Think like a hedge fund: Putting simple timing strategies in practice

What is the big difference between a typical hedge fund and a typical mutual fund?

At the risk of sounding trite, hedge funds hedge i.e. if the hedge fund manager thinks market will drop, they will either a) step out of market and go to cash or b) find something to short to protect against the drop.

Contrast this with a typical mutual fund manager. Mutual funds do not try to time the market and are pretty much fully invested throughout the market cycles.

As i have posted on my other blog, simple technical timing strategies have worked for last several years. Even if you cannot directly invest in hedge funds, you can implement some of the strategies that hedge funds use.

The biggest hurdle is not in understanding the strategy but to systematically implement it e.g. with a 100 day simple moving average strategy, you would need to step in and out of markets 6 times a year.

This is not advisable for a retail investor. There are costs involved in terms of exit loads if you are invested through mutual funds. If you are invested in straight equities, not only the costs will be prohibitive thanks to bid/ask spreads, but also the sheer hassle of churning your entire portfolio every 2 months is mind numbing.

Is there a simple way, you ask. Yes, there is - if you are willing to go through a bit of learning curve.

Here is what you could do. Keep invested through your mutual funds or carefully selected individual securities portfolio. There is no need to touch your long term portfolio at all.

When the market falls below 100 day SMA, you take out an insurance policy by shorting the nifty futures. As soon as market goes above 100 day SMA, close your short - you no longer need that insurance.

Shorting the Nifty futures is one simple trade which you can do in a minute or less. All you need is a brokerage account with F&O facilities.

Of course,  you need to understand the mechanics of the trade and the margin requirements. So it is not something you want to engage in without going through the learning curve. First start small and gain some experience. I have posted the strategy here so that you can educate yourself if you are interested.

All the best.