Wikipedia’s take covers the basic requirements in the United States: $200,000 annual income for two years, $300,000 income for two years if married, or $1,000,000 in net worth.

Needless to say, these benchmarks prevent most U.S. citizens from taking part, which is why so many copycat products are coming into the market. Regular guys want to earn high returns with less risk too. Trouble is, the high returns may be over as strategies hedge funds pursue are too widespread at this point.

Hedge funds have risen at an average annual rate of 8.4 percent since 2000, less than half the gains of the 1990s, according to data compiled by Chicago-based Hedge Fund Research Inc. Vanguard Group’s flagship mutual fund tracking the Standard & Poor’s 500 Index climbed 15.6 percent last year, compared with the 6 percent drop of Goldman Sachs Group Inc.’s biggest hedge fund, whose management fees are about 10 times steeper.

The subpar performance isn’t stopping the world’s largest financial institutions, including UBS AG in Zurich and JPMorgan Chase & Co. in New York, from chasing higher fees by offering copycat hedge funds to people with as little as $1,000 to invest. Assets of the so-called long-short funds almost doubled to $16.5 billion in the U.S. in the past two years, according to Financial Research Corp. of Boston, which tracks money flows.

In a case typical of the Street–or in this case, the City of London–much of the the big money for investors has already been made, and the only way that hedge funds themselves are going to continue to exist and profit is by servicing retail clients, who are unaware that the strategies they’re pursuing are passé and not worth paying 2% and 20% of profits for.

The discussion is interesting because, in terms of the investor type, the typical FX self-trader and the typical hedge fund investor could not be more different. To illustrate: It is possible for someone with zero investment or trading experience whatsoever to open a margin FX trading account in a few minutes with a broker, to fund the account by maxing out on a credit card, and to start trading away that same day. Odds are that the FX trader will not only not make any money, but that she will lose her entire initial investment, sooner or later.

To invest in a hedge fund, on the other hand, one must be an accredited investor, meaning among other requirements that one must have at least 1 million USD in net worth. This is so because someone with 1 million dollars or more is considered “sophisticated” enough to understand the risks of hedge fund investments (unregulated by the SEC, NASD or any other federal regulator) and is able to sustain the loss of their (large) investment capital. Hedge funds on average do better than mutual funds, so the typical investor will make at least some money. In the worst case, they will not lose their entire investment.

Speaking with the head of a hedge fund database provider last week, he told me that the industry is battling against pressure to raise the minimum net worth that defines who an accredited investor is. The SEC apparently wants to raise the net worth minimum from 1 million to 1.5 or 2 million USD! When speaking with the media, this man pointed out that in the retail FX market, inexperienced traders can lose their rent money in 10 minutes. He said that if anyone should be regulated it should be the FX brokers, not the hedge fund industry. He has a point.

As far as investor protection goes, it should be a priority to protect FX traders against scams and to make sure every client understands the level of risk they are taking. the CFTC and the NFA oversee FX trading but the CFTC is truly a futures regulator trying to regulate the spot FX market, and the NFA is a voluntary self-regulated industry body. Any individual should know that she will likely be among the 95% of FX traders who lose their total investment. Once these truly vulnerable investors are protected we can worry about hedge funds and their millionaire clients.

There are a few companies mining this information in masses already. The best way to market and make this work is to give incentives for doing it. One of the primary examples of this is the almighty Google. Google offers services to webmasters that lets them track traffic statistics with a nice easy-to-use interface for no cost. With Google Analytics webmasters can see all the traffic information including the following: geographic location, repeat visitors, referring sites, keywords, and since the information is tied in with Adwords the very important, cost per conversion.

Once you know what a conversion is worth (and it’s much easier to figure out than the cost per conversion) you can just look at the cost and determine how much profit is in the niche you are following. Even if you didn’t know anything about that niche, you would see areas that had tremendous opportunities.

Another company mining information is ALGOCO. ALGOCO is a company that pays you for surfing the internet. You install a toolbar in your browser which sends back your traffic information. The payment structure is enough to basically let you earn $10-30 per month depending on how much you surf. The nice part about it is you can refer others and earn more. They have a calculator that tells you the amount of money you can money with the network you build. This scenario yielded a monthly income of $9,767.50!

This information is not quite as direct as Google Analytics for determining which niche to open up a new business, but it is very rich with marketing information. For example, let’s say someone visits Bloomberg, Reuters, Yahoo Finance, and… our blog, ALGOCO would then know that maybe our blog had a similar target market as the other sites mentioned.

In any case, these funds allow people to take a position based on their market view–pro-dollar or anti-dollar–without leaving the comfort of the E*Trade, Scottrade, BrownCo, Schwab, and Ameritrade accounts. The tickers are UUP for the dollar bullish ETF, and UDN for the dollar bearish ETF, and both are traded on the AMEX (American Stock Exchange).

AMEX’s own press release has more (below), but for now my view is that the convenience of these instruments is their primary benefit. Costs, leverage, etc. are no better here than in spot forex and futures, by any means. But if laziness and fear would have otherwise prevented you from staking your claim in the foreign exchange world, then by all means, have at it.

http://sev.prnewswire.com/banking-financial-services/20070220/NYTU13820022007-1.html

The CHF is also the other funding currency with rates only at 2% which makes it great for carry traders and this the EUR/CHF spread doesn’t appear to changing at any degree of speed for this pair not to keep setting new highs.

Three years ago, market share was probably the last thing on the minds of what were then the leading firms in the industry–FXCM, Gain Capital, GFT. They were more concerned with offering a product that worked, and setting up their marketing and business models in a way that would be profitable and would allow for longevity.

The fact that this industry is internet-based rather than being built on personal relationships and traditional broking methods is what has allowed for its rapid development. Perhaps within the next five years, the inevitable consolidation phase will already be underway, as smaller participants who have yet to build substantial market share are gobbled up by their larger neighbors. All of this will of course be much easier if some of the forex brokers start going public.

What brought me to the realization that the industry is developing rapidly and speeding through the phases I describe above is seeing a sister industry–one that is hundreds of years old–zipping through the latter stages of development. A small and new company called Bats Trading has, in the last several months, taken nearly 10% of trading volume from the Nasdaq. It has offered a cheaper, faster, better product than what is already supposed to be the cheaper alternative to the low-priced technology exchange. The FT notes that it is now taking its success to the next level in attacking the Big Board itself (the New York Stock Exchange):

Bats Trading, the Midwestern share trading upstart that has captured trading in about 10 per cent of Nasdaq-listed shares with its low price, high-speed system, on Monday launched a parallel attack on the NYSE Group.

The move illustrates the increasingly cut-throat nature of competition in the US cash equities markets and underscores the pressures driving the two largest exchanges, Nasdaq and NYSE, to pursue acquisitions in Europe where stock exchanges remain monopoly-like businesses.

Bats said it would extend the tariff structure used for trading in Nasdaq shares, in which investors posting firm bids are given a rebate on the tariff they pay to buy shares, to NYSE-listed stocks. That tariff is well below that charged by the NYSE, the company said.

Bats is one of the more successful efforts under way to take market share from the NYSE and Nasdaq, which dominate US equity trading. But some analysts question whether smaller players will be able to sustain tariff reductions long enough to make a lasting dent in the big two exchanges’ market share.

David Cummings, Bats chief executive, said the aggressive pricing is a key part of its business model which aims to lure trade from its established competitors. “It takes a long time to change peoples’ behaviour unless you give them a good economic reason,” he said.

My own industry is far from the point where monopolistic participants even exist to be threatened. However, when that point comes, be assured that they will prove no less susceptible to low-cost alternatives than has the Nasdaq.

Some reasons to take such a trade are the following:

• China Yuan non-deliverable forward has an interest rate priced in at an extremely low .15% (the Japanese Yen is .63%)
• Yuan appreciation already priced in to the forward so low likelihood of getting hurt badly on a revalution
• The positive carry or yield is an astonishing 7.8% return
• Fundamentals in India favor being long rupee
• Carry trade diversification and there is potential of unwinding of other carry trades

The problem with it is the availability.  These currencies are ones with restriction in place and one can not trade them nearly as freely or in even the same standard methods of trading major currency pairs.

If your idea of a news trading strategy is to

1. Beat others to getting the news release.

2. Beat others to interpreting the news release.

3. Beat others to getting in the market.

4. Enter the market immediately following a major news release.

….or do all of the above, then you’re hopeless. Have at it, but most likely you’ll end up

1. Overpaying for your news feed (professional feeds run over $1000 / month)
2. Pissed off at your broker for poor execution, slippage, and the like.

3. Chasing the market…trying to get in after the move has already happened.

4. Misstepping as you place a trade before fully understanding the number.

I have a better idea:

Get into the market after the major move has been made. And get in when your chances of seeing a reversal are high. This allows you to get your price, rather than chasing and being slipped while executing during low liquidity. It also improves your reward/risk ratio tremendously, because you can enter where you want to rather than with total uncertainty, as when the market is ripping. Lastly, but perhaps most importantly, you can execute this strategy calmly, and keep your stress levels down. Stress–particularly the kind that is directly caused by trading itself–can ruin the best of trading plans. Short-term, jittery trading is not meant for everyone, and leads to overtrading generally unless you have tremendous control and patience. This strategy will keep you from being one of the fools who causes massive spikes and reversals, and instead allow you to take the time to set up your trade carefully and sensibly.

Read this, from www.dailyfx.com, a major FX news site for retail clients:

Over the past year, the US non-farm payrolls report has become incredibly difficult to trade. Large revisions are made frequently which is reducing the accuracy and reliability of each individual report. This is exactly what happened this morning when traders first took the US dollar lower on the disappointing headline release but quickly erased those losses when they saw the massive revisions for the prior months. More specifically even though payrolls increased by only 111k in December compared to the market’s 150k forecast, the number of additional jobs added back to the November and December payrolls totaled 81k, washing out the 39k shortfall. The massive revision was for the year ending in March 2006 where we actually saw payrolls increase by 754k, the largest revision on record.

The view that trading NFPs is harder than ever is misleading. Twice in recent history–December 8th 2006 and last Friday–non-farm payrolls have come in below expectations on the headline number, and the USD (US Dollar) has plunged. Within an hour, though, the market has reversed, and the dollar has gained and followed through, gaining over 100 pips.

What do the two dates have in common? And why did the dollar gain when the news was dollar bearish? Because of the massive revisions that make NFPs so confusing to begin with. Last Friday, the headline number came in below expectations, but previous months were revised upward, and an entire year was revised by several hundred thousand jobs. Yet speculative traders were out in enough force to drive the USD down, and the EUR, GBP, AUD, and JPY up, by 50 pips on average.

In the case of complex numbers such as NFPs, and those prone to large revisions in particular, time is better spent analyzing the number after it comes out–even if your news feed is free and delayed by 15 minutes–waiting, and pouncing on a reversal.

Just remember, reversals are more likely when the revisions are large and are in the opposite direction of the headline number.