Hedging? Unhedged?

Tue, 2012/12/18 - 1:04pm | Your editor
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Mark Hulbert of Hulbert's Financial Digest (HFD) compares performance by newsletters and hedge funds on the marketwatch (Dow Jones) website. Hedge funds are a select Wall Street niche occupied by the supposed best and brightest. Only qualified (i.e. rich) investors are legally allowed to engage their services. Most retail investors don't have hedge fund access.

Meanwhile there are investment newsletters and blogs, like this one, reputedly produced by a gaggle of lunatic self promoters whose research departments are their kitchen tables. They sell mostly to small investors.

Here is Mark's view:

“Guess what? Newsletters this year are handily beating hedge funds. The average newsletter, according to the HFD, has produced a year-to-date gain (after transaction costs) of 9%. In contrast, the average hedge fund, as measured by the Hennessee Hedge Fund Index, has gained 5.5%. (These numbers are through Nov.)

“Longer-term data paint a somewhat better picture of the hedge fund world. Over the last decade, according to Hennessee, the average hedge fund has produced a 6.6% annualized return, vs 6.3% for the average investment newsletter. That’s a surprisingly small difference.

“Naturally, the hedge fund world believes that raw performance numbers fail to capture the true value added by hedge funds. One major category of value added, they argue, is reducing volatility. After all, that’s the reason they're called hedge funds.

“But how much volatility are they really reducing? Again courtesy of data from Hennessee, I was able to measure the extent to which the average hedge fund is correlated with the overall stock market, as measured by the Wilshire 5000 index.

“The metric I used was the correlation coefficient, which ranges between minus 1 (a perfectly inverse correlation) and plus 1 (a perfectly positive correlation). When focusing on monthly returns over the last 20 years, the correlation coefficient was a surprisingly high 0.80.

“And, high as this was, it undoubtedly underestimates the true extent of correlation because hedge fund holdings often are illiquid, and therefore priced infrequently. As a result, when calculating their net asset value at the end of a given month, hedge funds often end up using out of date prices for their illiquid investments.

“None of this is to say that there are no good hedge funds out there or that all investment newsletters are worth following.”


I got into trouble with Tamar the compliance officer of the only hedge fund I currently own, from Weiss Asset Management. I published here a couple of weeks ago a report by its head, Andrew Weiss, an emeritus ec prof at BU, noting that finding matching hedges for the Eastern European closed-end funds his group invests in is proving harder and harder. I also noted that Andy's performance topped most hedge funds compared to his.

The compliance officer told me weeks ago I would be cashed out for writing up Andy's fund which in invested in more than 20 years ago with his then-brother-in-law in NYC. I'm still waiting to hear from Andy to confirm that this is what he wants me to do. Natch I want out legally in 2012 to avoid the capital gains tax increase next year if Tamar axes my account.


In Globes Israel, Schlomo Cohen writes on Mellanox, MLNX, which we sold before its price sank:

“Our frenetic friend Jim Cramer of 'Mad Money' on CNBC also had a part to play in last week's collapse. In August, at a price of $115, he went out of his way to praise the company's performance. 'It's become my obsession,' he said then, and after a fairly detailed explanation, he recommended buying it, despite the amazing run it had had. Last Monday, at a price of $70, Cramer suddenly turned against Mellanox without explanation, and just said, 'I don't trust them. I want you to sell the stock.' Don't worry. Sooner or later, he'll go back on himself again, because, in practice, nothing negative whatsoever has happened at the company.”

More from India, Singapore, Canada, Sweden, Finland, Britain, Bermuda, Israel, Brazil, Spain, and Belgium. Prior to going off tomorrow to London and Paris (for vacation with laptop), I tackle a couple of tough technical issues about ADR trading today. Prepare for MEGO (mine eyes glaze over), paid subscribers. You will get presents from Santa Claus if you persist.

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