Monty Agarwal | (Original Link)
2011 has been a challenging year for a lot of investors, amateurs as well as professionals. Buy and hold mutual fund type strategies have simply not worked. Trends have disappeared too and have been replaced by sideways markets that see monstrous moves — in either direction — in the blink of an eye.
In this environment, trend followers and even fundamental analysts have suffered. And I don’t see this changing any time soon.
That’s because the European Union (EU) refuses to realize the gravity of the financial mess they’re in. And unless they devalue the euro by printing euro bonds they, along with the rest of the global economies, will continue to be sucked into the black hole of recession.
So what are you supposed to do?
I’ve been a hedge fund manager for several years. So let me give you one of the hedge fund strategies that has worked for me: The ‘long/short’ approach.
In this approach you can take advantage of the market turmoil by pairing trades. In other words, buying an asset that you feel is cheap and taking an inverse position in an asset that you feel is expensive.
Now here are a two ideas using this strategy that I feel could help grow as well as preserve your portfolio in 2012.
Long Africa, Short Europe
As you can see in the chart below, over the past 10 years the African markets have outperformed the U.S. market as well as the emerging markets.
- Africa is rich in natural resources,
- Young demographics leading to rising domestic consumption, and
- Increasing capital inflows from smart money.
Yet very few people are even aware of it!
I think the Nile Pan Africa Fund (NAFCX) is one of the easiest ways to participate in Africa’s boom. The fund normally invests in African companies, securities issued by or guaranteed by African governments, their agencies and instrumentalities, and African multi-national organizations.
For the short side of your position, clearly the biggest basket case in the world right now is European equities. As the governments in Europe adopt severe austerity measures, we’re witnessing shrinking GDPs. This growth reduction will affect the corporate earnings, which will translate into lower stock prices.
To take advantage of the chaos in Europe, I suggest the ProShares UltraShort MSCI Europe (EPV). This exchange traded fund (ETF) seeks daily investment results, before fees and expenses, which correspond to twice the inverse of the daily performance of the MSCI Europe Index. That means for every 1 percent the index falls, you stand to make 2 percent.
Another benefit of taking a position through EPV is that it is denominated in euros. Therefore, as the euro comes under pressure when the European Central Bank (ECB) eventually devalues the euro, it will add another kicker to EPV.
Long Gold, Short Oil
Gold has been the safe haven of choice against depreciating currencies, falling stock markets, sovereign debt defaults and geo-political tensions. And as the predicted catastrophic environment unfolds, gold is bound to go higher.
|The yellow metal keeps its luster as a hedge against credit risk, and currency and inflation/deflation risk.|
Additionally, once the ECB starts issuing euro bonds, which is just a matter of time, it will imply a devaluation of the euro and a flight to gold.
SPDR Gold Trust (GLD) is the world’s largest gold ETF. And I can’t think of a better way for you to get exposure to gold without the delivery and storage hassles normally associated with owning bullion.
But a position in GLD will not do well if the U.S. dollar starts to rally. Therefore to hedge this risk, consider taking a short position in oil.
OPEC has stated that they don’t want to see oil rise much higher than $90 … as a higher price would sharply reduce the demand, which would hurt OPEC. Additionally, there is no growth in the developed markets as well as in Asia, which is trying to slow its growth. So oil will have a very hard time rising.
You don’t have to short oil directly. Instead there are a handful of ETFs that can get you positioned with a fraction of the risk. My favorite is the ProShares UltraShort DJ-UBS Crude Oil (SCO).
This fund is designed to provide twice the inverse of the daily performance of an index that tracks crude oil prices.
These give you some examples of trades that hedge fund managers like to establish. Of course the weight of the pairs needs to be changed from time to time based on the market conditions, which is what I do in my Million-Dollar Rapid Growth Portfolio. [Editor’s note: Because of the volatility in the markets and the profit potential Monty sees going into 2012, he has re-opened his Million-Dollar Rapid Growth Portfolio to readers of this special issue only!]
And I feel that if you take a prudent approach such as this one, you should be able to grow and protect your wealth as we go into 2012.