Even Traditional "Buy & Holders" Recognize the Need for Alternatives

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Published on Tuesday, 03 July 2012 01:00

Written by Zachary Scheidt, Editor, Hedge Fund Strategist, and Velocity Trader

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Tom is an old friend of mine who runs an investment advisory in my hometown of Atlanta. A mutual friend introduced us about eight years ago, and we struck up a warm friendship. Both of us have young families and have enjoyed getting together for cookouts at each other's houses.

While we both enjoy the friendship, I have to say we approach investments from two very different perspectives.

Tom is a die-hard buy-and-hold investor. His practice is built around the concept of "diversification," and his clients are invested almost exclusively in broad ETFs that give them long-term exposure to as many asset classes and market categories as possible.

Whenever we have a business conversation, Tom accuses me of being a "trading cowboy" (because I don't buy and hold securities for an indefinite period of time). I try not to call Tom a dinosaur (because the "buy and hold" approach is extinct), but sometimes I can't help myself.

So imagine my surprise when I got an email from Tom last week asking if I had time to meet him for lunch and talk about hedge funds. We sat down last Friday and Tom told me that he was interested in setting up a hedge fund for his wealthy clients, and wanted some advice for how to get started.

Adding New Options for Accredited Investors

After giving Tom a hard time for breaking out of his shell, I asked him what he was up to.

It turns out that a number of Tom's high-net-worth clients are losing interest in the stock market. Most of them have built strong businesses and have plenty of opportunities to put their cash to work.

These successful individuals can reinvest their wealth into their own businesses, and they have no shortage of contacts who have ideas for nontraditional ways for them to grow their money. Tom is feeling like he is missing out on the opportunity to manage a large portion of these clients' assets because he doesn't have an "alternative" category for them to invest in.

I find it fascinating that wealthy businessmen are now at a place where they don't trust the stock market, and they want to find new ways to grow their assets. Their aversion to "buy and hold" investing is so strong they convinced a die-hard professional to rethink his policy and begin exploring ways to offer new opportunities.

One of the biggest challenges Tom is going to have is figuring out how to market his new alternative investment fund to new clients. You see, right now, the SEC does not allow Tom to offer information publicly -- he can only show the fund to "accredited investors" that he has a pre-existing relationship with.

Accredited investors are individuals with a net worth of $1 million, or income over the past two years of $200,000 or more.

This will be a major challenge for Tom as he grows this new part of his business, but the good news for you is that as a self-directed investor, you can put hedge fund strategies to work in your account without being an accredited investor.

You Don't Have to Be "Accredited" to Kick Buy & Hold to the Curb

The SEC may be able to force hedge funds to close their doors to small investors, but they can't prevent you from trading the same strategies in your own account.

This is the underlying concept behind my Hedge Fund Strategist service.

It is not fair for the SEC to determine what you can and cannot invest in. If you are willing to do the research, find the opportunity and put your capital to work, you should be free to invest your money the way you see fit.

This week, we celebrate Independence Day. While you are enjoying the abbreviated work/trading schedule this week, give some thought to your investment independence.

Are you stuck with an advisor who is stubbornly sticking with the traditional "buy and hold" strategy?

Or are you willing to take the bold step of charting a nontraditional course to grow your assets regardless of the financial environment?

In other words, are you financially free?