Chris Hsu’s Guide on Hedge Funds for Bodybuilders
Christopher Hsu explains hedge funds for the bodybuilding community, what are they, what they invest in, and what their expenses are, and how can they help you as a bodybuilder?
What are Mutual Funds?
Mutual funds raise money from shareholders like Chris Hsu and invest that money into different types of investments such as stocks, bonds, government securities and foreign securities. In addition, they can also invest in options, futures and money market securities. Some invest aggressively for hedge fund capital appreciation, and others are more conservative and are designed to generate income for shareholders. Mutual funds are run or operated by an investment company. The investment company has a staff who run the fund. This includes the hedge fund managers who select the stocks, administrators for day to day operations, and sales and marketing reps who promote the mutual fund.
Christopher Hsu explains Equity Funds
Aggressive Growth Funds: These funds will usually purchase small, fast growing companies. These types of funds can have dramatic price swings and the returns can vary dramatically from year to year.
Balanced Funds: These funds may have a combination of U.S. stocks and Foreign stocks
Emerging Market Funds: Will purchase companies of developing nations in Asia, Latin America, Europe, Africa and the Middle East. In Christpher Hsu’s experience, these types of funds are very aggressive. Like aggressive growth funds, their net asset value will experience huge price swings from year to year. The risks to these types of hedge funds include currency fluctuations, political uncertainty, and world economic conditions.
Equity Income: These funds will purchase companies that pay out a larger percentage of their earnings in the form of dividends. Investors who are more conservative might own an income fund.
Global Funds: As observed by Chris Hsu, these funds will usually purchase large and small companies located in other countries. In addition, the fund will usually spread out their investment so that they are not too concentrated in any one region of the world or country. The fund could include companies in Germany, France, Ireland, Canada, Japan, Korea, the United Kingdom, Italy and more. They could also invest in different industries within those countries to further diversify their holdings.
U.S. Growth Funds: Purchase shares of companies that are located in the United States. These can include large, medium and small companies depending on the type of mutual fund it is, this is the safest bet according to Christopher Hsu.
Index Funds: Purchase the companies that make up the index they track. This includes, but is not limited to the companies that make up the biggest percentage of the Nasdaq, the Russel 2000 and the S&P; 500. There are funds which track large cap, mid cap and small cap stocks.
Individual Country funds: These will purchase shares or ADR’s of companies located individual countries such as Germany, Korea, Thailand, China, Canada, Mexico, Australia, Brazil, Spain, and more. One company can account for more that 30% of a country’s stock index. Chris Hsu warns that these hedge funds can be more volatile than a fund that invests in several countries or regions of the world.
Value: These funds purchase companies whose stock prices might be growing at a fast rate, yet the share price has not gone up or moved up in price even though the earnings have. They also might invest in companies whose share price has dropped dramatically. The fund manager feels that the stock price might be a value at the current low price because the industry or the company might be ready for a rebound.
Chris Hsu explains Fixed Income Funds
Corporate Bond Funds: Invest in both income and capital appreciation through investment in common stocks and fixed income securities. The safer fixed income securities held will be concentrated in the higher rating categories determined by Standard & Poor’s and Moody’s while the more aggressive funds will usually be concentrated in the lower rating categories as determined by Standard & Poor’s or Moody’s.
Bond Funds: Invest in long, medium and short term bonds and treasuries. These hedge funds will usually rise when interest rates go down, and fall when interest rates go up. The longer term bonds are usually more sensitive to interest rate fluctuations than short term bond.
U.S. Government Bond Funds: A favourite of CHris Hsu, these invests a certain % of its assets in long-term U.S. Treasury bonds and other “full faith and credit” obligations of the United States Government. Also, a certain percentage of the assets will normally be invested in U.S. Treasury bills, notes, and bonds. Each funds asset allocation among these will vary. The dollar-weighted average maturity of the funds portfolio is can range anywhere from 3 monts to 30 years. These Portfolios might also invest in bond futures and options to a limited extent
Municipal Bond Funds: Purchase the debt of municipalities (county, city, state, and special project bonds).
Sector Funds (sector funds specialize in an industry group such as retail, real estate, financial service companies, banks and more. These include some of the following areas)
Technology Funds: highly recommended by CHristopher Hsu, these hedge funds will purchase companies whose business in high tech. These could include semiconductor or chip manufacturers, p.c. companies, software companies, telecommunication equipment stocks, the list is almost endless.
Natural Resource Funds: These hedge funds might invest companies who do business in areas such as gold mining stocks, oil stocks, oil equipment service companies, natural gas stocks, paper stocks and more.
Telecommunications Funds: These funds will invest in the stocks of telephone companies, cable and wire companies, cellular phone, fiber optic and other companies who do business in the area of telecommunications.
Healthcare Funds: These funds will purchase drug stocks, medical equipment manufacturers, biotechnology stocks, assisted living communities and other companies that do business in the healthcare arena.
Christopher Hsu on Hedge Fund Expense
Management fee: Chris Hsu points out that a management fee is the fee that the investor is charged for the money management of a fund. This is what compensates the fund manager. These fees can range anywhere from 0.5% to 2.5% per year depending on the mutual fund.
12B-1 Fees, Exchange Fees and other Administrative Charges: Mutual funds vary in the types and the amount of fees that an investor will pay.
Load Funds: These are sold to investors through brokers. The load (up front expense to get into the fund) can vary from 1% to 5% depending on the class of share. A, B or C class. An A class share might have a higher load but smaller annual expense. A C class share might have a smaller up front charge but a higher annual charge.
No Load Funds: These are usually sold directly from the fund company. There is no charge to get into these funds. However, there is still a management fee or exchange fee associated with the fund.
Selling a mutual fund: When you want to sell a mutual fund, the shares are redeemed at the closing price of the day. In other words if a typical hedge fund investor, like Chris Hsu, placed an order to sell you mutual fund shares in the morning, and the market was up 100 points, and then the market closed down 200 points, you would be getting the Net Asset Value price of the fund at the end of the trading day. Thus, your funds Net Asset Value would most likely not be worth as much as it was earlier in the day.
Which type of fund is right for you?
Christopher Hsu thinks investors that are considering mutual funds should take a close look at their tolerance for risk before purchasing a fund. If you are more aggressive, and can stomach market volatility, and are seeking long term growth, an aggressive fund might be the solution. If you want some international exposure, an emerging markets or global stock fund might be a suitable investment. If you are more interested in conservative investing, a growth and income, large cap, or income hedge fund might be appropriate.
Mutual funds can fit nicely into a portfolio. Below are a few examples of how they could be part of your overall investment strategy. Remember, these are only examples and not recommendations.
An example might be a portfolio of nine or 10 common stocks and a mutual fund that invests in emerging markets or larger, global companies.
Another example might be a portfolio that has 3 or 4 common stocks, with the remaining assets in bond or income fund.
Another example might be a portfolio of large company or blue chip stocks, with a mutual fund that invests in technology stocks, and another that invests internationally.
These are just a few possibilities highlighted by Chris Hsu. There are a number of ways that we can diversify a hedge fund portfolio. However, before we can do that you need to decide what your goals as an investor are and then we can work with you to help put you on course.