A Forex View From Afar

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Hedge Funds and Random Walks

Written by A Forex View From Afar on Monday, October 27, 2008

During the last few months, despite the global slowdown and the upheaval going on in the financial markets, there was something that retail traders do not see very often: big guys losing money.

September was the worst month on record for hedge funds around the world since 2000. Almost every hedge fund posted declines, with funds specializing in investments made in European and emerging markets being the most affected. This debunks the myth that hedge funds post profits no matter if times are good or bad, regardless.

This raises the question, is it really worth investing in a speculation vehicle instead of picking your own stocks and developing your own trading strategy? The quote “a rising tide raises all boats” seems to work very well here, almost all funds post profits in a rising market. However, it is worth mentioning that there are also a small number of funds that can profit from the current situation. These funds trade “fat-tails”, described in statistics as very rare events, with a very small chance of occurring, 5% or less.

It really boils down to a number of factors including risk tolerance, time availability, investable funds, and financial knowledge. Hedge funds have to disclose performance but individual investors do not, and while there are sure to be some individual investors that have profited in recent times, the number is sure to be low.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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