Friday, January 3, 2014

Investing Like A Caveman: The WSJ markets for a Few Hedge Fund Winners

Investing Like A Caveman:  The WSJ markets for a Few Hedge Fund Winners

Add free publicity to the benefits of being a hedge fund manager.  The Wall Street Journal greeted the New Year with an article lauding a select group of big hedge fund winners during 2013[1].  I don’t believe a public relations firm could have crafted a better headline: “A Few Brave Investors Scored Huge, Market-Beating Wins.”  At the beginning of the fourth quarter, roughly 10,000 hedge funds were plying their trade.  Thus it is completely predictable that the Journal should find a handful of huge successes.  If 10,000 people flipped a coin, it would be equally likely that four or five people would correctly call eleven tosses in a row.
Roadshow (1996)
Who were the big winners?  Chris Tuohy, a trader for Tudor Investment Corp. parlayed a $10 million bet against the price of gold into $100 million.  Gold prices fell about 28%, so Mr. Tuohy’s derivatives bet paid off handsomely.  However, Mr. Tuohy’s bet wasn’t put into context.  According to The Journal, Tudor manages $14 billion, so the Tuohy gold short only represents a tiny bet of 0.7%.  It’s the equivalent of someone with $100,000, investing $70 and making about $700 on the bet.  There is nothing brave about Mr. Tuohy’s trade, and I’m certain that The Journal is wrong when it says Tudor, “was one of the few to profit from a sharp drop in the price of gold.”   Investors in two ETFs, PowerShares DB Gold Double Short ETN (DZZ) or ProShares UltraShort Gold (GLL) enjoyed similar gains.  The Journal also conveys important information about Mr. Tuohy.  Apparently he is, according to the newspaper, on “a so-called paleo diet, which emphasizes meat, vegetables and other foods that were part of the diet of cave men.”

David Tepper of Appaloosa Management LP, which manages $21 billion, bought calls in September (a bullish derivatives bet).  Since the market was up about 12% in the final quarter of 2013, Mr. Tepper’s bet paid off.  According to The Journal, Appaloosa was up 42% for the year after fees.  Since it isn’t likely that Appaloosa has issued their year-end investment letter, someone at Appaloosa or the firm’s publicist probably leaked the favorable anecdotes.  This is clever marketing.  Mr. Tepper gets to tout his performance record for 2013, as well as one particularly hot trade.  We don’t know how much the September calls contributed to the firm’s overall performance, but they make a nice story.

Paulson and Company’s Recovery Fund is included in the article because it netted a 55% return through November by “piling into mortgage insurers, international banks and real-estate stocks.”  Of course, the Journal makes no mention of the challenges to Paulson’s investment performance in 2012.[2]

Jericho Capital Partners, a telecommunications, media, and technology fund is lauded for its 33% return through November.  According to Jericho’s investment letter, they increased their exposure to the market to the highest level since 2009.  However, The Wall Street Journal’s year-end review shows that a wide variety of media, telecomm, and technology sectors were up 50% or more, making Jericho’s returns fairly ordinary.

The article goes on to laud successful trades by a couple of hedge funds in Japanese equities and the Euro.   The managers are described as exceptionally smart and prescient.  Apparently luck is not part of the Journal’s vocabulary.

Suppose I generated a return net of all fees of 71% in 2013.  Would The Journal be interested?  I doubt it.  My stellar return would simply have been an investment in a Russell 2000 Small Cap ETF while borrowing as much money as I invested.  The Russell 2000 gained 38.8%.  However, with 100% leverage, a borrowing cost of 6%, and a tiny 0.24% management fee, my return of 71% would fit right in with the stars featured in The Wall Street Journal.   There’s only one problem.  I don’t eat like a caveman, and I’m not that lucky.


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