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Jeff Diercks
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Jeff Diercks, is an investapreneur and recovering CPA. He actively trades his own money and manages the assets of a select group of clients at InTrust Advisors, a Tampa, Florida based wealth management firm focused on trend following and price momentum strategies utilizing ETF securities. Mr.... More
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  • Don't Cede Control Instead Think Outside The Box! 0 comments
    Mar 27, 2013 2:13 PM

    A recent survey by Both Sides Now of 75 families with at least $30 million in assets and a Institute for Private Investors membership showed that such investors are now much less inclined to give up control over their portfolios to an adviser.

    Of course, why would they after the showing by hedge funds and advisors in 2007-2008 and by hedge funds post 2009?

    The survey found that only 32% of families with up to $50 million in assets felt comfortable giving their advisors complete discretionary control over their portfolios. This number declined to just 20% for families with more than $200 million in assets.

    Now these are the super-wealthy in the U.S. so it is not surprising that 61% have an in-house chief investment officer.

    My take on this is that advisors disappointed in 2007-2009. The super-wealthy are dubious that they have learned their lesson and that the same thing won't happen in the next major bear market sell off.

    Now as a former family office CEO, I am dubious that a in-house chief investment officer is the answer. The answer is probably much simpler such as diversifying to more than one advisor. I would also suggest that buy and sell signals, like those trend following signals we provide at might be the answer.

    Our Solution

    So you are probably asking why on earth is the answer Jeff? Also why on earth does seem to be the answer to everything for you short of a cure for the common cold?

    The answer is simple!

    Since the wealthy primarily invest in individual stocks and some managed accounts, the solution is to hedge this exposure at the proper time to preserve capital.

    With the wealthy, taxes are everything! They don't want another 2007-2009, but at the same time they don't want to sell their favorite stocks. So they have a problem.

    My solution: sell some of the prized stocks now and set yourself up to add a trend following hedge using

    What is this? It is using some of the proceeds to buy one or two index signals that will hopefully make you money in the bull market and flip inverse or short in a bear market, thereby, hedging the remaining positions held in the portfolio.

    Here is an example:

    Let's say the wealthy investor has a single portfolio and no other managers (not likely, but we need to keep things simple). Let's further say his portfolio is $1,000,000 in individual stocks.

    For this solution he would sell some of his stock positions. Let's assume he sells those with the lowest tax hit (or with tax losses if possible). He raises 40% cash or $400,000.

    He now buys a 50% S&P 500 position ($400,000 x 50%) and a 50% Nasdaq position ($400,000 x 50%) utilizing broad based ETFs and our signals.

    Based on our signals today, he will be long both positions and they will hopefully provide broadly diversified gains for the wealthy individual and his/her portfolio as a whole on a pretty tax efficient basis.

    When he/she gets sell signals on one or both of these signal positions, they will now have a 60% long portfolio of individual stocks and a 40% short or inverse positions in the two positions. So in theory, they are only 20% exposed to significant market declines (60% long - 40% inverse/shorts).

    Let's also assume his portfolio of stocks are primarily value stocks with low betas (see more on beta here). Let's assume the portfolio beta is .80.

    Let's also assume that the S&P 500 component of the hedge has a beta of 1.0 and the Nasdaq Composite component a beta of 1.01 today. This would mean on a beta basis that the hedge would actually cover 83.7% of the long stock portfolio risk ($600,000 x .80% / (($400,000 x 50% x 1.0%)+($400,000 x 50% x 1.01%))).

    So bottom line the wealthy guy gets to have his cake and also eat it!

    1. He/she maintains control over his portfolio.
    2. He/she gets to keep most of his individual stock portfolio.
    3. He/she gets upside from the 40% trend following portion of his portfolio using the signals.
    4. Finally, he/she gets protection for his portfolio by following the signals that limits the downside of his tax efficient buy and hold portfolio of individual stocks.

    Want to know the best part? You can do this too, whether you have a portfolio of $10,000 or $10 million.

    It only cost a little time and an inexpensive subscription to!

    Why not get a free trial today?

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