The Hypothetical Personal Hedge Fund
A real-time simulation of a high-yield income emergency fund using real-world assets.
This is our primary educational tool designed to demonstrate how a small, high-yield income test portfolio could function in practice. We cannot stress enough that this is ONLY a learning tool—created to illustrate how time-tested hedge fund concepts can be combined with modern assets and financial products to build an imaginary emergency cash fund.
Why This Matters: A recent U.S. News & World Report survey revealed that 42% of Americans don't have an emergency fund. This stark reality inspired the creation of this educational resource—our goal is to spark motivation and provide a conceptual framework that might encourage individuals to establish their own emergency savings, whether through a simple bank savings account, money market fund, or any other savings vehicle that suits their needs and risk tolerance.
This tool is intended to educate, inspire thought, and demonstrate portfolio construction principles—not to provide investment advice or recommendations of any kind.
Important Disclaimer
- These are NOT stock or fund recommendations. In fact, we are legally prohibited from making any investment recommendations whatsoever.
- Use of Actual Assets: We utilize real, publicly-traded assets (ETFs, funds, etc.) for illustration purposes only so that readers can do their own real-world research on publicly available data. Simulating fictional assets would be meaningless and could produce artificially manipulated outcomes that don't reflect real-world market dynamics, thereby defeating the educational purpose of this experiment.
- No Endorsement: The inclusion of any specific security, fund, or financial product in this educational portfolio does not constitute an endorsement, recommendation, or suggestion that you should purchase, hold, or sell that security.
- Do Your Own Research: Any investment decisions should be made only after conducting thorough personal research and consulting with qualified financial advisors who understand your unique financial situation, goals, and risk tolerance.
Disclaimer: Everdend.com offers general information for educational purposes only. We are not licensed financial advisors and this is not financial advice. Please read the full disclaimers here.
Table of Contents
- Introduction
- The Goals 🎯
- Accessibility & Eligibility
- Fund Assets
- Investment Distribution Example
- Spreading Money Evenly Across All Assets
- Fund Overview: The Hedged Income Strategy
- Segment 1: Traditional Income 💰
- Segment 2: High-Yield Option Income 📈
- Segment 3: Capital Stability 🛡️
- Segment 4: Uncorrelated / Defensive 🌐
Introduction
That yield sound to good to be true?
Good.
Be skeptical and remain skeptical. That APY is indeed quite high based on industry standards. That's precisely why this Hypothetical Personal Hedge Fund serves as a learning tool—our readers can follow along using real asset prices and yields in order to do their own independent research to understand how this works and why this particular hedge fund is structured the way it is.
The Goals 🎯
This is NOT a capital growth fund test. We are not seeking or expecting the underlying assets to significantly appreciate in value. Instead, this is strictly designed as an income-focused fund that also functions as a passive-investment emergency fund.
Primary Objectives:
- Capital Preservation: The goal is to maintain relatively stable net asset value (NAV) over time. We expect the portfolio to remain approximately "flat" in terms of principal value, unless dividend and distribution payments are actively reinvested.
- Consistent Income Generation: The primary mission is to generate steady, recurring cash flow through dividends and distributions, regardless of market conditions.
- Resilience Through Market Cycles: A key objective is to continue producing income during flat or declining market conditions—times when traditional growth-oriented portfolios may struggle or produce losses.
- Emergency Liquidity: While generating income, the fund should maintain sufficient liquidity to serve as an accessible emergency fund when needed, balancing yield generation with capital availability.
Success Metric: This portfolio will be considered successful if it can consistently generate meaningful cash flow while preserving principal value through various market environments—demonstrating that income-focused strategies can serve a dual purpose as both a yield generator and an emergency reserve.
Accessibility & Eligibility
This learning tool is meant for everyone and was deliberately constructed using assets available to everyone—not just wealthy investors. Every security listed in this hypothetical portfolio can be purchased on a fractional-share basis through modern brokerages that charge no setup fees and no commission costs.
In theory, someone could replicate this entire educational framework with as little as $20, making it accessible to individuals with very limited resources. This democratization of investment education reflects a fundamental shift in financial markets: sophisticated portfolio construction concepts that were once exclusive to institutional investors and high-net-worth individuals are now available as practical learning experiences for everyday people.
The purpose is not to suggest this specific allocation is appropriate for everyone, but rather to demonstrate that understanding complex financial strategies is no longer gated by wealth—only by curiosity and willingness to learn.
Fund Assets
The Hypothetical Personal Hedge Fund (TEST-B)
There are a total of 21 assets in this hypothetical fund. The segments are for illustration purposes to point out each group of assets' role in the overall fund which is explained further below.
| Segment 1: Traditional Income (8 holdings = 38.09% of portfolio) | |||
|---|---|---|---|
| Type | Symbol | Name | Yield |
| REIT | ORC | Orchid Island Capital | 19.59% |
| REIT | ARR | Armour Residential REIT | 16.38% |
| BDC | HRZN | Horizon Technology Finance Corporation | 19.73% |
| BDC | PSEC | Prospect Capital Corporation | 20.22% |
| MLP | IEP | Icahn Enterprises L.P. | 25.32% |
| MLP | ARLP | Alliance Resource | 9.90% |
| CEF | DSU | BlackRock Debt Strategies Fund | 11.56% |
| CEF | CION | CION Investment | 14.49% |
| Segment 2: High-Yield Option Income (5 holdings = 23.80% of portfolio) | ||
|---|---|---|
| ⚠️ High Risk Alert: Please read What is an Options-Based Income ETF? | ||
| Symbol | Name | Yield |
| WPAY | Roundhill WeeklyPay Universe ETF | 38.51% |
| MSTW | Roundhill MSTR (MicroStrategy) WeeklyPay ETF | 65.10% |
| HOOW | Roundhill HOOD (Robinhood Markets Inc) WeeklyPay ETF | 44.46% |
| GDXY | YieldMax Gold Miners Option Income Strategy ETF | 101.58% |
| FEPI | ETF Opportunities Trust REX FANG | 24.84% |
| Segment 3: Capital Stability (4 holdings = 19.04% of portfolio) | ||
|---|---|---|
| Symbol | Name | Yield |
| TLT | iShares 20+ Year Treasury Bond ETF | 4.37% |
| VGLT | Vanguard Long-Term Treasury ETF | 4.35% |
| EDV | Vanguard Extended Duration Treasury ETF | 4.78% |
| BND | Vanguard Total Bond Market ETF | 3.87% |
| Segment 4: Uncorrelated / Defensive (3 holdings = 14.28% of portfolio) | ||
|---|---|---|
| Symbol | Name | Yield |
| KMLM | KraneShares KFA Mount Lucas Managed Futures Index Strategy ETF | 0.87% |
| JEPI | JPMorgan Equity Premium Income ETF | 7.75% |
| AAAU | Goldman Sachs Physical Gold ETF Shares | N/A |
| Segment 5: (*Treated as) Cash (1 holdings = 4.76% of portfolio) | ||
|---|---|---|
| Symbol | Name | Yield |
| SGOV | Blackrock iShares 0-3 Month Treasury Bond | 3.74% |
Yields are subject to change and not guaranteed.
Investment Distribution Example
The idea is that the investment is distributed evenly across all 21 assets. This can be achieved but using fractional shares so that it isn't about having mix matched amounts of shares so much as it is about an equal amount of money in each asset.
$21 = $1 per asset
$200 = $9.52 per asset
$2,000 = $95.23 per asset
$20,000 = $952.38 per asset
etc...
Spreading Money Evenly Across All Assets
Here are a few points and topics that are misunderstood by many self-directed investors...
Does Share Price Affect Your Dividend Income?
Short answer: No.
When you invest the same amount of money into different stocks, the **dividend yield** is what determines your income—not the share price.
Here's Why
Let's say you have $100 to invest in two different stocks:
Stock A: $50 per share with 10% dividend yield
Stock B: $10 per share with 10% dividend yield
What You Get
- Stock A: You buy 2 shares, earn $10 per year
- Stock B: You buy 10 shares, earn $10 per year
Same money invested + same yield = same income
The Simple Rule
Think of dividend yield like an interest rate on a savings account. If two accounts both pay 10% interest, it doesn't matter how they package it—$100 in either account earns you $10.
What matters: The yield percentage
What doesn't matter: The price per share
When comparing investments, always look at the dividend yield, not the share price!
Why Spread Your Money Evenly?
Investing equal dollar amounts across different assets is called equal-weight investing, and it's a smart strategy for most investors.
The Benefits
- You avoid putting all your eggs in one basket. If one asset struggles, you still have money in your other investments.
- You give each investment equal importance. Instead of one expensive stock dominating your portfolio just because it costs more per share, every investment gets the same shot at growing your money.
- It's simple to manage. You don't need to guess which companies deserve more of your money. Just divide it equally and let each investment do its job.
Example
You have $500 to invest across 5 dividend stocks:
- - Put $100 in each stock.
- - Each investment has equal weight (20% of your total).
- - Your income depends on each stock's yield, not its price.
This way, whether a stock costs $5 or $500 per share, you've invested the same amount in each company.
Fund Overview: The Hedged Income Strategy
This hypothetical personal hedge fund is structured around a Four-Pillar Strategy designed to maximize high, consistent current income while employing sophisticated, time-tested hedging mechanisms to stabilize capital and dampen volatility.
The core objective is to achieve a superior, absolute return profile characteristic of institutional hedge funds, prioritizing high cash flow generation alongside prudent risk management.
The fund's architecture systematically combines assets based on their risk, return, and correlation profiles, creating a Barbell Approach to income investing:
By balancing highly aggressive income pursuit with deeply defensive hedges (Treasuries, Managed Futures), the fund attempts to create a stable, through-cycle income machine—aiming to participate in market upside while mitigating the severity of potential downturns. This segmented approach is the foundation of the fund's capital preservation and absolute return mandate.
Segment 1: Traditional Income 💰
Quick Definition: Traditional Income forms the core income engine of a hedge fund, utilizing specialized structures like REITs, BDCs, MLPs, and CEFs that are legally required to distribute most of their income to investors, providing the primary cash flow generation that defines the fund's yield profile.
This segment is dedicated to generating a high, steady stream of current income through specialized financial vehicles. It is designed to capture above-average yields compared to traditional corporate or government bonds.
Concept and Purpose
- This acts as the fund's Core Income Engine. It focuses on investment structures that are legally required or structurally designed to pass through a large portion of their generated cash flow to investors.
- REITs (Real Estate Investment Trusts): Must distribute at least 90% of taxable income to shareholders.
- BDCs (Business Development Companies): Invest in private, often middle-market companies and are required to distribute at least 90% of taxable income.
- MLPs (Master Limited Partnerships): Pass through income to investors, often offering high distribution yields (though the tax treatment is complex).
- CEFs (Closed-End Funds): Often use leverage and actively managed strategies to boost yield, distributing income from various asset classes (like debt).
- Industry Context: In a standard fund context, these holdings provide the "alpha" (excess return) needed to meet distribution targets, often replacing or supplementing traditional fixed-income holdings which may offer lower yields. The trade-off is often higher credit/interest rate risk and principal volatility compared to government bonds.
More information...
Segment 2: High-Yield Option Income 📈
Quick Definition: High-Yield Option Income represents the aggressive income component of this hedge fund strategy, using derivatives-based approaches to harvest volatility premiums through systematic options selling, generating exceptionally high cash flow while accepting capped upside potential and elevated NAV risk.
This is the fund's Highest-Octane Income Generator, specifically designed for aggressive cash flow production, often on a weekly basis. This segment carries the highest risk for capital erosion (Net Asset Value - NAV) and return of capital (ROC) due to the use of derivatives-based strategies.
Concept and Purpose
- This segment represents a Highly Concentrated and Aggressive Income Strategy. It leverages options-based income ETFs, which typically generate cash flow by systematically selling covered calls and/or cash-secured puts against their underlying holdings (or a narrow index). The weekly income focus suggests a strategy of high premium capture and frequent rebalancing.
- Industry Context: This mimics a specialized "Option Overwriting" or "Volatility Selling" sub-strategy common in more sophisticated hedge funds. Its purpose is to harvest the volatility risk premium. While providing exceptionally high yield, this strategy inherently caps upside potential and exposes the fund to significant downside vulnerability during sharp market rallies or declines, necessitating the careful monitoring you've noted.
Critical Risk Alert: NAV Erosion & Return of Capital
Why This Segment Requires Careful Watching...
Net Asset Value (NAV) Erosion Risk: Regular dividend stocks pay you from company profits. But option income funds work differently—they can lose value even while paying you high distributions. Here's how:
- Missing Out When Markets Rise: These funds sell contracts (covered calls) that limit how much they can gain. Think of it like selling your concert ticket for $100, then the concert sells out and tickets are worth $500. You locked in $100 and missed the bigger profit. Meanwhile, regular investment funds capture that full $500 gain.
- Still Losing When Markets Fall: The money collected from selling options only provides a tiny cushion (maybe 1-3% per month). If the market drops 15%, that small cushion barely helps. The fund's value still falls about 12-14%, but they've already paid out most of that cushion as "income" to you.
- The Downward Spiral: As the fund's value shrinks, it has less money to work with. But it often keeps paying the same high percentage, which speeds up the losses. Imagine taking $500/month from a savings account that's also losing money from bad investments—it disappears faster and faster.
Return of Capital (ROC) - Getting Your Own Money Back:
- What It Actually Means: When a fund pays you more money than it actually earned, the extra comes from your own investment. It's like depositing $100 in a bank, and they hand you back $30 and call it "interest." That's not interest—that's just your own money coming back to you.
- The Trick: A fund might advertise "50% yearly income!" Sounds great, right? But look closer: you invest $10,000 and get $5,000 in payments. However, $3,000 of that is ROC (your own money back). Your account is now worth only $8,000. You actually only earned $2,000, but your original investment shrunk by $2,000. You didn't make money—you broke even while just simply getting back 20% of your starting amount.
- Tax Confusion: ROC doesn't get taxed right away, which sounds like a bonus. But here's the problem: you're getting back your own money (untaxed) while the account that's supposed to generate future income is getting smaller. It's a false benefit.
- The Breaking Point: High ROC can't last forever. Eventually, the fund's value drops so low that it has to drastically cut payments. Now you're stuck with both lower income AND less money than you started with.
Warning Signs to Watch For:
- The fund's value dropping faster than the overall stock market
- More than 25-30% of your payments labeled as ROC for several months in a row
- The fund paying out more money than it's actually earning
- Sudden announcements about cutting payments or changing distribution schedules
You can learn more about Options-Based Income ETFs in this article: What is an Options-Based Income ETF? You'll discover why these are being kept to 25% or less of this hypothetical hedge fund.
More information...
Segment 3: Capital Stability 🛡️
Quick Definition: Capital Stability serves as the defensive hedge within the fund structure, primarily utilizing long-duration U.S. Treasury bonds that typically appreciate during market stress, providing both downside protection and liquidity reserves that can be redeployed when other fund segments face distress.
The primary mandate of this segment is to provide safety, liquidity, and downside protection for the overall fund. It serves as a defensive anchor, intended to appreciate or remain stable when riskier assets (like the income segments) are declining.
Concept and Purpose
- This is the fund's Risk-Off Reserve, traditionally accomplished through Long-Duration U.S. Treasury Bonds. Treasuries are considered the safest asset globally and are generally negatively correlated with equities and high-yield instruments. When market panic strikes, investors typically flee to the safety of Treasuries, driving their prices up. The long duration (as seen in TLT, VGLT, EDV) maximizes the sensitivity of the bond prices to falling interest rates during economic downturns, thus providing the maximum potential for capital gains (stability/growth) during an equity market crash.
- Industry Context: In classic hedge fund structure, this is often the "Flight to Quality" component, serving a dual purpose: Hedge against equity/credit market declines and a source of Liquidity that can be redeployed to buy distressed assets in other segments when markets are cheap.
Segment 4: Uncorrelated / Defensive 🌐
Quick Definition: Uncorrelated/Defensive assets implement absolute return strategies through managed futures and defensive option approaches that generate returns independent of traditional stock and bond markets, reducing the fund's overall market beta and smoothing total returns across varying economic conditions.
This segment aims to generate returns that are independent of traditional stock and bond market movements while offering an additional layer of capital preservation and potential return during varied economic cycles.
Concept and Purpose
- This segment implements a Diversification and Absolute Return strategy.
- Managed Futures (e.g., KMLM): These funds often take long and short positions in commodity, currency, and financial futures based on trend-following models. Since trends in these markets are often independent of the stock market's daily gyrations, they provide a strong uncorrelated hedge.
- Defensive Option-Income (e.g., JEPI): While also an option-income strategy, JEPI's focus on a diversified basket of large-cap equities (S&P 500) and using a less aggressive covered call strategy makes it far more defensive and stable than your weekly high-yield segment. It provides a defensive income floor while retaining some equity exposure.
- Industry Context: These strategies are essential for a true hedge fund structure, as their returns are designed to pursue absolute return regardless of the broader market direction. They reduce the overall fund's Beta (market risk) and its exposure to common systematic risk factors, effectively smoothing the fund's overall returns.