Create Your Own Hedge Fund: Increase Profits and Reduce Risks with ETFs and Options (Wiley Trading) (Hardcover)

by Mark D. Wolfinger (Author) "People invest money in the stock market with one primary goal in mind: to earn a satisfactory return on that investment..." (more)
Key Phrases: option strategies you can use, covered call writing program, uncovered put writing, Dow Jones, Down Protect, Cash Start (more...)

Editorial Reviews

Product Description
Discover a practical trading strategy that combines options and ETFs.

Create Your Own Hedge Fund explains how exchange-traded funds can be used in conjunction with an options strategy to attain steady growth. Beginning with a tutorial on options and ETFs, the book goes on to describe both investment approaches in great detail providing you with a trading strategy that generates higher returns than buy-and-hold investing -- and allows you to reduce risk by adopting a hedging strategy. Filled with in-depth insights and expert advice, this book is intended for you if you're a sophisticated individual investor or a professional investor, trader, or other money manager looking to update your arsenal of investment tools.

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From the Inside Flap
Millions of investors have lost trillions of dollars to turbulent markets over the past five years. Millions of others, however, have used innovative strategies to hold their own and even see their portfolios increase in value. Create Your Own Hedge Fund outlines one such strategy using exchange traded funds (ETFs) and options.

ETFs such as DIAMONDs and VIPERS are fast replacing traditional mutual funds among investors attracted by their reduced expenses and increased versatility and variety, along with the fact—critical to the book's strategies—that ETFs trade on exchanges and are optionable. Option writing, on the other hand, has proven to give investors more winning positions, fewer losing positions (with smaller losses when they do occur), and less fluctuation in portfolio value.

Create Your Own Hedge Fund combines the best aspects of both ETFs and options into an investing program that works well in both bull and bear markets, is affordable for the bulk of investors, and provides overall package returns that are steadier and more predictable than those provided by its component pieces. This results-driven book is divided into four parts that fully examine each element:

PART I discusses the foundation of the book's program, Modern Portfolio Theory (MPT), and why MPT makes it difficult, if not impossible, for investors to beat the market. It then introduces the advantages and drawbacks of hedge funds, and how to invest like a hedge fund with less risk and lower cost.

PART II discusses mutual funds, both traditional and newer exchange traded funds, and explains why ETFs are a superior alternative for the majority of investors.

PART III covers the basics and mechanics of options and option writing, a strategy that is historically considered risky but actually entails far less risk than traditional buy-and-hold.

PART IV provides the payoff, explaining how to construct a foundation portfolio and choose an option to write, then providing detailed examples of option writing in action.

Create Your Own Hedge Fund details an uncomplicated investment program that utilizes the best aspects of a hedge fund to provide market-beating returns while significantly reducing risk. Straightforward and understandable, it will show you how to remove heart-stopping swings from your portfolio's performance—without sacrificing the performance itself.

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Product Details

• Hardcover: 234 pages
• Publisher: Wiley; 1 edition (January 17, 2005)
• Language: English
• ISBN-10: 0471655074
• ISBN-13: 978-0471655077
• Product Dimensions: 9.1 x 5.9 x 0.9 inches
• Shipping Weight: 15.2 ounces (View shipping rates and policies)
• Average Customer Review: 3.5 out of 5 stars See all reviews (4 customer reviews)
• Amazon.com Sales Rank: #467,394 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

61 of 66 people found the following review helpful:

3.0 out of 5 stars Should be "Exchange Traded Funds 101", June 4, 2005

By	Rob Ryley "Robert" (Northeast NJ) - See all my reviews

The newest craze in investment publishing involves something about "hedge funds." These mysterious investment vehicles (to the unsophisticated public) are seen as the investment of choice for the "rich" investor looking for outsized market gains, or a reduction in risk.

The author seemed to be taking advantage of this when he titled the book. In actuality, there is nothing more here than a basic (and I do mean basic), primer on Exchange Traded Funds, and basic options trading strategies (covered calls and short puts).

The first few chapters involve wasted pages on Modern Portfolio theory, the advantage of index funds over mutual funds, and the benefits of ETF's over traditional index funds. Anyone who is knowledgable enough to be interested in hedge fund strategies (ie. statistical arbitrage, relative value, market neutral, etc.) will find nothing here that he or she doesn't already know.

The second half on trading options on ETF's is similarly light on any interesting information. Much basic information on covered calls and short puts is covered. It wouldn't be unfair to call it simplistic.

Unfortunately, the author did not discuss the important concept of implied volatility when discussing writing strategies on ETF's. This makes certain option strategies, that normally are equivalent, less than equal when used on an ETF.

The book correctly states short puts are equivalent to covered calls, when the puts are secured by cash. If you are going to buy 500 shares and write 5 calls, it is simpler to just sell 5 puts, and hold cash to back them up.

But the author neglects to mention that options on indexes often trade at what is called an IV skew. Out of the money calls on ETF's are generally underpriced, while the puts are overpriced. This makes short puts backed by cash superior to covered calls on an ETF. But Lord help you if the market gets caught in a huge sell off, or implied volatility increases.

There was no discussion of identifying when it is prudent to sell options and when it is wise to remain unhedged. It didn't address the various follow ups to covered call/short put strategies when the stock moves adversely.

If you know absolutely nothing about ETF's, and options trading strategies, then you might find this useful. If you are looking for information on hedge fund techniques, look elsewhere.

28 of 35 people found the following review helpful:

5.0 out of 5 stars This book has changed my outlook on investing , February 27, 2005

By	John Hodges (Baltimore, MD) - See all my reviews

The market has always intrigued me. However, following the advice of well meaning, financially secure friends never brought me the success I sought. It turns out that it's much harder to pick winning stocks than I expected. Even the mutual funds I owned were disappointing. "Create Your Own Hedge Fund" really opened my eyes with insight and clear step-by-step guidance in teaching me a profitable, yet safer, way to invest.

The best two skills I gained from this book were: How to build a portfolio and how to make money using one rather simple strategy. This book gave me the necessary confidence to take control of my own finances and provided compelling reasons for doing so. I learned that ETFs (exchange traded funds) are much less expensive to own than what Wolfinger calls 'traditional mutual funds' ...and, on average, make more money.

Wolfinger clearly outlines exactly how to use ETFs and options - a topic that had always scared me. His detailed explanation of how options work convinced me that options are indeed doable. I was also pleasantly surprised to discover that I've been using "options" for years - rain checks at the grocery and auto insurance policies are both essentially options. And the best part - another surprise to me - is that options actually lessen risk. My chances of losing money are now less than they were before.

The author skillfully enables his readers to understand the rationale behind trading decisions with a multitude of examples that make the lessons come to life.

The book also contains useful background information, references and statistics to support the author's ideas. I tried it, and so far, it really works. I make my own decisions now and am happy with the results. Don't be afraid - if I can do it, so can you. As Wolfinger says, I feel like I'm running my own small fund.

10 of 13 people found the following review helpful:

3.0 out of 5 stars misleading title and limited strategy, March 13, 2007

By	W Boudville (Terra, Sol 3) - See all my reviews (TOP 50 REVIEWER)    (REAL NAME)

Hedge funds have been in the news lately. Since for the last few years, some have done very well. So it's quite a hot topic. Also true of ETFs, which have proliferated. Wolfinger's title invokes both, in an attempt to attract as large a readership as possible. Alas, the title is somewhat misleading.

The text gives next to nothing about how hedge funds tend to operate. Instead, it is mostly about explaining what ETFs are, and why you might want to own them. One key reason, as furnished by the text, is that you can then write (i.e. sell) covered calls on them. This increases the short term income you can garner from owning an ETF.

Commendably, the author does not recommend buying of options. He says, correctly, that on average, this is a losing game. It is reassuring to read this, for it means that the book is not one of these breathless tales about how to make money quickly.

The explanation of options could have been made 20 years ago. It is fairly limited; meant for a reader with little previous experience in finance. The only truly new material concerns describing ETFs.

The author's strategy is conservative. But in its own way, also limited. To the extent that an efficient market exists for the pricing of the underlying stocks in an ETF, then the covered calls will be priced fairly accurately by Black-Scholes. But if there is an unexpected upside, then your ETF will be sold when the call expires in the money. While if there is an unexpected downside, you retain your ETF and get the call income to reduce your losses. The problem is that if you do this method long enough, you relinquish the unexpected gains. And you end up holding losers.