Over the last fifteen years or so all manner of hedge funds whether they be a global macro trader or a guy doing volatility arbitrage have all built and used more and more sophisticated software and computing power to get more of the ever alluding edge that we all want.

For instance some hedge funds that are engaged in high frequency trading have gotten to the point where they even co-locate their computers and server farms to rooms that they rent in the exchanges itself all in an effort to reduce trading latency. When your profit and loss depend on the speed of execution this is the obvious choice but who would have thought that one millionth of a second mattered to their trading? It turns out it can mean a lot.

Another area where hedge funds and especially global macro funds and arbitrage guys really excel in terms of software is the prime brokerage. if you use four different brokers how can you reconcile all of the trading? Easy if you have built or use a third party accounting application to aggregate all your trades and positions, along with leverage and other risk management tools then you are ahead of the game and have a better idea of what to do then someone who does not.

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Unlike the simple buying of shares where an investor buys them hoping that they will rise, short selling is a tactic used to make money when a share price goes down. If the price does fall the person who has shorted them gains and vice versa.

So is there a problem? Well, many hedge funds operate at an ethical value I am sure. Personally I don’t use anything unless it is fully transparent. If I can’t see why an investment will go up or down I don’t make the investment. If I make a decision that later turns out to be wrong, I want to be able to still say that I would still have made that decision at the time I invested. I don’t want to be kicking myself because I believed noise and because I made an investment without knowing the details back to front.

Unlike the investment in shares, shorting is much less regulated. An investor investing in a share wants it to go up and everyone investing in such shares will want it to go up. This is good for the economy and the strongest shares do well but shorting is a negative approach which has a negative outcome.

It is easy to see why the Alliance for investment transparency (AIT) exists in the U.S. This coalition of publicly traded companies promotes transparency in the market place. Hedge funds are wall street’s largest customers controlling over $1.5 trillion in assets. (1) The AIT is firmly of the view that despite attempts by the securities and exchange commission to initiate regulation of these funds, that the market remains highly vulnerable to illegal market manipulation schemes.

Their view has been offered to the Senate that such schemes involve collusion between hedge funds and so called ‘independent stock analysts’ providing research on a stock. (1) They believe they create that data and send it out into the market which in turn drives it down or up, depending on what the need of the investor is. It’s what I often refer to in this column as noise.

If you think about it, it makes sense. If you have enough clout and the ear of enough of the media, you talk a share up and then short it, easy money. Alternatively you could also talk it down then buy it.

There is also the ability to buy a contract for difference which effectively means investors have to put much less down to participate. Like spread betting, investors are investing on margin (i.e. to have an investment of $1000 you might only have to put down $90 for example). If you think about this carefully, a gain will be multiplied upwards by this margin and a loss would be multiplied downwards. And so to make a decision where you believe the market will definitely go your way means you have to be pretty sure. How might you be pretty sure? It’s therefore easy to see why the AIT is driving for this opacity to be dealt with.

A former investigator for the U.S. Securities and Exchange Commission gave a testimony to the U.S senate judiciary committee

“The potential harm that hedge funds can inflict on other market participants has no real limits. Hedge fund trading now dominates the nation’s capital markets.” (1)

Whilst most hedge funds I am sure are perfectly fine, my reasons for not using hedge funds relates to the opacity. In twenty years of advising investors I have analyzed countless predictions on where the market or a stock will rise to. Invariably the prediction is complete twaddle. So if they do not know if a market or share can rise, how can they predict if it will fall and in any event, get paid any.

Resource (1) AIT

About Peter McGahan and Worldwide Financial Planning:
Peter McGahan is the Managing Director of Worldwide Financial Planning – FT Award winning Independent Financial Advisers. Peter writes for many national and local press publications and is widely repected as an expert in personal finance. Worldwide Financial Planning specialise in the provision of expert one-to-one advice in the areas of Mortgage, Business Finance, Investment, Pension and Retirement Planning and Inheritance Tax. Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorized and regulated by the Financial Services Authority. ‘The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.’ Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on our understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.

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The Securities and Exchange Commission (SEC) is focused on equity market structure, among its many responsibilities. With various rule proposals,as well as a concept release seeking comments on a wide range of market structure topics, the SEC has sought and received input from many market participants from the smallest of retail investors to the largest pension plans and the tiniest of hedge funds to the grandest of money managers, as well as all manner of broker-dealers and other financial intermediaries. The SEC is now synthesizing these comments and considering what new regulation, if any, is appropriate.

One of the rule proposals relates to possible changes to the regulation of ATSs that do not publish quotes. ConvergEx Group’s comment letter on this rule proposal can be found on www.sec.gov. The comment letter discusses some of the history of dark liquidity, the reasons it exists, and the purposes it serves. The letter also takes a candid look at the SEC’s proposed rules and tries to suggest some modifications that might help achieve the SEC’s goals without hindering this important source of liquidity and best execution.

Hedge funds, both large and small, can utilize dark pools to enhance their trading strategies in several key ways. First, ATSs provide additional liquidity that may not be available in the published quotes or on exchanges. Most investors appreciate the anonymity available through ATS trading, so you can find additional liquidity by accessing dark pools. Second, many ATSs offer price improvement over the published quote. If every trade you execute is price improved a penny a share, the fund’s alpha would show measurable improvement. Third, large blocks are more likely to trade smoothly and with less market impact when traded in an ATS. Fourth, the anonymity afforded by dark pools means that a hedge fund can submit orders with little or no market impact.

ATSs with non-public trading interest are just as important to the efficient functioning of the equity markets as exchanges and public quotes.

So be afraid of Darth Vader and the dark side. But don’t avoid the liquidity and price improvement of dark pools.

Michael DeJarnette is the President of ConvergEx’s NorthPoint Trading Partners. NorthPoint Trading Partners is a premier prime broker and global execution firm dedicated to providing prime brokerage services to hedge funds, mutual funds and family offices.

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Typically, they require potential investors to fill out a questionnaire that asks questions designed to determine whether or not the requirements are met. In the end, however, eligibility is on the honor system, as not much back up is required for the answers given on the questionnaire. For example, you might have to provide a financial reference, but it is not likely that anyone will ask to see tax returns.

Those new to hedge funds should visit with counsel to determine which funds are legitimate and stable. It can also help to review financials, and note well known CPA and law firms affiliated with the fund. There have been funds crash and burn in the past that had big name affiliation, but it is much more comforting to see names that are in the public eye rather than unknowns. Also, ensure that the fund undergoes a regular audit before investing.

Fund managers are allowed to accept thirty-five non accredited investors. However, the only way a non- accredited investor might be accepted into the fund is if they know the manager. This is because it is highly unlikely that a non-accredited investor would hear about the fund anyway. The SEC restricts hedge fund advertising, including public websites.

Some worry that the one million net worth for accredited investors and the five million in investments for qualified purchasers is not strict enough. This could be, as these numbers were set in 1982 and have not been changed since. The accredited investor qualification is not as difficult to meet as it might at first sound. This is a combined net worth between spouses, that can include the estimated value of your home. There is also a requirement for an income of $200,000 for an individual, or a joint income of $300,000 if married. In the end, hedge funds are not for everyone, but if you meet the qualifications, and research possible opportunities well, they can be profitable investments.

For more information on investing in investment opportunities usually or normally not found in the marketplace, click here!

Sean Johnson is an Investment Advisor for http://www.inquest.biz an Investment Referral Service for investors requesting information on specific investments.

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It is generally recommended that an investor avoid hedge funds that are managed by a single individual. This person will be able to make decisions regarding investments without needing the prior approval of the fund owners. Hedge funds are generally recommended when they are fully diversified and a fund managed by just one person may not fit this requirement. One of the things that prevent many investors from considering these funds are the typically high investment costs. It is not uncommon for that individuals managing the fund to get bonuses as a large as 20% and they have all of the authority necessary to close a fund at any time.

As with stocks, it is a good idea for any investor that has placed some of their money in these funds to closely monitor the market. While it is not possible to eliminate all risks, they can be somewhat limited by keeping a watchful eye. Is also recommended that an investor to put some their money in other areas aside from hedge funds. A well-rounded portfolio means that an individual has diversified his or her investments. Placing all of their money in a single area is a mistake that can lead to financial ruin for inexperienced investors.

One element that many newcomers fail to understand is that hedge funds occasionally include investments that are not covered by the same protection from the United States government as others. Hedge funds can deliver impressive financial rewards but they carry with them a very high level of risk and any investor should be conscious never to put themselves in a potentially disastrous situation by investing more than they can afford to lose. It is a good idea to get the advice from professionals before investing a hedge fund or any other type of long or short term investment.

For more information on investing in investment opportunities usually or normally not found in the marketplace, click here!

Sean Johnson is an Investment Advisor for http://www.inquest.biz an Investment Referral Service for investors requesting information on specific investments.

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Why is mutual fund good for you? Basically, fund managers use the pooled amount of money and spread them across many investment types. Overall, this reduces risks. Your money would not fluctuate much if compared to the stock market.

If you prefer to invest in individual securities yourself, by all means, go ahead. But this often requires experience. For beginning investors, this could be a hard task. Therefore, investing in a mutual fund is the way to go. In fact, when you are investing your hard-earned money into mutual funds, you are actually hiring a professional fund manager for a relatively low cost. Comparing the risks factors and experience, it is sometimes hard to compete with them if you invest in individual securities yourself.

What about exchange-traded, hedge funds and managed accounts? You should now be able to know that mutual fund is not the only option you have when it comes to hiring a professional money manager.

Exchange traded funds (‘ETFs’)

They are most similar to mutual funds. The only difference is that they trade on a major stock exchange. ‘ETFs’ can also be bought and sold at the same time during the day of trading. You would find that the good and most value-for-money ‘EFTs’ are the ones that have low fees. They work by investing to track the performance of a specific stock market index.

Hedge funds

Hedge funds are funds that are managed privately. Often times, this option is for richer people with more money to invest. Of course, with greater amount of money involved, risks also become higher. You will see that the fees are much higher (usually 15 to 20 percent) of the return from your hedge fund. Beginner investors should stay away from hedge funds before they have the experience to do so.

Managed accounts

Investing in managed accounts is almost the same as investing in a mutual fund. This is because major brokerage firms employ brokers on commission. Then they offer access to private money managers. As a result, you are getting the same thing in effect; a fund manager. But going the managed accounts is generally not recommended as the high fees reduces its effectiveness when compared to the more “ordinary” mutual fund.

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Low cost structures have become a reality as the result of consumer demand. After years of being hammered by large fees these have finally come under the microscope as fund values have plummeted. It seems a bit rich to pay someone 3% per annum to manage the dramatic decline of your assets. The advent of Exchange Traded Funds and Exchange Traded Notes are the other driver behind multi-asset funds. Now fund managers can use these listed tools to access a broad range of asset classes. Indeed the Gold ETF is though to have boosted the price in gold as it was formerly quite tricky to invest in without purchasing the physical product.

The funds are good for long term investors, but they wouldn’t be a good holding for anyone with a very high or very low risk profile. A further concern is that since they are relatively new products we can’t be sure if they will perform as intended over time. So in summary they look like a product with promise for certain types of investor.

For more information on multi asset funds take a look at: http://multiassetfunds.co.uk/.

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