December 21st, 2010

Racing Against The Hedge Funds

I was interested to read that hedge funds have found the past year as trying as I did. The headline on was In risk-on, risk-off year, hedge funds come up short” and the lead paragraph stated that

“Several of the largest hedge funds lagged the return on equities and bonds this year as big market swings combined with massive monetary stimulus to disrupt trading strategies.?”

An index of managers compiled by Chicago-based Hedge Fund Research Inc. rose 7.11% this year, through the end of November and early December as compared with a 7.88% gain in the S&P 500 Index. Those hedge funds that only invest in equities returned even less at 6.89%. The article went on to point out the returns up to the beginning of December for some of the larger and better-known all equity head funds:

  • Viking Global Equities was up less than 3%
  • Paulson & Co.’s Advantage fund climbed 1.8% this year
  • Paulson & Co.’s Advantage Plus fund, which uses a small amount of leverage, gained 3.68%.
  • Brevan Howard Fund, a giant global macro hedge fund, returned 1%.
  • Moore Global, another global macro fund, was up 2.5%
  • King Street Capital, a big credit-focused fund, advanced less than 5%.
  • Och-Ziff Capital Management’s Master fund,gained 7.63%.
  • Oculus fund was up just over 6%.
  • Tudor BVI Global advanced 5.4%.
  • York Investment was up 5.8%.

One of the factors contributing to the less than stellar performance of many hedge funds this year were this year’s violent market swings. However, this news came as a relief to me because my portfolio has outperformed the market and, apparently all these highly compensated hedge funds.

The following chart shows two indexes: the S&P 500 in red and the model portfolio my subscribers see in my Instant Alerts service:

Both indexes start at 1.0 with the launch of the service last March 17. As of last Friday (I issue a weekly Recap Report each Sunday), the portfolio was up 8.8% as compared with a 7.3% increase in the S&P 500. It was tough going until just after Labor Day when I reversed direction and started buying. You read about it here on September 2, when I wrote:

“I know I’m going to be criticized yet again for being too optimistic or pallyannaish but I’m looking forward to the possibility …. now perhaps 60/40% …. that the market also will hit and cross above the major, long-term descending trendline that stretches all the way back to October 2007.”

And two weeks later:

“…. the market timing indicator gave an “all-in”, 100% invested signal back on September 2 with the index crossing above the 50-dma ….. I’ve struggled against skeptics …. one of my harshest critics, continually asks me to explain to her why the market should advance in the face of continued bad economic news …… The only way I can respond is to say “stay tuned, the media will tell you why something happened after it happens … and then will call it news”…… the problem isn’t knowing which stocks to buy as much as knowing how much to invest and when. There are more great stocks out there to buy (like there were in March-May 2009) than money to buy them. What is in short supply is guts to do it.”

Finally, at the end of September, when asked why I buy stocks making new highs, I wrote:

“When the stock market is moving from a trough or consolidation into an uptrend and I have cash to invest, one of my primary means of employing that cash is to buy stocks making all-time new highs.”

That’s looking backwards; the question everyone wants answers to is what the future holds. I recently pointed to several areas where I’ve bought stock:

  1. Tech stocks will probably continue to be strong in the first half. See “Inverted Head-and-Shoulder Potential on NASDAQ Composite“; the NASDAQ composite is up 12.8% since that post.
  2. There’s “The Resurrection of Financials“. Have you seen what XLF has been doing over the past several days?
  3. Finally, how about “Steels: Your Second Chance“. The five steel stocks in that post are up an average of 4.84% over three trading days and none are down.

There will be new opportunities as the New Year rolls in so stay tuned and subscribe.

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  • zentrader

    Hey Joe,

    Are you open to a link exchange? We have comparable alexa rankings and should compliment each other's traffic nicely.