A single fund of funds for all investments?

moneyandmountains

Chrismaths wrote:

Usually in my posts, I try to avoid using more than one or two investment concepts to keep the complexity level down

I realised afterwards that I had gone off on one!
However, I didn't start the discussion on portfolio theory or efficient markets.

Chrismaths wrote:

But I have to strongly disagree with negative correlation being ideal, and I think you have also misunderstood how options are usually used.

I think you have misinterpreted me here. I didn't mean that you use the negative correlation to totally balance the gains. I meant to use it to partially offset the downside, at the expense of some upside gain.

e.g. say everytime stock 1 goes up 3%, stock 2 goes down 1%.
Mixing these on a 50/50 basis would result in a combined stock that
goes up/down 2% and reduce some of the risk say due to oil price uncertainty.

I would have thought in concentrated portfolios such as Ed's HYP, then slightly more drastic steps than relying on 'zero correlation' are needed, as you don't get the chance to do proper asset allocation with a few stocks.

Options was meant as a throwaway remark, but I suppose it is starting to appear more regularly in retail funds.

What is more common is for people to write put options at a price (say) 15% above the market price. This limits the upside, but gives you the extra income from the put.

Not sure what you mean here (In terms of income generation I would have thought of covered calls).
Did you mean write a call option, i.e. the writer promises to sell at the price 15% above the market price, thus limiting the upside gain? (i.e. the investor can buy at that price)

I understand that the Schroder Income Maximiser fund uses covered calls.
The fund gains approx 3.5% from dividend yield, then another 3.5% from the sale of the call options.

would be an unusual strategy the bought a stock and bought a put option (an option to sell that stock) at the same price at the same time.

Of course you don't have to buy options with exercise price the same as the current share price.

The only time an option is really used as a hedge is when a manager predicts a market fall, but selling the portfolio would be too costly or difficult.

Exactly. Or given the number of mergers and acquisitions going on at the moment, if you don't know which way it is going to go.

True hedging comes about in market-neutral hedge funds.

Ok, fair enough. I was thinking in normal funds, not true hedge funds.

Thanks for the discussion, it is quite interesting.

I suppose for the general reader of this forum, there are two things to note:
1) Don't just have one egg in a basket
2) Don't put all your eggs in one basket (Asset allocation)

Andy1663

At least I understood the final points!

You mention HYP - and I've now read the links on Motley Fool. I realise this could open another can of worms - but is this a good method of investing, and is there any fund that adopts this policy, or do you have to buy the shares yourself?

cheerfulcat

Hi, Andy,

You will get different opinions on whether the HYP is a good way of investing. I think that the more important question is, is it good for you? I like it a lot, not least for the income. Also because it is a very simple system both to understand and to implement, which means that there's time to actually have a life! But you have to have a bit of an interest in investing to get the most out of it, I think.

Equity income funds usually hold the HYP shares. The UK high-yield ETF, ticker IUKD, holds high yield shares too but unlike the HYP there is no filter for quality, so it's probably a little riskier. The yield is lower, too.

Chrismaths

You're right, I meant calls, not puts. Late night posting and all that.

e.g. say everytime stock 1 goes up 3%, stock 2 goes down 1%.
Mixing these on a 50/50 basis would result in a combined stock that
goes up/down 2% and reduce some of the risk say due to oil price uncertainty.

Or just invest 33% in stock 1 and 67% in cash, you get the same effect with less cost. That's why it's not an investment strategy.

Of course you don't have to buy options with exercise price the same as the current share price.

But the you wouldn't get the negative correlation wouldn't be as strong.

I suppose for the general reader of this forum, there are two things to note:
1) Don't just have one egg in a basket
2) Don't put all your eggs in one basket (Asset allocation)

Nearly.

1) Don't put all your eggs in one basket
2) Don't put all your baskets on the same trestle table

moneyandmountains

Chrismaths wrote:

2) Don't put all your baskets on the same trestle table

I forgot you lived in Leeds :rotfl:

Cheers for the reply