It seems that, wherever I look, these days, hedge funds and other funds that run on the same investment principles are not only abundant–they’re “all the rage.”
Strangely enough, most of us know little about them or their sudden popularity.
The year 1949 saw the emergence of the first hedge fund in the U.S. created by Alfred Winslow Jones. His Jones Fund outperformed all other funds in the five years preceding 1969 by 44% and 88% for the ten years following 1959. For a twenty-year period, his fund provided investors with an annual return of 20%! (Wow. Sign me up.)
Mr. Jones used a risk-mitigating principle of shorting lousy stocks and buying undervalued ones. Simple and profitable.
At PROFIT CONFIDENTIAL, we not only admire his returns, but we also apply his simple methodology to our own investing.
Most of the Hedge Funds out there these days have strayed from simplicity. They use everything from complex derivatives, index futures, options, warrants, and currency futures. You have to have a PHD in mathematics to make heads or tales of the prospectus!
It is easy enough to create a hedge for your portfolio. There is a simple way of writing covered calls to squeeze some extra profits and protection from the stocks you already own.
You can also apply a simple extension that Jones profited from. Make contrary bets. For example, if you believe interest rates will remain unchanged and may even tick lower, then a ten- year treasury product is your best bet.
One hedge we have been pushing for a while is our belief that the U.S. dollar is only just beginning its downward spiral. So, the hedge strategy is to invest in some foreign currencies. You are hedging against devaluation in the underlying assets you own, like your portfolio and any other assets that you measure in U.S. dollars (like your home).
At PROFIT CONFIDENTIAL, we have been predicting (correctly we add) for some time that oil can’t stay cheap forever. The hedge here is to find oil exploration companies that have been hammered down in price. When oil becomes expensive, the well-managed, presently undervalued companies will soar. You will pay more to heat your home and fill up your car, but you will offset those increases with your profits.
The key to creating your own hedge is to look to the future. Take advantage of short-term opportunities, but don’t forget some big money can be made by taking the road less traveled and staying on it for years to come.
Getting hedged maybe the smart thing to do.