Hedge funds have been getting attention lately. What exactly are they?

Introduction
Hedge funds are similar to mutual funds but with several important differences. First, hedge funds are private funds that are typically only open to wealthy, experienced investors. Second, these funds generally take on higher risk using a variety of strategies with the goal of gaining a higher return than mutual funds. Third, hedge funds are not regulated by the U.S. government, giving them more flexibility but less transparency to the public.

Hedging Definition
The word "hedge" in hedge funds is somewhat misleading at the present time. Hedging is a way to reduce risk in an investment. The first hedge fund was created around 1949, with the idea of reducing the overall market's affect on a single asset. Whether the market goes up or down, the value of the hedged asset should not change very much, ideally. However, modern hedge funds do not necessarily reduce risk or use hedging methods. They may use the added leverage of hedging techniques to hope for very large gains. This, of course, can also lead to higher losses.

Example of Hedging
One way to "hedge your bets" on a stock is by going long on Company A and short selling Company B in the same industry, with the same dollar amount invested in each one. That way, if the industry gets upgraded, A and B will both go up in price. The value of investment A goes up but the value of investment B goes down because of the way short selling works and effectively cancels out the upgrade news. The same idea would be true of a downgrade. Keep in mind this is a theoretical idea and market prices often do not match what the public would expect. In this example, A and B might not exactly cancel each other out because one company would move more than the other, which could be good or bad.

Hedge Fund Varieties
Now that you have an idea of how hedging works, it is important to note that there are hundreds or thousands of ways to use hedging to reduce risk and/or increase potential profits. That is why there are an estimated 8,000 or more hedge funds around the world, each with unique strategies and risk levels. These funds invest in a wide variety of instruments, including, but not limited to, stocks, commodities, futures, options, and even other hedge funds.

Who Can Join Them
Not everyone can join a hedge fund. They commonly require the investor to have a net worth of $1 million or more, extensive investment experience, and an acceptance of high risk. These requirements make the funds sound like strict, exclusive investment clubs, but there is a good reason for it. The U.S. government has many regulations on investment firms, which would normally prohibit some of the trading techniques used by hedge funds. However, there are some exceptions to these regulations, and hedge funds operate the way they do by legally taking advantage of these exceptions. So the funds' requirements are often no more than the government's requirements for these special situations.

Transparency
Since hedge funds are not really regulated by the government, they are not required to make their activities public knowledge. When the investor joins the fund, he or she is given documentation on the fund's goals and strategies. After that, the value of the shares or interests in the fund are usually not updated on a daily basis but they may be requested on a regular basis. A profit or loss is not locked in until the shares or interests are sold back to the investment manager, and dividends are not usually paid either. Also noteworthy is that the shares or interests are usually not exchanged between investors in a fund. Finding a list of hedge funds might also be difficult because the U.S. government has restrictions on the marketing the funds can perform, which makes it even more difficult for investors to find a good one. The good news is that several major financial publications often list the top known hedge fund performers on a regular basis.

Risk and Reward
Given the fact that there is little public knowledge about hedge fund performance, it is difficult to say what the average profit or loss is every year for the industry. Compounding this problem is the fact that troubled funds often shut down completely and start up again under a different name. One main goal of hedge funds is to deliver a higher return than mutual funds. Whether that is achieved or not on a regular basis by the average fund is difficult to say because of this lack of transparency. The amount of risk could also be much higher than a mutual fund because of the leveraging techniques used and the lack of government regulations. This is why the investors are required to have plenty of money and a willingness to lose a lot of it.

When Should I Start Saving?

The answer is simple: as soon as you can. Ideally, you'd start saving in your 20s, when you first leave school and begin earning paychecks. That's because the sooner you begin saving, the more time your money has to grow. Each year's gains can generate their own gains the next year - a powerful wealth-building phenomenon known as compounding.

Here's an example of what a big difference starting young can make. Say you start at age 25, and put aside $3,000 a year in a tax-deferred retirement account for 10 years - and then you stop saving - completely. By the time you reach 65, your $30,000 investment will have grown to more than $472,000, (assuming an 8% annual return), even though you didn't contribute a dime beyond age 35.

Now let's say you put off saving until you turn 35, and then save $3,000 a year for 30 years. By the time you reach 65, you will have set aside $90,000 of your own money, but it will grow to only about $367,000, assuming the same 8% annual return. That's a huge difference.

Where do I put all of my money

Net Positive Income - a Good Problem to Have

It’s great to be ‘in the black’ with your net income, simply meaning that more money is coming in than being spent. This is different that being 100% debt free. All it means is that you are not accruing more debt due to a negative cash flow.

When you’re relatively young one of the most daunting questions can be ‘what do I do with all this cash?’. It’s a nice problem to have, but without a strong financial background, the default solution often tends to be to stick it away in a savings account or certificate of deposit. Next to spending it or placing it under your mattress, this is about the worst thing you can do with your extra income, but more on that later. In general, one of the toughest decisions to make in personal finance is to figure out where the heck to put your money because it involves answering a lot of tough questions.

Starting an Emergency Fund

Many experts recommend that you save 2 to 3 months worth of your current salary to put into highly liquid (quickly and easily usable) assets. For your emergency savings, I would recommend opening a high interest money market account. You can do this through a discount broker or through your local bank. You may want to compare rates before selecting one. A money market is essentially a high interest savings account that gives you a high interest rate because you are required to deposit and maintain a higher balance than a regular savings account.

Figuring out how Much to Save for Retirement

In order to figure out how much you need to save for retirement and for early retirement, you need to work backwards and make a lot of educated guesses on the following questions:

What age will I live to?
What will my annual expenses be in retirement?
What percentage increase in salary can I expect to get on average per year?
How much in retirement savings will I need to meet my expenses until the age that I die? For this one, consider the fact that in order to receive full Social Security benefits you can’t begin getting payouts until age 67 and you can’t pull distributions from your retirement accounts (IRA’s or 401K’s) until age 59 and 1/2 without penalties.
What age would I like to retire at?
How much money will I need to get from my early retirement age to the point that I can begin withdrawing distributions from my retirement accounts without penalty at age 59 and 1/2?
Each of these questions are a post’s worth of material within themselves and will take a little bit of time to figure out. Since they do involve a little bit of guesswork you’re probably going to want to be as conservative as possible with your estimations. Here are some retirement calculators to help you figure it out:

CNN Money Retirement Calculator

Bloomberg Retirement Calculator

Choosetosave.org ‘Ballpark’ Estimate Calculator

What Investment Vehicle do I Allocate my Money into?

Once you know how much you need to save and in what amount of time for both early and official retirement (withdrawing distributions without penalty), you can figure out how much to allocate to each. My first recommendation would be to get the maximum match possible from your employer within your 401K. Once you get this, your asset allocation breakdown should be to distribute between taxable personal accounts and retirement accounts (IRA’s and 401K’s) at the level that will allow you to reach both your early and official retirement goals.

Summary

Asset allocation is rarely an exact science and it involves a lot of subjective guesswork on your part. It also depends on how comfortable you are with certain strategies. The steps provided in this post are simply guidelines to give you a better idea of where you should be putting your money. Ultimately, your final asset allocation will be dependent on your lifelong values and goals.

Confidence Building

GE Turns to Buffett for a $3 Billion Show of Confidence

In the latest unexpected deal stemming from the financial crisis, General Electric Co. turned to Warren Buffett to inject at least $3 billion in the company -- and, GE hopes, provide a much-needed boost in investor confidence.

Mr. Buffett's Berkshire Hathaway Inc. agreed to invest $3 billion, and perhaps as much as $6 billion, in GE. GE also said it would sell a minimum of $12 billion in stock to other investors.

U.S. business was getting a helping hand Wednesday, as the Senate appeared set to pass a bailout bill and Warren Buffett ploughed money into another corporate giant.

After Monday's botched attempt to get a $700 billion rescue package through the House of Representatives, senators loaded the measure with tax breaks and other sweeteners for the right and left. Leaders in both parties, as well as private economic chiefs everywhere, said Congress must quickly approve some version of the measure to start loans flowing and stave off a potential national economic catastrophe. "Inaction is not an option," Senate Majority Leader Harry Reid of Nevada said a few hours before the Senate was to vote Wednesday evening. "This is not a bailout for Wall Street. It's a bailout for our country." President Bush said, "It's very important for members to take this bill very seriously."

Even presidential candidates John McCain and Barack Obama made rare appearances to vote their support. That would send the package back to the House, where passage would require a turnaround of 12 votes. The House is expected to take up the reworked bill by the end of the week. As for Mr. Buffett, his attention was focuses on General Electric. Just a week after the famed investor put $5 billion into banking giant Goldman Sachs, Buffett investment arm Berkshire Hathaway said it has agreed to buy $3 billion in preferred stock from GE in a private offering. The conglomerate also is planning a public offering of at least $12 billion in common stock as it scrambles to raise capital amid a general squeeze on credit.

Mr. Buffett tried to reassure GE investors saying the company has "strong global brands and businesses with which I am quite familiar." GE shares fell by nearly 10% earlier in the day after a negative analyst note. But the stock pared its losses on the Berkshire news, closing down $1, or 3.9%. The Dow Jones Industrial Average also worked its way back from sharp losses, to finish 19.59 points lower, off 0.2%, at 10831.07. The S&P 500 slipped 0.5% to 1161.06, while the Nasdaq Composite Index slipped 1.1% to 2069.40.

Google Chrome

A couple of weeks ago Google introduced their new open source web browser for windows vista. I downloaded it a short time ago, it's nice but not what I expected from Google. It is useful only for it's bookmarking of your most visited sites. I can't say I hate it because I have not had much experience with it yet, but for now I still prefer FireFox at this point in time unless people begin to start writing their own personal spin adding on to the browser. Click here to download Chrome.

Google search engine is still in my opinion the best. That is one setting on the browser I chose not to change.

One suggestion for my readers is to also check out Lively by Google. This is a cool application in which you can design your own character in a 3D world and enter into the many different rooms created by Lively users. If you have an Avatar, then this is the place for you. Click here to check out Lively.

Good job Google, and keep the cool applications coming.

Mergers and Acquisitions:

Mergers and acquisitions (M&A) and corporate restructuring are a big part of the corporate finance world. Every day, Wall Street investment bankers arrange M&A transactions, which bring separate companies together to form larger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spinoffs, carve-outs or tracking stocks.

Not surprisingly, these actions often make the news. Deals can be worth hundreds of millions, or even billions, of dollars. They can dictate the fortunes of the companies involved for years to come. For a CEO, leading an M&A can represent the highlight of a whole career. And it is no wonder we hear about so many of these transactions; they happen all the time. Next time you flip open the newspaper’s business section, odds are good that at least one headline will announce some kind of M&A transaction.

Sure, M&A deals grab headlines, but what does this all mean to investors? To answer this question, this tutorial discusses the forces that drive companies to buy or merge with others, or to split-off or sell parts of their own businesses. Once you know the different ways in which these deals are executed, you'll have a better idea of whether you should cheer or weep when a company you own buys another company - or is bought by one. You will also be aware of the tax consequences for companies and for investors.

Investopedia 2008

Asset Allocation: Invest or Save?

Asset Allocation: Investing vs. Saving

This question has risen in many minds “What’s best for me, investing or saving money?” The truth is the best way to save money is to diversify between investing and saving. Most people argue that just putting money aside is going to turn into great wealth on its own. Wrong, what people don’t realize is that in this day in age, you are not going to be okay with just saving a few dollars here and there and depositing it into your savings account; you need to diversify your money. Split it up and not only save, but also invest a portion of that savings. The reason why you need both instead of one or the other is neither works best on their own. Asset allocation means “dividing your investment portfolio and investable dollars into different asset classes. The theory behind asset allocation is that by splitting your investment portfolio into different types of investments, you can reduce the volatility of the value and returns of your portfolio. In other words, asset allocation can help you smooth out your portfolio value and overall return on investment” (Bresnan 9). According to the online dictionary source, American Heritage, the financial term, diversify, “means to give variety to; to spread out investments, especially in business.” Asset allocation, which is formally known as money management, also according to American Heritage, “is to distribute assets according to a plan.” So for your money to work best for you, and have a great return, you need to start with a plan. That is where asset allocation and diversification step in. A prime example of a statistic regarding allocating your assets comes from the book, Asset Dedication, “Asset allocation became the dominant paradigm of investment strategy in the late 1980s. A research paper in a respected academic journal suggested that over 90 percent of the variation in a portfolio’s return could be explained by the way the funds were allocated among the three major asset classes: X percent to stocks, Y percent to bonds, and Z percent to cash” (Huxley 5). This quote is stating that the main reason behind a portfolio’s return is from the diversification of assets between investing and saving.

To begin, Investing is that portion of your money that works for you. It is the portion of your savings that you put aside, usually for the long run, with a view of this money increasing in value based on the products that you choose to place it in. The reason to invest is to reach a greater return on your money than just placing it into a savings account. Investing includes a

broad range of ways to allocate your money effectively. The ways include stocks, bonds, and mutual funds. When you deposit money away to your bank account and the sum doesn’t grow much larger, you start to realize that simply putting aside a portion of your money for savings, is not going to lend a hand in generating wealth. If you are saving, rather than investing, then you are merely retaining the value of your money. This is because of the low interest rate you are

receiving; even if the sum of money you are trying to save is large; it will still only generate a small return in a regular savings account. Keep in mind that invested money has a much greater risk or return than a savings account. That is why you should divide your capital into two sections; investing and savings. By doing this you get the best return with the lowest risk, no matter where you decide to allocate it.

The first thing to decide in investing is how to diversify your money. Investing in stocks is a very popular way to go. Take a portion of your money set aside to invest, divide it, and research different companies you would like to invest your money in. It is a good idea to pick at least one Blue Chip stock which is, according to Investopedia.com, a “Stock of a well-established and financially sound company that has demonstrated its ability to pay dividends in both good and bad times.” Like the millionaire Warren Buffet said, plain and simple, “Why not invest your assets in the companies you really like? As Mae West said, ‘Too much of a good thing can be wonderful.’ Invest in companies you enjoy.”

With investing also comes the option of buying bonds, which are issued by the government corporations. They are, in simplest terms an “I owe you contract” that the issuer is obligated to pay the bondholder the principal, which is the original amount for the loan, plus

interest. A bond is a security, but differs from shares of stock and in that stock is, an ownership interest, bonds are simply debt. Therefore a shareholder is an owner, but a bond-holder is a creditor waiting for the contract to be filled. Mutual Funds are another way to invest your money. They can be a short-term or long-term investment component. According to the (U.S Securities and Exchange Commission), “a mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. The combined holdings the mutual fund owns are known as its portfolio. Each share represents an investor's proportionate ownership of the fund's holdings and the income those holdings generate.”

Along with investing a portion of your money you should be allocating a part of your capital to your savings. When savings is mentioned it is merely a financial word that can be broken down into different savings components such as certificates of deposits; (CDs), individual retire accounts (IRAs), and a simple savings account.

All of these are great to put your money into, starting with CDs, according to Investopedia, “they are savings certificates entitling the bearer to receive interest.” A CD bears a maturity date, a specified fixed interest rate and can be issued in any denomination. CDs are generally issued by commercial banks and are insured by the Federal Reserve Insurance Corporation (FDIC). The term of a CD generally ranges from one month to five years.

Next, are IRAs of which there are two kinds. A Roth IRA, and a Traditional IRA; a traditional is unlike a Roth IRA because it is tax deductible. A Roth IRA is an individual retirement savings account that provides tax free growth, but it is not tax deductible which means the money contributed is taxed before it goes in, but is tax free at the time of withdrawal at the age of 59 ½. A traditional IRA is the same type of account but when withdrawn, the lump sum is taxed again.

Lastly, if you just feel like everything is too complicated and you just don’t care, then a regular savings account will do just fine for you. No worries about withdrawal penalties, no

waiting until you reach the age of sixty to take your money out, just plain and simple savings account where you manage what you put in and just sit back and watch the pennies grow.

With proper analysis and diversification, over the long run, your investment will have yielded a higher return than the savings account. Don’t forget even long term investments can turn for the worst, they are not always headed in the right direction. That is why you need to split up your money, broaden your horizons, allocate it to the different parts of the business circle. That is the successful way to save money. Simply to maximize the outcome of return, you need to combine your investments with total savings. This is the right way and the best way to save money, and no one can argue otherwise.

To wrap it up, these two asset allocators, investing and saving work best together and not by themselves. Because if you were to just invest your money in stocks, bonds or mutual funds, theirs that potential risk involved with loosing a portion of your money if the market is bad. But with diversification, over individual retirement accounts and stocks and savings accounts that are backed by the Federal Reserve, theirs less to worry about, and that makes for the best and effective way to save money. I like to think of it as not placing all your eggs in one basket. But no matter what, managing your money through investing and saving makes for the best way to save overall.