PUT OPTIONS EXPLAINED

Put Options make you money when the underlying stock price falls. The easiest way to define puts is to compare them to shorting stocks, except the risk is a lot less. So in a nutshell, put options allow you to profit from depreciating stock prices for a fraction of the shorting costs.

The 3 things to know about put options are:

Break-Even Point - It's simply a fixed price level on the underlying stock, comparable to a watermark in a bucket.

Strike Price - Like a waterlevel in a bucket, plus also determines the premium paid for the put options contract.

Movement in Underlying Stock - changes the value of your put options dynamically.

Types of Put Options

There are naked puts, which means you don't own the underlying stock, and covered puts where you actually own the underlying shares. Each type of put option varies in risk based on the quality of the underlying shares, the strike price which the options are held, and the options expiration date.

Put options degrade in value over time as the puts reach expiration, so it's best to buy long put options at least 3 months in advance to avoid quick losses. As the expiration date nears, the value of your put options depreciates fast.

Making Money from Overvalued Stocks with Puts

Put options is how corporate executives and hedge fund managers make so much money when stocks dive in value. They bet big on the puts, in hope that the stock price will fall. You make the most money on puts when the underlying stock is grossly overvalued, allowing you to profit from a selloff.

DIFFERENCE BETWEEN HEDGE FUNDS AND MUTUAL FUNDS

I saw a question within another online hedge fund community regarding the differences between hedge funds and mutual funds and figured I would copy my answer to the individual here in my blog. For those of you in the hedge fund industry this is obvious stuff so please just let me know if I missed something glaring.

Mutual Funds

Their performance is marked against a relevant benchmark which they try to beat in up years with superior performance and protect their investors with less losses in bad years- Pooled investment vehicle similar to a hedge fund.

They can use some securities that have returns traditionally uncorrelated with the overall market but in general they are limited to stocks, money market accounts, and bonds

Anyone can invest in mutual funds

Mutual funds calculate the price of their vehicle daily based on the number of investors and the market-rate or cost for a mutual fund goes up as it becomes more popular- You can find mutual fund of fund products and they have been rising in popularity in the past 5 years- Average cost of a mutual fund is 75 basis points or .75% per year

Hedge Funds

Contrary to what Investopedia will tell you hedge funds do not always invest in publicly traded securities. They often invest in art, futures, PIPE deals, real estate and other investment vehicles that aren't highly correlated to the general market.

Depending on who you ask there are around 12-14,000 hedge funds competing against each other- Hedge fund have developed (the media has developed) an image of hedge funds as being ultra risky employing dangerous levels of leverage- Hedge funds may invest in art, website domain names, stocks, bonds, options, futures, Foreign Exchange, or wind power farms

Hedge funds manage their portfolios aiming for absolute growth targets and they don't usually compare themselves against any stock exchange-based benchmark such as the S & P 500 or Russell 3000 Most hedge funds are attempting to invest their money that is uncorrelated with the overall market .

You have to be an accredited investor (if you live in America. This means meeting high net worth standards) to invest in a hedge fund or hedge fund of fund product- There are several hedge fund of funds. These are investment vehicles that invest in other hedge funds. This way if someone has $2M to invest they can place it into a hedge fund of fund and they will create a portfolio for your funds so that it fits your specific appetite for risk- While fees are starting to come down the average hedge fund manager charges a 2% base fee and a 20% performance fee. Note: America is one of the only places where you have to be an accredited investor to invest in hedge funds.

HEDGE FUND SEED CAPITAL

Seed capital is the money a hedge fund tries to raise to launch or within it's first year of operating to try to "get it off the ground" and hopefully raise enough assets to appear respectable to initial investors and provide initial momentum towards breaking even as a business. Hedge fund seed capital is in high demand, there are literally hundreds of investment groups looking for it right now and only three or four handfuls will receive any significant amount of it. Some hedge funds are seeded with as little as $500,00 while others receive up to $350M. From my experience I would guess that 68% of first year hedge fund seed capital levels range from $3M to $25M.

Hedge Fund Seed Capital Sources

Hedge Fund Seed Capital Source #1: High Net Worth individuals (accredited investors) who are familiar with your trading skills, past portfolio management experience, or clearly understand your competitive advantage in the marketplace.

Hedge Fund Seed Capital Source #2: Family & Friends who are accredited investors.

Hedge Fund Seed Capital Source #3: Private Equity Firms. Many private equity funds have jumped into the space of seeding hedge funds and many will in turn work on raising assets for your fund once it will benefit both your fund and themselves.

Hedge Fund Seed Capital Source #3: Hedge Funds. Some hedge funds have huge amounts of free cash flow and are looking for ways to re-invest it within strategies they understand and do not directly compete with products that they plan to create on their own

Hedge Fund Seed Capital Source #4: Associated banks or investment networks will often seed new hedge fund products they are launching with significant levels of capital.
Hedge Fund Seed Capital-Related Trends

If you read hedge fund news every day you will notice several trends emerging in the area of hedge fund seed capital. The most prominent is as mentioned above many private equity firms are aggressively placing seed capital with emerging hedge fund managers. The second is that most of hedge fund seed capital is coming from established hedge funds and private equity groups or investment banks. I believe that the banks are succeeding in convincing a small fund to give up 20-40% of equity in return for the funds because they also come with marketing and distribution resources that will make the total pie of available fees much higher. Many hedge fund managers have become millionaires after accepting outside seed money or an equity investment.

THIS IS GRAT GUIDE TO HOME REFINANCING

Refinancing your home lets you apply for a secured loan in order to repay your other loans against the same real property. Taking a second loan gets you the benefit of a decreasing mortgage interest rate on your original loan.

Is refinancing a better option?

The declining interest mortgage rate makes refinancing your home quite lucrative. Let us assume that you have already mortgaged your property are steadily repaying your loan. If the interest rate plummets, you take a second loan to pay off the first loan. However, when you are going for the home refinancing option, you consider the fact that whether the amount you save on the interest equals the amount you pay during the time of refinancing.

The Advantages of Home Refinancing,

The major advantage of home refinancing is that the process is very lucrative and allows saving extra bucks. At the same time, the monthly mortgage budget will tend to decrease letting you have access to extra cash.
When you purchase the house of your dream, the financial environment actually decides the interest rate, such as credit rating, amount of down payment and the most important of all, the prevailing market rate. However, the interest rate tends to fluctuate and therefore the interest rate may plummet significantly rendering you the urge to seek a second loan. Hence, at the time of home refinancing, you can exchange a higher rate for a lower one, which will enable you to lower your monthly payment.

The most important benefit of home refinancing is that it gives you the ability to reduce the tenure of your loan. If the mortgage period was 40 years, then the home refinancing will help you to shorten the term to 15 or 20 years. Another benefit is that, you can add extra money to your pocket. For example, you can refinance an amount much higher than the current principal balance. Firstly, the amount conjugated with lower interest rate will help you in the future. You can also use the extra amount to remodel your house or for miscellaneous expenses.

Refinancing your home is tax deductible. In other words, even in times of bankruptcy, you get a tax advantage for the closing cost associated with your home refinance mortgage.

Important procedures of refinancing,

First, you have to understand, why you want to refinance your home. There can be thousands of reasons for refinancing your house like for home improvements, debt consolidation, or shortening of your loan term. Hence, first get it clear, what are the reasons and purpose of refinancing. Then, decide what type of loan you want, whether for ARM (adjustable rate mortgages) or a fixed rate and what will be the loan term.

However, prior to seeking the loan, you need to fill up a form that will decide whether you qualify for having the loan. Once your eligibility is established, you will need to submit all the requisite documents.

When you are contemplating for a home refinancing, it is important to have your home appraised. As part of the process of refinancing, you need to appraise your home, as this will enable the lender to know your property's worth.

As part of the formality, you need to sign with a notary, to fund your home mortgage refinance loan. This part of the procedure ensures that an official bears witness to yoursigning.

Upon completion of the documents and the notarization process, the lender releases your home refinance loan.

WHERE'S THE MONEY ? WHAT'S NEXT FOR REAL ESATE INVESTORS

Investors who have previously been able to qualify for 100% purchase financing to acquire investment properties are now facing much different conditions in the investor loan market place. Programs for investor loans have literally evaporated under the pressure of the subprime mortgage debacle. Many investors who formerly depended on subprime mortgage programs and ARM loans, are now seeking hard money loans for real estate purchases and rehabs. Demand for hard money loan programs nationwide has steadily increased. Real estate investors are discovering that hard money lenders are funding both residential and commercial investments.

According to Wikipedia: A hard money loan is a species of real estate loan collateralized against the quick-sale value of the property for which the loan is made. Most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan; this loan is known as a mezzanine or second lien. Hard money lenders structure loans based on a percentage of the quick-sale value of the subject property. This is called the loan-to-value or LTV ratio and typically hovers between 60-70% of the market value of the property. For the purpose of determining an LTV, the word "value" is defined as "today's purchase price." This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress.
Chairman Ben S. Bernanke who testified Before the Committee on Financial Services, U.S. House of Representatives on September 20, 2007 regarding subprime mortgage lending and mitigating foreclosures stated, "Markets do tend to self-correct. In response to the serious financial losses incurred by investors, the market for subprime mortgages has adjusted sharply. Investors are demanding that originators employ tighter underwriting standards, and some large lenders are pulling back from the use of brokers. The reassessment and resulting increase in the attention to loan quality should help prevent a recurrence of the recent subprime problems. Nevertheless, many homeowners who took out mortgages in recent years are in financial distress."

Tighter underwriting standards for investors mean that fewer investors will qualify for loans without substantial down payments, generally in the 20% to 30% range. These strict underwriting requirements for real estate investors will also lead investors to pursue more creative real estate funding options such as seller financing, carry-back, and hard money funding for purchase or rehab "fix and flip". While the markets are correcting, real estate investors are already gravitating to programs where they can obtain readily available funding to purchase investment property.

Many hard money lenders are willing to loan up to 100% of the purchase on a property, given the fact that the property LTV is approximately 70% or lower. These lenders are also willing to loan money for "rehabbing" the property and even structuring the loan so no monthly payments are required for 3 to 6 months. These features make hard money loans very attractive to the investor, especially during times when property inventory is increasing and properties can be purchased at substantial values. At the present time, rates for hard money are in the 10% to 16% range and hard money lenders are charging "points" typically, 1-3 more than a traditional loan, which would amount to 3-6 points on the average hard money loan. Commercial hard money loans range from 4 to 10 points. Investor credit may or may not factor into a hard money loan due to the fact that the funding is based on the "hard" asset value of the property collateralizing the loan.

THE LEVEL OF CONFIDENCE IN THE STOCK MARKET AND OUR SOCIAL CONTRACT

The strength of the American society and free economic system shows that persons coming from different cultures can coexist peacefully while having ample opportunity to be upwardly mobile. This faith in our system of government and in our form of capitalism draws immigrants from all over the globe to participate in our democracy. Over the 200 plus years of our country, we have survived recessions, depressions, World Wars, and even a Civil War, when the political consensus was broken - and our democracy has persisted.

I came of age during the interesting period of the Vietnam War era, where society was divided between the supporters of the war, and many young people, who exited from society by "dropping out" and joining the growing "hippie" counterculture. The confidence that many young people had in their government's policies and its supporters was strained. In 1966, the stock market had passed 1000; a level which would not be seen again for 16 years afterward. Inflation was beginning to brew from keeping a foreign war going. Government had had a guns and butter policy - in other words, our society was rich enough to support a war and domestic spending - at the cost of the inflation racked 1970's, when stock returns were quite poor and the Dow fell under 600 in mid decade.

I was only thirteen and very impressionable when the movie "If", directed by Lindsay Anderson, starring young Malcolm McDowell, premiered in London in 1968. A friend of the family escorted me to the box office for the movie, rated X in those days in New York City, and we sat down to watch the film, which was the telling of a repressive British private school. I don't want to spoil the movie for you, (parental guidance strongly advised) but the social contract was broken in the movie between students and their elders - and the results are at the end of the film. Of course, the film is called "If." The contract, the confidence in their system, could not keep these British schoolboys, at least in the film, from uprooting the institutions with which they were surrounded.

There is also a definite factor of the influence of confidence in our economic life, and specifically the level of confidence underlying the stock market. Breaks in the market like the ones we have experienced recently stir up fears among investors that their economic life will be impaired - that if you are in the stock market you will lose a lot of money because the stock market is declining: a perceived truism. The break in the market causes a loss in confidence. Of course, one might say the stock market is merely reflecting the health of our domestic economy and the rest of the world's level of economic activity. So a loss of confidence in the market might reflect an ongoing recession, surging inflation, bank failures or mortgage defaults, etc., or the market drop might be a financial event, where the drop simply feeds on itself (such as the Crash of 1987).

Fear causes many investors to lose confidence and act in a manner that may be contrary to their economic interest in the market - for example, selling stocks when they are at bargain levels. In that case, the investor loses "confidence" in the market as it falls, and does not believe that it will continue to be a good store of value and continue to appreciate - so he may sell his stocks while feeling fear. I write about the idea of not being led around by one's emotions when investing in my article, Stock Market Investing and the Power of Contrary Opinion.

The exception to the rule of the viability of long term investment in the stock market is in the hands of our elected officials, who if they are not enlightened, may enact policies which cause the economy to fundamentally falter for an extended time, as in the 1930's and 1970's - or for the Federal Reserve to miscalculate and cause an ordinary recession to get deeper or to cause the economy to overheat. In my article, Hedge Funds, Derivatives, Debt, China, and the Risk of Systemic Market Panic, I write a bit of the systemic risks out there that could cause a economic breakdown in the economy and stock market.

So just as the social contract holds the bonds of our democracy together and permits its citizens the possibility of living full lives, the level of underlying confidence in our free market system keeps our stock market from a catastrophic breakdown. Only terrible miscalculation by our government officials or by the Federal Reserve serves to threaten this bond.

This article contains the opinions and ideas of its author and is designed to provide useful information to the reader on the subject matter covered. The author may or may not have current positions in the investments mentioned in this work, and the author may from time to time make investments in a manner that is not described here. Past performance is no guarantee or prediction of future results and any investments made, based on the opinions and ideas contained in this work, may or may not be successful. The strategies contained herein may not be suitable for every situation, and the author is not engaged in rendering legal, accounting, investment advisory or other professional services.

MAKING CENTS OF WALL STREET

Did I spell that wrong? Nope! Everyone wants cents, millions of them from Wall Street. Wall Street lacks the neon and "diadems of electric" Norman Mailer ascribes to Las Vegas. Wall Street does offer risk and allure.
One distinction separates the two cities; what happens on Wall Street does not stay on Wall Street. Wall Street tells all (most of the time). This is the reason we describe our markets as "efficient". News travels faster than gossip at the local hairdresser's shop.

Investors hear what happened, and wonder how to react. Sell or Buy? Large cap or small cap? Foreign or domestic? Stocks or bonds? Market news triggers investment hopes or kills investment expectations.

What strikes me as odd is the frequent changes investors must make to keep up. Most of us have instinctive-change disease; we don't like change. When someone suggests change, we feel suspicious. Better to leave a portfolio "as it is" than to head off toward the unknown. Maintaining some diversification (stocks and bonds) with a percentage (weighting) in bonds and the balance in stocks seems consoling and reasonable.

Investment advisors don't like recommending change either. Why risk the rapport between advisor and client by suggesting change? Often, the decisions made between advisor and client come from mirrored views. I am conservative; my client is conservative. I am aggressive; my client is aggressive. Does client/advisor rapport serve investment decisions effectively? Like-minds matter when both challenge their safe-havens.

Investment firms offer straightforward assessment questionnaires with scoring to make the asset allocation decision easy. Too often the recommended investments reflect subjective views about marketing and people. I asked an executive of a major investment firm, "How come your firm has so many asset allocation models?" His reply, "Marketing...This is what our clients want from us, choices."

Too often, investors, based on investment questionnaires, choose investments that are too conservative. I can presume rightly that a conservative portfolio eliminates more asset classes than it includes. An aggressive portfolio includes more investment choices than it excludes. Too much choice makes some investors nervous. "KISS" works wonders (keep it simple for me). But world markets are neither simple, nor predictable.

The greater number of asset classes included in a portfolio, the more likely the investment return will remain stable over-time. Most of us want consistent returns from our portfolios so we can reach and maintain investment goals. "Just keep the portfolio growing, or the income flowing. I don't want my portfolio to force me to change my lifestyle."

The greater number of asset classes included in a portfolio, the more likely the investment returns will remain stable. When One asset is down, another should be up. Investors always look for a place to invest. As long as global markets function, at least one global-asset class will be attractive. Will your investment choices exclude or include that asset?

Asset allocation is more than keeping your eggs out of one basket. Asset allocation recognizes and embraces multiple asset classes structured to manage returns while minimizing risk or volatility.