top picks in order of priority are: PHDG, MFADX, DGQIX, GOBAX, SCNAX, ARLSX, RLSFX, VQT, BPRRX, TGTRX. (GOBAX and TGTRX are not long-short, but are high-performance bond funds such as lost very little in 2008.)
    * PHDG is usually only 15% derivative, VQT is 100% derivative. Therefore I give priority to PHDG.

    All long-short funds utilize derivatives for hedging, which in theory might have collapsed in 2008 if there were no bailouts for major banks. However derivatives have never failed so far and in theory it is impossible for derivatives to fail during a bull market. And if derivatives collapse, nobody can predict which ones. And if derivatives collapse, every non-derivative investment on the planet will probably lose -75% anyway.

    So I would not be paranoid about adding derivative risk at the expense of adding volatility risk. And I would invest in both PHDG and VQT for risk diversification, although perhaps with a 2:1 ratio.

    Perhaps Mr. Piard can eventually look into the following. VQT seems entirely underwritten by Barclay's of London. Who is underwriting the derivatives used by PHDG? And how about studying the index protocol, and contacting PHDG's management, to ask what percentage of PHDG might become derivative-reliant during a 2008-level bear market? Nonetheless during a 2008-level crash, there is also the mismanagement risk which partially--although not entirely--caused losses for investors in some Lehman Brothers funds.

    In short, in any case, investors with more than $100,000 might want to consider a maximum of 1/20 of portfolio per fund--to consider some non-derivative trend-trading--and a non-ETF US Treasury ladder including TIPS.

    However for investors with less than $50,000, it may be necessary to build up their savings--and any investment risk may be much less significant in proportion to salary income--especially the obscure risk of derivative collapse. Therefore for the small investor, I would suggest considering strong emphasis on PHDG and half as much again in VQT.
    Oct 29 11:13 AM | 1 Like Like |Link to Comment