Intelledgement, L.L.C.

Intelligently hedged investment

Tactics: exchange-traded funds

“The combination of index investing with the handiness—and lower costs—of individual stock ownership is irresistible.”

— The Motley Fool

In times gone by, it was not very easy to employ a Macro strategy approach for a modest-sized portfolio. You couldn’t invest in a hedge fund directly (and still can’t) unless you are an accredited investor (annual income of $200,000+ and/or net worth of $1,000,000+). And to duplicate the strategy yourself, you would need a brokerage account with a margin agreement that enabled you to trade options, a commodities trading account, and a currency trading account. Capitalizing these with limited funds—not to mention withstanding the volatility inherent in leveraged- and derivatives-steeped strategies—would be problematic at best. Also, these are not fire-and-forget type investments; they really need to be actively monitored when the market is open…a little tough to do when you have a day job.

The wonders of modern science

With the relatively recent advent of exchange-traded funds (“ETFs”), it is now possible to invest in commodities, currencies, industries, sectors, national stock markets, and, of course, indices with a modestly-sized Macro strategy-informed portfolio all in a single brokerage account. Many exchange-traded funds are similar to mutual funds in that their value is based on a compilation of different components (e.g., the S&P 500). The key technical differences are that [a] ETFs, instead of being priced once a day after the market closes, are traded throughout the day just as regular stocks; and [b] when you buy an ETF, you are buying an interest in the underlying securities—in theory, you could trade in your ETF shares for a fraction of whatever the ETF is invested in. When you buy shares in an ETF, you buy them as you would buy a stock—namely from someone else who sells them to you via a stock exchange (hence the name “exchange-traded fund”).

There are also ETFs that track only one component (e.g., gold or Swiss francs). And there are “short” ETFs (e.g. DOG, which increases in value when the DOW declines).

Spreading the risk

We believe that ETFs (and index-based mutual funds) are the best vehicles for the average investor to implement any strategy, not just a macro strategy. No matter how closely you study any individual company, there are too many random, uncontrollable (by you) factors that can overwhelm your analysis (e.g., CEO crashes his new Ferarri on the day of the successful IPO leaving company leaderless at key moment, CEO and CFO turn out to have been lying about revenues and profits, contractor working in company’s Kasakhstani office deeds oil wells to friends and relatives and the local courts recognize the transfer as “legal”, etcetera). If there is a supply-demand imbalance in natural gas for the USA market, don’t just buy two or three individual companies—buy ETFs focused on the USA natural gas market and/or on the price of the commodity itself. That way if one of the companies flames out with a fire, hurricane damage, unexpectedly bad exploration results, fraudulent accounting, or whatever, some other company your fund is invested in will pick up the slack and overall your ROI won’t be much affected.

Here are some links to additional information about ETFs: