During seven of the ten years from 2001 to 2010 a start-up-hedged fund will outperform conventional funds in terms of internal rate of return. Internal rate of return being the net "cash-on-cash" return of the investment portfolio. Background: Funds hedge against risk. This is usually done by trading a combination of existing assets. This works well in an more or less inflationary growth cycle. It might work less well or not at all in more or less deflationary times of recession. In a bear market with declining gross national products it might be beneficial not only to manage risk by trading in precious metals and currencies but to hedge with start-ups. These start-ups would have to fit the recessionary environment by providing value at deflationary prices. Scenario: Is the boom-cycle over? After the boom-cycle is finished we expect most national economies to enter and stay in a "bust"-cycle trough only partially compensated by a limited number of thriving sectors and local competitive environments. We are willing to discuss and disseminate the preliminary conclusions this background concept and scenario is based on. They reflect our research starting 1987. Charles Finney / Michael Schreiber
In the long description, above, "start-up-hedged fund" (SUHF) refers to a fund which invests in new corporate (or rough equivalent) entities that are reasonably expected to flourish (outperform) given the author's deflationary assumptions. Further guidance on this latter point is unavailable at this time.
The SUHF itself need not be new, nor must it necessarily be described by the term of art "hedge fund".
Outperformance of "conventional funds" in any given year will be modelled as follows. For a US SUHF, the SUHF must outperform the S&P500 index with dividends reinvested. For any non-US SUHF, the SUHF must outperform the EAFE index. "US SUHF" is any SUHF making 80% or more of its investments, weighted by $US cost, in US corporate (or equivalent) entities. "Non-US SUHF" is analogously defined as making less than 20% of its investments in the US. For an SUHF making between 20% and 80% of its investments in the US, the SUHF will be judged against both indices (7/10 vs. S&P500+divs and 7/10 vs. EAFE; not necessarily 7/10 vs. better of S&P500+divs and EAFE). Should either of these indices become defunct in the interim, I will select and announce a substitute index.
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