Long-Short Equity Funds

If you're looking to invest in mutual funds and to get the "down low"
on the long-short Equity funds, and are looking for investment
opportunities continue reading. If the topics are not of interest,
delete the email.

The Long-Short / 130-30 funds that practice "hedge fund strategies" ,
short selling and leverage, do not live up to the much hyped image
"Poor person's hedge fund". These funds make the fund manager happier
that the investor. The 5 year Long-short equity fund top performer is
DIAMX that has returned an annual return of 17.58 %. Nice; however,
there are items to consider. I'll talk about this fund because it has
5 years plus data, and in my opinion any fund with less than 5 years
of data is just not conducive for an analysis.

The long-short funds are not sound investment options for the regular
investor, includes you and me, for the following reasons.

1. Don't get mesmerized by the double digit returns, although I must
admit it did get my attention. The double digit returns come with a
cost - the turn over percent for the DIAMX fund is 83 %. Burn !!! I
have seen some long-short funds with a turn over percent as high at
800 %. Yes I have!!!! This basically means in a taxable account you
will make the IRS very happy, because a sale, regardless of a profit
or a loss, creates taxes, and a sale is sale is a sale.

2. The expense ratio for the Diamx fund is 1.51 % . In my opinion this
is too high, some of the other long-short Equity funds have expense
ratios as high as 4 %. Ouch. Most of these funds are just too
expensive.

3. The 5 year annualized return for Diamx is 16.55 %, impressive but
not really. The return is 3.64 % higher than the return of the S&P
500; however, after expenses and other costs - front end load, yes
these funds have load costs as high as five %, the fund has gained 2 %
more than the s&p 500 return. Is the fund worth the extra 2 % gain, I
don't think so.

The gains are primarily associated with the 2002 stock market crash.
Short selling works well in a down market, and not so much in a stable
or growing market. I'll explain the details in another email. All in
all, as much as I like the hedge fund strategies, I'm going to stay
away from these funds. For those of you who have an interest in these
funds, following is a list of Long-short funds:

http://biz.yahoo.com/p/tops/lo.html

Following are my predictions for the next 6 months.

First a comment on the sub prime mess. A day doesn't go by when some
bank claims to have lost billions in the sub prime mortgage mess, but
the bank intentionally paints an ugly picture. What the bank doesn't
tell you is, the bank has been shorting financial shorts for more than
a year and has made a profit, including the write down, by "fooling"
the regular investor.

My three predictions for the coming year:

1. I have been stacking money in my money market fund, and I'm not
worried about money market funds backed by Commercial paper and other
securities: all these securities fall under short term debt, and money
market accounts will not be affected by the sub prime mess. As arms,
adjustable rate mortgages, reset begins in the 2nd quarter of 2008,
the market will take a downward turn. In short, consumer spending will
be significantly affected.

2. If you're into shorting stocks, my recommendation is to short
retail stocks. As many home owners are worried about arm resets, this
holiday season will not be prosperous for the retail stores. Even
though the stores are hoping the holiday season will bring in boat
loads of cash, the smart homeowners are preparing to save as the
dagger of arm resets inches closer.

3. For those of you who do not know, Brazil will host the 2014 world
cup soccer. Nice. For those of you familiar with Brazil, you know
Brazil's infrastructure is not suitable to host an international event
such as the world cup; however, this represents opportunities. As
construction spending increases in Brazil, companies that win the
construction bids will have impressive growth prospects. My suggestion
continue to invest in Brazil.


Foooooo, all done, till next time. I hope all of you are having a fun weekend.

The Endowment Fund Model

In an effort to keep this email short and to not turn this into a term paper, I'll just highlight basic items to ponder upon.

Following is my analysis of the economy (united states): the four keybasic perspectives to evaluate an economy.

A. Consumers: The CPI has decreased in some areas, but then again ithas increased in other areas. Check out the following link:http://www.bls.gov/news.release/cpi.nr0.htm However, the current increases in agriculture stocks (such as wheat),mortgage defaults, more consumer debt, and higher unemployment rate(close to 5 %) basically means consumers, average folks, have lessmoney to spend. Avoid industries / companies that will be mostsignificantly affected by less consumer money: travel, entertainment,restaurants, and etc. However the rich always have money, so if youwant to buy stock buy stock in high end luxury products.

B. Companies: Companies have access to money: the discount rate (5.25%) is higher than the fed funds rate (4.75 %). The next boom will bein 1. Medical industries or in companies that will help reduce medicaloperating costs 2. Companies that make eco friendly products - most innovation
Buy stock in the above sectors.

C. Political - I believe the democrats will win. Lets not forget theIran issue. When there is an attack on Iran, there will be, think ofthe war effect on oil and gas prices. Oil and gas stocks : good shortterm buy, but not long term buy.

D. Trade /Exchange rate / Dollar value: The dollar is declining andthe US Interest rate is much lower compared with interest rates aroundthe world. Short term : buy stock in companies involved in us exports.
Everything in life follows a sin curve, yes everything...LOL. Theemerging market and tech sectors are over priced, and at the top ofthe curve. The secret to successfully investing is diversification.Lately i have been analysing endowment funds. Long story short,endowment funds returns are a few points higher than that of the s&p500; the standard deviation of returns is much lower for theendowment funds than it is for the s&p 500 index funds.
What is the endowment fund model? Breaking away from the traditionalstrategy of just sticking with domestic and foreign stocks and bonds.Most investors just limit themselves to stocks and bonds.

Bonds don't make sense for our age group, the after inflationadjusted returns will be 2-3 %. Ignore bonds. The endowment fundmodel, following Harvard and Yale endowment funds, is basically investin roughly
17% in hedge funds;31% in hard assets including real estate, timber and energy;13% in private equity;31% in foreign and domestic stocks;13% in fixed income.
The returns are 3-5 % higher than that of the s&p 500 index, and thereturn deviation is in single digits compared with the s&p 500 returndeviation of double digits.

The key is to minimize the down side risk and endowment funds do thatreally well. I'll be breaking away from the traditional model thatmost individual investors follow, and invest in index funds to get themost diversification
Get the following :A. s&p 500 index fund ( large blend), get the best of value and growthcompanies: -B. small blend index fund : msci us small cap -- innovation takesplace at this level (subject to debate)C. total international index fund: msci europe index, msci pacificindex, msci emering markets index

This should give you enough diversification: hard assests, and foreignand domestic stocks.
The "head fake" is to balance this with money in private equity indexfunds and hedge funds index funds. Things have changed, there are nowtwo indexes that allow the average investor to put money in privateequity and hedge funds.
S&P Listed Private Equity Index - made up of 30 private equity firmsaround the global..
http://www2.standardandpoors.com/portal/site/sp/en/us/page.family/indices_ai/2,3,4,0,0,0,0,0,0,0,0,0,0,0,0,0.html
S&P Hedge Fund Index - hedge funds will in most cases except bearsterns hee hee...will always make money; comes down to insider tradingand connections. these big players really control the market....theindividual investor is just a pawn. so might as well invest in a indexof hedge funds.

Long story short, "Think like an endowment fund, and follow theendowment fund model".