Sep
20
2008

  The Fed vs. Hedge Funds

I've been thinking a lot about my friends Nora & Trey lately-- she works for the Fed and he works for a hedge fund.

I gave her a call today-- she said it was the first weekend she'd had a day off in a while. She confirmed my suspicion that her and her husband couldn't really talk about work at this point. She's involved in all the secret Fed policy stuff so she can't really talk to anyone about it, but it's all very exciting. I'll bet!

Trey's personal fund is making money, but his employer's overall profits are down for the year, so it's stressful over there as well. But what a time to be in the NY financial game, eh? This type of environment is the stuff experience is made from, and only until you've been through it once can you be better prepared for it in the future.

I remember trading our Brokat shares on the Xetra exchange during the tech crash in late 2000. Terry sold AFS the first time in a pure stock deal, so each nickel of price change in the stock translated in a huge gain or loss for us personally, so I was definitely day-trading it. More like day-selling it, it wasn't like I was buying any back, just trying to unload it advantageously. We had so many shares if all the parters were to dump them on the market immediately it would dilute the share price too much, so we had volume restrictions. One of the partners ignored the restrictions and sold all his shares at once-- he consequently got the best share price but there was nothing really we could do about the unfairness of it. I was pro-active and watched the price closely and traded it, and Terry and I did ok. His partners held on to their shares longer, and the price had gone down further by the time they sold. A lot of the employees didn't realize anything since they held their shares as an investment, which turned worthless when Brokat went out of business the next year.

We had most of our proceeds invested with a broker, but we didn't like the first firm much so we switched to another guy. It turned out he was also a dud. After two years, Terry and I figured out that just because someone is a certified or licensed financial planner, it didn't make them more capable of managing our investments than we were capable of ourselves.

We have the unique benefit of being smart, resourceful, and in the industry, but it wasn't until we saw the planners in action that we realized that that those traits made us at least as competent if not more so than they were. We've done well, saved a lot of fees, and haven't looked back. And I've been enjoying myself quite a bit since I stopped investing and started trading last year.

Investing was always too dull for me to keep up with, and I lost interest in the portfolio, which is basically what you're supposed to do, once you set your allocations. But you are supposed to check on the progress of the portfolio at least somewhat regularly, and I never did that. I let Terry take charge of the responsibility and while he was interested, he just didn't have much time to spend on it since he spent all his time running his company.

But last May I decided that from what I had read, I would be tempermentally suited to being a trader, so I gave it a try. I stick to technical strategies, and while I'm still learning, I'm finally starting to get a feel for it. I'm up for the year, and while I don't have an amazing return, considering that the markets are down something like 15% for the year, I feel I've done alright. Like Nora just told me, "Up is the new 20%." I'm sitting on some losses from Thursday and Friday, but I think they'll turn around by November.

But Terry and I are largely "invested" in cash at this point, what I'm trading with is a very small percentage of our portfolio at this point. With our savings FDIC-insured, both regular and retirement (yes, we moved our 401k funds from mutual funds to money market accounts and some bond funds last last year, no equity exposure, that business about being 80% in stock in your retirement account is only appropriate in bull markets, in my opinion), we'll weather this bear market fine. With interest rates so low, we're barely keeping up with inflation, but it sure beats losing money. And I'm wiring money from one account to another nearly every week, chasing yield. In this environment, I'll eke out any .5% advantage where I can.