Hedge Fund Masters

All the 13Fs are in and the rebal has taken place for AlphaClone. I started tracking a "Hedge Fund Masters" Clone in Jan 2007 that in backtests showed historical outperformance of about 6-12% per year.  (I did those tests by hand and it took me an entire month.)

The ten most popular stocks from ten of my favorite hedge fund managers are beating the market by a whopping 27% YTD and 17% a year since 2000. That is astonishing to me.  (This even includes one fund imploding, and at the end of 2008 year we replaced Okumus with Appaloosa.  Appaloosa clone is absolutely destroying the market this year. )

Below are the 10 managers I track, as well as their current holdings.  The portfolio is beating the market by over 40% since I started tracking it in 2007.  (Note: I started out tracking the top 2 holdings from each fund as well, and while it outperforms the market by a nice 8% per year, I don’t think it is the best way to track these funds.  But I’ve said enough already, go get your hands dirty with the software and come up with your own alpha findings.  PS check out the recent Goldman Trend Monitor for some tidbits as well.)




Blue Ridge



Lone Pine


Appaloosa (formerly Okumus, switched beginning of 2009)




Top Ten Most Popular Stocks

Qualcomm, QCOM

Visa, V

Google, GOOG

Apple, APPL

Mastercard, MA

Priceline, PCLN

Health Management, HMA

Strayer Ed, STRA

Coca Cola, KO

Union Pacific, UNP



Some nice Memorial Day Pics.


The End Draws Nigh


Selecting active mutual fund managers.


This is completely unrelated to the markets but I think a really cool project!

One of my good friends in producing the documentary film, "The 100 Years Project".  If you are interested consider visiting the website and donating a little coin…(the director and producer are both Emmy award winners so it should be a great film).

About the film:

"100 years ago we were just one generation out of slavery.  There were no cars on the road, no planes in the sky, no computers on our desks.  Since then the world, and our country, have changed in immeasurable ways.  We have lived through two world wars, the introduction of the radio, television, segregation, the birth of Civil rights, race riots, a walk on the moon, the beginning of the Information Age and now, the election of American’s first black president.  Can you imagine living through all this in one lifetime?  What can we learn from remembering the past directly through the eyes of someone who has been there to see it all?  How can we celebrate where we are today, and where we will be tomorrow – especially in this unique moment in history?

100 YEARS is a project that aims to shed light on some of these questions.  The project begins with a documentary that will recount out country’s past through the eyes of five African Americans over the age of 100 who have lived through all of these changes.  The film will look at our country’s racial history the past 100 years through the eyes of these unique individuals –and of the contributions and sacrifices that have been made by all African Americans —  and will celebrate how far we have come while recognizing how far we still must go."


Everything She Does is Magic

It’s rebalance week for AlphaClone and all the 13Fs are in.  Do my long time readers remember the World Beta Hedge Fund Masters Clone we started tracking in Jan 2007?  We found historical outperformance of about 6-12% per year in backtests I did by hand.  I shudder thinking about how long that took me.

The ten most popular stocks from those ten managers are beating the market by a whopping 25% YTD.  I’ll update the holdings this wknd.


Canada and the US


Call it The Rooster, Hot Cock, or just Sriracha, but everyone loves it.  I would say Sriracha, Chalula, Lizano, and Texas Pete are my four favorite hot sauces. . .


I have no idea what substance he is on in this clip, but CNBC would certainly be more interesting if they required all the commentators to be on it.


I haven’t read much lately of great interest (send me some links!), so here is a little diversion from I Liked This :


When to Buy? When to Sell?

Will be in Phoenix/Scottsdale the rest of the week.


Ha!  Meb Fabor….I guess that is not as bad as Melanie Faber when I first published the GTAA article. . .


People often ask me if buy and hold is dead (or make comments about my model "disproving" buy and hold).  Look, I have no problem with buying and holding asset classes – being long risk has proven to be a great strategy for a long, long time. 

I see the issue as more of a personality issue.  With a diversified portfolio of world asset classes (or a 60/40 portfolio) I think you need to be able to accept a 50%+ drawdown.  With a single asset class or security you need to be able to accept an 80%+ drawdown.  I think using risk management via a trendfollowing method fits me personally.  While historical drawdowns have been low for the timing model, I can certainly see scenarios where they could be higher.

The tactical model is meant to only be broadly represenative of a risk management strategy.  It is not the Holy Grail by any means.  One of the main difficulties people have is in doing wholesale shifts in asset classes.  ie "I’m in stocks", or, "I’m out of stocks".

A potentially better option for many investors would be to scale in their investments.  So, instead of using just the 10-month SMA for each asset class, divide the capital into two buckets.  Time half with the 3 to 6-month SMA and half with the 9 to 12-month SMA (take your pick, 50 and 200-day SMA could be similar).  That way you avoid all of the personal stress of "missing rallies" and "sitting in bear markets".  And yes, fyi, I expect there to be no difference in the long run to performance either way.  But for a lot of people it might fit their disposition better.

I have received a ton of emails asking if it is possible to combine the rotation and timing models.  More in a follow up post if I can get around to it. . .



Mean Reversion (also 500th post!)

I have written a lot of posts on mean reversion in the past.  Here is a post from September that is a good summary post including links.  Summary:

In one study I examined asset class performance after a really bad month.

The take-aways from this study were:

- It does not pay to buy an asset class after a really bad month for the following 1 month.

- 12 Months later the return is not much different than average.

- 3 and 6 month returns, however, are stronger. You pick up on average about 3-4% abnormal returns buying after a terrible month.

A simple strategy would be:

After an asset class has a terrible month, wait a month then take a 2 month position.

It looks like a good “trigger” for equity like asset classes is around -8%, and for 10 yr bonds around -3%.

Note that this does not work for the commodity index, and one could speculate that is due to differing risk premiums and sources of return to that asset class.

How did this perform in 2008 and 2009? 

Instances when the five asset classes had <-8% returns (-3% for bonds).   

The below will show when the system would have triggered and the resulting return for sitting out a month, then long for a two month hold.

I’m not really sure what sort of benchmark to compare this system to, other than buy and hold of the asset class over the period.  This system may prove to be a nice complement to the GTAA timing model.  The stats show the date the system triggered, then the resulting "wait a month then invest for two months performance". 

S&P500 triggered on, performance:

6/30/08: -7.6%

9/30/08: -6.2%

10/30/08: -7.6%

1/30/09: 19.17%

2/30/09: TBD (9.57% so far)

Average return excluding 2/30 is -0.55%.  [Beating buy and hold by about 25% July/08 through April.]


10 Yr Bonds triggered on, performance:

1/31/09: -0.59%

[Beating buy and hold by about 1% Feb through April.]



MSCI EAFE triggered on, performance:

1/31/08:  4.5%

6/30/08:  -17.87%

9/30/08: 0.34%

10/30/08:  -4.37%

1/30/09: 20.18%

2/30/09: TBD (12.96% so far)

Average return excluding 2/30 is 0.56%. [Beating buy and hold by about 38% Feb/08 through April.]


NAREIT triggered on, performance:

6/30/08:  1.67%

10/30/08:  -3.24%

11/30/08:  -32.77%

1/30/09: 33.61%

2/30/09: TBD (27.97% so far)

Average return excluding 2/30 is 3.89%. [Beating buy and hold by about 28% July/08 through April.] 

Beach Weekend Reading

I took his class back in college (Spring ’00) and here is the reading list for Blue Ridge Capital (HT: Market Folly)

John Griffin’s Reading List

also, here’s Passport’s as well:

John Burbank’s Reading List

great stuff!


Investing 101

Thanks for all the suggestions.  (I blogged asking what the best intro book to investing is for a high school graduate.)

The overwhelming favorites were "Intelligent Investor" by Ben Graham, and "The Only Investment Guide You Will Ever Need" by Tobias.  There was then a looong laundry list of other titles (check out the comments here to see the books mentioned), many of which I have never heard of.  I picked up a few, including the previous 2 – it’s about time for a re-read!



Late Week Diversion

I originally thought this might be NSFW, but fiat currencies having sex is hardly X-rated. Now you all know the odd reader emails I get everyday…(HT:SD.)

Value Investing Congress

I was going to do some live blogging from the VIC this week in Pasadena until I found out the conference didn’t have wireless.  Instead, I took a bunch of notes to post later (ie did you know Lebanon has 30% of their GDP in gold?), but then noticed that Zain at The Manual of Ideas did a far superior job of live blogging the conference.  I’ll link to their blogs below, and then chat a bit about my take on things.

I love going to these conferences, and the concept of tracking the smart money is one of the reasons we started AlphaClone.  Wayyyy back at the end of 2006 we started tracking a group of 10 hedge funds I like (Baupost, Berkshire, Blue Ridge, Eminence, Greenlight, Lone Pine, Maverick, Okumus, Private, and Tiger).

The portfolio of the 10 most popular ideas amongst these funds has outperformed the market by 14% a year since 2000, and is beating the market by over 25% YTD in 2009.  That is astonishing to me (and even includes one fund imploding).  At the end of the year we replaced Okumus with Appaloosa – and their clone is absolutely destroying the market this year.

Summaries below (I’m trying to get the guys to let me post the PowerPoints as well). More later.



David Nierenberg, D3

David Chu & Igor Lotsvin, Soma Asset Management

Zeke Ashton, Centaur Capital

Charles de Vaulx, International Value Advisors

Brian Gaines, Springhouse Capital

John Burbank, Passport Capital

Gus Spier, Aquamarine Capital

Jed Nussdorf, Soapstone Capital

Dave Rabinowitz, Kirkwood Capital



William Waller & Jason Stock, M3 Funds

Scott Klein, Beach Point

J. Carlo Cannell  Cannell Capital

Whitney Tilson & Glenn Tongue, T2 Partners, Presentation here






Some Recent Milestones and a LinkFest

Blogging has been light due to a heavy travel schedule, but it should pick back up.  I’m headed to the Value Investing Congress in Pasadena if anyone is around this week…


Some cool recent milestones:

Launch of two private Cambria Funds

500th blog post

25,000 downloads for my paper, putting it in the top 10 all time on the SSRN!


Some videos of yours truly:

Forbes video 1

Forbes video 2



A Framework for Risk Based Fund Manager Comp


Finally a Convertible Bond ETF is here


Great post with lots of charts on hedge funds.


Buffett and Fairholme


Back in May 2007 I penned a list of ETFs I’d like to see.  Amazing to see that many holes have been filled:

My original list

1. Foreign Small Cap
2. Foreign Bonds, Emerging Bonds
3. Municipal Bonds
4. Russia
5. Convertible Arbitrage
6. Value Hedge Fund of Funds (tracking the 13Fs)
7. Activist Fund of Funds (ditto)
8. Dogs of the Dow with Net Payout Yield (Wisdom Tree but with Payout Yield weighted instead of dividend yield)
9. U.S. Listed Hedge Funds and FOFs

Reader Suggestions:
1. Emerging markets non-free (all the countries that cannot exchange local currency for dollars like Sudan and Iran).
2. Timber
3. Individual commodities ala LSE
4. Disease (Diabetes, etc)
5. Country ETF’s by market cap, style
6. Emerging Value, Small Cap
7. Emerging Real Estate
8. Lots of individual country suggestions (Vietnam)
9. Lots of leveraged suggestions for asset classes (AGG, GSP)


Let’s say you knew nothing about investing, and someone presented you with the following choices. Over the past 36 years there are two asset classes, and their return statistics are :

1973-2008 Asset Class A

Return: 9%

Volatility: 16%

MaxDD: -45%

Sharpe 6% : 0.21


Asset Class B

Return: 9%

Volatility: 9%

MaxxDD: –19%

Sharpe 6% : 0.30

Most investors would choose asset class B due to the similar returns as A, but with much less volatility and drawdown. Obviously, asset class A is stocks and B is bonds. The problem with this analysis is a big bias in the period chosen – one of largely declining interest rates and two big bear markets in stocks. If you take the results back further to 1900, the results are a little different. Here stocks handily outperform bonds, albeit with much more risk.

There are lots of observations to be made here (the cyclical nature of returns, the importance of the period chosen, path dependency, what works in the past doesn’t mean it will work in the future etc) but the main point I wanted to highlight here was just how much risk a 60/40 portfolio has (60% stocks, 40% bonds). An investor putting 40% of his portfolio in bonds would still have been subject to a nasty 60% decline in the value of his portfolio. This doubles the roughly 30% drawdown investors faced with a 60/40 portfolio in February. How many investors do you think have a 60/40 allocation and are willing to absorb a 30% loss, let alone a 60% loss? Timing helps on the risk management front, but that is largely due to decreasing the risk in the equity allocation.


What’s your stock’s O-Score?


And if it is as nice where you are as it is where I am today, quit reading this and go play!  Or at least take a copy of my book and read it outside. . .


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