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  • Activist Starboard Value Planning Another Proxy At LSB Industries [View article]
    I pulled it up. The firm is young and does not have a deep track record in the sector yet. Its overall active long returns have been strong, but inconsistent (particularly security selection/stock picking):

    Year: 2012 2013 2014 2015
    Long Return: 39.71 43.89 26.68 -1.13
    Passive: 24.83 56.06 17.79 -4.87
    Active: 14.88 -12.17 8.88 3.74
    Security Selection: 15.93 -16.89 5.98 1.39
    Market Timing: -1.05 4.72 2.90 2.35

    Still, it is in the top 10% of hedge funds as far as active management skill goes -- definitely worth paying attention.
    Mar 24, 2015. 11:45 PM | 1 Like Like |Link to Comment
  • A Look Inside Hedge Fund Holdings May Tell Us Where The 'Smart Money' Thinks Stocks Are Headed [View article]
    The 13F holdings of quant hedge funds may not reflect their exposure to the stocks, countries, or themes in question. In fact, it is common to have a long equity position and a net short exposure due to derivatives. This applies to many of the top managers: D. E. Shaw, AQR, Renaissance, etc. So analysis needs to first filter for the long-biased buy-and-hold types of managers.

    It would also be more helpful to discuss the bets of the group along with its performance track record. As it happens, the average hedge fund does no exhibit security selection and market timing skills in most sectors. In addition, crowding of hedge fund bets is a growing concern: In January the most crowded hedge fund longs underperformed the most crowded shorts by over 10% (http://bit.ly/1D1W3eo). So betting against the industry is usually a winning strategy.
    Mar 19, 2015. 04:50 PM | Likes Like |Link to Comment
  • Activist Starboard Value Planning Another Proxy At LSB Industries [View article]
    It would be interesting to know more about Starboard’s performance / record of value creation in this sector. This would provide objective metrics of their competence and likely outcomes.
    Mar 19, 2015. 02:46 PM | 2 Likes Like |Link to Comment
  • Is One Of Warren Buffett's Portfolio Holdings A Compelling Short? [View article]
    It is commonly assumed that top investors are skilled in all areas – this is a mistake and Buffett is no exception. While Berkshire’s overall stock picking results are exceptional (http://bit.ly/1BCbwk0), the minerals/materials performance is ordinary.

    So this is not an area where Buffett demonstrated any evidence of edge over the past 10 years. It may lie outside Berkshire’s circle of competence.
    Mar 19, 2015. 12:23 PM | Likes Like |Link to Comment
  • Where hedge funds have bets in the consumer staples/discretionary sectors [View news story]
    Precisely. Hedge funds are the dumb money in a number of sectors. So doing the opposite is often a profitable strategy. But their edge and performance varies dramatically by industry (http://bit.ly/18zZzFB) so in several sectors it does make sense to follow the herd. The context of skill and performance record matters a great deal and general observations about hedge fund positions are rarely useful.

    Also, beware of crowded and illiquid hedge fund positions. These are especially vulnerable to mass selloffs. In January this volatility cost investors dearly (http://bit.ly/1D1W3eo).
    Mar 1, 2015. 02:21 AM | 1 Like Like |Link to Comment
  • 5 Reasons Why Buffett Threw In The Towel On Exxon Mobil [View article]
    Energy is not Berkshire’s best sector, but Buffett’s record in selecting energy stocks has been strong: http://bit.ly/1AeXhkC

    Berkshire has done far better than a typical hedge fund and far better than one would have done by taking the same risks passively. So the sale of XOM is a negative indicator, albeit a weak one.

    However, one should not extrapolate to the overall energy sector since there is no statistically significant relationship between Berkshire’s exposure to the Energy Factor and its performance.
    Feb 27, 2015. 01:48 AM | 1 Like Like |Link to Comment
  • Dan Loeb Likes AIG And So Do We [View article]
    Note that, while some very smart investors favor AIG, it is also one of the most crowded hedge fund ideas. AIG a top consensus long HF bet (http://bit.ly/1D1W0PW) and is the consensus bet in its industry. This does not necessarily make it a bad investment, but warrants caution:
    - Crowded hedge fund insurance bets have done poorly over the years.
    - Crowded hedge fund bets are vulnerable to disorderly selling on any slip-up or due to fund capital flows. January was a nasty illustration of this (http://bit.ly/1D1W3eo).
    Feb 23, 2015. 01:46 AM | 1 Like Like |Link to Comment
  • GURU And ALFA: Are Hedge Fund ETFs Worth Your While? [View article]
    Thanks for the good work and for the effort to adjust the performance of these portfolios for their higher beta. Most analysis completely overlooks the 10-20% higher (average) exposure and the higher performance it ought to warrant. Though note that returns-based analysis can produce incorrect estimates of beta when exposures vary.

    Also thanks for shining the light on the complexities of in- and out-of-sample testing and survivor bias.

    The other tricky point often overlooked is conviction: When talented managers run small funds, their best ideas are often their largest. However, as they accumulate assets they often can’t scale their best ideas. Consequently, sizing or conviction of large funds is often a function of liquidity, rather than quality of ideas. Take Greenlight, for example. Their top long positions generated lower risk-adjusted returns than their average ones. If Greenlight sized all positions equally, long portfolio would have generated ~20% higher stock picking gains over the past 10 years (http://bit.ly/1z6ffWi). This holds for most hedge funds, especially the larger ones.
    Feb 21, 2015. 12:48 AM | Likes Like |Link to Comment
  • 5 Real Estate Trusts To Outperform In 2015 [View article]
    Another recent tailwind for the sector, but also a source of future risk, is the high correlation between REIT returns and Oil price changes (http://bit.ly/1DoQAlS)

    Deflationary effects can be both consequences and causes of declining oil prices. These deflationary effects are also significant drivers of fixed-income assets’ returns. Due to their fixed-income features, REITs are affected.

    The delicate balance between decent top-level U.S. indicators and deflation lurking beneath the surface is a key reason for the recent performance of fixed-income proxies (REITs, Utilities, etc.) and their (historically) lofty valuations. With the current global macro backdrop, this delicate balance could persist for a while.
    Feb 7, 2015. 02:12 AM | Likes Like |Link to Comment
  • Carnival: Declining Fuel Costs To Lift Profits In 2015 And Beyond [View article]
    Funny that you should bring up USDFX: We are doing similar review of the sectors most exposed to USDFX and will publish soon. The effects of oil price and USDFX are often in opposition so the net impact on some industries will be more muted this time.
    Jan 31, 2015. 01:47 PM | 1 Like Like |Link to Comment
  • Carnival: Declining Fuel Costs To Lift Profits In 2015 And Beyond [View article]
    Cruiselines are indeed one of the top beneficiaries of declining oil prices, but the relationship is weaker that between Oil and Airlines: A 10% decline in oil price is associated with ~4% increase in Airlines, compared to ~2% increase in Hotels, Resorts, and Cruiselines (http://bit.ly/112jw4d).
    Jan 29, 2015. 04:45 PM | Likes Like |Link to Comment
  • Cheniere Energy Is Irrationally Overvalued Compared To Its International Peers [View article]
    There’s another source of concern for investors in Cheniere (LNG) – It has been the most crowded U.S. equity bet of hedge funds for some time:
    http://bit.ly/XRK71s
    http://bit.ly/1yLJaav

    Crowded names do very poorly if a slip-up or disappointment leads to a mass liquidation by impatient holders.
    Jan 27, 2015. 04:24 PM | 2 Likes Like |Link to Comment
  • Sectors Most Exposed To The Oil Price [View article]
    You nailed it before I could chime in:

    At first, I too was surprised by the negative relationship between REITs and Oil. But, having checked other inflation-sensitive factors, the relationship is pervasive.

    Deflationary effects can be both consequences and causes of declining oil prices. These deflationary effects are also significant drivers of fixed-income assets’ returns. Due to their fixed-income features, REITs are affected as well. You can see these effects broadly in bonds also.

    This deflation link is important to Oil and REIT performance. Consequently, the statistical relationship is strong.

    Statistics seems to capture the messiness of links between Oil and Airlines: A macro/deflationary shock that reduces oil price also weights on the cyclical airline demand. The interplay between these positive COGS and the negative demand effects leads to a less consistent negative relationship. So the inflation-REITs link turns out to be more consistent.
    Jan 24, 2015. 12:52 AM | Likes Like |Link to Comment
  • Valeant Pharmaceuticals, A Bet The Jockey Story With Upside [View article]
    Note that while SEQUX has excellent overall stock-picking record, its 3- and 10-year results in the healthcare sector have been poor:

    SEQUX has not made money picking healthcare stocks since 2004 and lost about 4% since 2011. For the past 3 years SEQUX would have generated higher returns if it simply bought a healthcare ETF.
    Jan 20, 2015. 03:32 AM | 1 Like Like |Link to Comment
  • Red-Hot REITs And Collapsing Commodities [View article]
    Thanks for the excellent work. Investors generally believe that Airlines are the best source of negative oil exposure. Turns out REITs offer a more consistent short oil bet: http://bit.ly/147dKQ0

    Deflationary effects can be both consequences and causes of declining oil prices. These deflationary effects are also significant drivers of fixed-income assets’ returns. Due to their fixed-income features, REITs are affected as well and the statistical relationship is strong.
    Jan 15, 2015. 12:52 PM | Likes Like |Link to Comment
COMMENTS STATS
187 Comments
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