How to build a poor man’s hedge fund

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If you want start a hedge fund on a shoe-string, this is the way to do it.

DISCOUNT BROKER
Being the savvy (but poor) hedgie that you are, you select a discount brokerage account that let’s you trade equities for say no more than $9.99 for a lot under 1000 shares.

SEGREGATED ACCOUNT
You then open a cash or registered (held in trust) account such as an RSP (Canada) or 401K (U.S.).  The reason for this is not to take on the risk of the broker.  Your money is segregated and belongs to you even if the broker goes bust (unlike a margin account).  OK, so you’re a conservative hedgie.

TRADING PLAN
You then design or adopt a trading plan such as REAP or Dogs of the Dow for free, or pay for a book or newsletter on the subject.  One newletter that I’ve always liked and found to be very useful is The Successful Investor. Patrick McKeough has been consistently solid over the years with very good, well-researched ideas – particularly for value investors. 

RESEARCH
If you want to do your own research, I would recommend going to the MSN Money stock screener site.  Download and install the Deluxe Screener (free) that is near the bottom right-hand side of this web page.  Use this to design custom stock screens using all manner of criteria.  Save the link to this page in your browser’s Favourites list.  This is the tool I use for my REAP value screen.

PORTFOLIO TRACKING
There are any number of online portfolio trackers and I’m not going to go into any detail on these.  MSN Money has a very capable one.  On this page select “Portfolio Manager” from the left-hand link list and follow the instructions. Save this link in your browser Favourites list of all you need is simple portfolio tracking.

For added flexibility (and pride of ownership) we’ll assume we need and build a spreadsheet.   I use Microsoft Excel (not free, but who doesn’t have some kind of spreadsheet software?).  The free MS Works that comes with most computer installations may work OK, but I haven’t tried it, and sometimes I need to transfer the file to other computers.  Excel is pretty-much ubiquitous.

On one worksheet, create the inventory of your overall position.  I group together and sub-total all the REAP groups in separate blocks – 6 in all now, with total calculations and summaries at the top.  Do your calculations so that the current market value can be calculated for each stock, then sub-totaled and totaled until you get your full total portfolio market value.  Don’t forget to include spare cash in the account.

These are the things I track – a column for each:

A – Stock name
B – Stock Symbol
C – No of shares
D  -Total cost of share position
E – Market value of share position
F - Unit share price (currency-adjusted for US positions)
G – Unit share price at the time of the last REAP trade in the group
H – Current stock price
I – % increase of the position vs average cost
J – REAP buy flag (1 or 0) – used in the trade size calculations
K – REAP sell flag (1 or 0) – used in the trade size calculations
L – % gain/loss since last REAP trade in the group (used to isolate the two lowest %s using the REAP buy flag)
M – % gain/loss since last REAP trade in the group (used to isolate the two highest %s using the REAP sell flag)
N – REAP shares to buy calculation
O – REAP shares to sell calculation
P – Dollar value of REAP shares to sell (also used in determining REAP shares to buy)
Q – Calculated % differential for a REAP trade
R – $C value at the time of the last REAP trade in Group (used in currency adjustment calculation)
S – date of last REAP trade in Group (used for reference)
T – Total annual dividend income for the stock
U – Calculated % yield (calculated from V and U)
V – Reference % yield
W – Reference stock price associated with reference yield.

I also derive from this on another worksheet within the same file the portfolio summary (for display purposes here) that I use in the reports you can see in the blogroll to the right under “My portfolio”.

In separate worksheets in the same file, I also keep

• a list of all REAP trades,
• a list of all discretionary trades,
• a formatted section I use to display the REAP group structure here,
• the trading summary updates, and
• most importantly the daily price update worksheet.

PRICE UPDATES
To keep track of the REAP profit and loss, not only a daily basis, but on an intra-day basis if I want to, I do the following.  I use the Globe and Mail’s Globeinvestor website to set up a watch list of stocks, which provides a list of 20-minute delayed price and volume updates for all the selected stocks.  You use the “Update your stocklist” feature to create the watch list.

Once the watchlist is set up, click on “View stocklist price report” to get back to the displayed stock list.  Save this URL in your browser Favourites list.  Whenever you select this link – it will now display your up-to-date stock list.

To transfer price information to your spreadsheet,

1. On the Stocklist page select “Print this page”.  It will give you a simplified stock list that looks very much like a spreadsheet. 
2. Ignore all the header information, and starting at the first letter of the first cell with a stock name in it, select all the cells down to the last cell of the last stock in the list
3. Select Control C on the keyboard to copy the information
4. Open the worksheet in the spreadsheet file where you want to put current price data
5. Select the top left-hand cell (A1) in the spreadsheet and press Control V on the keyboard to copy the data.
6. Column C contains the current prices.

In the spreadsheet wherever you need to pull in the current price, enter “=”, then navigate to the stock price that you want in the source worksheet, click on that cell, hit enter, and you will be back to the cell in the destination worksheet where you want to have the current stock price data.  Then hit enter to complete the formula.  In my case that would be Column H in the list I laid out above.  From now on you don’t have to change anything on the portfolio worksheet – you just overwrite the previous stocklist prices with the new ones on the pricing worksheet and everything elsewhere updates itself.

FEEL THE POWER
This allows me in 30 seconds or so to update the portfolio value.  Intra-day, I’m only ever 20 minutes behind the current value of the portfolio, and the REAP % differentials on which I do re-allocations.    I can even add the S&P500 to the stocklist (which I have done using symbol SPX-I) which allows me to keep current the performance of the REAP portfolio to my benchmark S&P500.  (I use this benchmark because most North American portfolio managers do.)

The only thing I have to update manually is the Canadian dollar (as it is not provided on the stocklist page).  This I get from the Bank of Canada (once a day) or Bloomberg (20 minute delayed).  On the Bank of Canada site just click the “Convert” button to get that day’s conversion rate.

NOW THE HEDGE FUND PART
You can now be long and short sectors, indices, currencies, and commodities by using long/short ETF pairs in addition to regular stocks, bonds, mutual funds and ETFs.  Some, like the Horizons BetaPro ETFs and the ProShares ETFs I use even provide 2x leverage. You can either use these instruments to create opposite correlations if you are using an allocation strategy like REAP, or just simply go long or short if you are trying to the time the market’s or a sector’s direction.

This is how you can turn your RSP or 401K into a mini hedge fund that would do Ebenezer Scrooge proud.  Charging yourself hefty 20% performance fees is optional. 

Cheers,
Allocator
a.k.a. George Parkanyi
gparkanyi@hotmail.com

Copyright 2008 – All rights reserved

 

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