Macro Tsimmis

intelligently hedged investment

Intelledgement’s Investment Strategy

Posted by intelledgement on Sun, 31 Dec 06

We seek the best compounded annual growth rate we can get in excess of the S&P 500 and the Greenwich Alternative Investments Macro hedge fund index utilizing Macro strategy-informed investments in—primarily—exchange-traded funds.

Macro analysis is one of the classic strategies employed by hedge funds. Typically, macro hedge funds aim to profit from changes in global economies brought about by shifts in geo-political factors that impact interest rates, currency, stock, and bond markets. Macro hedge funds invest in all major markets—equities, bonds, currencies and commodities—though not always at the same time. Most aggressively utilize leverage and derivatives to accentuate the impact of market moves. According to the Greenwich Fund Indices (which are an industry standard), Macro-strategy hedge funds on average between 1988 and 2005 produced a compounded annual growth rate (CAGR) of +16%, which handily beats the CAGR of the market overall during the same time frame (S&P = +9%).

In times gone by, it was not very easy to employ a Macro strategy approach for a modest-sized portfolio. You couldn’t invest in a hedge fund directly (and still can’t) unless you are an accredited investor (annual income of $200,000+ and/or net worth of $1,000,000+). And to duplicate the strategy yourself, you would need a brokerage account with a margin agreement that enabled you to trade options, a commodities trading account, and a currency trading account. Capitalizing these with limited funds—not to mention withstanding the volatility inherent in leveraged- and derivatives-steeped strategies—would be problematic at best. Also, these are not fire-and-forget type investments; they really need to be actively monitored when the market is open…a little tough to do when you have a day job.

With the relatively recent advent of exchange-traded funds (“ETFs”), however, it is now possible to invest in commodities, currencies, industries, sectors, national stock markets, and, of course, indices with a modestly-sized Macro strategy-informed portfolio all in a single brokerage account. Many exchange-traded funds are similar to mutual funds in that their value is based on a compilation of different components (e.g., the S&P 500). The key difference is that ETFs, instead of being priced once a day after the market closes, are traded throughout the day just as regular stocks. If you want to buy shares in an ETF, you buy them as you would buy a stock—namely from someone else who sells them to you via a stock exchange (hence the name “exchange-traded fund”). But there are also ETFs that track only one component (e.g., gold or Swiss francs). And there are “short” EFTs (e.g. DOG, which increases in value when the DOW declines).

We believe that employing a Macro analysis strategy to selecting investments whilst eschewing aggressive use of leverage and the vagaries of individual stock ownership reduces risk without compromising overall return on investment. In order to demonstrate this strategy, we have set up a model portfolio launching here at the start of 2007. The portfolio is based on a virtual investment of $100,000 and will take into account a 1% annual management fee assessed on the principal, commissions, dividends, interest, and so forth. Investments will be in ETFs (primarily), with no individual stocks. The performance of the portfolio will be tracked on this blog via quarterly reports and also via the third-party portfolio tracking tools on the Marketocracy website (scaled up to a $1 million virtual money portfolio; this website also accounts for a 1% management fee, commissions, dividends, and interest on cash) and The Motley Fool website (“CAPS,” which explicitly measures performance against the S&P 500). All buy and sell decisions will be posted on this weblog before being “executed.” For transactions announced between 0830 and 1530 EST/EDT on days when the market is open, the closing price will be used to determine the cost/proceeds. For transactions announced after 1500EST/EDT on days when the market is open or anytime when the market is closed—except between 0830 and 0930 EST/EDT on days the market is open)—the opening price the next time the market is open will be used to determine the cost/proceeds. (We cannot precisely control the prices obtained for Marketocracy or CAPS transactions, but we will do our best to obtain similar prices.)

The Intelledgement Macro Strategy Investment Portfolio is not designed to be an optimal fit for every client’s needs. However, we do intend for it to serve both as our cardinal benchmark to measure performance and mechanism for reducing risk. Accordingly, each client should expect any portion of their assets allocated to equities to approximate the positions of the model portfolio unless we mutually agree otherwise.

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One Response to “Intelledgement’s Investment Strategy”

  1. Here is an archive of all IMSIP quarterly reports with the most recent shown first:

    https://intelledgement.wordpress.com/category/a2-investment-reports/

    Also, through the end of 2009, the 1988-to-present compounded annual growth rate of the S&P 500 is +7% while that of Macro-strategy hedge funds is +14%. Both down from where they were at the end of 2005, but the Macro hedgies have an even stronger relative advantage than they did four years ago.

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