Hedge Funds: Only for Fancy People?

Hedge Funds, Hedging the market. What does it all mean? Can I do it myself? How to I get there? All those things are answered in this episode. 

It is not always easy to conceptualize some of these when you feel like you cannot immediately get started, but it certainly helps form your goals on what to shoot for. Thanks for being here!

Episode Transcript

Chris Holling (00:00):
This is the truth about investing back to basics
podcast where we want to helpyou take control of your
personal finance and long terminvestments. If you're looking
for a way to learn the why andhow of investing, then you found
the right place. Thank you fortaking the time to learn how to

(00:23):
better yourselves. I guess weshould record. Yes. Welcome
back, ladies and gentlemen, toanother episode of truth about
investing back to basics. Myname is Chris Holling.

Sean Cooper (00:37):
And I'm Sean Cooper.

Chris Holling (00:39):
Today, we are going to move back out of the
stretch of asking me questionsbecause Well, I I just don't
know enough. We were gettingback into the into the void the
pond. That is stuff that I stilldon't understand. So I, you

(01:01):
know, when when we, when we needto get back onto the term about
the different intricaciesbetween, you know, root beer and
Sarsaparilla, or, or whether ornot a hot dog is a sandwich,
then, you know, I think I thinkI'm your guy. But until then, I
think we gotta go back to measking you questions.

Sean Cooper (01:24):
Well first off, I think the whole concept of root
beer versus sarsaparilla reallydepends on if you're talking
about rootbeer versustraditional sarsaparilla, or
what we con call today assarsaparilla.

Chris Holling (01:38):
You know, I don't even know that I I haven't even
looked into that. I don't knowthe answer to that. But I do
know

Sean Cooper (01:46):
You can't find traditional sarsaparilla
anymore, because I think you'dget all sorts of lawsuits for
letting someone consume in thisday and age, but

Chris Holling (01:56):
does it have cocaine in it.

Sean Cooper (01:57):
I don't think it was cocaine, but it wasn't,
wasn't good for you.

Chris Holling (02:01):
Can I say cocaine?
I could say cocaine,

Sean Cooper (02:04):
but now it is more like root beer, that's for sure.

Chris Holling (02:08):
Well, I can tell you today, the main difference
is there's more wintergreen insarsaparilla than in the root
beer, so it has a verywintergreeny taste. It's likely
to be sarsaparilla

Sean Cooper (02:22):
probably explains why I like some sarsaparilla
better than most rootbeer

Chris Holling (02:28):
There you go.
That that'll do it. Yeah. Yeah.
See? Learning Yeah, you don'tyou don't have any more
questions for me even though Ididn't even answer the one
question you asked me. Okay,today we are going to talk about
hedge funds. Parenthesesaccredited investors. Do I I

(02:54):
think I thinkaccredited investors

Sean Cooper (02:59):
define the hedge fund first, define do your
definition of the hedge fundfirst, we'll get to accredited
investors down the road. Andwe've actually talked about them
before too

Chris Holling (03:10):
I think a hedge fund is is that you pull out you
pull out that hedge trimmer andyou go out and then yet you make
your bushes all cube likebecause because you live in The
Stepford Wives land. And thenafter you trim it, and you throw
the excess into a black trashbag, and then that's, that's

(03:34):
your that's your available hedgeor your hedge funds within a
compiled sack.

Sean Cooper (03:41):
You know what that made me think of?

Chris Holling (03:43):
What,

Sean Cooper (03:44):
have you ever read the ultimate Hitchhiker's Guide
to the Galaxy?

Chris Holling (03:48):
Yes, I have.

Sean Cooper (03:49):
Yeah, you know, I can't remember which book it is.
But it's one of the later booksand the people I believe it's
when he comes back to Earth andthe people have basically
regressed and they have startedusing leaves as currency. And so

(04:11):
they're all walking around withjust like, tons of leaves in
their, you know, packed in theirshirts and their trousers
because and, you know, they havehorrible inflation because
there's so much currencyavailable and yeah, anyway,
that's, that's what that made methink of.

Chris Holling (04:28):
It's, it's that's just I'd say that's only like,
one more generation past theIdiocracy stage. The

Sean Cooper (04:37):
yeah

Chris Holling (04:38):
Brondo the thirst mutilator Yeah, has it has
electrolytes in it. Like youshould be watering your crops
with, with water. What Not, notBrondo it's got electrolytes in
it. No, I know. You should beusing water You mean like, like
from the toilet that's groes.
Okay, yeah, well, we're we'redoing we're doing well here so

(05:04):
far.

Sean Cooper (05:07):
Suffice it to say, that's not what a hedge fund is,

Chris Holling (05:10):
shows what, you know, you just don't you just
don't trim enough hedges?

Sean Cooper (05:14):
Apparently not.
Apparently not

Chris Holling (05:17):
tell me, okay?
No, okay, if I'm gonna, I'mgonna actually guess a hedge to
me are, and I'm kind of piecingtogether some some stuff I've
been learning lately. So here wego. You can utilize alternative
investments, like perhaps goldor silver, and utilize it as a
hedge in the market, if yousomehow miraculously knew that

(05:42):
there was going to be a bigcrash tomorrow, that you might
want to have some gold or silveror some other form of a hedge to
try and offset some of that. Andso I believe a hedge fund would
be funds that that are of thesame, the cut of the same cloth,

(06:03):
but not outright, just simpleprecious metals. And so it's a
it's a fund and the fund ismanaged by hedge fund managers.
And, and they are the ones thatin fact, say, Yes, you should

(06:25):
invest in leaves, because leaveswill become currency.

Sean Cooper (06:37):
Know, you

Chris Holling (06:37):
How's that

Sean Cooper (06:38):
you actually touched on a number of the
concepts around hedge funds. Iwon't say that, yes,

Chris Holling (06:43):
leaves

Sean Cooper (06:43):
necessarily defined it, but you definitely touched
on some of the concepts.

Chris Holling (06:48):
Well, good. Okay.
See, I'm kind of with it.

Sean Cooper (06:50):
Yeah. No, you pieced it together decently

Chris Holling (06:52):
tell me tell me more.

Sean Cooper (06:54):
So traditionally, yes, hedge funds were more or
less what they sounded like theywere investments, funds designed
and managed to hedge yourtraditional market risk, or
hedge some sort of a specificrisk today that they're they're
much broader than that they'renot necessarily hedging

(07:17):
anything, depending on the hedgefund that you're investing in?
And what we refer to as hedge.
You know, we should probablydefine that a little bit, you
know, you've probably heard thephrase hedge your bets.

Chris Holling (07:32):
Yes, I have.

Sean Cooper (07:33):
Yeah,

Chris Holling (07:34):
actually, like it to me. I do know stuff.

Sean Cooper (07:36):
Yeah, so you know about cards, then.

Chris Holling (07:39):
Yeah,

Sean Cooper (07:40):
No necessarily about investing. But sure.
Anyway, um, no, but so in in theinvesting realm, to give you an
example of what it would looklike to hedge your investments.
So let's say for example, youhave purchased a stock. And

(08:01):
again, I'm gonna reference afuture here, because this is one
of the concepts that we haven'tdelved into yet. But one of the
things you could do to hedgethat investment risk, because
you've bought into this stock,you bought it bought into the
company, if that company,something horrible happens to
it, or they go bankrupt, orthere's just some really bad
negative news and they lose tonsof value, you lose your shirt on

(08:25):
your investment. A way to hedgethat so reduce the risk. So
you're hedging your risk wouldbe to buy a put. So a put is an
option, it gives you the optionto sell a set number of
securities at a set price. Sofor example, let's say you own a

(08:48):
stock that's currently tradingat $55 a share, you buy an out
of the money put at $50 a share,that gives you the option to
sell at for $50. So if thatstock were to tumble, it drops
down to $30, then you wouldexercise that put, and you would
actually sell the stock at $50 ashare even though it's only

(09:12):
valued at $30 a share. So thatwas your your hedge. The
limiting factor why you wouldn'tnecessarily do this all the time
is because it cost money to buythat put that option. And yeah.

Chris Holling (09:27):
So that was that was just a big realization,
because that's exactly what Iwas thinking. I was like, Why?
Why wouldn't you do that?

Sean Cooper (09:33):
Right

Chris Holling (09:33):
Like, why wouldn't you just set limits on
everything all the time?

Sean Cooper (09:37):
Because it costs money,

Chris Holling (09:38):
okay,

Sean Cooper (09:38):
yep. It's gonna reduce your, your overall
profitability, potentially

Chris Holling (09:42):
got it,

Sean Cooper (09:42):
but it can reduce your risk and that's what a
hedge is, is a way to reducerisk in this scenario. So
traditionally, that's what ahedge fund refers to is some
means of hedging, or reducingyour your risk or offsetting
your risk in one way or another.
Today, that's not necessarilywhat the hedge fund is doing,
depending on what you'reinvesting in. Technically

(10:05):
speaking, today, if somebodyrefers to a hedge fund, really,
they're most likely justreferring to something that is
not a 40 act fund. So somethingthat's not registered under the
Investment Company Act of 1940,like a mutual fund or would be.
So, it's become much broaderthan what the traditional sense

(10:28):
of hedge fund would be. Now,because it's not registered.
It's it's not subject to thesame rules as a 40 act fund,
there are fewer restrictions onwhat they can do more perceived
risk associated with it. And soonly accredited investors can

(10:49):
invest in hedge funds. Now,there, there are some loopholes
in that, but for the most part,only accredited investors can
invest in hedge funds, with thenotion being that they either
have more knowledge of theinvestments or are in a
financial position to take onthat additional risk. Whereas
the average Joe investor is notallowed to invest in those

(11:16):
because they're not fallingunder the same rules and
restrictions and guidance andall of that, that a 40 act fund
would be. And

Chris Holling (11:29):
so

Sean Cooper (11:29):
go ahead,

Chris Holling (11:30):
and I'm, so you, being an accredited investor can
do that.

Sean Cooper (11:36):
Right. So I would be considered an accredited
investor because of mydesignations. And and what I do,
yeah. Okay. Traditionally, formost people, accredited investor
has more to do with assets, andincome. So you have to have a
net worth of a million dollarsor more, or you have to have had

(12:02):
an income that exceeds 200,000 ayear as an individual 300,000 a
year as a joint filer for atleast the prior two years, with
reasonable expectations ofmaking that much or more in the
future. So either one of thosecategories would allow you to,

Chris Holling (12:20):
I'm really close on this one.

Sean Cooper (12:22):
Yeah.

Chris Holling (12:26):
Okay,

Sean Cooper (12:27):
so, but that's how you are able to invest. That's
how you qualify as an accreditedinvestor, and would allow you to
invest in a hedge fund. Now,though, that's not the only
restriction though, because mosthedge fund have very high
minimum investments. And what Imean by that is, on the low end,

(12:47):
you're typically looking at aminimum investment of say, like,
$100,000.

Chris Holling (12:52):
Oh, wow. Okay.

Sean Cooper (12:52):
So if you're looking at a portfolio, and
you're saying, Oh, I'd like toput, you know, five, maybe 10%
into this hedge fund, five, or10%, if that's $100,000, you're
looking at a portfolio of atleast a million, probably $2
million.

Chris Holling (13:08):
Wow.

Sean Cooper (13:08):
And some of these hedge funds have minimums of
250,000, or maybe even a milliondollars. So you really do have
to have some fairly substantialfunds to be able to invest in
them unless you're putting in avery concentrated position. I
mean, if

Chris Holling (13:21):
so,

Sean Cooper (13:22):
go ahead

Chris Holling (13:22):
at the risk of sounding ignorant, and, and kind
of when you said a net worth,but then you also said that
there might be a certain amountthat needs to get applied into
it does that? Does that include,like net worth, maybe I didn't
understand that. But like, say,say you have the million dollars
in your net worth because youhave some properties? Does that

(13:47):
mean that you could invest withthat, or you're saying that you
need the 250,000 in cash? To doso. I like I think I understood
it, but like, where's theseparation happened between
those?

Sean Cooper (14:03):
Right? So you're talking about two different
hurdles. Number one would be theaccredited investor hurdle
actually qualifying as anaccredited investor and having
that million dollars net worth,which by the way excludes your
primary residence. So you can'tcount your your primary
residence in that

Chris Holling (14:19):
okay? Sure that makes sense.

Sean Cooper (14:20):
Factor. But the second would be their minimum
investment. So if you have abunch of money, if you have a
net worth of, you know, millionor even a couple million, but
it's all tied up in real estate,unless you're talking about
doing some kind it wouldn'tnecessarily be a 1031 exchange.
I can't remember the exactexchange that it would be, but

(14:41):
unless you're looking at doingan exchange where you basically
exchange the the real estate forthe investment, you would need
the you would need to haveliquidity you would have to
actually generate the cash toinvest in the hedge fund because
unless the hedge fund isinvesting in real estate
specifically then you can't doany type of exchange there

(15:01):
easily.

Chris Holling (15:03):
So that's actually kind of an interesting
thing, because I don't I don'tknow that we've really touched
on that before. And I'm familiarwith it just with, you know,
according to our last episode,where I clearly have been
involved in real estateinvesting,

Sean Cooper (15:14):
yes.

Chris Holling (15:16):
Which is funny.
It's weird to actually like,call myself a real estate
investor now, like, I'm stillnot, it still feels, I feel I
feel dirty when I say it. Ijust,

Sean Cooper (15:25):
I mean, if it makes you feel better, anybody who
buys a house is technically areal estate investor, it's just
a matter of what level you'rebecoming a real estate investor,
you're taking it to a differentlevel, because you are, in fact,
doing the rental portion aswell.

Chris Holling (15:40):
Right? That's, that's yes, I agree with it, I,
you're totally gonna throw meoff topic, don't

Sean Cooper (15:46):
sorry,

Chris Holling (15:46):
you stop that I've like squirrel brain here.
So like, you got to know. Okay,so with the, the 1031 exchange
how that works. And and I'mpretty sure I understand how it
works out as a whole. So reallycorrect me if I'm wrong on any
of this. But the 1031 exchangeworks at where you, you sell a

(16:08):
property of some sort that,really whether you're living in
or not, and then there is acertain amount of capital gains,
that happens usually throughappreciation of some sort. And
then at the end of the year, ifyou have that money in your
pocket, then you are supposed topay the or you will pay the

(16:28):
capital gains tax that existsfrom being taxed on what your
profit margin was from thosecapital gains of selling the
property. Whereas a 1031exchange, if you go through with
that, then that is you take thecapital gains, and then you put
it into a I believe it's equalor above, but it's at least
above in value or size property.
And if you put it straight intothat, then you do not get taxed

(16:53):
on your capital gains in theprocess. Did I miss anything on
that?

Sean Cooper (17:00):
Well, first off, I'm assuming you're not talking
about primary residence.

Chris Holling (17:03):
Or it gets deferred, I'm sorry,

Sean Cooper (17:04):
assuming you're not talking about primary residence

Chris Holling (17:05):
No, I'm not talking about a primary
residence,

Sean Cooper (17:07):
Because then you have your own set of rules that
can allow you to bypass More

Chris Holling (17:11):
A townhouse that you own that's down the road,
or less? Yeah,there are a number of
and you sell it. And then if youpocket the difference in change
from like, what you pay themortgage company and whatever,
restrictions in terms oftimeframe like you have to
and then that's it, then you'regoing to get taxed on that
amount that went into yourpocket. Whereas if you take that
money, and then you purchase athree bed, two bath house,

(17:33):
because it's larger than thetownhome, also down the block,
and you use that money in thecourse of the same year, then
actually move the money within acertain window,
you do not get taxed on thatbecause you did a time if you do
a 1031 exchange, then you do notget taxed on your capital gains,
because you just immediatelyplaced it back into the next
property. Am I Am I describingthat correctly?

(18:01):
Right

Sean Cooper (18:01):
the new purchase has to be substantially similar.
So you couldn't, for the mostpart, you couldn't take like a
townhome and then buy raw land,they wouldn't view that as
similar enough to qualify forthe 1031 exchange.

Chris Holling (18:18):
Sure, but like a a home or like a townhouse and
then into a duplex andespecially a duplex into like a
four Plex, like a multifamilydoing multifamily. You should be
able to use it for those though,correct?

Sean Cooper (18:33):
Yeah.

Chris Holling (18:34):
Okay. Okay. So as long as that's, that's
established that that the the1031 on side of that. So now
that we know what a 1031 is,then you're saying that there's
a variation of that, where it'snot a 1031. But similar to that,
where you can sell the property,and then your capital gains can

(18:56):
get utilized to get placed intoa an investment fund of some
sort, through a different form,but then you're not getting
taxed on the capital gains, aslong as it's going straight into
investing. Is that what you'resaying?

Sean Cooper (19:09):
It would have to be a real estate investment of some
sort.

Chris Holling (19:14):
Oh, okay. Okay.
So of like, of like things?

Sean Cooper (19:17):
Yes.

Chris Holling (19:17):
To do so.

Sean Cooper (19:18):
Correct. Yeah, you couldn't say, exchange your
townhome in this example orhouse or whatever, for a fund
that's investing in futurescontracts for wheat or whatever.

(19:39):
Yeah, they wouldn't, theywouldn't allow that exchange.

Chris Holling (19:43):
Well, and I'm talking as a whole and not just
the 1031 here now at this point.
And you're saying that becauseyou were saying there's
something that's like a 1031 butit's not quite

Sean Cooper (19:52):
Yeah, I'm trying to remember the exact number for
you.

Chris Holling (19:58):
But the purpose is, is it it was have to stay
within the like of real estatein this.

Sean Cooper (20:03):
Yeah, we'd still have to be real estate. Yes.

Chris Holling (20:05):
Okay. That's That's mainly what I was curious
about.

Sean Cooper (20:08):
Yep. Yep.

Chris Holling (20:11):
Cool. Okay. No that's good

Sean Cooper (20:12):
the other thing to be aware of there is with like
the 1031 exchange, for example,you can continue doing it. So
you can take your your realestate, sell it, use that money
to buy another one, you can doit again and again, over and
over. But once you go into afund, like a REIT, so you
exchange into a REIT, you can'tgo back out to hard. Assets, you

(20:36):
can't go back out to buying ahouse or something like that.

Chris Holling (20:38):
Okay.

Sean Cooper (20:39):
So

Chris Holling (20:39):
yeah,

Sean Cooper (20:40):
one thing to be aware of, anyway, but that's,
you know, there are hedge fundsthat invest in real estate. But
otherwise, that's just kind ofwhat we were talking about
there. So,

Chris Holling (20:53):
right. No, I just wanted to touch on that, while
we're while we're on it, that'sFor sure. So um, one of the one
of the things, the disadvantages

Sean Cooper (20:57):
for sure.
I talked about with hedge fundswas the, that those high
minimums, so the the minimuminvestment, some of the other
things that you'd want to beaware of, if you were going to,
you know, if you met theserequirements, and could invest
in hedge funds are going to belockup periods. So a lot of
hedge funds are going to havevery low liquidity. So you can't

(21:21):
just take your money out at anytime. The way you could with,
you know, a mutual fund, yousell it, it sells, at the end of
the day, t plus two is tradingplus two days, three days for
the funds to be available foryou to take them out and move
them back to your your checkingaccount or what have you. So
you're looking at what a total,maybe four to five days, their

(21:42):
total, with a hedge fund, youknow, and if it's a stock or an
ETF, it's going to be evenfaster than that, because the
trading is instantaneous.
Liquidity is still t plus two.
But with the hedge fund, they'regoing to typically have lockup
periods, and then liquidityevents. So a hedge fund might
say, Okay, you can't get yourfunds out for your lockup period

(22:04):
is one year, they're going to beliquid at quarterly liquidity
events after that time, so youcan access your funds, once per
quarter. If you miss thatwindow, tough, you have to wait
for the next quarter quarterlywindow to actually access your
funds. Some of them might havelockup periods of five years,
you know, if they're certaintypes of investments where

(22:26):
they're investing in a very nonliquid asset. So like a new
company, or, you know, a bunchof private equity companies, and
they aren't going to haveliquidity events until those
companies sell, then they haveno money to pay you, though,
that those funds are locked up.
So there might be a very longlockup period in those
instances. So liquidity is a bigthing when it comes to hedge

(22:48):
funds. And part of why a lot ofaverage investors really can't
afford to do it, in in additionto the the low minimums is they
just can't have their fundslocked up for that long period
of time.

Chris Holling (23:01):
Gotcha.

Sean Cooper (23:02):
Another aspect of it is there, they do tend to
have high fees, at leasttraditionally, the most common
fee structure in the past forhedge funds has been what's
called Two and 20. So that's 2%annual fee of your assets under
management, plus 20% of profits.

Chris Holling (23:21):
Okay,

Sean Cooper (23:22):
so you're going to pay 2% annually. So let's say
you invest that 100,000, you'regoing to pay 2%. In that first
year, those assets grow to say110,000. So that you're going to
pay, so you've paid the twowe'll say the 110 growth is

(23:42):
after paying the two, thenyou've got $10,000 of growth,
you're going to pay 20% of that,because that's your, the 20. So
that's another 2000. So nowyou're at 108. So that next
year, you're going to pay 2% of108,000. Which is a little over

(24:07):
2000. And then from there, youknow, depending on what the
market does, let's say if if itdrops back down that that one
110 is basically now a highwatermark for you for most hedge
funds so that the two and 20,the 20 portion is only going to
kick in if you get back abovethat. So if it drops down and

(24:30):
you go down to 105, or back downto 100 or less, you're not going
to and then it jumps back up tolike one. So it drops down to 90
jumps back up to 105. You're notgoing to pay that 20% Again,
because all they did was recovertheir losses. It's not until you
get back above that above thathigh watermark that 110 In this

(24:51):
scenario that you're going tostart paying the 20%. Again,
you're still going to pay the 2%annually, but you're not going
to pay the 20 until there areactual gains in the account.

Chris Holling (25:01):
Okay, okay, I think that makes sense.

Sean Cooper (25:02):
So in that scenario, you go from one to 10.
You know, they do great. Andthey go up to 150. Okay, well,
now you're going to pay the 20%on that other 40,000 of gains.
Okay, but the 2% annual is goingto happen regardless. So two and
20.

Chris Holling (25:20):
Gotcha. Okay, 2 and 20, 2 and 20 rule.

Sean Cooper (25:23):
Yeah, that's general, there are other
structures out there, some ofthem just do the profit sharing
where you know only gain, theyonly charge you based on the the
gains that they make. Some ofthem have just a very low annual
fee, and then they they makemost of our money off of the
gains, it, it varies a fair bit.
But that's the general rule. Soyou do want to be aware of it.

(25:47):
And understand that it tends tobe fairly high, because two and
20, you know, you're guaranteedto give up 20% of your profits,
plus, you're paying 2% annually,so it, it adds up pretty quick.

Chris Holling (26:01):
Sure,

Sean Cooper (26:02):
they're also often investing in things that tend to
be fairly risky. You know,again, that varies a great deal,
depending on the hedge fund thatyou're investing in. But they
can invest in things that tendto be fairly risky. So you want
to be aware of that as well.
That's on. That's thedisadvantages, the advantages.
There are a variety. So becausethey're not regulated in the

(26:25):
same way, they tend to have somemore leniency in terms of what
they can invest in how they caninvest, that provides some
unique opportunities. Whetherit's direct investments, like we
were talking about directinvestments in private equity,
or a variety of other thingswhere you're getting access.

(26:46):
directly to these funds, there'snot multiple layers of removal
between you and the theunderlying investment. By having
that direct investment, itactually provides for lower
lower correlation, morediversification, we've talked
about that a little bit in thepast. There's also some more

(27:07):
unique strategies that they canemploy by having that that
leniency that leeway, in termsof what they do, a lot of them
will employ leverage mutualfunds are able to do in ETFs are
able to do that now as well. Butit's just a different feeling
from that standpoint. Butultimately, that's what you're

(27:32):
shooting for is that lowercorrelation with the hedge
funds, unique strategies anddirect investments that you
might not otherwise get. In amutual fund. We've talked before
about the concept ofalternatives. And how investing
in these alternatives providesthat lower correlation, that
diversification that you'relooking for, to balance out a

(27:52):
portfolio, the closer you canget to the underlying
investment, typically, thebetter you're going to be with
that, in terms of theenhancements to your portfolio.
So for example, there are mutualfunds and ETFs that invest in
some alternatives. And they arebuilt on or potentially even

(28:12):
managed by the same people thatmanage hedge funds. So they
track the same things, butthey're not necessarily able to
invest in them in the exact sameways. And by being in the
general market, the hedge fund,the mutual fund is going to
naturally be more heavilycorrelated to traditional asset

(28:33):
classes than the the hedge fundis going to be. And that
liquidity actually plays a rolein that. And we saw that in 2008
2009, where as people wereselling in 2008, they were panic
selling they were sellingthings, whether they're the

(28:53):
valuation was actually goingdown or not. Quite frankly,
hedge fund investors didn't havethat ability because of lockup
periods because of liquidityevents. And so they couldn't
panic sell to the same degree.
And so valuations held more to amore logical level, if you will,

(29:15):
for an extended period of time.

Chris Holling (29:18):
And, and so, I mean, when you're, when you're
looking at these, like, I don'tknow if this is too broad of a
question, because you're, you'rekind of in, in depth on, on how
these all pieced together at akind of at its core, but like,
when do you kind of start tosay, I'm not even asking the
question very well. Do you doyou look at hedge funds as

(29:41):
something that is a like youstrive to get to a, a point
where you're able to afford itand hey, I want a majority of my
investing to be in a hedge fundor is it? Is it something that
is kind of kind Like we talkedabout before, where it's a

(30:02):
another tool for the toolboxtype thing where you have X
amount of investments and youwant this to exist as, as
something in addition to yourrepertoire, like, where, where
do you start to consider it'stime to look at hedge funds, and
not just the monetary and thelimitations and stuff? Like,
where do you start to consider?
Maybe I should look into this?

(30:24):
Does that make sense?

Sean Cooper (30:25):
Yes, yes, um, it depends on why you're investing
in the hedge funds. So you canget, you can invest in hedge
funds that invest in traditionalequity. And, to me, unless
you're employing some kind ofvery unique strategy, I don't
necessarily see a point. I Ok

Chris Holling (30:48):
I view the hedge funds, as in the alternatives
realm. I think that's wheretheir their niche really excels.
And so from that standpoint, Iview it as a target, something
to strive for. Because the, theoverall goal of alternatives is
to provide lower correlation,better diversification, to

(31:11):
enhance or optimize the riskreturn trade offs of the
portfolio. And hedge fundstraditionally do a better job of
that than mutual funds or ETFs.
So I do view it as a goal, atarget for that portion of the
portfolio, not for the wholeportfolio, if that makes sense.

(31:31):
Okay, yeah, that totally makesme

Sean Cooper (31:33):
I don't think it's worthwhile to pay the higher
fees for hedge funds for some ofyour traditional asset classes.

Chris Holling (31:40):
Sure. And that's, that's what I was getting at,
like I was, I was wanting toaddress like, Okay, I could I
just have enough to get intothis. And that's it, it would
take it would take all of mycapital, or all my everything to
get into this. Should it beenough to be like, Yeah, let's
let's make it work. Or if itshould be something to add tools

(32:00):
to the toolbox is really what Iwas getting at

Sean Cooper (32:02):
right.

Chris Holling (32:02):
So

Sean Cooper (32:03):
yep,

Chris Holling (32:04):
that's exactly what I was getting after.

Sean Cooper (32:05):
Yeah. And the other thing to consider is, you know,
if, like we talked about, ifyou're going to be investing in
these, most likely you're goingto want some diversification
between them, because you don'twant just, you happen to pick a
hedge fund that just does reallypoorly. So ideally, you'd want

(32:25):
to have a few of them, whichmeans a you're meeting the
minimums for each of them and beif it's only a piece of your
portfolio, your overallportfolio has to be large enough
to meet all of those minimums,and still do the rest of your
investing. So

Chris Holling (32:43):
Gotcha.

Sean Cooper (32:43):
Yeah. That's, that's the gist of hedge funds.
I mean, you've got some hurdlesto overcome, there's def, some
definite advantages. And we'vetalked about some of the
strategies before in ouralternatives.

Chris Holling (33:01):
Yeah,

Sean Cooper (33:02):
podcastle, hedge funds do a lot of that. That's
where it started. Mutual funds,and ETFs have only recently
started providing some of those.
And like I said, they don't doit quite as well, at this point.
They, they, they help theaverage investor get into some
of those strategies, but they'renot perfect. So

Chris Holling (33:26):
no, that's, that's perfect. And actually,
that's, that's why I asked thequestion that I did, where I
wanted to make sure that it wasa, you know, we've we've talked
about this before, we've talkedabout hedging to kind of offset
some stuff. And when we'vediscussed things like
diversifying a portfolio and,and that's, that's why I wanted
to ask where it was becausewe're, we're continuing to grow
the, you know, take this intoconsideration, this might be

(33:46):
something that would beadditional to what you want to
take on and, and that's exactlywhat this is. I'm glad we're
encompassing that of being a youknow,

Sean Cooper (33:56):
yeah,

Chris Holling (33:57):
as as I'm saying this too many times, you know,
more, more tools for the toolboxkind of thing.

Sean Cooper (34:02):
Exactly. Yeah, it's a piece to consider. And it's
not for everyone, because like Isaid, there are there are issues
with it. The liquidity is a hugeone. Certainly meeting the
minimums is a big one. And thefees are a hurdle. But like I
said, you look at the bigendowments, Yale, Harvard, a 60%
in private equity, that's not athat's not a liquid 60%. But

(34:25):
they also have such large assetsthat they're working with that
they know the amount that'sgoing to be coming out of the
endowments, so they can plan forthat liquidity years in advance
and have it available, and theycan still deal with all those
lockups. The average investorcan't put 60% in private equity

(34:46):
and deal with the lockups thatare associated with it. So

Chris Holling (34:50):
right

Sean Cooper (34:50):
it's a it's a different view. But it's one
that I think is worth emulatingto a certain degree for many
people. But it's not foreverybody.

Chris Holling (35:00):
RIGHT. SURE.
That absolutely makes sense.
Okay, great. Well, is thereanything else that you think we
should would touch on with it?
Or how do you feel with it?

Sean Cooper (35:10):
No, I'm, I'm good.
We hit everything I was I wasshooting for so a fairly simple
concept today. I mean, fairlyshort concept, I should say.
Yeah.

Chris Holling (35:20):
Yeah. I think I think that's, that's putting it
well, well, and, you know, justjust go go out, go. Go collect
your, your leaves, for for youryour bag of hedges. And maybe
someday you'll have a value of250,000 leaves available to I

(35:45):
don't know, I'm just babbling atthis point. Cool. No, I'm glad
we're able to touch on thiswe're able to, to get after
another opportunity. Well, let'swrap us up then. Thank you
again, everyone, for joining ushere on The Truth about
investing back to basics. Myname is Chris Holling.

Sean Cooper (36:03):
I'm Sean Cooper.

Chris Holling (36:05):
And we will catch you on the next episode here in
our seats. I was I was trying toattach something to it. I was
trying to to encourage I don't Idon't know what I was trying to
do. I was trying to I was tryingto blossom our our outro I'm
just I'm just blossom. Like

Sean Cooper (36:27):
yeah,

Chris Holling (36:27):
hedges.

Sean Cooper (36:27):
Yeah, I knew where you were going.

Chris Holling (36:29):
We'll catch you guys next time. Podcast
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(36:50):
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are solely those of Fitfinancial consulting LLC unless

(37:12):
otherwise specifically cited.
Chris Holling is not affiliatedwith Fit financial consulting,
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(37:33):
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(37:53):
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(38:15):
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(38:38):
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(39:00):
securities administrator. Amen.
The science when we laugh andwhy Americans like jokes that
include insults or vaguethreats.

Sean Cooper (39:15):
I believe that

Chris Holling (39:16):
Texas, Texan says where are you from? Harvard
graduate. I come from a placewhere we do not end sentences
with prepositions.
All right. Where are you fromJack
reccording button pushed blue,

Sean Cooper (39:36):
green

Chris Holling (39:38):
smeared burgundy.

Sean Coo (39:44):
What's in murburgundy?

Chris Holling (39:45):
I was starting to say seven and then I thought Why
would I wrote I switch tonumbers. I should go to like a
shape. And so then I started tosay square and then I was like,
well, maybe I need anothercolor. What color starts with S
Like I don't know a collor tat starts with S, silver now
I was like, smearbu

Sean Cooper (40:07):
wasn't coming to you at the time.
That's fair.