AIM UK

[ls7550]

If you AIM ETF's then you have greater protection against failures (which AIM dislikes), but providing you're diversified enough across a wide range of stocks with no one stock being too large then the odd failure is both to be expected and generally has a relatively low impact upon the whole. Likely those failures will be countered by other stocks that perform unusually well.

On the plus side of AIM'ing at that stock level is that you inherently create multi-way mini-ETF's that span a wide range of styles/class.

For example if I AIM'd two ETF's (to keep things simple) of Emerging Markets and Commodities then contained with both of those ETF's might be some value type holdings and some growth type holdings. Let's assume that there's 50/50 of each of value and growth in both of those ETF's.

If value stocks perform well and growth stocks poorly then that relative performance might not be sizeable enough to trigger a buy or sell within those two ETF based AIM's.

AIM'ing at the stock level however will more likely have some buying and selling activity occuring in reflection of value stocks rising in price/growth stocks declining in price, so you capture some AIM like volatility capture benefits from that particular growth/value relative price motion cycle.

In effect you can make a range of potential home-grown ETF's from a wide range of underline stock holdings, but you don't
actually have to physically create such virtual ETF's as when you AIM at the individual stock level the mechanics of those virtual ETF's is automatic and transparent.

The problem of course is that AIM requires sizeable amounts to be invested, typically $10K stock value per holding. Ladder
is one way in which that can be circumvented as it supports smaller amounts being invested per holding whilst still trading in an AIM like manner.

My guess is that at around a $750K fund value you could drop Ladder and just use AIM, having perhaps $10K stock value in each of 50 individually AIM'd stocks with each having $5K cash reserve. That way any one failing stock loses an acceptably low amount of 2% to 3% of the total fund value. Even then however, Ladder is more flexible in that you can specify the top and bottom stock price levels (price level at which you're all in cash or all in stock) and that price range can be quite narrow if so desired which has the potential of uplifting stock price volatility capture benefits considerably.

One way in which to implement a stock AIM like style might be to, assuming a $100K total investment fund amount, create 50 LD-AIM's (or Ladders) allocating $2K total to each, with 66% stock and 34% cash allocations each.

You might then use the combined cash reserve to add an additional Long or Short position to align the overall actual stock exposure with that indicated by vWave (or similar, I personally use something along the lines of that described in http://investorshub.advfn.com/boards/read_msg.aspx?message_id=37163437 ).

Where insufficient cash were available to align the actual overall stock exposure with that indicated by vWave then you could resort to using short double (e.g. SDS) e.g. where you had $66K of stock exposure, $33K of cash and vWave indicated 90% cash, 10% stock, then you might buy $56K of short exposure by buying $28K of SDS.

As vWave changes over time and adjustments to actual versus indicated exposure levels need to be made, what I tend to do is use vWave based sells (reduce stock exposure) to realign individual stock AIM's that have fallen into a 'dead-zone' - where the AIM is 100% in stock and the price is significantly below the next sell price level. For example if vWave indicates reduce stock exposure by $1K then I'll sell some of a dead-zones stock (typically at a loss) to raise that AIM's cash reserve, but then realign the AIM's next buy and sell price levels around that lower stock price level so that it re-awakens the AIM back into subsequently capturing stock price volatility capture benefits.

From the link above you can see that generally I expect to pace buy-and-hold using that style alone. Adding on the stock volatility capture benefits (AIM like trading) therefore value-adds to that.

As a ballpark indicator consider this Ladder



Here we have a top stock price at which we're all-out of 120 and a bottom price at which we're all-in of 80 (20% either side of an assumed 100 central price). When allocated $2K of funds then at each Ladder step we trade a unit amount of $470. The steps are proportionately spaced at 10% intervals between the top and bottom price so for each paired buy/sell (up/down) price move of 10% we trade $470 and make a $47 gain.

Typically 10% price moves occur on average around 2 times p.a. which generates a gross volatility capture benefit of 47 x 2 = $94 which relative to the $2000 allocation = 4.7%. That gain might be reflected across 50 such accounts ($100K total fund) and similarly generate 50 x $94 in gains (4.7% of the total fund).

Trading costs however weigh heavily upon this level of account size and trading frequency, for example assuming two $12.50 trading fees per cycle that $25 combined cost knocks down the gains from $47 down to $22. Even then though we're still left with 2 x 22 = $44 against a $2000 allocation = 2.2% net average volatility capture gain.

With less trading frequency (lower trading costs)/larger amounts, more selective top/bottom price ranges etc. it's not that difficult to get overall net volatility capture gains to 4%+ amounts.