They’re delivering Alpha, you scoundrels.
Post largest redemptions since the financial crisis, the gurus in our beloved hedge fund industry are doubling down on their moronic strategy, by concentrating their assets into very few stocks. At the present, current concentration amongst the top 10 holdings for hedge funders stands at a record 68%.
“We’re moving out of a macro-focused environment and into one where stock fundamentals matter,” Ben Snider, an equity strategist at Goldman, said by phone. “It’s been an exceptionally poor 2016 and that comes on the heels of many years of underperformance for hedge funds and mutual funds, so this is definitely something the industry needs.”
As volatility crept into the stock market over the last year, some of the biggest losses were in stocks beloved by hedge funds. The 300 companies in the Russell 3000 Index that they owned the most shares in plunged an average 25 percent in the year through Feb. 11, compared with an 11 percent drop in the S&P 500, Bloomberg data show.
The culprit was a breakdown in the momentum style of stock-picking, a strategy that exploded in popularity last year in which investors simply buy companies that went up the fastest in the recent past. The result: a group of investors that pride themselves on independent research and stock-selection all ended up owning the same shares.
“When you’re playing catch-up to zero you really have to focus on the names that are going to get you there,” said Dunn. “Concentration works, it’s the way you should manage your portfolio. Hedge funds are an absolute return strategy and the way to optimize your potential outcomes is having your biggest positions in your highest conviction names.”
“Hedge fund portfolio concentration stands at the highest level on record,” the team, led by chief equity strategist David Kostin, wrote in the May 27 report. “The elevated stock return dispersion will help skilled fund managers generate alpha during the remainder of 2016.”
Or, maybe this strategy can backfire, causing another disastrous year for the 2 and 20 players? One thing is for certain, the results aren’t going to be milquetoast. It’s do or die for many funds out there now.
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concentrations kill
Unless you know what you’re doing and are also lucky. How likely is that?
Not true. Luck alone is sufficient for success in investing
Well, that’s true, at least in the short term. But luck can run out at any time, whereas educating yourself so that you know what you’re doing can have lasting power.
Momentum investing has been the most historically successful strategy. That is a big reason why it is so hard to beat SPY. As stocks build momentum and get more expensive, their market cap goes up and their share in SPY also goes up. Of course, in bear markets this same investment strategy amplifies losses.
The largest component of TA investing is based on momo as well: buy high, sell low (or at least buy rising stocks and sell falling ones). It is rare to find investors or traders that do well in both bear and bull markets becuase of the biases we have. We blame bad luck when stocks go against us and award our skill when stocks move in our favor, even if the stock movement is based on things that we could not predict such as analyst upgrades/downgrades or regulatory investigations. I know I am susceptible to this and I could point to many examples in the comments on iBC’s own website.
Yeah, a lot of people confuse brains with a bull market– or with a bear market, for perma-bears.