I am an idiot.
Jul. 15th, 2007 07:02 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
elfsSo, being forty, I'm reading through investment and retirement planning packages. I'm learning an awful lot about hedge funds, REIT (real estate investment trusts), exchange traded funds, and so on. Lots of interesting and surprisingly geeky data throughout. Oh, I know I'm bad at this, but I want to at least have a grasp on what my family's new financial adviser has to say when he says it.
My new FA is big on hedge funds. (In fact, the day I met him was the day the Bear Stearns hedge fund, heavily leveraged in sub-prime mortgages, was seriously hitting the fan, and he said he admired my willingness to ask him about that.) He talked about having a diversified collection of hedge funds as one asset allocation class, and I was sitting there trying to figure out what the heck that meant.
I figured it out today. You can have hedge funds in different investment classes: commodities, energy, technology, transportation, etc. The average annual performance over the past decade for all hedge funds is 10.48% return with 7.22% deviation, meaning for any given fund (again, this is all averages, just as an example), there's a 68% chance that your return will be somewhere between 17.7% and 3.26% (10.48%±7.22%) and a 95% chance that the return will be 24.91% to -3.96% (10.48%±(7.22%×2)). That's right, there's a slight risk you could lose some of your investment in a given fund
The idea is to selectively choose a lot of different hedge fund investments, so that the average performance across the portfolio approaches or even exceeds the average of all of them. I mean, this may seem blazingly obvious, but it never quite clicked for me. I suppose the same is true for any investment tool, but I had to be reading about something as esoteric as a hedge fund to figure it out.
Y'know, ever since someone showed me the way standard deviations are used to describe risk in investment tools, I've been much more comfortable with understanding the risks that I might someday take.
If I ever have any money.
My new FA is big on hedge funds. (In fact, the day I met him was the day the Bear Stearns hedge fund, heavily leveraged in sub-prime mortgages, was seriously hitting the fan, and he said he admired my willingness to ask him about that.) He talked about having a diversified collection of hedge funds as one asset allocation class, and I was sitting there trying to figure out what the heck that meant.
I figured it out today. You can have hedge funds in different investment classes: commodities, energy, technology, transportation, etc. The average annual performance over the past decade for all hedge funds is 10.48% return with 7.22% deviation, meaning for any given fund (again, this is all averages, just as an example), there's a 68% chance that your return will be somewhere between 17.7% and 3.26% (10.48%±7.22%) and a 95% chance that the return will be 24.91% to -3.96% (10.48%±(7.22%×2)). That's right, there's a slight risk you could lose some of your investment in a given fund
The idea is to selectively choose a lot of different hedge fund investments, so that the average performance across the portfolio approaches or even exceeds the average of all of them. I mean, this may seem blazingly obvious, but it never quite clicked for me. I suppose the same is true for any investment tool, but I had to be reading about something as esoteric as a hedge fund to figure it out.
Y'know, ever since someone showed me the way standard deviations are used to describe risk in investment tools, I've been much more comfortable with understanding the risks that I might someday take.
If I ever have any money.
