How You Can Invest Like a Hedge Fund Manager
Before ETFs exploded on the scene, the only people in the world with access to exotic investments like China, Brazil, India, timber and mortgages were hedge fund managers.
The only way you can invest with them is if you’re a high net worth investor. Investors pay huge fees to do it too.
Hedge fund managers typically charge what is known as 2 and 20. A 2% annual fee based on assets to manage the fund. Plus 20% of any profits.
Now you have access to the same strategies without paying huge fees and giving away a percentage of your profit.
All thanks to the creation of ETFs (Exchange Traded Funds).
ETFs trade just like stocks. Not like mutual funds.
Investor demand determines the price of an ETF at any time during the trading day. You can watch the price movement of an ETF just like you can of Nike. (Mutual Funds trade at the end of the day based on the value of the investments held by the fund.)
Like mutual funds, ETFs consist of a basket of investments.
But ETFs offer several advantages over mutual funds.
They’re easier to trade.
They’re more transparent. You can see what stocks or other investments are inside the ETF daily. (Mutual funds usually report holdings quarterly.)
The big problem for individual investors is that there are so many to choose from.
According to research firm ETFGI, there are over 5,000 ETFs trading around the world. Close to 2000 based in the U.S. (If you include ETNs or exchange-traded notes, that adds another 1,888 around the world and 268 in the U.S.)
The number to choose from is overwhelming. However, most of the money only flows into a small number of them.
According to FactSet, ETFs saw net new inflows of $250.2 billion in the first half of 2017. Half of that money went to only 20 funds.
How do you know which ETF to buy?
There are two big things you should look at when researching ETFs… AUM (Assets Under Management) and the expense ratio.
AUM is kind of like a popularity contest. The more AUM, the more popular the ETF.
Which generally means that it is more liquid. Compare an ETF that only has $1 million in AUM with one that has $1 billion in AUM.
The fund with $1 billion in AUM will have more money flowing in and out of the fund daily. This makes it easier and faster to match buyers and sellers.
The expense ratio works just like the hedge fund fee example above. It’s the annual fee charged to shareholders of the ETF.
The fund takes this from your account to pay its annual expenses.
The average mutual fund fee is 1.28%. The average ETF fund fee is .44%.
You want to buy ETFs with low expense ratios. As a rule of thumb, the more exotic the ETF, the higher expense ratio.
The benefit is that ETFs allow you to invest like a hedge fund manager. (Except you don’t have to pay the high fees and part of your profits.)
For example, if you think stocks are expensive, you can buy a gold ETF as a hedge (Ticker symbol GLD is a popular one).
If you think Singapore is going to boom, you can buy the ETF for Singapore (Ticker symbol EWS).
If you’re not comfortable investing in a technology company because you don’t understand it, you can buy a technology ETF.
For example, you could buy the Technology Select Sector SPDR Fund (Ticker symbol XLK). It’s a basket of companies including Apple, Microsoft, Facebook and Alphabet among several others.
If you’re looking for another opportunity to be a better investor, ETFs are it. They’re another tool for your investment tool box.
I suggest putting ETFs on your radar. They give you another advantage over Wall St.