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2014: Another Lousy Year for Hedge Funds

Written by Nicholas Vardy, CFA.

SNAG Program-0749

Even as the S&P 500 flirts with the 2,000 level, up a solid 7.71% through the first eight months of 2014, the hedge fund industry is enduring yet another difficult year.

Once renowned for risk-loving "cowboy" trading and double-digit percentage returns, hedge funds have failed to live up to their reputation as money-making machines.

Hedge Funds: Trailing the Market in 2014, Yet Again

According to data compiler Preqin, hedge funds have trailed Standard & Poor's 500 stock index in 2014, both through the end of July, as well as over the past 12 months. Year-to-date through July, the Preqin Hedge Fund All Strategies benchmark posted a gain of 3.47%. That's far below the 4.45% gain for the S&P 500 over the same period.

Other observers of the hedge fund world confirm this underperformance. The Barclay Hedge Fund Index is up 3.26% through end of July, while Hedge Fund Research pegs the average hedge fund return at just 2.5% over the first seven months of the year.

Preqin also notes that hedge funds underperformed the broad U.S. stock market over the past 12 months. Having rallied 14.5% over the past year, the S&P 500 outpaced the Preqin Hedge Fund All Strategies benchmark by more than 5%. Perhaps most surprisingly, not a single one of the 19 major hedge fund strategies tracked by Preqin have beaten the S&P 500.

Nor is the picture any better across the pond. The $492 billion Europe-focused hedge fund industry generated a return of 2.1% in the first half of 2014. That is less than one-third of the 6.7% return of the benchmark STOXX Europe 600 Index. As Barbara Wall, Europe research director at Cerulli Associates points out, hedge funds last outperformed European stocks in 2008, when hedge funds fell 17.4% and the STOXX Europe 600 slumped 43%.

Hedge Fund Investors: Increasingly Disaffected

Looking at this underperformance, no wonder some institutional investors have cut back or even completely axed their investment in hedge funds.

The disaffected group includes $300 billion mega pension fund California Public Employees' Retirement System (CALPERS); the $18.3 billion Los Angeles Fire & Police Pension System; and even the $2.7 billion Oxfordshire County Council, Oxford, England; all of which have reduced their hedge fund investments.

The Market Claims Its Scalps

Up until 2008, hedge funds had a fantastic run. Since then, making money in the markets has become markedly more difficult. The big hedge fund managers achieved most of their big returns before 2008. Since the market bottomed in March 2009, almost all the big names have lost their way.

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Are We on the Verge of a Market Crash?

Written by Nicholas Vardy, CFA.

SNAG Program-0748

Much like the Great Depression did to the "Greatest Generation," the financial crisis of 2008 seared the souls of millions of investors. Almost six years after the collapse of Lehman Brothers, professional Cassandras never ceased predicting that the next economic meltdown and a stock market crash is just around the corner.

That's ironic...

After all, U.S. stock markets have been in a classic bull market for over five years now.

Instead of gold hitting $5,000 an ounce and the Dow Jones collapsing below 1,000, the S&P 500 has risen 189% from a low of 683 on March 2, 2009, to yesterday's close of 1,971. The Nasdaq closed yesterday at its highest level since early 2000.

And that's with the most anti-business U.S. administration since the days of Woodrow Wilson.

The Case Against a Coming Crash

First, let's review the factors that have supported this surprising bull market.

Most of the global economy has recovered from the very worst of the economic contraction between October 2008 and March 2009. Strong earnings growth, combined with record levels of share buybacks, has boosted companies' earnings per share. Finally, artificially low interest rates supplying liquidity to the banking sector have served as a tailwind to asset prices around the world.

There are still several contrarians willing to endure the public humiliation of being in the bull camp. The much-reviled Goldman Sachs reckons that another economic collapse is unlikely. Sure, Goldman concedes that the stock market could crash any day. But one of the key preconditions needed for an economic bust is high credit growth. Credit may be accelerating. But in the grand scheme of things, it's still at pretty low levels. The global economy is more macro-economically stable than headlines would suggest.

Steven Auth of Federated Investors is another brave bull who thinks the S&P 500 will hit 2,100 by the end of 2014. Auth also predicts the S&P 500 will reach 2,500 within the next 18 months to two years. The combination of growth, bond rates and perceptions of risk will continue to propel the U.S. stock market ahead. With the Fed paranoid about tightening rates too soon, as it did in 1937, a liquidity backdrop for stocks will remain favorable.

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Why You Should Invest in These Arab Economies

Written by Nicholas Vardy, CFA.

SNAG Program-0747

Even in the best of times, the Arab World is not a place you'd normally think of as a red-hot investment opportunity.

Yet, I bet you'd be surprised to learn that the Market Vectors Egypt ETF (EGPT) is the single-best-performing stock market in 2014 among the 46 global markets I track on a daily basis.

Given the political chaos in that country, investing in Egypt is clearly a contrarian call, much like, say, investing in Russia.

Yet, there is a group of Arab countries — the Gulf States — that are attracting investors' attention because they are among the fastest growing and most successful economies in the world. In fact, the Gulf States collectively are the #4 ranked global markets in 2014 and are up 22.22% this year.

No wonder that investor interest in the Gulf States is growing steadily.

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What Market Sentiment Tells Me about Today’s Market

Written by Nicholas Vardy, CFA.

SNAG Program-0746

With last week ranking as the worst for the S&P 500 since 2012, the bears are out in full force.

By some measures, market sentiment has not been this negative since August 2011.

Market sentiment occupies a curious position in investing.

In many ways, it is the red-headed stepchild of stock market investing.

In a world awash and bedazzled by complex financial models, gauging market sentiment doesn't seem as legitimate, as, say, fundamental or even technical analysis.

That's ironic.

After all, the best investors in the world know that the short-term price of financial assets is driven by little else.

Warren Buffett was a disciple of Ben Graham and a value investor. That places Buffett firmly in the fundamental analysis camp.

Yet, Buffett has said that the single-most-important thing he has ever read was Graham's chapter on Mr. Market's Moodswings in "The Intelligent Investor."

And "Mr. Market" is just another metaphor for market sentiment.

In his book, Graham compares the market to a manic-depressive.

Some days, Mr. Market is euphoric. On other days, he's very depressed. If you catch him on a euphoric day, he wants a very high price for his shares. If he's in one of his down moods, he's willing to sell you his shares for a pittance.

Mr. Market highlights the one thing you can predict with certainty about financial markets: investors will always overreact to events — whether positive or negative.

And it also highlights how savvy traders profit from just such overreactions.

Why Market Sentiment Matters

So why is an understanding of market sentiment so crucial?

It is because it gives you an edge.

Both mainstream fundamental and technical analysis are pretty much commonplace.

Every financial analyst in the world studies from the same textbooks.

With all financial analysts trained the same way, it's hard to generate the kind of novel perspective to distinguish yourself from the crowd.

You can say the same about technical analysts.

How To Make Money From Market Sentiment

One myth surrounding market sentiment is that it is not quantifiable.

Nothing could be further from the truth.

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Untitled Document

GLOBAL GURU CAPITAL – MONTHLY UPDATE
July  2014

The "Ivy Plus" Investment Program fell 2.26% for the month.
The "Global Gains" Investment Program dipped 0.51% for the month.
The "Double Your Dividends" Investment Program lost 1.99% for the month.
The "American Alpha" Investment Program fell 3.10% for the month.
The “Masters of the Universe” Investment Program lost 1.25% for the month.

THE "IVY PLUS" INVESTMENT PROGRAM
ALMOST ALL ASSET CLASSES PULL BACK


The "Ivy Plus" Investment Program lost 2.26% for the month. The program is up 3.14% year-to-date, through July 31.

The Ivy Plus investment program had a poor month, with most asset classes falling across the board.

The exception was your holdings in emerging markets- an asset class that seems to have found its footing after a long period of underperformance.

Managed futures also managed to eke out a gain. Real Estate and U.S-based holdings continue to be the strongest gainers year-to-date, although some emerging markets assets are catching up fast .

The “Ivy Plus” investment program positions performed as follows:

@NickVardy