Nicholas Vardys

SPECIAL REPORT
For Bull Market Alert Subscribers Only

Hedge Fund Secrets Revealed:

A Simple Four-Step Technique to Manage your Money Like a Hedge Fund

$19.95

IMPORTANT NOTE: This special report is for information and educational purposes only, based on current data as of February 2012. Do not buy or sell any investments until you have read the current issue of Bull Market Alert, the current Hotline, or an email update from Nicholas Vardy.

Hedge Fund Secrets Revealed Copyright 2012, by Nicholas Vardy. All rights reserved. No quotes or copying permitted without written consent. Published by: Eagle Publishing, Inc. One Massachusetts Ave. NW Washington, DC 20001 800/211-4774 Email: editors@NicholasVardy.com Website: www.NicholasVardy.com

Hedge Fund Secrets Revealed:

A Simple Four-Step Technique to Manage Your Money like a Hedge Fund ______________________________________
In real estate, the key is location, location, location. With money management, the key is risk control, risk control, risk control.
Bruce Kovner, Founder of Caxton Corporation, one of the most successful hedge funds of all time

In this special report, I will share with you secrets of how to maximize your profits as a subscriber to Bull Market Alert. Todays global investment is as challenging as its ever been. But imagine if you had access to a technique that would allow you to gain complete control over your trading and investing. While your friends are glued to CNBC, entranced by the relentless onslaught of the latest negative news from Wall Street, picture yourself standing above the fray completely in control of your financial destiny. Unlike other shell-shocked investors, you can feel secure in the knowledge that your hard-earned dollars never will suffer from the kind of financial meltdown youd suffer by following mainstream investment advice. The technique Im about to share with you provided the basis for a system that I developed to manage a top-performing hedge fund during the post dot-com bust in 2001 and 2002. The result? While other hedge funds struggled as they dropped 30%, 40%, even 50% in a grueling bear market, we used what I am about to teach you to preserve our capital and were uniquely well-positioned for the inevitable bull market that followed. This technique also has served as the basis for my popular seminar Hedge Fund Secrets Revealed: How to Become Your Own Hedge Fund Manager. I regularly present the seminar at the MoneyShows (www.MoneyShow.com) held periodically throughout the year. In order to benefit from the system in this special report, heres what you need to do: Realize that what you are about to learn represents a fundamentally different way of looking at investments. Dont expect your broker or financial planner to know about or to understand this approach. So please keep an open mind. Understand that this is about managing your risk and not about promising pie-in-the-sky results. The very best of the top hedge fund managers have a tough time in bear markets. Like life, markets have their seasons. Once you have these principals down, the upside will take care of itself.

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Try implementing the techniques that I outline in this special report on my Bull Market Alert for 90 days. Im sure that itll not only change your thinking about how you invest in stocks forever, but youll also be a lot richer for it. So lets get started with a question:

What is the ONE (and probably the ONLY) question you ask when you look at an investment recommendation? You have three choices: 1) What Do I Buy? (Entry) 2) When Do I Sell? (Exit) 3) How Much Do I Buy? (Position Sizing) If youre like 99%+ of investors, you want to know the hot stock tip in other words: What to buy. Im about to reveal to you something that even some of the VERY TOP hedge fund managers in the world dont realize: What you BUY is ALOT less important than when to SELL. And when to SELL is less important than HOW MUCH you buy. According to trading coach Van Tharp, the relative importance of these three decisions is as follows: Entry Exit Position Sizing 10% 30% 60%

Lets look at each of these in order of importance:

I. Entry Not the Holy Grail

Although we havent actually met, heres something I already know about you The reason you subscribed to Bull Market Alert was that you wanted the latest, greatest, and most profitable ideas out there. You wanted an investment advisory service that offered you the top stock tips. You wanted the Holy Grail and you were hoping that Id be able to provide it. And youve come to the right place. Based in the heart of Londons hedge fund community, I analyze U.S. and foreign stocks, commodities, currencies, and recommend those that I think are the top investment opportunities no matter where they are on the planet. As a subscriber to Bull Market Alert, youll learn about investment opportunities you simply havent heard of anywhere else.

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But Ill let you in on a secret. And its one that you already probably know but this is probably the first time youve had it pointed out to you. As important and as valuable as each individual stock pick is, it can be pretty darn near useless unless you have a disciplined framework for investing. A scattershot approach is not the way to achieve long-term investment success. In fact, trading psychologists have shown that if you dont have a disciplined plan for managing your stock picks, you can actually lose money even if you invest in nothing but the worlds top-performing stocks. How is this possible? Just think for a minute Have you ever bought a stock which turned out to be a big winner, only to see it drop? But you held on, hoping that it would bounce, and resume its upward trend? Then what happened? The stock collapsed and you still held on rationalizing that it was too late to sell. Well, if youve had this happen to you, you already know that unless you have a plan in place to manage each and every one of your stock picks, there are many, many things that can keep you from locking in big gains. I can send you 10 consecutive winners in Bull Market Alert. But unless you know what youre doing, you can lose money on each and every one of them. As a Bull Market Alert subscriber, I dont want that to happen to you. And thats the purpose of this Special Report.

II. Exit Dont Run the Red Light

With each Bull Market Alert pick, I also provide you with a stop (or exit) price. You ignore these stop prices at your own peril. Youll be surprised to learn that those stop prices are three times as important as your picks if you know how to use them. And sticking to your stop will put you ahead of EVERY SINGLE mutual fund manager out there BY LAW. Think of it this way Imagine that your neighbor has a teenage son who is a reckless driver As testosterone charged as he is, he regularly speeds through red lights But because hes never been in an accident, he thinks he can get away with anything Then one day, he speeds into an intersection, gets hit by truck and WHAM! Result?

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A totaled car and (if hes lucky) a seriously chastened teenager So think of ignoring your stops as a lot like going through a red light You can ignore your stops and you may even get away with it a few times but at some point, you ARE going to get hit by the equivalent of a Mack truck. As long as you keep investing and trading, its not a question of IF, but WHEN. So why will following this single rule make you better than the best mutual fund manager out there? As a former mutual fund manager myself, I can tell you that your mutual fund manager is actually breaking the law if he is not fully invested in the stock markets even if the stock market is headed straight down for the next 10 years! You, on the other hand, dont have your hands tied like this. You can SELL anytime you want. By determining your stop price at the same time you buy your stock, you KNOW your worst case scenario EVEN BEFORE YOU GET IN THE MARKET. Its really common sense But as Voltaire said: Common sense is not so common

III. Position Sizing: The Secret That Accounts for 60% of Your Trading Success
Ask any hedge fund manager who has been around for more than a few years about the most important thing in his trading and he will tell you it is position or bet size If he gives you a different answer, dont even THINK about giving him your money. He and his investors are bankrupt already. He just doesnt know it yet Let me illustrate the importance of bet size with this example Its early September 2008. Lets say that youve decided to call the bottom of the meltdown in U.S. financial stocks. Youve just heard your favorite analyst on CNBC talk about how financial stocks are due for a bounce. In fact, you even heard that hedge fund guru George Soros has placed a large bet on Lehman Brothers recovery. Youve decided its time to bet on a big turnaround. Its as close to a sure thing as youve seen. You have $50,000 to invest, and you decide that this is a once-in-a-lifetime opportunity to hit it big. You decide to bet the farm.

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So you buy $50,000 worth of Lehman Brothers stock At the time you placed your bet, one of two things can happen: One, your bet works out, and you make five times your money. You think you are a genius and calculate that you only need to do this six more times to become a billionaire (Do the math yourself) Or two, the minute you buy the stock, Lehman Brothers starts plummeting on rumors of an imminent collapse. And because you bet all your money on Lehman Brothers, you spend your days glued to your computer watching every tick in Lehmans stock price. Every drop in Lehmans price is PAINFUL and is reducing your net worth considerably After a weekend wracked with worry, on Monday morning, Sept. 15, you hear the news that Lehman Brothers went bankrupt. Youve lost everything. You made a novices mistake and bet much too big on one idea. That idea didnt work out, and you are literally blown out of the game. Contrast this high-stress image of you with your new enlightened self once you understand the risk-management technique Im about to give you below. Lets say youre willing to place a bet that Lehman Brothers is going to make it But now that you understand the importance of exits and position sizing, the scenario is very different. You know that as smart as you know you are, you are not infallible. And even if you do consider yourself infallible, remember that there is always the possibility of some external event beyond your control say, a terrorist attack, an earthquake in California, or other Black Swan event that can cause Lehman Brothers and the market to drop unexpectedly. So you calculate your position size so that the WORST that could happen is that you lose 1% of your portfolio. You place your stop at the same time that you buy your stock. So how would you feel that fateful Monday morning? You may be a bit disappointed but, frankly, given that you knew your worst-case scenario ahead of time, you had psychologically accepted that this could happen. You actually feel good about yourself for having stuck to your discipline. In fact, I can tell you exactly how that Monday morning feltBecause I actually placed that bet on Lehman Brothers myself! So what was my reaction to Lehmans demise? Its not that big of a deal!

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The lesson: Be sure that you NEVER bet too big on any idea no matter how great it seems And Ill let you in on another secret: sophisticated hedge funds screw this up all the time! In fact, the next time you hear about a hedge fund blowing up, you can be 100% sure that it was due to a hedge fund manager getting too cocky and taking too big of a position in his fund or, not sticking to his stops. But the very best hedge fund managers think differently. George Soros lost hundreds of millions on this bet on Lehman Brothers. But his loss still was manageable given the size of his portfolio. As Soros says: Im very concerned about the need to survive, and not to take risks that could actually destroy me. Or as Larry Hite, top trader interviewed in Jack Schwagers Market Wizards put it: Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. Heres my personal rule of thumb: I never risked more than 0.5% (thats of 1%) on any one idea for any of the hedge funds that I traded. If the trade went in my direction, Id just add to it But those are details I cant get into in this Special Report

IV. A Simple Four-Step Technique That Can Save You Millions over Your Investment Lifetime
So here it is: A simple four-step technique to manage your risk on any single Bull Market Alert (or ANY) investment idea. STEP 1: Establish the size of your trading portfolio. Whats the total amount of money you are willing to play with in your short-term trading portfolio? For the purposes of this example, I will assume its $100,000. STEP 2: Decide how much you want to risk on a Bull Market Alert investment idea. I will sometimes give you some guidance on this. I will often say whether the idea is high risk (say, the highly volatile Turkish ETF) or low risk (like a very steady currency ETF).

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For whatever reason, you may be more comfortable with some ideas than others. Or maybe you have some special insight into that portfolio pick that gives you an extra edge. Or maybe the overall market has entered a bullish phase, and you are willing to risk more on your investments. But ultimately, how much you are willing to risk on any idea is up to you. For the purposes of illustration, lets say you are willing to risk 1%, or $1,000 (out of your $100,000 portfolio), on the current investment idea. STEP 3: Calculate your risk per share. If youre like most people, you think that if you buy a share for $100, you are risking the entire $100. But from now on, I want you to think about risk in a very different way. Lets say you buy a stock at $100 and you place your Good til cancelled or GTC stop price at $85. You do both of these at the same time that you buy the stock with your online broker. So here is what you are REALLY risking: $100 entry price $85 stop price = $15 dollars risked per share Heres what is most important to understand: Once you place your stop, you are only risking $15 per share. (That assumes you dont run the red light and you stick to your stops.) By the way, you will always find a stop price for every pick you get with Bull Market Alert. You should know that I put a lot of thought into each stop price. Although I cant go into details here, each stop price is tailored particularly to each picks personality. That means Ill give more volatile picks more room to move than relatively stable picks. Sometimes, a stop will be as far away as 30% from the entry price. Others will be as near as 7% or 8%. STEP 4: Calculate how many shares you should buy. This is a crucial step. Say youve decided to risk 1% of your investment capital on this months Bull Market Alert idea. Based on the difference between the stock price and the exit price, you are risking $15 per share. Heres the important part: Take the 1% of your portfolio (or $1,000) that you are risking on this weeks Bull Market Alert idea, and divide it by the $15 per share you are risking on each share.

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This will give you the number of shares you should buy. Heres the formula: Number of shares = $1000/$15 per share = 66.66, or 67 shares (rounded up). That means that you can buy 67 shares of this pick, for a total of $6,700. Note that this many shares amounts to a 6.7% position in your portfolio which is probably a lot bigger than you expected BUT because you have placed a stop of $85 on each share, you are limiting your TOTAL RISK on this one idea to $1,000, or 1%, of your portfolio.

Let Me Land the Plane Here

I strongly recommend that you use this approach to calculate your risk and position size for each and every one of your Bull Market Alert picks. (And if I were you, Id use it for every single one of your other investments as well.) So every time you get your issue of Bull Market Alert: Decide how much you are willing to risk on that investment idea (I recommend you start small!). Subtract the recommended stop price from the share price to calculate how much you are risking per share. Divide the total amount you are risking by the amount you are risking per share. And voila! You have the number of shares that you should buy, based on the amount you are willing to risk. I like to tell my seminar audiences to view this technique like a set of training wheels on a bicycle. Use the formula a few times until you get the hang of it. Once you really get it, youll realize that youll be able to ride the bike as fast or as slowly as you want. If you are feeling skittish about the market, you can dial back the risk you are taking to, say, $500 per trade, or even $100. Or, if you feel particularly bullish about the market or a certain investment idea, you can decide to risk $2,000. The point is to focus on the risk that you are taking on each position. But within that, you can vary your position size to suit your own risk appetite. The point is: Its all up to you You and not the market are in control

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And by adding up the total number of dollars you are risking on any set of trades in your portfolio, you always know your worst-case scenario that is, how much your entire portfolio is always at risk. So try this technique and see how it works for you. Once you do it three or four times, itll become second nature.

Heres to investing like a hedge fund!

Nicholas A. Vardy, Editor, Bull Market Alert

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