A $10,000 Hedge Fund Portfolio

Someone asked me recently how they could implement a retail hedge fund portfolio with $10,000. The Model Hedge Fund Portfolio is simple and easy to understand, but it can’t be implemented with $10,000. Liquid alts like Vanguard’s Market Neutral hedge fund have large minimum investments, so we need to look for alternatives. Even more challenging, how do we achieve the 2x leverage multiple with a low enough interest rate that it doesn’t outweigh the theoretical benefits of leveraged diversification?

There are a few caveats, but in 2024 retail investors can get something remarkably close to the model portfolio with only three funds and $10,000:

Here’s a quick explanation of these funds and the role they serve in the portfolio:

• PIMCO StocksPLUS (PSLDX): A 60/40 leveraged stocks/bonds fund. This fund allows us to achieve our target leverage multiple in a fund that is more efficient than leveraged ETFs. Fact Sheet
• Virtus Managed Futures (AMFAX): A textbook managed futures hedge fund. Managed futures is one of the most predictable hedge fund strategies and has consistent non-correlation with stocks and bonds. Including this fund lowers our volatility and improves our risk-adjusted returns because of this non-correlation. Fact Sheet
• LoCorr Long/Short Commodities (LCSIX): A fund-of-funds that contains three managed futures funds and three funds that employ a relative value strategy, all operating on commodities markets. Again, this fund is designed to be non-correlated with stocks and bonds but is also non-correlated with the Virtus fund, providing additional risk-adjusted benefit. Fact Sheet

Recall that our target asset allocation in the model portfolio is 55/30/15 for stocks/bonds/liquid alts. The PIMCO fund varies it’s stocks/bonds allocation and leverage multiple (right now it is 50% stocks, 50% bonds and 2.2x leveraged) but over time it targets a 60/40 ratio and leverage multiple of 2x. Here is how the stock and bond allocations from PSLDX affect our overall asset allocation:

Here’s how this implementation compares to the model portfolio:

It is a unique feature of the 21st century investing landscape that a retail investor can replicate the characteristics of a sophisticated institutional investment portfolio with only $10,000 worth of funds. Here is how the $10,000 portfolio would have performed over that last ten years compared to the S&P 500:

There is a caveat however: the PIMCO fund, PSLDX, is marketed as an institutional fund and the only brokerage that currently offers it to retail investors is Charles Schwab. The good news is that Schwab often offers hedge funds in their institutional share class to retail investors making Schwab a decent brokerage to use for this type of portfolio.

There’s much more to be said about each of these three funds in the portfolio, especially about how the PIMCO fund achieves it’s leverage more efficiently than typical leveraged ETFs, I’ll do deep dives into each fund in the future, and in the meantime feel free to leave questions in the comments section.