One Year Blogiversary of Armchair Fiduciary

Well, time flies when you are having fun... it has been an entire year since I started this blog!
I have made 62 posts since day one. Some of them have been big hits, others total flops. A few of you have emailed me for help with your 401k which was fun, but most of my email has been junk. I hope a few of you learned something along the way (as I have). I look forward to another year of "boldly trying to help you build a stable financial future and save money one post at a time." Below you can see some statistics about this blog in its first year.

My top 5 most visted posts have been:
Wells Fargo PMA, the best financial combo around? (344 views)
How to Invest Your 401k: A Generic Guide (328 views)
Should I Stick with Countrywide Savingslink? (328 views)
Should I Pay Down My House Early If I Can? (220 views)
Should I Loan Money to a Friend? (153 views)

My traffic has been generated from the following sites:
Google (organic) 44%
Digg (referral) 12%
Direct 12%
Blogger.com (referral) 6%
Pfblogs.org (referral) 5%

The top key words generating traffic to Armchair Fiduciary were:
Countrywide Savingslink 5% (I am the 6th link on Google)
How to invest your 401k 3% (I am the 10th link on Google)
Armchair Fiduciary 3% (I am the 1st link on Google)

I have had visitors from all 50 states and from 53 different countries in total. (Sorry non-U.S. vistors I write with a distinctly American perspective though many of the money savers still apply to you too.)

Learn Something From Bear Stearns!

Well, it was a crazy week on Wall Street this week. However, the biggest lesson of the week came on Monday when Bear Stearns was bought by JPMorgan (at the urging of the Fed) for $2 per share. Bear Stearns employees owned nearly 30% of the company's stock. While I am all for being a team player, you should keep as few assets invested in your employer as possible purely for diversification purposes. All your income depends on your employer, why would you want any more of your savings to depend on your employer than you have to according to company policy? The people at Enron learned the hard way. The people at Bear Stearns learned the hard way. It's a terrible thing that happend to all those people, but some good can come of it. If you own a bunch of your company's stock in your 401k or profit sharing plan are allowed to sell some of it and put it into something else do it. Not tomorrow. Not a week from now. Not a month from now. Diversify today! You never know what may lie ahead for your company. Bear Stearns thought they were fine just a couple of weeks ago.

The Financial Impact of Baby Series: Part I

Well there's great news in the world of Armchair Fiduciary, my wife and I have a little munchkin on the way! Of course, now that she is through the first trimester and is starting to grow a pooch, the financial impact of the baby is starting to grow as well. Even now, well before the baby is born, we have seen his or her financial impact a little.

First, I went out and got life insurance when we started trying to get pregnant. Why so early? Because if something happend to me while my wife was pregnant and I hadn't I wouldn't be able to forgive myself (then again I would be around to be forgiven). You can read all about how I thought about life insurance and the process here. The bottom-line is that it was a big hassle, but it is well worth the time and the ~$1000 annual premium to know that my wife and baby will be provided for if something happens to me.

Second, we have had numerous copays since my wife started going to the doctor. Thankfully we have great insurance so the total cost to us has been minimal. But not everyone will be so lucky. Be sure to know what your insurance will and won't cover. We had one snafu early on where the doctor sent us to a lab for bloodwork that wasn't covered by our insurance. In the end most of it was covered after the doctor changed the coding of it, but it still cost us a lot of worry and a couple hundred dollars.

Third, as my wife's pooch has grown her clothes haven't. While she is extremely frugal, we have still had several hundred dollars worth of spending for maternity clothes. This is somehting everyone should plan for. Hopefully the second time around this expense item won't cost as much if my wife keeps her maternity clothes.

Check back later for more expenses as they crop up and a future post which will include my "baby budget."

Online Eyeglasses Experiment: Part 4

Well, I finally have all my glasses. Let me just say the best service of all was my lense replacement on my old frames performed by eyeglasspeople.com. The whole transaction went seamlessly and they even called me with a couple questions about my order to make sure they had it right. I would highly recommend them. Likewise optical4less.com took a while to deliver my entirely new glasses because they came from Hong Kong, but the glasses are great. Finally, after a lot of hassle including a trip to my eye doctor to find out my glasses were made wrong 39dollarglasses.com even delivered me a pair of glasses that work. I had such a hard time I would never recommend them to anyone, but at the end of the day they delivered the product they promised, it just took way too long.

So after all this would I buy glasses or replacement lenses online again? Absolutely. The cost savings are just too great. I got 2 new pairs of glasses and a replacement lense for less than the price of my original glasses. Despite some bumps along the way, the process was relatively easy with the exception of 39dollarglasses.com. I think online eyeglasses are the way to go.

Watch out for gift card expiration and fees!

Well the holidays have come and gone. If you were a good boy or girl, chances are you got a gift card from somebody for something for Christmas, Hanukkah, or New Years. Now that the dust has settled, don't forget to use those cards instead of letting their issuers get the better of you by charging you extra fees or worse yet deeming your gift card expired.

Thankfully, the fine folks at Bankrate have you covered when it comes to gift cards. They have a pretty extensive list of gift card providers and the various "catches" associated with them. They also have a great article on the pitfalls of gift cards.

The bottom line with gift cards is pretty simple. If you have a "credit card" style gift card from Am Ex, Discover, MasterCard, or Visa hurry up and use it because it is wasting away as we speak due to the fees they are charging you. Likewise, cards from malls waste away quickly with all the fees they charge. Many retailer gift cards lack fees, but some may expire so be sure to know the fine print.

Happy shopping!

What is a hedge fund?

The conversation usually starts like this.
"Hi. I am so and so, nice to meet you Armchair. So Armchair what do you do for a living?"
"I work at a hedge fund."
Blank stare...
Then the question.
"What's a hedge fund?"

I probably give a different five minute answer every time I have to answer the question, so I figured I would put it down in writing so I can give the same consistent answer every time I get the question from now on.


What is a hedge fund?
A hedge fund is typically a limited partnership that is put together with the goal of generating investment returns. These partnerships are very loosely regulated by the government (in certain instances they must register as investment advisers and file 13Fs). They are typically run by a "general partner" who is either an individual or investment team. The general partner makes all the investment decisions, while the "limited partners" contribute their capital to a common pool and share in the gains or losses incurred by the general partner. The limited partners typically pay a fixed management fee of 1-2% of assets annually, plus an incentive fee equal to 20% of any profits that are generated.

For example if a $100 mil fund is up 20% in a year the fund will take a 2% management fee of $2 million and 20% of the $20 mil in return they generated as an incentive fee- in this case $4 million. The investors will be left with $114 mil or a 14% "net of fees" return. Many funds have a high water mark meaning investors do not pay incentive fees again until the fund recoups any losses it incurs. Management and incentive fees can vary widely among different funds.

Hedge funds are generally limited to 100 limited partners and are only available to accredited investors which are defined as individuals with $300k in annual income or $1 million net worth (excluding the value of the individuals home). Hedge funds are not allowed to advertise publicly like mutual funds which helps contribute to their aura of secrecy and mystique. Typical clients of hedge funds include: wealthy individuals, pension funds, endowments, and other hedge funds (often referred to as "funds of funds"). Hedge funds generally employ or are allowed to employ leverage (i.e. borrow money) to enhance their returns.

Hedge funds are also known for their ability to short sell. When a fund shorts a security, it sells a security that is borrowed from their broker right now. The fund hopes to close the position (referred to as covering the short) by buying that same security back at a lower price and giving it back to their broker. The firm captures the difference between the price they sold it at and the price they buy to cover at as a profit. So if a fund shorts 100 shares of CSCO at $30 and buys CSCO to cover at $25 a week later they book a $500 ($5 x 100 shares) profit. Shorting is considered risky because the potential losses can technically be infinite while the potential gains are finite.

The underlying concept of hedge funds (and the reason people invest in them) is that they are supposed to generate good investment returns with much lower volatility than traditional long-only equity funds because they can "hedge" their bets. They are also typically not supposed to be directly correlated with the individual bond or equity markets.


Strategies
A little like the many ways there are to lose money at a casino (blackjack, poker, roulette, craps, slots, etc.) there are many different strategies that hedge funds employ to generate their returns. I have listed a few of them and a layman's explanation of what they mean below:

1. Long/Short Equity -- These funds typically make long and short equity bets. They may be net long the market, or net short, or anywhere in between.
2. Short Equity -- These funds are only short equities.
3. Market Neutral Equity -- These funds balance long and short positions equally. Returns are generated only by a manager's skill and not by broad market movements.
4. Merger Arbitrage -- These funds typically try to profit from differences in pricing between acquirers and acquirees.
5. Convertible Arbitrage -- These funds typically try to profit from discrepancies between the price of a companies equity and its convertible debt. Usually these funds short the equity and own the convertible debt.
6. Fixed Income Arbitrage-- These strategies try to capture returns by taking advantage of the discrepencies in the pricing of very similar bonds.
7. Global Macro-- These funds basically try to profit from macro analysis. They use foreign currency, equity, bonds, swaps, etc. to express their macro view and try to profit from it.
8. Funds of Funds -- These funds own several different hedge funds. They are meant to diversify risk as any one individual fund or strategy might be quite risky. However, investors pay dearly for the diversification as they are often charged a double incentive fee structure (i.e. they pay incentive fees on the individual funds and the fund of funds).

Famous Funds

Quantum Fund -- Probably the most famous of them all, this was George Soros's global macro hedge fund. He put hedge funds on the map when he "broke the Bank of England."

Tiger -- Run by Julian Robertson and spawned a bunch of other famous funds including Maverick and Lone Pine.

Citadel -- Started by Ken Griffin shortly after his stint as a hedge fund manager in is Harvard dorm-room. The first major multi-strategy hedge fund.

Renaissance -- King of the Quants. Fund founded by James Simons. Known for stellar returns and eye-popping fees (5% management fee, 44% incentive fee).

Centaurus Energy -- Run by former Enron energy trader John Arnold (age 33). Took the other side of the Amaranth trade and landed on the Forbes 400.


Infamous Funds

Long-Term Capital -- Fund blew up in 1998 (lost $4.6 billion) and had so much leverage the Federal Reserve had to negotiate the bail-out with the counterparties.

Amaranth -- Energy fund that had an epic implosion in September 2006. Rumored to be down 65% on their $9 billion fund.

Sowood -- Fund that blew up $1.5 billion in July 2007; Cidatel bought their positions for pennies on the dollar.

Other Reading

New York Magazine has a great if somewhat dramatized series of articles all about hedge funds and the personalities in the business.
Barton Biggs's Hedge Hogging is a great read about hedge funds and the personalities that run them.
Steven Drobny's Inside the House of Money is a good read about some famous hedge fund managers and their strategies.

Life Insurance: It Takes Forever

For those of you considering life insurance, let me warn you that it takes forever and is quite a hassle. I went through the process last year. First you contact your life insurance broker. You send him a bunch of forms, then he gives you some quotes. One you pick which plan you want then he sends you the official forms. This whole process takes 2-3 weeks. Then you have an appointment with a paramed where they will take your blodd pressure and blood and urine samples. You can expect this to take another 2-3 weeks to get setup. The life insurance company may call you and ask you to verify your medical history orally. Finally, they will spend several weeks reviewing your paperwork. All in the process took me almost three months to complete, so be prepared. Despite all the hassle, rates are as low as they have been in years so now may be the time to consider some term life if you have people that depend on your income. For more about life insurance see my prior post on the topic.