Dr. Kellegro being an observationalist and a market philosopher can’t help but notice how much things have changed in the equity markets since his unceremonious retirement in 2006. There was a time when investors would actually attempt to do their own research, generate their own ideas and put some thought behind them. But it is disturbing to see the most prevalent trend of this generation of equity investors is being a hedge fund copy cat or to add a bit more detail, a SEC Form 13F slut.
When I was trading heavily there were very few websites dedicated to tracking what hedge fund managers were doing. Low and behold 2010…there is a stink in the air from all those who are trying to copy these fund managers thinking it will lead to outperformance for their own portfolios.
I hate to be the bearer of bad news, but this line of thinking is deeply flawed in more than one respect. First, you cannot judge a fund managers true exposure from looking at a 13F filing. There are so many different variety of hedging instruments available to hedge funds in today’s market that are not reported on the 13F and if one doesn’t exist, the scientists at Goldman or Morgan Stanley will cook up whatever you need in their respective kitchens. Secondly, fund managers have caught onto the fact that groupies exist and are now taking advantage of them to the point that it would make Tommy Lee jealous.
And finally, what investors fail to realize is that you can steal one man’s idea and make it your own, but unless you have the fundamental knowledge of that investment or a valid thesis to stay with that investment, you will be prone to either A) getting out at the first sign of turbulence or B) not getting out at the first sign of turbulence. Let me explain. The astute fund manager typically has a very detailed thesis as to why the portfolio is structured the way it is. When that thesis changes, due to information that the typical 13F groupie will not be capable of identifying, the fund manager will adjust their position and can do so through various means that are not identifiable to the 13F groupie. When the first sign of turbulence appears, some 13F groupies will add more when their rock star hedge fund managers are selling out of their position. Others will be selling, while their rock star hedge fund managers are adding.
Essentially…when it comes down to it…it is a completely inept, lazy method of investing in the financial markets. It is a long term loser as a strategy and makes the good doctor nauseous from its odorous after effect. I can’t help but think the pervasiveness of this strategy is one more sign that the equity markets have become hardened to the point that those retail investors, mutual fund/pension managers and smaller hedge fund managers that are still attempting to juggle the hot coals, have had their hands burned to the point that they have become soulless zombies, who are walking around attempting to imitate success as a very last resort.