THE HEDGE FUND EDGE by Mark Boucher.pdf

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THE
HEDGE FUND
EDGE
Wiley Trading Advantage
Trading without Fear /
Richard W. Arms, Jr.
Neural Network: Time Series Forecasting of Financial Markets I
E. Michael
Azoff
Option Market Making /
Alan J. Baird
Money Management Strategies for Futures Traders /
Nauzer J. Balsara
Genetic Algorithms and Investment Strategies /
Richard Bauer
Seasonality: Systems, Strategies, and Signals /
Jake Bernstein
The Hedge Fund Edge /
Mark Boucher
Managed futures: An Investor's Guide /
Beverly Chandler
Beyond Technical Analysis /
Tushar Chande
The New Technical Trader /
Tushar Chande and Stanley S. Kroll
Trading on the Edge I
Guido J. Deboeck
Trading the Plan I
Robert Deel
The New Science of Technical Analysis /
Thomas R. DeMark
Point and Figure Charting /
Thomas J. Dorsey
Trading for a Living /
Dr. Alexander Elder
Study Guide for Trading for
a
Living /
Dr. Alexander Elder
The Day Trader's Manual /
William F. Eng
The Options Course: High Profit £f Low Stress Trading Methods I
George A. Fontanills
The Options Course Workbook I
George A. Fontanills
Trading 101 /
Sunny J. Harris
Trading 102 I
Sunny J. Harris
Analyzing and Forecasting Futures Prices /
Anthony F. Herbst
Technical Analysis of the Options Markets /
Richard Hexton
Pattern, Price & Time: Using Gann Theory in Trading Systems /
James A. Hyerczyk
Profits from Natural Resources: How to Make Big Money Investing in Metals, Food, and
Energy /
Roland A. Jansen
New
Commodity Trading Systems & Methods /
Perry Kaufman
Understanding Options /
Robert Kolb
The Intuitive Trader /
Robert Koppel
McMillan on Options I
Lawrence G. McMillan
Trading on Expectations I
Brendan Moynihan
Intermarket Technical Analysis I
John J. Murphy
Forecasting Financial Markets, 3rd Edition /
Mark J. Powers and Mark G. Castelino
Neural Networks in the Capital Markets I
Paul Refenes
Cybernetic Trading Strategies /
Murray A. Ruggiero, Jr.
The Option Advisor: Wealth-Building Techniques Using Equity and Index Options /
Bernie G. Schaeffer
Gaming the Market /
Ronald B. Shelton
Option Strategies, 2nd Edition I
Courtney Smith
Trader Vie II: Principles of Professional Speculation I
Victor Sperandeo
Campaign Trading /
John Sweeney
The Trader's Tax Survival Guide, Revised /
Ted Tesser
The Mathematics of Money Management /
Ralph Vince
Portfolio Management Formulas /
Ralph Vince
The New Money Management: A Framework for Asset Allocation /
Ralph Vince
Trading Applications of Japanese Candlestick Charting I
Gary Wagner and Brad Matheny
Trading Chaos: Applying Expert Techniques to Maximize Your Profits /
Bill Williams
New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities /
Bill Williams
New York
THE
HEDGE FUND
EDGE
MAXIMUM PROFIT/MINIMUM RISK
GLOBAL TREND TRADING STRATEGIES
Mark Boucher
JOHN WILEY & SONS, INC
Chichester •
Weinheim
•
Brisbane •
Singapore •
Toronto
Acknowledgments
This book is printed on acid-free paper. ®
Copyright © 1999 by Mark Boucher. All rights
reserved.
Published by John Wiley & Sons, Inc.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system or trans-
mitted in any form or by any means, electronic, mechanical, photocopying, record-
ing, scanning or otherwise, except as permitted under Section 107 or 108 of the 1976
United States Copyright Act, without either the prior written permission of the Pub-
lisher, or authorization through payment of the appropriate per-copy fee to the Copy-
right Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax
(978) 750-4744. Requests to the Publisher for permission should be addressed to the
Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY
10158-0012, (212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ ©WILEY.COM.
This publication is designed to provide accurate and authoritative information in
regard to the subject matter covered. It is sold with the understanding that the pub-
lisher is not engaged in rendering professional services. If professional advice or
other expert assistance is required, the services of a competent professional person
should be sought.
Library of Congress Cataloging-in-Publication Data:
Boucher, Mark, 1962-
The hedge fund edge : maximum profit/minimum risk global
trend
trading strategies / Mark Boucher.
p.
cm. — (Wiley trading advantage)
Includes index.
ISBN 0-471-18538-8 (alk. paper)
1. Hedge funds.
I. Title. II. Series.
HG4530.B68 1998
332.64'5—dc21
98-18230
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
Two broad groups of people deserve recognition and thanks for
the making of this book and for the events in my life that have led
up to it. The first people are what I term "the wind beneath my
wings." These are the people who directly helped me in ways that
made this book possible. The second group is what I term "the
shoulders of greatness on which I stand." These are people whose
work indirectly has been of enormous benefit and help to me not
only in putting this work together, but also in developing the con-
cepts described in many of the chapters.
Among those who have been the wind beneath my wings, I
want to thank my parents, particularly my mother, who through-
out my life has been willing to sacrifice anything to help me to
achieve my dreams. I want to thank my significant other, Anita
Ellis, without whose consistent help and support none of this
would have been possible. I am grateful to my coworkers for all
their hard work and effort. Thank you Larry Connors and others
for proofreading and offering moral support. I also thank my first
partners in the hedge fund business, Tony Pilaro and Paul Sutin,
whose faith and support led me into this industry. And I want es-
pecially to thank Tom Johnson, my partner and friend, whose re-
search, faith, fascination, and support made this possible.
This book is greatly enhanced by the previous efforts of oth-
ers who act as the shoulders of greatness on which this effort
vi
ACKNOWLEDGMENTS
stands. First and foremost, I must acknowledge with gratitude
the contribution of Mr. "X," a great European money manager.
He asked to remain anonymous, but near the end of his life, he
shared with me his knowledge and system for financial success.
Mr. X, your work will indeed live on and not just with me.
Next I thank Marty Zweig and Dan Sullivan for their work on
avoiding negative periods in U.S. markets, which provided a
model of what to strive for, both internationally and across other
asset classes. Also, thanks Marty, for all those wonderful correla-
tion studies you filled your newsletter with each month for
decades—I saved them all and sought to apply my own reworking
of them to our master models.
William O'Neil has done tremendous work on stock selection
criteria, emphasizing ways to find the top-performing stocks in
each market, and Frank Cappiello has done pioneering work on
the importance of institutional discovery in the odyssey of a
stock's rise from obscurity to prominence. Meanwhile, Nelson
Freeburg has applied a never-ending, incredible stream of timing
systems to a whole host of asset classes providing me with many
insights. Also, I am tremendously indebted to all the people at
Bank Credit Analyst for their rigorous work and insight into the
liquidity cycle across most tradable markets on the globe.
My heartfelt thanks go to Ludwig von Mises, Ayn Rand, and
Murry Rothbard for their selfless preservation of Austrian eco-
nomics, the ideals of capitalism, and truth. I am grateful for the
work of Paul Pilser for putting economic myth in its place and
bringing forth the theory of alchemy. I want to acknowledge
Stanley Kroll for his work on money management and Jay
Schabacker for his brilliant melding of the liquidity cycle and
mutual fund selection.
Finally, I thank Tony Robbins for reteaching me how to
change and grow and for exposing me to some of the ideas on
which this work is based. If there is anyone out there who has not
yet drunk of the knowledge of any of the great innovators I have
acknowledged here, let me encourage you to partake immediately
for your own enrichment.
M.B.
Contents
Introduction
1
2
The Importance of Risk
How It All Started
How to Recognize a Market Master
Understanding Is Key to Success
Overview of the Approach in This Book
1 The Risk of Traditional Investment Approaches
5
6
9
9
16
The Effects of a Long-Term Bull Market
Long-Term Returns in Equities
Protection against Bear Markets
Blue Chip Stocks
Investment Criteria
High Returns and High Consistency—The Tradeoff
Summary
2 Liquidity—The Pump That Artificially Primes
Investment Flows
16
19
26
28
30
35
41
43
Understanding the Austrian Interpretation of
the Liquidity Cycle
The Liquidity Cycle Illustrated with an
Island Economy
45
48
viii
CONTENTS
CONTENTS
ix
The Liquidity Cycle in Modern
Economies
Timing the Liquidity Cycle
Understanding Economic
Gauges
Implications for U.S. Markets
Summary
3 Index Valuation Gauges—Do Not Ignore the
Price You Pay
51
62
89
100
106
111
Using Index Valuation Gauges
Limitations of Index Valuation Analysis
Using Gauges for Mutual Funds
Valuation Gauges for International Markets
Summary
111
115
116
117
122
Disastrous Social Programs
Minimum Wage Policies
Economic Freedom Index
When Investing, Look for Countries with
Low Impediments to Growth
Profiting from Understanding Distortions
Some U.S. Distortions
Evaluating Government/Media Hype
Secular Themes and Trends
Examples of Secular Themes and Trends
Summary
198
202
204
206
207
209
220
227
230
239
4 Macro Technical Tools—Making Sure the Tide
Is Moving in the Right Direction
The Argument for Technical Analysis
Taking a Wider View
Using Technical Analysis to Confirm Trends
Reading the Message of the Markets
Overview of Technical Analysis
Answering Criticism of Technical Tools
Summary
5 Containing Risk—Sound Strategy and Money
Management Methods and the Principles of
Character Necessary to Achieve Them
Money Management Rules
Principles of Character
124
125
128
130
132
134
146
150
7 Equity Selection Criteria Long and Short—
How Profits Are Magnified
Mutual Funds
.
Individual Stock Selection
Identifying Meteors and Fixed Stars
Equity Fuel
Measuring Price against Growth
Modern Portfolio Theory Methods
Stock Trading Method
Summary
8 Other Asset Classes and Models to Exploit Them
Outperformance and Asset Allocation
Building a Portfolio
Exploring Asset Classes
Summary
240
241
245
248
261
265
270
. 273
285
151
152
161
287
287
293
294
327
329
329
6 The Essence of Consistent Profits—Understanding
Austrian Alchemy
Alchemy versus Economics
The Long-Run Growth Paradigm
Negative Tax Policies
166
168
174
180
190
9 Asset Allocation Models and Global
Relative
Strength
Analysis—Constructing a Portfolio
Using Asset Allocation Models
Global Relative Strength: Radar Screen for
Flexible Asset Allocation
Summary
336
343

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