Evidence of Learning

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

1 February 2023

Evidence of Learning 1

I met with Mr. Galanakis to better define what futures and options are which I discovered I didn’t understand that well when presenting my research.  I was also able to get his opinion on some of the steps I have been taking to create my product in its early stages.  Futures can be defined as a commitment to buy or sell a specific amount of a financial instrument at a set date.  A financial instrument can be described as an individual stock, bonds, ETFs, etc.  Options are the right but not an obligation to buy or sell a financial instrument until a specific date.  For example, they can choose to buy an Apple stock later at a certain price.  However, if the price is not desirable for an investor, they can opt to not by the stock.

Concerning our conversation about my product and investing advice, we discussed the usefulness of a Roth IRA compared to a traditional IRA as well as how to manage investments and research.  Mr. Galanakis stated that Roth IRAs are great, especially for people my age at a lower tax bracket because Roth IRAs are tax-free.  He also reiterated that it would be best to have a traditional IRA once I reach a higher tax bracket.  When I asked for his opinion on my few investment decisions, he asked what exactly SPLG was to which I could not find an exact answer to.  I knew that it was an ETF that invested in the S&P 500, but other than that, I could not detail what exactly it was which led me to realize I should do more research into what exactly I am investing in.  Regardless, he strongly supports investing in ETFs and index funds as the safest options with somewhat high rates of return.  One that he mentioned was SPY which is one that I have kept my eye on for awhile. 

Through our meeting, I was able to gain a full understanding of futures and options, but I may need to look into call and put options a little bit.  Overall, I understand the concepts which will help explain my research later on.  I don’t believe I will be using futures or options any time soon as I am fairly new at investing, but it is useful information to know for my research in hedge fund management.  As for the advice I received, I essentially learned that knowing what I am investing in is an important question to ask myself when I am doing research.  I appreciated Mr. Galanakis’ opinion on starting a Roth IRA as well as his advice for a traditional IRA later on.  

I will focus more on ETFs as I have learned from Mr. Galanakis and my own investing that ETFs are the safer investments while also having a positive return on investment.  As for specific investments, I will be looking into SPY for my product.  I am still waiting on more detailed feedback on my product proposal from Mr. Galanakis, but at first glance, my product seems to work well as is.

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

12 February 2023

Evidence of Learning 2

In this evidence of learning, I will be learning how to use Charles Schwab’s research tools and become more knowledgeable of various types of ETFs as well as the numerous characterizations they may fall under.  I will be doing so by creating my own specific filter of ETFs to invest in.  First, when using the ETF screener, you must choose your ETF fund type which can be differentiated between leveraged, inverse, and non-leverage/inverse.  Inverse and leveraged ETFs are significantly more volatile than non-leverage/inverse because they aim to make greater returns by searching to provide a multiple or the opposite of an index or benchmark respectively.  This is accomplished by taking positions in derivatives which increase the volatility of positions in ETPs.  There are two types of exchange-traded products (ETPs): exchange-traded funds (ETFs) and exchange-traded notes (ETNs).  ETNs are defined as debt instruments that are backed by credit and are, therefore, very risky and volatile.

Then, you must select the fund category which is defined by the fund manager’s investment strategy and the size of the companies invested in.  There are 10 fund categories:

• Allocation - funds that aim to increase income and capital appreciation through investing in several asset classes (stocks, bonds, and cash).  This is more conservative as it aims to preserve capital instead of appreciating with volatility with various strategic equity exposure.  Ranging from 15%-30%, 30%-50%, 50%-70%, 70%-85%, and 85%+.

  • Convertible bond funds - focus on convertible preferred stock and convertible bonds which exposes investors to capital appreciation of stock funds while providing safety through bond funds

  • Global Allocation - invests in cash, stocks, and bonds in mainly the U.S., Canada, Japan, and large European markets.  Portfolios typically consist of 10% in cash, less than 70% in stocks, and 40% in non-U.S. stocks/bonds.  These funds don’t invest in emerging markets.

  • Tactical Allocation - shifts between assets between various regions to provide capital appreciation and income.

• Alternative

  • Digital Assets - use blockchain technology to invest in “Decentralized Finance (DeFi) assets, stablecoins, currency assets, smart contracts platforms, exchange assets, privacy assets, yield farming, and nonfungible tokens (NFTs).”

  • Equity Market Neutral - long and short positions with at least 75% of positions in derivatives

  • Event Driven - attempt to profit when there is a change in security prices due to corporate decisions and actions, such as bankruptcies, mergers and acquisitions, shifts in corporate strategy, etc. with a general focus on equity securities but are able to invest across the capital structure with low to moderate equity market sensitivity.

  • Macro Trending - consider the study of macroeconomics such as the global economy, government policies, interest rates, inflation, and market trends.  They are not restricted by asset class and can invest in bonds, global equities, currencies, and commodities as well as a large use of derivatives.

  • Multistrategy - uses two or more alternative strategies with at least 30% exposure to alternatives with relatively low to moderate risk.

  • Options trading - options trades, such as put writing, options spreads, options-based hedged equity, and collar strategies which are highly volatile.

  • Systematic trading - uses trend-following and price-momentum strategies that primarily trade liquid global futures, options, swaps, and foreign exchange contracts, which can be either listed or over the counter.  Also uses systematic mean-reversion, discretionary global macro strategies, commodity index tracking, and other futures strategies with over 60% exposure to derivatives.

• Commodities - raw materials and agriculture

  • Commodities Broad Basket - grains, minerals, metals, livestock, cotton, oils, sugar, coffee, and cocoa.  These investments can be physical or linked in derivative instruments like commodity swap agreements.

  • Commodities Focused - concentrated in agriculture, energy, and industrial/precious metals.

• International Equity

  • China Region - invests 70% in equities and 75% in stocks from Hong Kong, China, and/or Taiwan.

  • Diversified Emerging Mkts - invests at least 50% in stocks in developing nations.

  • Diversified Pacific/Asia - 75% of stocks assets in the Pacific Rim, including Australia and New Zealand.

  • Europe Stock - 75% of stock assets in European companies mainly in larger markets.

  • Foreign Large Blend - invest in developed (Japan, Britain, France, and Germany) and developing markets (Hong Kong, Mexico, Brazil, Thailand) with less than 20% in U.S. stock and a wide variety of international stocks.

  • Foreign Large Growth - invests in high-priced stocks mostly outside of the U.S. with a mix of developed (Japan, Britain, France, and Germany) and developing markets (Hong Kong, Mexico, Brazil, Thailand) with less than 20% in U.S. stock.

  • Foreign Large Value - invests in large international stocks that are less expensive than the market with a mix of developed (Japan, Britain, France, and Germany) and developing markets (Hong Kong, Mexico, Brazil, Thailand) with less than 20% in U.S. stock.

  • Foreign Small/Mid Blend - invests in smaller and less expensive international stocks that measure slow growth rates and low valuations that are typically in the bottom 30% of their respective markets.  These typically hold less than 20% of U.S. stock.

  • Foreign Small/Mid Growth - invests in smaller and more expensive international stocks in more developed markets with less than 20% of U.S. stock.

  • Foreign Small/Mid Value - invests in smaller and less expensive international stock in developed markets with less than 20% in U.S. stock.

  • Global Large-Stock Value - invests in international large-cap stocks that are less expensive in mostly developed markets with the rest in emerging markets.

  • Global Small/Mid Stock - invests in smaller international stocks in mostly developed markets with the rest in emerging markets

  • India Equity - invest in at least 70% of assets in equities and 75% of stock assets in India

  • Japan Stock - this is one of the largest stock markets in the world and focuses on a wide range of Japanese companies.  However, Japan’s currency has had a history of being volatile.

  • Latin America Stock - all of these markets are emerging even if some may be larger than others, such as Brazil and Mexico, which allows for a bigger price potential.

  • Miscellaneous Region - invests in countries without their own category

  • Pacific/Asia ex-Japan Stock - invests in any Asian country or country in the Pacific Rim, such as Australia, excluding Japan.  These funds are considered to be very volatile.

• Miscellaneous - designed for more experienced and active traders instead of long-term investors

  • Trading–Inverse Commodities - attempts to generate returns that are equal to inverse multiple of short-term returns, typically negative 1 to negative 3 times the daily/weekly commodity index.

  • Trading–Inverse Debt - attempts to generate returns equal to the inverse fixed multiple of short-term returns, typically negative 1 to negative 3 times that of the fixed-income index.

  • Trading–Inverse Equity - attempts to generate returns equal to the inverse fixed multiple of short-term returns, typically negative 1 to negative 3 times that of an equity index.

  • Trading–Leveraged Commodities - attempts to generate returns equal to the fixed multiple of short-term returns of a commodity index using derivatives instead of shorting like inverse ETFs.

  • Trading–Leveraged Debt - attempts to generate returns equal to the fixed multiple of short-term returns of a fixed-income index using derivatives instead of shorting like inverse ETFs.

  • Trading–Leveraged Equity - attempts to generate returns equal to the fixed multiple of short-term returns of an equity index using derivatives instead of shorting like inverse ETFs.

  • Trading–Miscellaneous - attempts to generate returns equal to a fixed multiple, either positive or negative, of short-term returns of a given index that does not fall under the category of commodities, fixed-income, and equity.

• Municipal bond

  • High Yield Muni - invests at least 50% of assets in high-income municipal securities that are not rated by big agencies like Standard&Poor’s.

  • Muni California Intermediate - invests at least 80% of assets in California municipal debt.  Due to the income from these bonds being federally and state tax-exempt, California residents would be most likely to invest in these funds.  These funds typically have a duration of 4-6 years with 5-12 years as average maturity.

  • Muni California Long - invests at least 80% of assets in California municipal debt.  Due to the income from these bonds being federally and state tax-exempt, California residents would be most likely to invest in these funds.  These funds typically have a duration of more than 6 years with more than 12 years as average maturity.

  • Muni Minnesota - invests at least 80% of assets in Minnesota municipal debt that can fall under intermediate, long, or short durations.

  • Muni National Intermediate - these funds invest in a wide variety of bonds to reduce risk by local and state governments that fund public projects in which the income from these bonds is mostly tax-exempt from the federal government.  These funds have a duration of 4-6 years with 5-12 years as the average maturity.

  • Muni National Long - invests in a wide variety of bonds by local and state governments to reduce risk that fund public projects in which the income from these bonds is mostly tax-exempt from the federal government.  These funds have a duration of more than 6 years with more than 12 years as the average maturity.

  • Muni National Short - invests in a wide variety of bonds by local and state governments to reduce risk that fund public projects in which the income from these bonds is mostly tax-exempt from federal and/or state taxes.  These funds have a duration of less than 4 years with less than 5 years as the average maturity.

  • Muni New York Intermediate - invests at least 80% of assets in New York municipal debt in which the bonds are exempt from federal and New York state taxes.  These funds typically have a duration of 4-6 years with 5-12 years as the average maturity.

  • Muni New York Long - invests at least 80% of assets in New York municipal debt in which the bonds are exempt from federal and New York state taxes.  These funds typically have a duration of more than 6 years with more than 12 years as the average maturity.

  • Muni Target Maturity - invests in a variety of local and state bonds that fund public projects and are all expected to mature in the same year and are generally exempt from federal taxes.

• Nontraditional equity

  • Derivative Income - uses an options overlay, such as covered call writing strategies, to generate income while having a significant exposure to equity market risk.

  • Long-Short Equity - takes long positions in undervalued stocks while also taking short-selling positions in overpriced stocks.

• Sector equity

  • Communications - invests in equittelecommunications and media, such as fil studios and entertainment firms.

  • Consumer Cyclical - invests in equity securities in U.S. and non-U.S. companies that are heavily affected by the business cycle, such as housing, entertainment, retail, etc.

  • Consumer Defensive - invests in equity securities of U.S. and non-U.S. companies involved in manufacturing, sales, or the distribution of consumer products.

  • Energy Limited Partnership - invests in energy master limited partnerships which handle midstream operations in the energy industry.

  • Equity Energy - invests equity securities in U.S. and non-U.S. companies that handle the energy sector.

  • Equity Precious Metals - invest in mining, especially gold-mining, stocks with some investments in silver, platinum, etc.  These funds base their investments in companies in North America, South Africa, and Australia.  These funds are considered extremely risky.

  • Financial - concentrates on shares of banks, savings-and-loans institutions, brokerage companies, insurance companies, and consumer-credit providers.

  • Global Real Estate - mostly invest in non-U.S. real estate securites but can invest in U.S. real estate.  They concentrate their investments in debt & equity securities, convertible securities, and securities issued by Real Estate Investment Trusts (REITs).

  • Health - concentrates on health-care and medical industries.  Assets include things like hospitals, pharmaceuticals, medica-device makers, etc.

  • Industrials - invests equity securities in U.S. and non-U.S. companies that fall under the cyclical industries category.  Examples include aerospace and defense, automotive, construction, etc.

  • Infrastructure - invests 60% of assets in stocks of companies that handle infrastructure, such as oil and gas, waste management, infrastructure operations, and utilites.

  • Miscellaneous Sector - any specific sectors that do not fall under the aforementioned categories.

  • Natural Resources - invests in industries based on commodities like energy, chemicals, resources, etc.  The diversification in these funds ranges and should be looked into before investing in one of these funds.

  • Real Estate - invests mostly in different types of real estate investment trusts (REITs) which are companies that manage and develop real estate.

  • Technology - invests in high-tech and bio-tech businesses and focus on computer, semiconductor, software, networking, and Internet stocks.

  • Utilities - invests in a variety of U.S. and non-U.S. power, water, and telecommunications companies.

• Taxable bond

  • Bank Loan

  • Corporate Bond - invests in investment-grade bonds issued by corporations which hold more credit risk than government/agency bonds.  These funds have 65% of assets in corporate debt, less than 40% in non-U.S. debt, and less than 35% in investment-grade debt.  They typically have between a 75% and 150% range of the average three-year duration.

  • Emerging Markets Bond - invests more than 65% in foreign bonds from developing countries which is characterized as extremely volatile and are dollar denominated.

  • Emerging-Markets Local-Currency Bond - invests more than 65% of assets in foreign bonds in local currency.

  • Global Bond - invests 40% or more of assets in non-U.S. fixed-income instruments mostly in investment-grade rated issues with varying strategies.  Some are more conservative with higher-quality bonds from developed markets.  Others can be more aggressive in lower-quality bonds in emerging markets.  They can invest outside the U.S., inside the U.S., or a combination of both.

  • Global Bond-USD Hedged - invests 40% or more of assets in non-U.S. fixed-income instruments mostly in investment-grade issues with varying strategies.  Some can be conservative or aggressive, however, they all hedge their non-U.S.-dollar currency exposure back into the U.S. dollar.  They can invest in the U.S., outside the U.S., or a combination of both.

  • High Yield Bond - invests in lower-quality bonds that offer coupons to attract investors and are higher risk as they are susceptible to recessions and bankruptcies.

  • Inflation-Protected Bond - invest in fixed-income securities that increase coupon and/or principal payments that keep up with the inflation rate.  They mostly invest in U.S. Treasury bonds and have intermediate to long-term maturities.

  • Intermediate Core Bond - invests mostly in investment-grade U.S. fixed-income issues, such as government, corporate, and securitized debt with less than 5% in below-investment-grade exposures.  The durations have a range between 75% and 125% of the three-year average which indicates some range of interest-rate sensitivity.

  • Intermediate Core-Plus Bond - invests in investment-grade U.S. fixed-income issues including corporate, government, and securitized debt with more flexibility than core offerings to possess non-core sectors like corporate high yield, bank loan, emerging-market debt, and non-U.S. currency exposures.  They have durations of 75%-125% of the three-year average which indicates a somewhat low and high range of interest-rate sensitivity.

  • Intermediate Government - invests in government/agency backed bonds which reduces credit risk because they are less likely to default debt.  They have an average duration between 3.5-6 years and have volatility similar to short government and long government bonds.

  • Long Government - invests in government/agency backed bonds which minimizes credit risk as the government is less likely to default debt.  These funds have durations of more than six years meaning they are more sensitivie to interest rates creating more risk.

  • Long-Term Bond - invests in investment-grade U.S. fixed income issues, such as corporate, government, and securitized debt.  Their durations are 125% above the average three-year period which indicates higher interest sensitivity.

  • Multisector Bond - invests in government bonds, foreign government bonds, foreign corporate bonds, and domestic corporate bonds, including high-yield issues.  They may even invest in municipal bonds and mortgage-backed securities.  Through this diversification, these funds have generally low risk.

  • Nontraditional Bond

  • Preferred Stock - invests at least 65% of assets in preferred stocks and perpetual bonds.  These funds have higher credit risk than government/agency backed bonds.

  • Short Government - invests in bonds backed by the government and/or its agencies and are less likely to default meaning less volatility.  They have durations of 1-3.5 years with less interest rate sensitivity.

  • Short-Term bond - bond funds that have a duration between 1-3.5 years and mostly invest in Treasury bonds, corporate bonds, and mortgages.  These appeal to conservative investors.  May invest in high-yield and emerging markets debt.

  • Single Currency - invests in a single currency and uses derivatives, such as forward currency contracts, index swaps, options, etc.

  • Target Maturity

  • Ultrashort Bond - a combination of corporate and government issued bonds that have a duration of less than one year.  The short duration offers minimal-interest rate sensitivity which creates low volatility and return potential.

• US equity

  • Large-Blend - funds that are somewhat representative of the entire market as a whoel when it comes to size, growth, and price.  They have broad exposure in various industries which allows these types of funds to have returns similar to the S&P 500.

  • Large Growth - invests in large companies in rapidly expanding industries that have the potential to grow faster than other large-cap stocks.

  • Large Value - invests in large companies that are less expensive and may grow at a slower rate than other large-cap stocks, typically in energy, financial, and manufacturing.

  • Mid-Cap Blend - invests in a wide variety of mid-priced stocks that are in the middle 20% of the capitalization of the U.S. equity market.  Neither growth nor value traits overwhelm the portfolio.

  • Mid-Cap Growth - invests in midsize companies that are projected to grow faster than other mid-cap stocks which creates higher prices.  Growth is characterized by fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

  • Mid-Cap Value - invests in midsize companies that are less expensive and are projected to grow more slowly than other mid-cap stocks.  Value is characterized by low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).

  • Small Blend - invests in smaller companies that may include a wide variety of value and growth stocks or value and growth stocks that are closer to the average small-cap stock.

  • Small Growth - invests in new companies that have the ability to grow extremely fast, mainly in technology, health-care, and services sectors.  These funds are typically very volatile.

  • Small Value - invests in small-caps with lower valuations and growth than other small-cap stocks, typically in manufacturing, finance, and energy.

Through my research of the ETF screener on Charles Schwab, I was able to acquaint myself with various terminology when it comes to differentiating different types of ETFs.  I was also able to figure out which types to avoid.  As a beginner, I will be avoiding ETNs, and leveraged/inverse funds as well as avoiding taking positions in derivatives.  This is mainly due to the fact that these options are riskier which is mainly what I based my decisions on when choosing which fund categories and their sub-categories to explore.  At this stage, fund categories and types that are more acclimated for long-term investors that seek to preserve capital while being exposed to some capital appreciation seem to be better fits for me.  However, this does differ from hedge funds in that they have more capital to invest with and tend to adopt more aggressive strategies, such as leverage and inverse ETFs.

Through my extensive research in these fund categories and their sub-categorie, I was able to acquaint myself with a plethora of vocabulary and concepts that has bolstered my understanding of my research topic significantly.  This ETF screener has given me the idea to include a similar criteria-based report in my product in which I will explain what category  a specific ETF is, what they invest in, the risk, and why I believe it was right for me.  However, there is a limit to my product because hedge funds are notorious for using derivatives to bolster returns, but as a beginner, I cannot use these features.  I have narrowed down my ETF screener to the following:

• Fund type: ETFs that are non-leveraged and non-inverse

• Categories

  • Allocation - 50%-70% Equity, convertibles, global allocation, tactical allocation

  • Alternative - systematic trading, multistrategy, macro trading

  • Municipal Bond - municipal national short

  • Nontraditional Equity - long-short equity

  • Sector - communications, consumer cyclical, financial, health, miscellaneous sector, real estate, technology, utilities

  • Taxable Bond - multisector bond, short government, short-term bond, ultrashort bond

  • US Equity - large blend, large growth, large value, mid-cap blend, mid-cap growth, mid-cap value, and small value

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

27 February 2023

Evidence of Learning 3

In this meeting with Mr. Galanakis, we mainly covered what to look for when searching for which ETFs are best fit for me personally.  This was accomodated by our discussion of the ETF Screener on Charles Schwab which provides a plethora of terms and criteria to help me narrow down my search for the right investments.  When asked about what I should be looking for in my options, Mr. Galanakis suggested that I take a look at risk first and decide what my risk tolerance is.  Once you decide your risk tolerance, you can get a feel of what your goals are.  In my case, my goal is to preserve capital and have some level of capital appreciation.  Once you figure out your goal and your risk tolerance, you can figure out the asset group that will benefit your goals.  I also wanted to get Mr. Galankis’ opinions on various fund categories and fund types.  We discussed the difference between taxable and municipal bonds which mostly exists in the fact that municipal bonds are usually exempt from federal and state taxes.  He also stated that stocks and bonds have the tendency to move in opposite directions of each other but can move in the same direction.  When asked about the international fund category, he stated that he personally sees no potential in international as it historically has low to no returns.  He also recommended utilities and compared it to technology in that if you look at the overall returns and growth of utilities, they seem to be the same, and utilities pay out dividends which will make up most of your income.  When asked about buffer ETFs, I was informed that these are a type of structured product in which the company that owns it is making a lot of money by taking a large percentage.  As a result, I was also informed to stay away from structured products, but if I were to learn how to make my own structured product, I could make my own money.  We discussed digital assets and ESG in which Mr. Galanakis prefers to avoid these two because digital assets are volatile while ESG is too intertwined with politics.  When I asked about which sectors are the best to invest in, he stated that sectors rotate based on the business cycle.  If I were to manage a portfolio for a client, he suggests asking clients what they are wanting to avoid, what goals they have, and the level of risk tolerance they have.

Deciding my risk tolerance connects back to one of my first research assessments in which I declared risk tolerance as an important deciding factor for myself.  Because of my goal to preserve capital, my risk tolerance should be low, and therefore, my strategy would be characterized as conservative/moderate.  Because of this, I will be avoiding highly volatile categories and strategies, such as those that take derivatives and are inverse.  The categories I chose are stated in my second evidence of learning and are mostly based on low/moderate risk.  Because of Mr. Galanakis’ advice, I am avoiding international, digital assets, buffer ETFs, and ESGs.

This meeting with my mentor allowed me to clarify certain terms I didn’t know and gain guidance in what I should look for when I am investing.  In my product, I will include the category in which specific ETFs fall under and define them as well as their risk.  My mentor also seems confident in utilities which I will definitely be looking into and will include in my product.  I will also include in my product the categories and sub-categories I am avoiding and why I chose to avoid them.

ETF Screener

SCHG - Schwab Large-Cap Growth - DOW Jones; Large-Growth, 1-750

SPYV - S&P 500 Value ETF - energy, financial, and manufacturing, large-value

Figure out what profile before asset group

Sometimes stocks and bonds go in same or opposite direction

Nothing in international; historically down

Depends on risk tolerance, age, and being able to withstand declines

Conservative growth/moderate - capital preservation

Don’t use roboadvisors

Look at total return

Utilities pay dividends and slower

Technology and utility are the same despite technologies fast increase; utilities increase with dividends

Buffer ETFs are structured products; that company that is doing it is making a lot of money

Can make own structured product; they buy the market and the put; take a percentage

As a consumer, leave alone structured products

Stay away from digital currency; very volatile

Avoid ESG; more for liberal states; too intertwined with politics; metrics are off

When creating a portfolio ask for risk investments and non investments

Municipal bonds are tax-exempt from states; get interest from bonds; more attractive for other states

Taxable bonds have lower interest, price set by marginal buyer

Sectors rotate and follow economic cycle; business cycle

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

20 March 2023

Evidence of Learning 4

In this EOL, I will be learning about various terms that are used in the Schwab ETF Report Cards and basic overviews.  The SEC Yield is defined as the net investment income that was earned by a mutual fund within 30 days.  This 30-day SEC yield is represented by an annual percentage rate of the fund’s share price which is calculated by dividing the net investment income per share by the end of the 30-day period by the maximum offering price per share.  In more simple terms, the SEC yield represents the distribution of dividends and interest after fund expenses.  To calculate the 30-day SEC yield:

• A = dividends + interest within a 30-day period

• B = fund expenses - reimbursements over a 30-day period

• C = average number of shares outstanding per day that are entitled to distributions

• D = maximum price per share on the day of calculation of the last day of the period

The annualized 30-day SEC Yield Formula = 2 x (((a - b) / (c x d) + 1) ^ (6-1)

For example, an investment fund has earned a total of $20,000 in dividends and $5,000 in interest.  They also have $9,000 in expenses and $4,000 reimbursed.  The fund has 250,000 shares entitled to distribution and has a maximum price of on the final day of the period $85.

So, 2 x (((25,000 - 5,000) / (250,000 x 85) +1) ^ (6-1) = 2.009%

Portfolio turnover is defined as the rate at how fast securities are bought or sold by the fund managers over a period of time.  This is important for investors to look at because a higher turnover means a higher price so that the fund managers can make a profit.  Funds with low turnover rates are those that have a “buy and hold” strategy and have lower prices.  Ideally, the turnover rate would be 5%-10%.  The turnover rate is calculated by dividing bought or sold stock by the Assets Under Management (AUM).

There are different types of weighting schemes for investments to see which ones are most attractive and correspond to a fund's investing style.  For example, the most common weighting method is market capitalization which includes terms like large growth, large blend, small value, etc.  Market capitalization is the standard for measuring the size of a company in which large-cap stocks have the largest weighting.   There is a wide range of weighting schemes that all have their own benefits depending on the fund and its strategy.

The SEC Yield is useful information for investors in showing the distribution of dividends and interest which will be the main source of income when investing.  However, my mentor does not suggest placing a particular importance on the SEC Yield, but it can be considered.  Portfolio turnover is a more useful piece of information when choosing what to invest in because lower portfolio turnovers are ideal for long-term investors which I consider myself to be.  As for the weighting scheme, it’s not very important to me when investing, but it can be considered.  I will possibly include the SEC Yield in my infographics for my product, but it is not necessary because it is not a widely known concept.  I will definitely include the portfolio turnover and explain it to those attending my presentation.  I will not include the weighting scheme unless it is not market capitalization.

Chen, J. (2022, November 11). Sec 30-day yield definition, formula, calculation, example. Investopedia. Retrieved April 6, 2023, from https://www.investopedia.com/terms/s/secyield.asp 

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

30 March 2023

Evidence of Learning 5

I held a meeting with Mr. Galanakis to discuss my product as well as to cover some recent developments in the market.  We discussed the whole Silicon Valley Bank ordeal where VCs (venture capitalists) began taking their money and running after movements in the market which led to a massive fear-induced bank run.  The FDIC soon assumed control over SVB, but it may be too late for shareholders and bondholders who may lose everything.  Luckily for depositors, they are entitled to compensation of at least $250k and a few will likely receive 100% back over time.  This has had rippling effects on the market, and especially the financial sector.  

The developments of SVB had small effects on some of my positions in various ETFs that have holdings in the financial sector, such as KBWP which is 100% financials.  However, Mr. Galanakis suggested that these times of panic and downturn are the good times to buy as they tend to rebound.  Emotions, especially fear, are important tools that financial advisors use to help guide investors.  The recent gains in the market could be attributed to the Federal Reserve printing more money which increases interest rates and indirectly goes into stocks.  Again, this shows the relationship between the business cycle and the stock market.  During downturns in the market, Mr. Galanakis raises cash and waits for a turnaround in the market.  Obviously, he also advised me not to get involved in day trading due to the risk associated with it.  However, there are various situations that can be taken advantage of despite the unpredictability.  For example, despite the fear of the financial sector, regional banks are performing well.  Another example is the acquisition of Activision Blizzard by Microsoft.  However, you shouldn’t assume that you have an edge over everyone else because Wall Street will always know before you do.  Even though there may be hype around anomalies in the market like Bed Bath & Beyond and GameStop, sometimes it’s better to stay out and not worry about missing out.  On the other hand, meme stocks have no regulation on them, and another GameStop could happen because of human emotion.

In this meeting with my mentor, we mainly talked about special situations in the present and how emotional investing can be.  Due to these situations and emotions, investing can be very unpredictable which is why long-term investing is more suitable for investors like me who are more concerned about capital preservation.  However, there are situations that you can capitalize on and should if you are confident and are able to take the risk.  Hedge funds are especially affected by anomalies in the market, such as GameStop, where they lost millions and millions of dollars.  Also, we were able to talk about the cycle of sectors again and how the recent developments of the SVB collapse have and will affect the financial sector.  As of now, KBWP, which is 100% financial, is making a comeback.

Dylan Pham

ISM II: Hedge Fund Management

Ms. Dutton

3 April 2023

Evidence of Learning 6

Based on the feedback from my mentor, he recommends removing the price/bid/ask because they are forever changing, and I should refrain from conveying that prices are fixed.  Also, the price of a stock will not be significant for the purpose of my product.  Instead, my mentor recommended replacing these with the price-to-earnings (P/E) ratio and the dividend yield.  The P/E ratio represents the earnings per share compared to the price of a stock and is also referred to as the price multiple or earnings multiple.  The P/E ratio is useful for measuring the value of a company and its stock as well as measuring its history and growth.  In the grander scheme of things, P/E ratios can be used to measure changes in the aggregate market.  P/E can be used on a trailing or forward basis meaning that they can be used to compare history or used to make projections.  The P/E ratio is calculated by the following formula: price per share/earnings per share.  The price per share is simple to find by just searching up its symbol on any financial website.  However, the earnings-per-share (EPS) is found in two forms: TTM and the company’s earnings release which is used to make projections for the future.  The TTM or “trailing 12 months” was coined by Wall Street and represents the company’s earnings over the past twelve months.  The P/E ratio is a strong representation of a company’s value for investors as the P/E 10 and P/E 30 are utilized to find the value of an overall stock index.  This can make up for changes in the business cycle.  For example, the S&P 500 had a P/E ratio of 5x in 1917 to over 120x in 2009.  The average P/E ratio of the S&P 500 is 16x which means that the stocks that make up the S&P 500 have a premium 16 times their average weighted earnings.  Essentially, the P/E ratio represents the dollar amount that an investor can expect to spend in order to receive $1 in income.  Therefore, a security with a lower P/E ratio means a more profittable/optimal investment.

The dividend yield is defined as a financial ratio that represents the return that an investor would earn just from dividend payments.  Dividends are the distribution of a company’s earnings decided upon by the board of directors and are distributed in the form of cash or reinvestment.  Companies that are more mature and/or categorized in the utility and consumer staples sectors generally have higher dividend yields.  However, dividend yields can be misleading because higher dividend yields may be caused by declining stock price.  The dividend yield is calculated by the following formula: annual dividends per share / price per share.  For example, if a company pays $1 per share in annual dividends at a $20 share price, then the dividend yield is 5%.

In this evidence of learning, I was able to learn what more useful tools that I can include in my product.  Although the share price is somewhat important for those with limited investing power, the P/E ratio and dividend yields are more important for talking about your expected return on investment.  I also learned that dividends are going to be your main source of income when investing.  I have already received some dividends in my investments which I have chosen to reinvest.  The optimal ranges I am looking for in the dividend yield is at least 2%.  When it comes to the P/E ratio, I am looking for lower P/E ratios.

Fernando, J. (2023, April 5). Dividend yield: Meaning, formula, example, and pros and cons. Investopedia. Retrieved April 17, 2023, from https://www.investopedia.com/terms/d/dividendyield.asp 

Fernando, J. (2023, March 25). P/E ratio - price-to-earnings ratio formula, meaning, and examples. Investopedia. Retrieved April 14, 2023, from https://www.investopedia.com/terms/p/price-earningsratio.asp