Markets

Why Apple is NOT a Top Ten Holding of 93% of Hedge Funds

To infinity and beyond Buzz Lightyear   A recent report by Goldman Sachs describes Apple (AAPL) as a “Very Important Position” (top ten holding) for 47 hedge funds. Overlooked is that fact that it’s not a significant position for 93% of the hedge funds in the survey and represents only a 1-2% overall allocation, less than its weighting in the S&P 500. Further, three years ago it was in fact a top ten holding of 109 hedge funds, so more than half decided to cut back. What happened? Perhaps the real question is, “how cheap is AAPL today?” Carl Icahn, …

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Is Warren Buffett a Value Investor?

  The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. Warren Buffett The quote above is a far cry from value investing as described in such canonical works as Graham and Dodd’s Security Analysis (1934). Those works tended to focus on asset rich companies – especially firms with easy to value assets like cash and working capital. The idea was to buy shares at a significant discount to intrinsic value. A lousy company with easy-to-value assets of $100 per share might still be a …

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When a Client Asks, “What is Brexit?” Here’s Your Quick Guide

As we discussed in a post on Market Psychology and the Investor Narrative, the markets get very volatile when a new, large and unfamiliar risk surfaces. Brexit, or the possibility that the UK will decide to exit the European Union, is one such risk. Will it happen? Right now opinion polls are roughly 50-50, and market participants are putting the probability at 40-50% of a yes/Brexit vote on the upcoming referendum on June 23, 2016. So, when a client calls and asks for an explanation, here’s your short primer: Basic points: The European Union consists of 28 member states. Member …

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Market Pundits in 2016 – A Reality Check

Most successful pundits are selected for being opinionated, because it’s interesting, and the penalties for incorrect predictions are negligible. You can make predictions, and a year later people won’t remember them. Daniel Kahneman (Nobel Prize winner in Economics for Behavioral Finance theory) It’s time for a reality check. The scary market narrative right now goes something like this: slower global growth – led by China – unleashed deflationary forces that exposed malinvestment and excessive leverage in commodity and industrial companies that will lead to widespread corporate bankruptcies, sovereign debt defaults and another banking crisis. Central banks are out of monetary …

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How Smart is Smart Beta?

If smart beta is smart, is my beta dumb? First, a definition:  smart beta strategies are (allegedly) better ways of getting exposure to equities, bonds and other asset classes than via traditional indices.  What precisely does this mean? Let’s assume my core equity allocation is an S&P 500 index fund.  Smart beta guys think I have a problem:  the index is weighted by market cap.  Whenever Standard & Poor’s rebalances it, the weights of winners go up and losers down.  In other words, after Google rose 45% in 2015, I buy more Google (ok, “Alphabet”); as Chesapeake Energy dropped 75% …

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The Commodity Head Fake

Prediction is very difficult, especially if it’s about the future. Niels Bohr In the annals of modern portfolio theory, commodities deserve an award for the biggest diversification head fake of all time. By 2006, commodities looked like the ideal diversifier.  Academic studies demonstrated that commodities had consistently generated equity-like returns over decades, but with basically no correlation to other asset classes.  Performance over the preceding decade supported this, and allocators extrapolated these return characteristics out into the future.  Mean variance optimizers loved it as the new efficient frontier jumped to the upper left. Now fast forward to early 2016.  Over …

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The Trouble with Oil (Part Three)

One thing that I’ve realized is that there’s a disconnect in how different investors think about oil. For asset allocators, oil and commodities are a financial asset. Volatility and drawdowns are viewed like those of a stock. Oil down 20% feels a lot like a stock down 20%. For investors in oil company stocks and bonds, however, a 20% decline in oil is much more serious. A stock price primarily reflects a company’s equity and earnings prospects; oil, on the other hand, reflects revenue. A 70% drop in crude prices is like GE selling every product at 70% off. Framed …

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Position Crowding and Valeant

Position crowding is when a bunch of similar investors own a stock.  When those investors rush for the exits at the same time, the price drops a lot more than expected – perhaps to well below intrinsic value.  Note that we have published several notes on this on the Beachhead site (see Hedge Fund & Position Crowding and Equity Long/Short Post-Crisis: A Structural Analysis of the Decline in Alpha). The poster child for position crowding in 2015 was Pershing Square Capital Management, a highly regarded hedge fund.  Pershing Square ended the year down around 20%, its worst year ever and stunning …

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The Trouble with Oil (Part Two)

Two weeks ago we wrote a post on oil (The Trouble with Oil Part 1)  – why it matters to equities these days, and how the initial market response (and pundit commentary) seemed to miss some key fundamental aspects of commodity supply and demand. What a difference two weeks makes.  A few updates: Oil is up more than 25% from the lows (below $27 per bbl ten days ago, close to $34 today). The focus has shifted from near term demand hysteria to medium and longer term supply issues. The first indication of a policy response – Russia essentially publicly …

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Japan & Abenomics redux

Overnight, Japan’s central bank pushed short term interest rates into negative territory and pledged more monetary stimulus.  For a brief overview of Abenomics, please see our video below. In contrast to the positioning we discuss in the video (short the yen, long Japan equities), many systematic hedge funds appear to have been long the yen recently.  The unwind of those positions likely contributed to the 2% decline in the yen today (that’s a very big one day move in fx land…).

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