Phil Davis's Weekend Musings

by: Philip Davis
Hedge funds underperformed the S&P last month. This is not a terrible thing as hedge funds hedge and, like our middle Google plays, playing both sides. While safer, it doesn't always yield the best month-to-month returns.

I'm sure that is small comfort for investors in Goldman Sachs Group Inc.'s (NYSE:GS) $10B Global Alpha fund, which dropped 10% last month... The fund was hurt more by currency movements than the commodity crash but, when this letter goes out next week, look for many high-flying funds to experience outflows from nervous investors.

The last time GS had a monthly loss this large was October 1998, when the S&P dropped 10% in a month, not the same thing at all! The fund told investors it does not intend to change it's strategy, which returned 33% last year: "Our overall view on U.S. Treasuries was and continues to be negative given poor long-term value and a less favorable macroeconomic outlook." So the smartest fund guys on the planet disagree with me -- I've had worse!

As the WSJ notes about the letter, they also say: "We continue to maintain the highest confidence in our models and positions, despite our performance in August."

This is what I mean about commodity funds (and currencies are commodities too), they are not going to capitulate in a single month, even when that month is a disaster. But a 10% drop in oil for August, followed by a 5% (so far) drop in September may have hedgies heading for the exits before they wipe out last year's profits.

Think about the amount of gold, for example, held by the streetTRACKS Gold Trust ETF (NYSEARCA:GLD) and others as investors picked up 8M shares a day, double the usual volume, as gold went from $575 in April, to $730 in July. Buying was more muted but still strong as gold picked up again in June, from $542 to $676 again in July. Last week's drop caught everyone by surprise except this guy, and I think the ETF investors, just like many hedge funds have not yet begun to freak out -- a break below $550 should do that!


As much as you want to admire the determination of New Yorkers to get the new "Freedom Tower" built, I do question the wisdom of having State and City government centers locate there. Giuliani's former "command center" was at 7 World Trade Center and, though not directly hit, the building was too unsafe to enter and was ultimately demolished as well. Putting vital government centers in the center of a two-time target may be a big New York FU to your enemies but, strategically, it's not necessarily the smartest move.


Let's buy some health care insurers, as they have brilliantly combined good PR with good business by allowing regulatory changes that allow parents to keep paying for their kid's health insurance until they are 30. This article says about 30% of the gap group, between college and 30, are uninsured, and I know when I got out of college my loss of health care was a big issue. With fewer employers making payments these days, piggybacking kids on parental policies gives insurance companies a huge boost in revenue on the segment of the population that is least likely to require expensive medical care!

Read all of Phil Davis's articles on Seeking Alpha.