It is one thing to have confidence in your own trading abilities, but more importantly, it is prudent to diversify, as it fosters a higher probability of survival, or put more simply – don’t put all of your eggs in one basket. This is a great tip for beginning investing.
For online forex trading this bit of historical wisdom translates into knowing all of your options while bewaring any concentrations over common sense limits. Perhaps the team of “Me, Myself and I” should consider a little diversification and friendly competition with a few other forex managers. Here is a great investing for beginners question. What types of forex alternative investments are out there?
The phrase “Hedge Fund” has become a popular and oft used term in our current lexicon. A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.
Funds are typically open to a very limited range of investors, not your average personal investor, and engage in a wide variety of trading practices in order to produce higher than average performance. Regulation and licensing regimens are also at a minimum, so “Caveat Emptor” is the first rule. In most cases, only high net-worth individuals may participate with many deposits starting at $1 million. Management fees can range from 1-2% and performance fees of 20% of generated profits are the norm. Offshore funds tend to charge higher fees.
FOREX HEDGE FUND INVESTING
The world of foreign exchange has its own version of these funds, and a few other variations that have been assigned the classification of a “forex hedge fund”. These alternatives can range from forex managed accounts to exchange traded funds or ETFs. There are a plethora of private forex hedge funds on the market. A casual review on the Internet will produce a number of sites that encourage the forex professional to start his own fund, that proclaim that the process is simple and straightforward, and that fields of riches will lay at your feet just waiting to be cultivated. Well-intentioned individuals seeking your money to manage have flooded the market. If you wish to deal with strangers rather than yourself, then don’t forget your due diligence. Real results for three years should be available. You may see high yields present, but your sights should be set on seeing stability. Yes, there is volatility involved, but if your potential manager has difficulty maintaining a reasonable beta, then you could run into a downside without much notice.
Is this type of alternative investment right for me? If you do not have a net worth north of $1 million, there are still options available for you, but most will be with unlicensed fund managers and involve higher risk. This type of alternative falls under the “managed account” classification. Your tolerance for risk will be tested from month to month as the rollercoaster ride plays itself out, but hopefully, the total sum game will be double-digit returns over a short period of time. However, remember that you are not the only one seeking high returns in this marketplace. Start with a conservative manager and a small amount of capital to get your feet wet. As you get more familiar, then you may be ready to experiment with other managers. Forex hedge funds tend to be very liquid, but be sure to verify any constraints on withdrawals or lockout periods. Safety is paramount, along with preparation and knowledge, so when it is time to move on, move!
If your gut feels that this managed arena is too esoteric for your blood, then an exchange traded fund focusing on forex strategies may be ideal for your desire to diversify and hedge your portfolio risk. New currency ETFs have made the forex market simpler to understand and allowed individual investors to benefit from favorable movements in major currencies. The carry-trade involves selling a currency from a low interest rate country and using the proceeds to purchase a currency from a high interest rate country. The idea is not to capture big moves, but to exploit the spread between the two countries’ interest rates. Many forex ETF funds have adopted this trading strategy. Units in these funds sell on exchanges like any other stock. There are a variety of popular funds that focus only on G10 currencies, thereby limiting the downside risk inherent in more exotic currency pairs.
To sum up, if you are looking for a way to diversify your holdings and want to compare your prowess against another individual or groups of managers, then the alternatives above may have interest for you. The rule of thumb is to limit your exposure to 30% of your portfolio or whatever amount does not cause you to lose sleep at night. If you risk more, be prepared to lose more than sleep, your shirt for example!
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