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James Altucher
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James Altucher is a managing director of Formula Capital, an asset management firm and fund of hedge funds. He's written four books on investing: Trade Like a Hedge Fund, Trade Like Warren Buffett, SuperCash, and The Forever Portfolio. He currently writes for The Wall Street Journal, Techcrunch,... More
My company:
Formula Capital
My blog:
The Altucher Confidential
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  • Hedge Funds Have Been a Scam for the Past 20 Years
    Mostly now-illegal or dubious activities are how hedge  funds have made almost all of their money in the past 20 years.  

    In the mid to late 90s - investing in tech stocks is the only strategy that worked. So-called "sophisticated" funds like LTCM or Victor Niederhoffer's fund worked for awhile but ultimately failed miserably (in part, because vulture funds picked at their weaknesses until they imploded). 
     
     Also, funds that "played the calendar"
    worked. What is playing the calendar? If you knew XYZ Bank was going
    to IPO ABC.com you would trade back and forth 10s of thousands of
    shares, generating commissions for the bank in the month before the
    IPO. Then, as a token of the bank's gratitude (or the broker that made the money on the commissions), you would get a slug of 100k shares at IPO time. It would
    open 50 points higher, you'd sell. REPEAT. Many people made 100s of
    millions of dollars on this and retired to far-flung locations never to be heard from again. Tech stocks are dead now and playing the calendar is
    somewhat illegal. Oh, another strategy (now illegal) that worked in the 90s for funds was a loophole called Reg S transactions. But that's another story. 
     
    In 2000-2003 the only strategy that worked was mutual fund timing.
    Every fund of funds loaded up on mutual fund timers. Now illegal. All the fund of funds redeemed their money from mutual fund timers and had to find a new strategy. 
     
    2003-2006 - PIPE strategies consistently outperformed. As well as
    funds that loaded up on high yield subprime mortgages. 95% of those
    funds blew up for reasons ranging from the housing bubble imploding to outright fraud. I ran a fund of PIPE funds at the time and fortunately unwound that part of my fund in 2006, dodging the bullet for my investors.
     
    2006-2009 the only strategies/funds that worked were funds that
    consistently got either insider information or information in a very
    gray area that could be considered insider but hard to prove. Galleon is the prime suspect but there are many, many others that fell in the gray category. Oh, and if you happened to have been in the 2-3 funds that invested against subprime than you are a hero. Everywhere I go now I seem to run into people who were magically invested in Paulson's fund. Funny how none of those people seemed invested in Paulson's fund back in 2007-8 but of well. 
     
    Now I think people are struggling to figure out what works. Even the
    best hedge funds don't seem to be consistently outperforming the
    markets (there are outliers but thats normal, a la Taleb's Fooled by
    Randomness). Druckemiller and Pelligrini are shutting down their funds for lack of opportunities. The entire  nature of funds is changing. I'll be doing a followup story on what _is_ working now but suffice to say, there's no magic bullet and there may never be again. 
     
    That all said, if you want to simply own the top stocks owned by the most hedge funds, without having to invest in the hedge funds themselves, here are the top 10: courtesy of Goldman Sachs (NYSE:GS): BAC, MSFT, AAPL, GOOG, JPM, PFE, QCOM, RIG, CVS, V


    Disclosure: No positions
    Tags: GS, BAC, MSFT, AAPL, GOOG, JPM, PFE, QCOM, RIG
    Sep 03 8:05 AM | Link | 1 Comment
  • What Warren Buffett's annual letter DIDN'T say
    What I didn't see in the Berkshire Hathaway report: 
     
    1. A more substantial discussion of succession. While he mentions it in the last few paragraphs he doesn't add any information to what we already know from prior announcements. Despite going on and on about how CEOs don't do enough risk management, the shareholders of BRK are left with the biggest risk of all - who will replace Warren Buffett if he were to decide to step down (unlikely) or take ill (he's 9000 years old). Part of the reason Berkshire generates such amazing profits is that Buffett, on the force of his reputation and charisma is able to secure unbelievable deals. Future CEOs (David Sokol, for instance) may be very competent but not capable of hitting the high level of networking performance that Buffett is able to do with such ease. People pay millions for a peek into Buffett's wallet but more valuable is the 50 year old rolodex that he's developed. A rolodex of such high quality it probably can't be emulated ever again. Which is why its extremely important for us to have an understanding of what reasons he has for not be more specific about a succession strategy. 
     
    My one assumption is that he figures we should trust the process. He does clearly have a good managerial bench and he has said that the future manager of the company is either already in the company or "available" to the company. What does that mean? 
     
    Buffett has one folksy comment about succession in the letter: "If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit." Funny, but considering the importance of this topic to shareholders, probably not appropriate.  
     
    2. More discussion of his new investments. Clearly he's making a big bit on RSG, for instance. It would be valuable to understand his reasoning and the future direction these investments might take. Perhaps he doesn't want to signal too much to the remora out there what he's intending but it would still have been interesting to see his thoughts on that industry. The last industry he piggybacked Bill Gates on was railroads. Gates had bought shares of CNI and talked Buffett into the benefits of owning railroads (Buffett has admitted he wished he had first bought into the industry when Gates first told him about it). Are we seeing the same thing in the trash industry? Gates owns 57mm shares of RSG and also some shares of Waste Management (NYSE:WM). Buffett likes the wide moats offered by industries like the highly regulated trash industry. Are we going to see a similar development to Buffett's approach towards the railroads industry? 
     
    He does state: "we normally will not talk about our investment ideas" but that doesn't mean I can't want for more. 
     
    3. Discussion of the oil industry. Again, this is not mandatory for shareholders (like I feel #1 above is) but he's rotated in and out of Exxon (NYSE:XOM) and ConocoPhillips(NYSE:COP) and it would be interesting to know why. Similarly I'd like to know more of his thoughts on the healthcare industry where it looked like he was about to take a deep dive (GSK, SNY, JNJ investments) but his energy has been more tepid since those first forays into the space. 
     
    4. He's a large shareholder of Goldman Sachs. His investment there was amazing. He got an excellent deal on preferred stock (much better than the government's deal at the same time) and although the investment dipped initially, the option component in his investment is now significantly in the money. However, as a shareholder of Berkshire, I'm very nervous.. Goldman is generating an extraordinary amount of heat lately. At first I thought Goldman could handle it (See my article <a href="http://www.huffingtonpost.com/james-altucher/why-all-the-hate-towards_b_371512.html">Why all the hate for Goldman Sachs</a> but now I'm not so sure. Between the backroom dealings on AIG and the media buzz about Goldman shorting Greek debt I'm worried the heat can get too great. Its starting to remind me of the buzzing that ultimately proved to be the undoing of Arthur Andersen. They were found innocent years later but that did them no good when every client dropped them. I think GS has done no wrong in any of these situations but I'm scared of what's happening and since this is a significant investment for Berkshire, I'd like to know Buffett's take on it. 
     
    5. More specifics on the equity index put options. These are options with billions of potential risk that we lose if the equity indices fall a certain amount. All we know about what the strike prices are is this statement: "In 2009, we agreed with certain counterparties to amend six of the equity index put option contracts. The amendments
    reduced the related contract expiration dates between 3.5 and 9.5 years and reduced the strike prices of those contracts between
    29% and 39%."  I have no idea what that means or how much risk we are currently exposed to as shareholders. As opposed to #2 above I'm not sure how it hurts Buffett to be a little more specific on this. 
     
    6. Municipal bond insurance. Ever since the demise of Ambac and MBIA, Berkshire Hathaway has been tiptoeing into the municipal bond insurance game. In 2009 they were second in the business but it was a distant second behind Assured Guaranty (NYSE:AGO). Given all the nervousness about the potential bankruptcy of Harrisburg, PA and the nonstop media buzz about the insolvency of California and other states, it would've been nice to hear Buffett's view on this business. Again, I understand if he doesn't want to alert competitors to the opportunities here but I'd like to know to what degree of risk he thinks this industry has. 
     
    By the way, the letter was immensely satisfying in terms of what it did say but that's the topic of many other articles this morning. 


    Disclosure: long AGO
    Tags: GS, AIG, GSK, MSFT, BNI, XOM
    Feb 27 2:08 PM | Link | Comment!
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