And despite a ridiculously inefficient regulatory burden, there are a number of new markets and investment opportunities that can further help today's active investor mitigate risk and achieve superior returns. Here are a few of my favorites:
One of the most exciting new opportunities isn't a stock at all. Prosper.com offers one of the most exciting and innovative developments in online dealing I've seen in years. It's also a heck of a lot of fun.
Essentially, Prosper.com is an open marketplace where anybody — from the urban fat cat to the rural grandmother can become a banker. Prosper has created an eBay-like marketplace for unsecured consumer loans that connects those looking to borrow directly to those looking to lend. An individual seeking funding for anything from home repair to a college education creates an online ad, describing the size of the loan he'd like, what interest rate he'd be willing to pay and how he intends to use the money.
If you don't need money, but rather have some extra to lend, you can click through pages and pages of loan requests, deciding for yourself what risks you feel comfortable in taking. Amounts range from a few thousand dollars up to $25,000, and you can fund the entire loan yourself or contribute as little as $50. Because a number of lenders band together to fund one loan, you're able to diversify your exposure. If a high-risk borrower skips payment for a $10,000 loan, you might only be on the hook for $75 of it. Payments are made monthly, and Prosper.com handles all loan servicing for a nominal fee.
Although managing fear has always been a regular part of the trading game, traders of all sizes can now tweak their exposure using an exciting new exchange-traded product that turns fear into an asset class unto itself. Although professional investors, primarily options market-makers, have long traded volatility through complex spreads on index options, the Chicago Board Options Exchange now offers a clean and transparent method for individual players to take positions with ease. This isn't buy-and-hold, mutual-funds-for-dummies-type stuff. If you aim to be operating on the edge, trading volatility puts you smack dab on a new frontier.
The majority of the volatility-linked derivatives are based on the CBOE's Volatility Index, or VIX, which was first tracked on a real-time basis in January 1986. Initially tied to options on the S&P 100 index (it is now based on the S&P 500) the VIX was originally designed not as a trading instrument but as a shorthand way of expressing the overall volatility level of stocks. Because it tends to rise when stocks fall, the VIX quickly became known as the "fear" index.
I'm intrigued by VIX Options, the first product on market volatility to be listed on an SEC-regulated securities exchange. These contracts can be traded from any standard stock account approved for options trading, allowing you to buy puts and calls on volatility just like you'd trade them on General Electric (GE) or any other exchange-listed issue.
Because volatility tends to rise when stocks drop, one would expect that most investors would use VIX Options as a hedge (albeit an imperfect one) against a precipitous decline in stock prices. If the Dow dips 200 points in one day, the VIX will undoubtedly experience a sharp spike. Interested traders should review the CBOE's website for more information about the new VIX contracts.
Recently, Rydex Investments has introduced a number of currency-based ETFs that offer everyday investors a unique opportunity to trade currency like the big boys. Launched late last year, CurrencyShares Euro Trust (FXE) offers an effortless way to bet on (or against) the euro. Each share represents 100 euros plus accrued interest. If the euro strengthens relative to the U.S. dollar, then the price of FXE will rise. If the euro weakens, then FXE falls. Because euros held in the fund earn interest, the fund also boasts a dividend.
Just a few weeks back, the firm expanded their lineup with a number of funds based on other currencies including: CurrencyShares Australian Dollar Trust (FXA), CurrencyShares British Pound Sterling Trust (FXB), CurrencyShares Canadian Dollar Trust (FXC), CurrencyShares Mexican Peso Trust (FXM), CurrencyShares Swedish Krona Trust (FXS) and CurrencyShares Swiss Franc Trust (FXF).
Most of us are familiar with the need to diversify our equity and fixed-income portfolios. Yet the difficulty in playing the dollar has kept us from having to think too much about currency risk — the potential that the value of the dollars in your pocket (or bank account) might fall in value relative to other world currencies. And while there are thousands and thousands of mutual funds that own the same handful of large-cap U.S. stocks, these are among the few products that permit individual investors to diversify into an entire new asset class. To that end, investors will benefit from reviewing Rydex's currency ETF website at http://www.currencyshares.com.
Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC and is a markets columnist for Smartmoney.com. He appears regularly on FNC's business program Cashin' In.