Financial Debate- info found for those who were interested

[snowbank]

A few weeks ago there was a "debate" as to if I was correct when I mentioned the opportunities that become available once an individual earns $200,000 a year. Hawk69, Benjamin, and maybe a couple others I told I would look for some info for them while I was home. I figured I'd just post it so others who were interested could see what I was discussing:

The Securities and Exchange Commission(SEC) defines an individual as an Accredited Investor if they earn $200K+ in annual income, $300K+ annually as a couple, or $1 million+ net worth. The SEC established these requirements to protect the average investor. The problem is, these investor requirements also shield the average investor from some of the best investments in the world. Based on who qualifies, it's only about 3% who can invest. The rest of us are not legally allowed to participate in these types of investments because of SEC regulations.

These are the qualifications to invest for individuals. There are also companies that can be considered eligible, but I just gave the requirments for individuals. You can find more info on sec.gov, and several other websites. Also, many investing books should have information on this, but sec.gov gave a pretty good description.

Hope this helps clear it up /images/graemlins/wink.gif

[wall_st]

Are you alluding to hedge funds ?

A hedge fund is basically a privatized version of a mutual fund, but they often contain more risk and much more reward. Of course the amount of risk is a variant of the hedge fund you invest in, some are still quite conservative in nature. The advantage most hedge funds have over a mutual fund is they can (a) sell short and (b) are much smaller in nature, therefore they can get out of losing positions much quicker than a larger institution.

I've never quite understood the idea that the average joe can "gamble" his life savings via the futures market, but they are "protected" from diving into hedge funds. For example hedge funds provide no leverage where the futures market provide insane amounts of leverage.

As far as investing in a hedge fund it is quite difficult to do for the average person. In fact finding information about most hedge funds is difficult if you do not have the means to do so. Just because you make over 200k a year does not mean that they will allow you to invest in a fund, in fact most funds want a minimum of a million dollar investment (and that's if they like you). Besides the best ones are already capped in size and are most likely not accepting new members.

If you couldn't tell..... Im jealous

[snowbank]

Are you alluding to hedge funds ?

no

[Zetack]

Don't be jealous. Hedge funds are like anything else, they may be good they may be bad, but there are plenty of issues with hedge funds that are negative.

Hedge funds don't have some magic investing insight or strategy that brings in huge returns other investment vehicles can't achieve. But they do tend to take a lot of risks. In a world of thouseands of funds many of whom are making risky investments the bell curve tells ya some of them are going to do very very well. Many many more simply suck. Can you tell which is going to do which once you put your money in?

But the real problem is huge, nay exhorbitant fees taken by these funds. Also they only take fees (usually) on gains after a high water mark, thus if a fund loses say 15 percent you won't pay any fees until they gain back that fifteen percent plus. Of course to gain it back they now have to earn a thirty percent return. Looks like no fees for them for a while...what do most hedge funds do when this happens? They disolve the fund and start a new one so they can charge their exhorbitant fees without having to make a thirty percent return first.
Its a dirty dirty business.

--Zetack

[Evan]

[ QUOTE ]
A hedge fund is basically a privatized version of a mutual fund

[/ QUOTE ]
Eh, at best that's a very very basic definition of it. It's a capital management fund (as is a mutual fund) with just about 0 regulation (which is extremely different than a mutual fund).

[ QUOTE ]
(b) are much smaller in nature

[/ QUOTE ]
This is too vast a generalization. Since they're far less publicized most people would be think the same but it is largely not true.

[ QUOTE ]
I've never quite understood the idea that the average joe can "gamble" his life savings via the futures market, but they are "protected" from diving into hedge funds.

[/ QUOTE ]
Its got nothing to do with anyone trying to "protect" smaller investors. Its got more to do with massive funds not wanting to waste their time with the micro management required when ever idiot with $1,000 to spare wants to throw money at these guys because they returned 1,000,000% last year.

[Evan]

While I agree with your main idea that hedge funds are not as great as many think (I actually don't care for any managed funds all that much), I do think you're underrating them still. There are lots of completely valid techniques available to hedge funds that mutual funds cannot take advantage of (gamma trading comes to mind).

They're not magic, as you said, but they do offer some advantages is used correctly.

[sfer]

The accredited investor definition used to require 200K+ in income for the past 2-3 years, plus the expectation that your income will exceed that in the coming year. I'd be surprised if that restriction was relaxed.

Also, it's not particularly difficult/expensive to set up an LLC that can invest in anything.

[sfer]

Gamma trading?

[Evan]

Gamma is the rate of change of delta (change in a call's price per $1 change in the price of the underlying asset). Gamma trading adjusts your long or short position depending on the movement of the market price of of the underlying asset relative to the strike price (and therefore relative to its chance of being exercised).

Here's a pretty decent example of gamma trading that I found on the web (instead of writing it myself--to aid my laziness):

eg. say you had sold 1,000 share put options with a strike of $2 with the shares also trading at $2...the delta would be close to 0.5....(you have about a 50% change of being exercised). To delta hedge these options you should hold 500 shares (0.5*1,000). If the shares rally to $2.50 then you have a higher chance of being exercised...say a delta of 0.65....to be neutral to the underlying market you should increase your delta hedge to 650 shares

This process of adjusting the delta hedge is effectivley gamma trading....Gamma I guess can probably be crudely defined as the rate of change in delta....

p.s. Shouldn't you know this?

[edtost]

[ QUOTE ]
p.s. Shouldn't you know this?

[/ QUOTE ]

mmmmm - things that are taught in academia but not actually used.......

[Evan]

1. I didn't learn this is "academia"
2. I'm pretty sure this is used somewhat commonly (although not specifically in the area of finance that sfer works in)

[sfer]

I've typically heard of gamma trades is a very different context.

[BottlesOf]

That's what Bruce Banner was exposed to right?

[wall_st]

[ QUOTE ]
I've never quite understood the idea that the average joe can "gamble" his life savings via the futures market, but they are "protected" from diving into hedge funds.

[/ QUOTE ]
Its got nothing to do with anyone trying to "protect" smaller investors. Its got more to do with massive funds not wanting to waste their time with the micro management required when ever idiot with $1,000 to spare wants to throw money at these guys because they returned 1,000,000% last year.

[/ QUOTE ]

Yea that was kind of my point... sorry if I wasn't clear enough.

I think sfer provides the best advice here when saying that setting up your own LLC is the best route to take (assuming you know what you are doing, which most people don't). This is something I have pursued personally and plan on doing within the next year or so.

Gamma trading is certainly something you won't be learning in academia, because from my experience most of the financial information you learn in academia is pure crap. There is a reason your professors are teaching you and are not rich instead, although there are exceptions.

So snowbank if you were not referring to hedge funds, what type of investment vehicle were you referring to ?

[Evan]

So how did that job prospect with the WSJ work out? /images/graemlins/grin.gif

[snowbank]

So snowbank if you were not referring to hedge funds, what type of investment vehicle were you referring to ?

Restricted offerings, limited partnerships, and angel investor networks.

[stoxtrader]

[ QUOTE ]
So snowbank if you were not referring to hedge funds, what type of investment vehicle were you referring to ?

Restricted offerings, limited partnerships, and angel investor networks.

[/ QUOTE ]

I would say being an accredited investor, if a requirement at all for any of these, is the least difficult part - I've seen a number of all three, and just like many other things, there are terrible offerings and great ones but knowing the right people and doing your own homework helps the most.

I think it is incorrect to think that being an accredited investor opens the doors to untold riches - I've been a hedge fund investor for a number of years, and count a large number of them as clients, some kill it, many go bust.

[lu_hawk]

In my opinion anytime greek letters get mentioned when dealing with investments you should stop listening. I don't know what gamma trading is, but beta,alpha, delta hedging, all that stuff is garbage.

For the most part it's hedge funds that accredited investors get into(at least recently with everyone and their dog starting a hedge fund.) They can pursue unconventional strategies that mutual funds aren't allowed to pursue but that doesn't mean they are better. I'd rather be investing in one of Bill Miller's mutual funds than the newest fund that gamma trades iraqi cattle hides or whatever it may be.

There is undoubtedly going to be a big shakeout in hedge funds over the next couple of years. The compensation structure rewards strategies that make money now even if they are -EV over the long term. That's why you see funds doing things like selling CDS at spreads that will undoubtedly prove to be too low(it's absurd right now) because they can make money right now, collect their 20% management fee, and when they blow up their investors are left holding the bag. It's all reward and no risk when you manage a hedge fund so you see a lot of irresponsible things going on. The current environment rewards that behavior but when something can't last forever it won't.

But like others have said there are good funds and there are bad funds, it all depends on who is running it and what they are doing. Of course you'll see some funds with exorbitant returns but that is to be expected when you have a large sample size and many of them are pursuing high variance strategies. It doesn't mean they are any good.

Our fund is plain jane, we're just looking for anything out there that is undervalued and we tend to take concentrated positions. So we are pretty similar to a mutual fund, the only advantages we have are that we can invest anywhere in the world(which we have increasingly been doing) and we're able to invest in things like debt, options, etc. where a regular mutual fund would usually be limited to just the equity.

So yeah, opportunities open up when you become accredited but that doesn't necessarily mean they are better than what a non-accredited investor can do. In many cases they are much worse.

[snowbank]

So yeah, opportunities open up when you become accredited

I'm glad that you agree now.

[lu_hawk]

[ QUOTE ]
So yeah, opportunities open up when you become accredited

I'm glad that you agree now.

[/ QUOTE ]

You should have quoted the rest of the sentence so that you wouldn't change the meaning. I never disagreed that opportunities don't open up when you reach a certain level of worth. What I disagreed with was your argument that these new opportunities are magical and guarantee high returns.

[snowbank]

I never disagreed that opportunities don't open up when you reach a certain level of worth.

Sure Hawk.

This thread was not made to START a financial debate. It was posted for those I told would disclose the info to who were not aware of the opportunities and were interested in what I was talking about.

[NotMitch]

[ QUOTE ]
[ QUOTE ]
A hedge fund is basically a privatized version of a mutual fund

[/ QUOTE ]
Eh, at best that's a very very basic definition of it. It's a capital management fund (as is a mutual fund) with just about 0 regulation (which is extremely different than a mutual fund).


[/ QUOTE ]

Not unregulated for much longer though.

[djack]

Your original post (http://forumserver.twoplustwo.com/showflat.php?Cat=&Number=1388970&page=&view=&sb=5& o=&fpart=all&vc=1): [ QUOTE ]
once you are able to earn $200K+ per year, a whole different world of investment opportunities open up to you, that if you did not make $200K a year you would not be legally able to participate in. If you knew what you were doing, or had hired someone to manage your investments, 10% return would be a joke with all of the investment opportunities that would be available to you.

[/ QUOTE ]
One post later: [ QUOTE ]
[Hedge funds are] not what I'm referring to.

[/ QUOTE ]

And now it turns out that you were just talking about hedge funds all along.