Goldman Sachs Hedge Fund Trend Monitor

There is a ton of good information in this quarterly report (link to PDF here, or in full at the bottom of this post). Goldman looks at 687 funds with $500 billion in long stock positions. Similar to a lot of what we do on AlphaClone.

They examine a few strategies that historically outperform the S&P 500. The first is a strategy of buying the 20 most concentrated stocks (defined as hedge funds owning X% of the company). This has beaten the market by 14% a year since 2001. The 20 current stocks are:

Sears Holdings Corporation (SHLD)

AutoNation (AN)

AutoZone Inc. (AZO)

CF Industries Holdings (CF)

CB Richard Ellis Group (CBG)

Sun Microsystems (JAVA)

New York Times (NYT)

AK Steel Holding (AKS)

Mastercard (MA)

E*TRADE Financial (ETFC)

CenturyTel (CTL)

SLM Corp. (SLM)

Allegheny Energy (AYE)

Goodyear Tire & Rubber (GT)

Harman International Industries (HAR)

Life Technologies (LIFE)

Wyeth (WYE)

Abercrombie & Fitch (ANF)

MBIA (MBI)

CIENA (CIEN)

The highest concentration of stocks <$1billion market cap is:

Federal-Mogul (FDML)

Loral Space & Communications (LORL)

American Railcar Industries (ARII)

Ardea Biosciences (RDEA)

Virage Logic (VIRL)

Alternative Asset Management Acqusition (AMV)

AMAG Pharmaceuticals (AMAG)

TerreStar Corporation (TSTR)

Chordiant Software (CHRD)

Specialty Underwriters Alliance (SUAI)

Another strategy is the VIP list. This looks at the 50 stocks that most frequently appear among the largest 10 holdings of hedge funds with 10-200 holdings. This strategy has historically beaten the market by 2.8% a year since 2001. The top 10 are:

Bank of America (BAC)

Microsoft (MSFT)

Apple (AAPL)

Google (GOOG)

JP Morgan Chase (JPM)

Pfizer (PFE)

QUALCOMM (QCOM)

Transocean (RIG)

You can play around with these and many most similar strategies over on AlphaClone.

And probably my favorite graphic, here is the portfolio density of hedge funds vs. mutual funds. If you recall from the academic literature, you want the concentrated funds and not index huggers. [click images to enlarge]

The 100 largest hedge funds by equity assets:

Comments

[bordo:]

Bloggers and other advisors who cite strategies which have "beaten the market by 14% (or "2.8%") a year since 2001" do a disservice to investors.

I like Taleb's quote (and an idea previously expressed by Bertrand Russell):

A Turkey is fed for 1000 days—every day confirms to its statistical department that the human race cares about its welfare "with increased statistical significance". On the 1001st day, the turkey has a surprise.

That's how we got into this mess in the first place. I recall talking several years ago to an analyst about the mortgage insurance companies. He had a model showing earnings over a variety of assumptions, including "HPA" (housing price appreciation) variables. A colleague asked: "but what happens if housing prices go down?" "Well" the analyst sputtered, "that's never happened on a nationwide basis."

Now I know that you know all of this. But what's the true information content in the "fact" that these strategies have beaten the market over the past 7 or 8 years? What do you think the chances are that they'll beat over the next 7 or 8? And even if they "beat the market", will an investor make or lose money?

Sep 05 10:57 AM

[AJ Clausen:]

I think the basic flaw in stock picking is that it is in reality a bet against the stock market - will "my" stock be better or worse than this asset class?
so it is in reality just an enhanced risk on the stock market.

alexander-clausen.at

Sep 06 04:26 AM