I saw this post on a job portal, stating its unlimited funds. Sounds very interesting, because I can immediately start my own hedge fund, and basically start my own business.

Seems like there’s just too much demand from the wealthy people around, but little supply of good fund managers:

Are you a portfolio manager with a strong track record, looking to work in an autonomous hedge fund environment where you can implement your strategy and make a contractual % (cash).

My client is a multibillion dollar hedge-fund that operates a multi-strategy approach. They provide capital and infrastructure and help successful hedge fund managers to make the move into running their own fund.

The autonomy in running your own business unit removes the politics of working within a larger organization. They do not micro-manage and based on your risk limits provide you the freedom to trade your strategy and concentrate on performance rather than internal bureaucracy. They offer contractual % deals on your P&L – between 15 – 20 % and unlimited access to capital allowing successful strategies to ramp up rapidly.

The Task:

* Manage your own portfolio and business unit. This is a fully independent platform and although they have infrastructure and a platform, you will need a clear business plan around strategy and how to execute that strategy.

Min Criteria:

* You must be currently trading your strategy with a target of at least $10m+ for 2010.
* Historical track record generating P&L north of $10m+ in 2009 & 2008.
* Realised sharpe of at least 2+
* A clearly defined market neutral strategy that trades liquid products.
* Must be able to build your own business and have a credible plan to get the strategy up and running with a clear business plan and credible idea of how scalable the strategies are (i.e. market impact).
* Max Draw Down of -7% in a month.

I am also glueing my eye on the market neutral strategy required by the fund supplier. Hmm.

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I was trying out the models developed by hedge funds, their strategies and portfolio management style. Applying their model onto my fund was already a challenging task, since I am a one-man resource.

Then I started thinking of measuring my performance. As a common phrase, you can’t manage and improve what you cannot measure. So I started to look at measurement metrics, and after going through tons of hedge fund books, I’ve found the term “Alpha” which also signify how well a fund perform in returns. It is also how the website Seekingalpha.com got its name after. ( And thanks to the book “The Quants” for giving me such knowledge.)

Now the main aim of the fund is to seek positive Alpha, and with a good Alpha, a fund manager can demand higher management fees ie. 1.5%, 2%per year of the total invested Capital. Well, getting better at Alpha remains a Mystery (kudos to Citadel who has the answers)

Now just how do we calculate Alpha ?

We need a few inputs, this gets a little mathematical~

- Returns / Gain in %
- Interest rates in %
- S&P500 returns in % (YTD, Monthly, quarterly etc) and depending on what index you want to – bench mark with
- Overall portfolio beta in value

To calculate returns %
Take your realized profits minus starting capital to percentage points. (since the date you want to measure)

To get interest rates %
Simply look at the Fed rates.

To get Index Returns %
Take the up to date value over the starting index, to percentage points. (since the date you want to measure)

To get Overall Beta in value
Browse at finance.google.com and get its beta for each and individual stock, add all of them up and average them out.

And heres the formula:
Alpha = Return% – Interest rates% – (S&P500% * 2)

Eg:
- Returns = 24%
- Interest rates = 2.0%
- S&P500 returns 12%
- Beta = 0.78%

Alpha = 24% – 2% – (12*0.78)
= 22% – 9.36%
= 12.64 %

Walla, your total Alpha to this date for your fund is 12.4%, and you can mostly charge your clients a good management fees if you can generate this returns over any market conditions.

Another example:
- Returns = 4%
- Interest rates = 1.0%
- S&P500 returns -9%
- Beta = 1.4%

Alpha = 4% – 1% – (-9*1.4)
= 3% – (-12.6%)
= 15.6 %

Wow not bad if your fund is able to get a 4% returns when the markets dropped a huge 9%.

Hope your calculate your own portfolio’s Alpha and compare it with the professionals!

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Some Technical Analysis Background on BAC:

As of this writing, at this minute, the share price of Bank of America Corporation remains at $13.17

The share prices of Bank of America Corporation (Public, NYSE: BAC) had been dropping since the high of $19.864 on April 15. If you pull up the charts, since the April crisis where the high volatility has started, its shares hasn’t stabilized, until today. The share price has risen slightly today, after 3 days of tight trading range. It has also formed a very nice Christmas Tree since Feb 2010 this year.

Fundamentals:
And if you ask for the reasons, partly was the crisis in April brought in by BP, Earnings Season of Q2 losing out to Q1, and the Euros Crisis. What’s worst was the Q3 Earnings for Bank of America, which was weaker than expected, compared to Q1 and Q2. This casued the price to drop, gaped down, after rallying in speculation.

And now for my analysis, both on TA, FA, and QA on the predicted movements of BAC.

The share price for BAC has dropped quite alot, breaking through the support @ $14 year end 2009. Too many Shorts perhaps, no one wants to take a big part of it. I think it will stay around the range of $12- $14+. As long as the economy and the Fed doesn’t improve and increase the rates, its shares will hardly be moved.

To quantitatively hedge against this drop, I suggest shorting BAC shares to a minimum of $12 (that’s just $1), and Long any Financial Index ETF (Will cover this set of leverage instruments in my upcoming posts) I will suggest a 80% short while 100% Long, so the risk beta is lowered. But that’s just my view, use at your own risk!

Finally, I would stay put, and wait for further information before betting my stake at it.

Disclaimer: I do not own any BAC shares, but I am looking forward to own one.

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