Steve Eisman is somewhat of a celebrity in the hedge fund world. And after the release of the film adaptation of Michael Lewis’s The Big Short, Eisman has also become a star outside of the financial community as well.

Eisman, who is played by Steve Carell in The Big Short, was one of the few hedge fund managers to realise the risk sub-prime mortgage borrowing presented to the US economy. His bets against the US housing market, banks and the wider equity market generated a return of more than 70% for his hedge fund investors during 2008.

The handful of hedge fund managers that manage to profit from the financial crisis have earned a certain respect in the financial community, and when they now speak, Wall Street pays close attention.

Hedge Fund Letters To Investors

Eisman closed his own hedge fund two years ago (his crisis fund, FrontPoint Partners was closed in 2012 when he started Emrys Partners, which focused exclusively on financial stocks) and now works at Neuberger Berman, a money management firm where he runs separately managed accounts. His investing style has changed to a more classic hedge fund model, buying stocks he expects will rise in price while betting on others to fall partly because of the limitations placed on him by the separate accounts model. For the service, Eisman charges clients 1.25% of assets per year per $1 million of investment.

The low-cost is a result of the fund manager’s belief that high hedge fund costs are unsustainable. In an interview with Bloomberg, Eisman said the reason he challenges such a low fee is because “that’s where I think fees will be in ten years.”

Such a big change from the traditional 2-and-20 has caught the attention of other hedge fund managers, and the industry seems to be warming to lower fees as investors withdraw assets from the sector.

Steve Eisman: Leading a hedge fund revolution

According to Bloomberg’s data over the past three-quarters, investors have withdrawn almost $25 billion from hedge funds globally. Even though this total is only a snip of the $3 trillion in assets hedge funds manage, it is the highest rate of redemptions since the financial crisis.

Moreover, the rate of redemptions is increasing, New Jersey State Investment Council announced it was slashing its $9 billion hedge fund investment budget by 50% earlier this month and over the past 12 months, funds of hedge funds have lost more than $100 billion in assets because of outflows and poor performance. Long-short funds are bearing the brunt of the losses according to Eurekahedge. During the first six months of the year, funds falling into this category lost 0.8% of assets under management, three times the percentage lost in the strategy that saw the next biggest withdrawals.

Why Hedge Funds Still Exist

Eisman isn’t the only manager taking drastic action in an attempt to stem outflows. At the beginning of the year, well-known manager Paul Tudor Jones announced he was slashing his annual management charge on one of his funds from 2.75% to 2.25%. Performance fees were cut from 27% to 25%. Investors have already pulled $2.1 billion from Tudor Investment Corp this year, leaving the firm with $11 billion under management. Management responded by cutting 15% of the staff and now billionaire Jones is encouraging his team to take on more risk.

John Malone And EMC Proved To Be Hedge Fund Favorites Last Quarter

According to Bloomberg, managers at Tudor Investment Corp have been paired with scientists and mathematicians to bring new analytical rigor to their trading and the firm is looking to double the gross Sharpe ratio target for its main fund to about 2.25. Further, the firm has implemented a new ‘chief investment officer tool’ to replicate trades of its best managers by using futures contracts and foreign-exchange securities.

The group’s main fund, Tudor BVI Global is down 2.3% so far this year

This is part one of a four-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.

Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.

Zeke Ashton founded the Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.

From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.

Zeke Ashton also manages the Centaur Total Return fund and you can find more information on the mutual fund at (www.centaurmutualfunds.com) or Morningstar’s performance page here.

The Zeke Ashton iinterview has been divided into several parts and will be downloadable as a PDF at the end of the series. So stay tuned for the rest of the series as well as the downloadable PDF!

Interview with Zeke Ashton of Centaur [Pt. 1]

First off, could you tell our readers a little about the Centaur Value Fund and your investment strategy?

The Centaur Value Fund is a hedge fund that I started back in the summer of 2002. At the time, the markets were coming off one of the biggest speculative bubbles in history, but there was also a lot of value in areas of the market that hadn’t participated in that crazy bull market. Much of the value was in smaller cap companies and in sectors that were considered “old economy”. At the same time, however, there was still a lot of overvalued fluff hanging around that one could bet against. So in retrospect it was a great opportunity set for an investing style that was flexible and focused on the gap between stock prices and underlying business value. Value investing as a style had become pretty out of favor at the time given how wildly speculative the market became in the late 1990s, and a lot of the older generation of value investors had largely been discredited by early 2000. Even Warren Buffett was being widely criticized for his unwillingness to buy tech stocks. And of course there were also very few short sellers that had survived the late ‘90s, so there wasn’t as much competition and the market was much more conducive to short selling than it has been in recent years. So we entered the fray with the Centaur Value Fund at a good time for a value-oriented strategy that could go both long and short.

The basic strategy for our hedge fund is pretty straightforward. We look to own a portfolio of stocks that we think represent good value, and then we also look to short or otherwise bet against a handful of stocks that we think are trading for prices far in excess of what we believe the underlying businesses are worth. On the long side, we are looking for the ingredients you’d expect from fundamental, value-oriented investors: good businesses, strong balance sheets, good management, and then very importantly, a stock price that doesn’t fully reflect all those qualities. On the short side, we largely think of the things we like to see in a good long idea and then flip it around. In other words, we are looking for bad businesses, poor management, weak balance sheets, or egregiously overvalued stocks, though not all those ingredients are necessary for a good short idea. One might think of our ideal short candidate as something like a photo negative of value, or what we often call “anti-value.” So that’s really the basic strategy: long value, short anti-value.

We are always long-biased, such that our long exposure is typically at least three times our short exposure. For example, it has been typical for us in the past to have 95-100% market exposure on the long side and 20-25% exposure on the short side. Such a portfolio, assuming the underlying stock selection is decent, should allow the fund to make decent money in strong markets, protect capital better than average in down markets, and gives us a chance to do reasonably well in the occasional stretches where the market wiggles around but doesn’t really go anywhere.

The attraction of such a strategy is that if well executed, it should generate equity-like returns over a full market cycle and not really encounter a market environment in which it performs terribly. Most importantly to us, we want to reduce the chances for any kind of catastrophic loss to as low to zero as we can. We would define catastrophic in this sense as a percentage loss that is too big to recover within a reasonable period of time. In investing it is really important to avoid those losses that erase three or four years’ worth of compounding.

Like any investment strategy, there are disadvantages to our approach as well. The first is that any long / short, value-based portfolio is unlikely to put up really amazing returns in any given year. This is because in a big up year for the market, the short positions and hedges are likely to be a drag on performance. In a big down year, the short book will likely help us, but since we are long-biased we will probably still lose some money – but hopefully way less than the market. And certainly we are likely to trail the broad market averages in the last stages of an extended bull market as stock prices reach lofty valuations and we struggle to stay fully invested on the long side. Many people don’t truly understand that taking actions that reduce the risk of large percentage losses also tends to curtail the possible upside. But if we do our jobs well we should be able to compound capital at a steady, reliable pace, and we should have the ability to get really heavily invested at the bottom of the cycle when other investors are tapped out both financially and emotionally. That’s when the best risk-adjusted returns are usually available to those who are able to wade in to the market and buy assets cheaply from distressed sellers.

I’d also like to mention that we offer a somewhat more conventional value-based investment strategy in a mutual fund called the Centaur Total Return Fund (TILDX), which we’ve managed since 2005. We do not short individual securities in the mutual fund, and though we can use index puts and other instruments to hedge market risk we tend to do less of it in the mutual fund. Since we do not have a short portfolio to act as a market hedge, we try to be somewhat more defensive in the positioning of the long portfolio. We have in the past emphasized current income in the mutual fund, and we incorporate covered call selling as an added component in order to generate extra income. We have discovered that selling covered calls, when done intelligently and selectively, can help reduce portfolio volatility without the risks of shorting individual stocks. Otherwise, the general goals are the same, though we understand

The post Interview with Zeke Ashton of Centaur [Pt. 1] appeared first on ValueWalk.

This is part two of a four-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.

Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.

Zeke founded the Centaur Capital Partners Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.

From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.

Zeke also manages the Centaur Total Return fund and you can find more information on the mutual fund at (www.centaurmutualfunds.com) or Morningstar’s performance page here.

The Centaur Capital Partners interview has been divided into several parts and will be downloadable as a PDF at the end of the series. So stay tuned for the rest of the series as well as the downloadable PDF!

Centaur Capital Partners Zeke Ashton's Centaur Total Return Fund — Centaur Capital Partners

Interview with Zeke Ashton of Centaur Capital Partners [Pt. 2]

Continued from part one…

How do you go about looking for investments (both long and short) at Centaur; what’s your investing process?

We have a pretty disciplined research process once we start working on an idea that we think might be a potential investment, but in terms of just gathering candidates we haven’t come up with a better way than just to read widely, cast a wide net, and then take a deeper dive when something strikes us as interesting. The most reliable source of new ideas for us has actually been ideas that we’ve researched in the past. After fifteen years of writing research reports, we have a pretty big database of internal notes, and we maintain a spreadsheet of stocks that we have researched previously that will alert us if the stock hits an interesting price. Given the work we’ve already done, we can usually determine pretty quickly how close it is to being actionable and therefore budget how much time to spend on it.

In terms of evaluating completely new ideas, we obviously see a lot of investment pitches on the web, and of course we read investor letters from other managers that we think are smart. We’ve also developed a bunch of statistical screens that occasionally produce a nugget or two. Finally, every once in a while, we do an exploratory study of an industry niche to help us understand who the players are and the competitive dynamics of that space. Sometimes we find something immediately actionable, and sometimes we end up with a stock that goes on our “wish list” to be reviewed at a lower price.

How do you approach valuation?

This is a subject that requires a whole book, because the craft of valuing businesses is effectively a career-long journey. I find that one never really becomes a master because every stock and every industry is different. I like to say that every stock has a story to tell and a lesson to teach.

In order to keep my answer to a reasonable length, I will simply offer two insights that experience continues to pound into me. One is very simply that valuing any company requires a certain familiarity with and a decent understanding of the business. The idea that an investor can just slap a multiple to earnings or stated book value is a highly superficial notion – though of course it does sometimes work. The better you understand a specific business and the industry that business competes in, the better the valuation work is likely to be. That said, some businesses are easier to understand than others, and there are many businesses that simply can’t be valued with much precision. That’s a difficult concept, I think, for sophisticated investors to accept. There is a temptation to believe that every business can be valued with enough informational input, but we’ve found that for us there is a good percentage of the investable universe that really and truly belongs in the “too hard” pile.

The other insight I will offer is that at least in our experience, the further we drift from true cash flow profitability as a starting point in our valuation work, the more difficulty we have. What does this mean? To me, it means that using EBITDA is far less trustworthy than true cash flow. GAAP or adjusted net income is far less reliable than true cash flow. And when you find yourself running DCF models where most of the cash flow is expected to materialize many years out into the future and you are discounting that back to today at some arbitrary rate, let’s just say there are lots of ways for that to go wrong. We almost always use a DCF at some point in our valuation work, especially to help us with scenario analysis, but we have to remind ourselves that a DCF model isn’t gospel. DCFs are very useful as a sanity check and thought experiment, but shouldn’t be a substitute for a more complete valuation exercise.

The post Interview with Zeke Ashton of Centaur Capital Partners [Pt. 2] appeared first on ValueWalk.

This is part three of a four-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.

Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.

Zeke Ashton founded the Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.

From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.

Zeke Ashton also manages the Centaur Total Return fund and you can find more information on the mutual fund at (www.centaurmutualfunds.com) or Morningstar’s performance page here.

The interview has been divided into several parts and will be downloadable as a PDF at the end of the series. So stay tuned for the rest of the series as well as the downloadable PDF!

Interview with Zeke Ashton of Centaur [Pt. 3]

Continued from part two…

Your top holdings, accounting for more than 10% of the Centaur Value Fund, are bank warrants. Could you talk us through this holding, why did you decide to devote such a large percentage of your portfolio to banks?

Well, first of all you have to understand that the 10% figure that you quote is market exposure, adjusted for the leverage inherent in any option-like instrument. The actual cash exposure for us has ranged between 2% and 3.5% of the portfolio depending on the prices of the underlying warrants and our positioning at any given time.

The attraction to these specific warrants is that at the time we originally bought them, we felt the banks were very cheap relative to their earnings power, and we selected banks that we believed to be either best in class or very near to it amongst their peer group. Also, we tend to buy warrants when the market is assigning very little time value to the instruments, which given the long time to expiry is very unusual for publicly traded options. Our warrants happen to expire mostly in late 2018, and we’ve held positions since 2014.

So the underlying thesis for the position is a combination of 1) high quality banks that have demonstrated a history of strong credit standards; 2) cheap prices relative to historical and prospective earnings; 3) the warrants allowing us to get essentially full exposure to a good case scenario but only partial exposure to the worst case scenario, and 4) the warrants themselves being under-valued relative to the time value premiums usually present in exchange traded options.

The banking sector is facing a lot of headwinds right now, including regulatory headaches and stubbornly low interest rates. Do you see as much upside in the industry as there was say two or three years ago?

Your question implies that there was a large upside in these two or three years ago. JP Morgan Chase stock traded in the mid-50s in the summer of 2013, before the markets blasted off. It traded at below $60 as recently as a couple of months ago following the Brexit vote, and is now trading in the mid-to-high-$60s. So it’s not like these stocks have been running hard the last three years. Still, your question is a good one, and I think that the U.S. banks have done well despite the low interest rate environment. Of course it has been helpful that credit losses have been extremely low for several years prior to a slight uptick in the back of 2015 and early 2016 due to distress in the commodity sectors. It is the credit cycle that concerns me more than low interest rates at the moment. Money has been cheap for a long time now, and the reflexive lending discipline that persisted for a couple of years after the credit crisis has likely given way to a certain level of laxity by this point. I am watchful for signs that we are entering the down side of the cycle with regards to underlying credit quality.

Finally, I should mention that we tend to trim our warrant positions on strength in the underlying bank stocks (usually when for some reason the market becomes convinced the Fed might increase rates in the near future) and we also tend to nibble back on weakness (usually after an event that the market interprets as being unfavorable to a resumption of higher rates). We have tended to maintain a core position, but with flexibility to increase or decrease the positions opportunistically.

The post Interview with Zeke Ashton of Centaur [Pt. 3] appeared first on ValueWalk.

Crispin Odey’s Odey European Inc Fund, which consists of the OEI, OEI Mac, and Odey Swan funds had yet another terrible month during August.

For August 2016 the fund returned -8.1%, against the MSCI Daily TR Net Europe (EUR) return of +0.7%. Year-to-date the fund is now down by 34.9% and over the past 12 months, the fund has lost 38.5%. Over the previous five years, the fund is down by 8.2% underperforming its benchmark by 72.1%.

After currency hedging, the short equity book made a negative contribution for the month of -4.1% and the long equity book made a negative contribution after currency hedging of -1.1%. The fund’s active currency exposure made a positive contribution of +0.2%, the majority of which came from the GBP/USD position. Elsewhere, government bonds returned -0.1% and commodities returned -3.0%, most of which was attributable to gold futures, according to a letter to investors reviewed by ValueWalk. The hedge fund had a profit on a short position in Elon Musk’s Tesla Motors (TSLA) joining a chorus of investors short the firm.

Odey still hates central banks

Odey tries to regain some composure and explain his hefty losses this year in the ‘Managers Report’ section of the Odey Europe monthly tear sheet. In the report, Odey blames central bank failures for the world’s current situation, and opines that central bank policy is no longer proving effective, it is only damaging the world’s economy. “When will central banks realise that monetary policy which holds up asset prices whilst growth disappears actually exacerbates the divide between the Haves, who own the assets, and the Have-nots, who are losing their jobs?” He asks.

Also see Q2 2016 hedge fund letters

Odey blames the Fed for his disastrous performance. Specifically, he states:

“It is always dangerous to fight the Fed and that is what we have been doing this year. The world economic growth continues to disappoint despite the benefit of lower energy costs. Corporate earnings in most parts of the world have continued to fall and now the USA is experiencing falling earnings. My thinking this year was that stock markets would follow earnings. What we did not expect was that markets would re-rate massively into an earnings downturn. Moreover, it still seems to be a re-rating which is not supported by hopes that earning will soon recover but only by the monetising undertaken by central banks. The quest for yield explains 100% of this year’s performance. Quite apart from the pain that this policy is bringing to pension funds, insurance companies and banks, it has ensured that individuals have been buyers of dividend streams which are not underwritten by earnings streams. There is nothing sustainable about the current status quo.”

He then goes on to warn that the UK economy is heading for trouble next year:

“Already we have seen, since the crisis of ’09, central banks expand cash in the system by around 700%, so that cash now is closer to 100% of GNP up from 13% of GNP, when things were normal. No one will ultimately trust Fiat money again, but the fact they have gone so far, means that there is no way back for these guys. We saw that, in the UK, Carney’s reaction to a Brexit result, which immediately took 10% off the trade weighted value of sterling and was the equivalent of a massive monetary expansion anyway, was to lower rates and increase QE. All assets responded to the Bubble machine. But next year will be a different one for the UK economy. The balance of payments could show a 10% current account deficit. Inflation could easily be 4%, or if not, real wages will take the equivalent hit. Investment uncertainty will take its toll. Fiat money may meet its nemesis then. Since it is the central banks who are responsible for the bub-bles, it is no surprise that the epicentre of the bubbles lies in the sovereign bond markets. After all, $14 trillion of govern-ment bonds now have a negative yield up to 10 years. Whilst world GNP stands at around $75 trillion, M2 now stands a close to $83 trillion, the stock markets are close to $75 trillion, bank lending somewhere in the $140 trillion range and gov-ernment bonds at around $40 trillion. No one is spared. The bulls on equities argue that sentiment remains negative even as stock markets hit new highs. However, we worry that earnings and prices are going in different directions. Take the UK equity market. Since 2011 the earnings for the FTSE 100 companies have fallen from 500 to 119 currently or nearly 80%, whilst the stock market has risen by around 10%. That would be okay if we were at the beginning of an upcycle but indications point to a peaking in demand for most production. This peaking is coinciding with new capacity coming on stream. No wonder sentiment is a little off colour.

And warns that central bank policies are pushing saves into products that will untimely result in the total loss of capital:

“Investors are being driven to invest further and further from home. Keynes wrote in the thirties that “people should travel, goods should travel but savings should never travel.” I never understood that remark until now. The developed world has always had a surplus of savings because on the whole capital is protected and labour is not. In the developing world they are always chronically short of capital because labour is protected and capital not. Sadly savings, thanks to QE, are going into a place where the odds of their survival are slim. Who is responsible for these irresponsible policies?”

Finally, Odey proclaims that it’s time to start selling insurers:

“It would certainly be simpler to follow the market. But then we would be ignoring the fundamental data. At present, we are selling insurance shares. Interest rates can hardly go any lower. The credit cycle and with it, economic growth, will be more difficult and all asset classes are simply overvalued. At the same time, the insurance industry lacks capital, and the financial regulators would like to see more of it. In the boom years, the dividends paid out were too high. At present, we would only pay 0.5 of book value for insurance companies. However, in reality, the book value is about 2.5. We are not very enthusiastic either about Swiss watchmaker Swatch, or Video-on-Demand operator Netflix.”

The post Odey: Builds Massive Long In Gold Futures; Short Insurers As Investors Lose Faith In Central Banks appeared first on ValueWalk.

This is part four of a five-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.

Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.

Zeke Ashton founded the Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.

From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.

Zeke Ashton also manages the Centaur Total Return fund and you can find more information on the mutual fund at (www.centaurmutualfunds.com) or Morningstar’s performance page here.

The Zeke Ashton interview has been divided into several parts and will be downloadable as a PDF at the end of the series. So stay tuned for the rest of the series as well as the downloadable PDF!

Interview with Zeke Ashton of Centaur [Pt. 4]

Continued from part three…

Apart from the bank warrants, can you tell us a bit about your other highest conviction position in NASCAR stocks?

The two stocks we own are International Speedway and Speedway Motorsports. Between the two of them they own almost all of the tracks that host NASCAR racing events. I just think that they are unique assets that nobody is excited about and that are priced as if the popularity and profitability of NASCAR racing as a sport is guaranteed to be in perpetual decline.

Popularity for car racing in the U.S. seems to have peaked in the late 1990’s, and based on all the data we can see the sport remains very relevant but has struggled to grow attendance and corporate sponsorship since coming out of the recession. Both businesses remain very profitable, however. One of the largest income streams for the track owners actually comes from media broadcast rights to the races. This is a high margin revenue source and the current media contract runs out to 2024, so there is quite a bit of visibility for the next eight years or so. The valuations for the stocks are reasonable, with both stocks trading at low multiples to the current cash flow generated by the businesses, and substantially below the replacement value for the tracks and the adjacent real estate. If NASCAR is successful in maintaining the popularity of the sport and the management at each company does a decent job in terms of allocating the cash currently produced, investors should do pretty well. If the sport were to actually recover a bit in terms of popularity these stocks could be big winners, and we don’t think that is a crazy notion at all. Major sports tend to wax and wane in terms of fan interest, and it could be that car racing is just going through one of those lulls. In the meantime, we can be pretty well assured that there are not legions of new entrepreneurs lining up to enter the car racing business, so it’s not like a bunch of new competitors are going to spring up out of nowhere. In terms of our conviction level, we consider the NASCAR investments to represent one underlying investment idea, so our combined position in the two stocks is not much bigger than a typical top 10 position would be for us.

According to a recent interview you gave to Value Investor Insight, Centaur’s current cash allocation is more than 35%. Does this mean you’re preparing for a market crash?

We are always preparing for a market crash, whether we are 10% in cash or 50% in cash, at least mentally. Nobody can predict the timing of market corrections or crashes with perfect accuracy, but a professional investor always has to be prepared to wake up in the morning to a vastly different market than the one prevailing when he or she went to bed. Also, being mentally prepared for a crash and being positioned for a crash are two completely different things. There have been times in the past where we’d been prepared for a crash (or at least further declines) but positioned for a recovery. If a crash happened tomorrow, we’d be both mentally prepared and reasonably well (but not ideally) positioned.

I’ve been responsible for managing other people’s money in one vehicle or another since late 1998, and I have learned that the scoreboard changes very quickly in the stock market. Very few people in March of 2000 would have believed that the NASDAQ index would fall 80% from its peak to the trough in early 2003, but it did. That is a major index, by the way, not some small corner of the stock market. I can assure you that in mid-2007 very few people saw a 50% decline in the S&P500 coming, or at least very few were positioned for it.

All that said we don’t use some kind of crash probability generator to determine how much cash we hold. The amount of cash we hold in our funds is almost 100% correlated to our ability to find really compelling long ideas that meet our criteria for value, safety, and liquidity. Right now, the pickings amongst the ideas we feel that we can evaluate are pretty slim.

The U.S. stock market today is probably more uniformly overvalued than it was prior to either of the two prior bear markets. Total debt outstanding in the world is far higher now than it was prior to the credit crisis of 2008. So yes, we are prepared for a correction, though I am not predicting a crash. I am also prepared for a multi-year period where the market bounces around a lot and doesn’t go anywhere, or a period where the market doesn’t crash or correct, but just loses ground for an extended period of time. But mostly we are just trying to exercise patience until we see the next compelling bargain security that we can buy.

The post Interview with Zeke Ashton of Centaur [Pt. 4] appeared first on ValueWalk.

It appears that Andrew Hall, the (iin)famous oil trader, is finally giving up on his prediction that the price of oil will return to $100 a barrel in the near-term.

Hall, whose record profitability in oil trading has earned him the nickname ‘the Oil God’ has been claiming that oil will return to $100 a barrel since the price of the commodity began its decline during 2014. But in a letter to investors of Hall’s hedge fund, Astenbeck Capital at the beginning of September, the oil God appears to backtrack on this target, according to a copy of the letter obtained by ValueWalk.

Is Andrew Hall giving up on $100 oil?

Astenbeck’s regular letters to investors have become somewhat of an oil newsletter over the years for those who could get their hands on it. Within the letters Hall gives a detailed rundown of the happenings in the oil sector and developments since the last report. During the past two years these letters have also become a support system for oil bulls thanks to Hall’s optimistic outlook for oil markets.

More ValueWalk coverage on Andrew Hall and Astenbeck:

However, it would appear that Hall is finally coming around to the idea that oil prices may not return to the levels seen three years ago–in the near-term at least.

Andrew Hall Gas oil Fracking andy hall oil — Andrew Hall Photo by Skitterphoto (Pixabay)

In his September letter to investors Hall writes, “for now however, prices will be driven by sentiment and positioning. Until we see a decline in U.S. oil inventories, investor sentiment will be skeptical. This means for now we are likely to see prices in a $45 to $50 range (for Brent) before a sustained move higher…” which is about half the one hundred dollar earlier “price target”.

Specifically, Andrew Hall ends off the letter stating:

For now however, prices will be driven by sentiment and positioning. Until we see a decline in U.S. oil inventories, investor sentiment will be skeptical. This means for now we are likely to see prices in a $45 to $50 range (for Brent) before a sustained move higher later this year. That said, the structure of the market has been improving, with contango narrowing even as absolute prices move lower. This is further corroboration that the market is finally moving into deficit.

Nonetheless, even though Hall has lost his optimism for oil prices in the near-term he is still confident that towards the end of this year/beginning of 2017 oil prices will begin a sustained move higher as the market moves into deficit.

According to Hall, demand is increasing faster than expected:

“Most reporting agencies continue to adjust their forecasts of future demand higher – while at the same time revising higher their estimates of current and recent past demand. In its latest Oil Market Report, the IEA estimated Q1 2016 demand at 95.4 million bpd. That is some 0.9 million bpd higher than what they had been forecasting in February this year when the quarter in question was already half over!” Forecasts for demand in subsequent quarters have been adjusted higher too. It would not surprise us to see further increases in these demand forecasts over time if the past is any indicator of the future.

Andrew Hall While supply is still falling:

The market imbalance of the past two years was created by too much supply (emanating primarily from North America) rather than a lack of demand. Supply was thus expected to bear the brunt of the rebalancing process that was meant to be triggered by the resulting price collapse. As it turned out, supply has been surprisingly resilient in the face of lower prices – and for various reasons.
Firstly, there was a certain momentum: projects that had been sanctioned in a $100 world were going to be completed regardless. That’s why production in areas like the Gulf of Mexico and the North Sea actually registered significant growth this year. It is also why Canadian oil sands production will continue to grow for the next year or two almost regardless of price (albeit with a hiccough this year due to the wildfires in the spring).
Secondly, Russia has continued to set production records because a collapsing ruble boosted the bottom lines of Russian oil producers whose costs are denominated in the local currency. Russia has a large domestic oil services industry, unlike most producing countries who are largely dependent on foreign oil service providers who set their prices in dollars or euros.
Thirdly, U.S. shale oil producers were able to slash their costs as oil prices fell by squeezing their hard- pressed service providers who had nowhere else to go and were prepared to run at a loss in order to stay in business. This allowed the U.S. operators to maintain at least a modicum of drilling and well completion activity – the more so as investors seem happy to supply more capital to the industry despite questionable economics. The E&P companies then focused their reduced activities on their most prolific producing
areas. Lower levels of drilling and completion concentrated in the sweet spots allowed them to minimize production losses from their high-decline rate wells despite a collapse in the overall rig count.
Finally, sanctions were lifted on Iran which allowed it to ramp up production and exports – something it achieved much more rapidly than virtually anyone expected. Iran’s return to the market has also complicated the calculus for the Saudis, who for political reasons seem loathe to cede customers to its Middle East adversary even if it would make economic sense to do so. Thus paradoxically, Saudi Arabia is straining to maintain exports in the face of stagnating production in a low price environment “

………………..

Global oil supply is finally beginning to contract. In Q2 last year, oil supply was 3.3 million bpd higher than a year earlier. In contrast, in Q2 of 2016, oil supply was 0.5 million bpd lower than a year earlier. The year-over-year decline in production is expected to be 0.7 million bpd in H2 2016. In Q2 last year, oil supply was 3.3 million bpd higher than a year earlier. In contrast, in Q2 of 2016, oil supply was 0.5 million bpd lower than a year earlier. The year-over-year decline in production is expected to be 0.7 million bpd in H2 2016.
Production has been hit in a disparate group of smaller, but nonetheless significant, oil producing countries and regions, like China, Colombia and Mexico (whose collective production will be down this year by at least 0.5 million bpd) as well as conventional (non-shale) production in the U.S. and Canada. Production growth has also ground to a halt in Brazil.
Even within OPEC, not all member countries have been able to participate in the production free-for-all.

The post Long-Time Bull, “Oil God”, Andrew Hall, Capitulates On $100 Oil; Sees $45-$50 Range appeared first on ValueWalk.

This is the final part of a five-part interview with Zeke Ashton Portfolio Manager and founder of Centaur Capital Partners. The interview is part of ValueWalk’s Value Fund Interview Series.

Throughout this series, we are publishing weekly interviews with value-oriented hedge funds, and asset managers. All the past interviews in the series can be found here.

Zeke Ashton founded the Centaur Value Fund back in the summer of 2002 and his conservative value style has produced some impressive returns for shareholders over the years.

From its inception on August 1, 2002, through July 31, 2016, the Centaur Value Fund produced a cumulative net return of 351.2%, versus a cumulative return of 217.0% for the S&P500.

Zeke Ashton also manages the Centaur Total Return fund and you can find more information on the mutual fund at (www.centaurmutualfunds.com) or Morningstar’s performance page here.

The Zeke Ashton interview has been divided into several parts and is downloadable as a PDF at the bottom of this part. Stay tuned for the next interview in the series!

Interview with Zeke Ashton of Centaur [Pt. 5]

Continued from part four…

Are there any companies at all that interest you in this market, and if so, what do you think makes the businesses stand out from the crowd?

What fascinates me at the moment is the flood of capital pouring into the stocks of companies that happen to pay out most of their income in the form of dividends in the search for “safe” income. Valuations of stocks that might be considered any form of alternative to the contractual income offered by bonds of reasonable credit quality have gotten extremely steep and may now have gotten extreme enough to call a bubble. I think before long the market’s current craze for “safe dividends” is going to get ugly, and investors will discover that a 3% dividend doesn’t feel like a lot of comfort if the stock declines 30% and you lose 10 years worth of income. But I guess we’ll find out.

Since inception, Centaur has outperformed the S&P 500 by 2.8% per annum or 134.2% on a cumulative basis. Which traits in your opinion have helped Centaur beat the market over the years?

I think avoiding really big losses or huge mistakes has been the most important factor. I would say the one element of our track record at Centaur that I am most proud of is the fact that we just haven’t had any significant losses that we couldn’t recover relatively quickly. Even in the mutual fund, when we lost 20% in 2008, we made 44% in 2009 and were back to even by September. Still, I always remember the words of former football coach Bill Parcells: success is never final as long as you are still playing the game. That’s especially true in the stock market, where we’ve seen many great long-term track records wiped out with a few really poor years or in extreme cases with just one poor decision. At least in football, if you win a championship it’s forever. In investing, you always have to keep a part of your focus on protecting what you’ve made.

Our performance in the hedge fund has really come in three chapters. There were the years from mid-2002 to mid-2007, when we performed so well it almost seemed too easy. Then there was mid-2007 to 2010, when the Fund’s absolute performance was not as good but was strongly positive and the market was significantly negative. Then we’ve gone through a third chapter from 2011 through mid-2016 where we’ve been able to make money, but we have not been able to generate the kinds of returns we did pre-2008 and we’ve not been able to keep pace with the fully invested market indices. You’ve probably read a lot of articles about value investors having trouble in the market the last several years, and I think that’s largely true. And you may not have read any articles about it, but I can assure you that short sellers have struggled, particularly in 2013.

Since the late fall of 2012 we’ve really been unable to find enough good stocks to stay consistently fully invested on the long side. So instead of running exposures of 100-110% long and 25-30% short, we’ve been running 75% long and 15-20% short. While the net exposure difference between these two theoretical portfolios doesn’t seem that great (110% long and 30% short is 80% net long, while 75% long and 15% short is 60% net long) the difference between running total exposure of 140% and total exposure of 90% is a very big gap. Also, we’ve really found making money on the short side is much more difficult in recent years, as borrow costs have increased and of course fundamental value doesn’t seem to matter as much to the market as it once did. Obviously, hedge funds that try to be market-neutral have performed very poorly in this environment, so we are really glad we haven’t tried to play that game. We’ve done far better than the average hedge fund, at least based on what I can gather from the published hedge fund industry returns. I think we’ve produced a respectable performance relative to the amount of risk we’ve taken, but we just haven’t had a high-conviction hand to play in what seems like a long time.

Hedge funds in general are now out of favor as much as they’ve ever been, which I think is interesting given the amount of talent that the hedge fund industry attracts. Short selling is hard and a lot of people have given it up. Value investing has been difficult to practice lately, and many value investors are suffering similarly to what happened in the last couple of years of the late 1990s. I sense that this environment cannot continue indefinitely. We have tried to use this tough stretch to refine our skills and to learn whatever lessons it has to teach us. Still, I am reasonably optimistic. If the market environment changes to one that rewards the skill set we bring to the table of valuing businesses and assessing risk, we will be ready to capitalize on it.

And lastly, what advice would you give to value investors who are just starting out (or even experienced value investors) to help them navigate today’s market?

I’ve come to believe that learning to master the art of investing really boils down to finding a game that you can win, and then playing that game really well. I’ve come across all kinds of investors in my career, and all of the successful ones learn to differentiate the ideas that they can handle where they have some sort of system or approach that really works for them from ideas that they can’t handle or where they really aren’t any better at than the market at large. Value investing as a philosophy is actually a very broad framework, and there is a lot of room for many different styles, but starting with the idea that you are looking to buy underpriced securities is a pretty good place to start. Once you’ve mastered the basics, it is about developing a

The post Interview with Zeke Ashton of Centaur [Pt. 5] appeared first on ValueWalk.

George Soros is one of the most successful hedge fund managers ever. While at the helm of the Quantum Fund (founded by Soros and Jim Rogers in the 70s), he generated an average annual return for investors of 30%.

Across this ten-part series, I’m taking a look at Soros’ life, trading career, and political involvements. In the first three parts of this series, which can be found at the links below, I covered the beginnings of Soros’ Quantum Fund, Soros’ trades against the Bank of Thailand and possibly Soros’ most famous trade against the British pound in 1992.

Part five: George Soros in court

As well as being the greatest hedge fund manager of all time, George Soros is also the most controversial figure in the world of finance. If you search for the billionaire trader online, you are bombarded with conspiracy theories and speculation about Soros’ political influence. Many theories speculate that Soros’ greatest trades paid off because of his political influence. There’s never been any proof to back up this speculation.

But Soros has been found guilty of insider trading although the penalty was insignificant compared to his enormous wealth.

The insider-trading case goes back to 1988 when the Quantum Fund was purchasing shares in French companies. At first glance, this appears to be a traditional Soros trade. The Socialist party had lost its majority of seats in the French Assembly two years before, and the new government under Jacques Chirac had instigated an aggressive privatization program. As he had done many times before, Soros was using a mix of his market knowledge, political insight and understanding of human emotion to guide his trading patterns.

As part of the privatization program, public bank Société Générale was sold off during 1987. However, the following year lawmakers were demanding the bank be brought back under state control. A group of investors connected to the French financier Georges Pébereau hatched a plan to take control of the bank before the government made its move.

As Bloomberg reports:

“The French government sold Societe Generale in June 1987 at 407 French francs (then $63) a share. After a stock market crash a year later, the shares had fallen to 260 francs. In September 1988, French financier Georges Pebereau sounded out investors including an adviser to Soros about joining him in building a stake in Societe Generale.

While Soros declined to take part in that operation, that month his Quantum Endowment Fund spent $50 million to buy 160,000 shares of Societe Generale as well as shares in three other companies the French government had sold and whose stock had tumbled.”

After the private buyer had been announced, shares in Société Générale surged, although the raid was ultimately unsuccessful.

According to court documents, an associate of Mr. Pébereau informed Soros of the plans for the bid in a telephone conversation. Soros then moved to build a stake in the bank ahead of the takeover offer, violating insider trading rules. France’s stock market regulator opened an investigation into the case in 1989 but determined that Soros had not violated French insider rules (at the time insider-trading rules only applied to employees of the companies concerned trading on privileged information).

During 1990 France’s insider-trading rules were revised to apply to third parties, Soros claims these amendments were specifically put in place to bring him to court. In 2002 a French appeals court convicted the billionaire of insider trading and fined him €2.2 million, the equivalent of what he was accused of making from the trade. Soros was the first in France to be prosecuted for insider trading.

Unsatisfied with the actions of the French government and regulators, Soros took his case to the European Court of Human Rights. He claimed that France had violated his rights by punishing him criminally for trading on inside information after changing insider-trading laws. Soros believed France was set on punishing him directly, which is why the country went to great efforts to change its legal framework.

In 2011 the European Court of Human rights finally published its ruling on the Soros case. The court found that France’s insider trading laws were sufficiently clear at the time to hold Soros criminally responsible and ruled that it did not support Soros’ view that France had amended its insider trading laws because of his conduct. In a statement the court proclaimed:

“Mr. Soros was a famous institutional investor, well-known to the business community and a participant in major financial…As a result of his status and experience, he could not have been unaware that his decision to invest…there had been no comparable precedent, he should have been particularly prudent.”

“In view of the subject matter, well-informed professionals had a duty to be prudent in their work and to take special care in assessing the risks of their actions,” it added.

While Soros’ 2002 insider-trading conviction was a relatively benign event on the Soros timeline, the event is relatively informative as it showcases not only the billionaire’s trading habits but also his personality. Soros could have chosen to pay the fine and forget about the situation but instead, he stretched the case out over a decade in an attempt to clear his name and overturn the conviction.

The post George Soros Part Five: Soros In Court appeared first on ValueWalk.

The running of the bulls continues on Wall Street as signs point to the bullish hedge fund positioning that was in place before the FOMC and BoJ comments earlier this week still being in place now. Indeed, it seems as if investors are unconvinced that the U.S. Federal Reserve will follow through with past hawkish statements and seeming “promises” of rate hikes. This time anyway, they were right.

Also see Q4 hedge fund letters

Hedge funds still bullish despite market selloff

Morgan Stanley Prime Brokerage strategist John Schlegel and team released their latest “Hedge Fund Positioning Update” on September 20. They reported that hedge fund flows were generally skewed toward buying going into the Federal Open Market Committee and Bank of Japan meetings.

They added that this “modestly bullish” trend has been going on since the middle February and when looking at a longer term chart, the volatility observed earlier this month is hardly noticeable. In fact, hedge fund flows have remained skewed toward buying despite the exchange-traded fund hedging that occurred during the market selloff that took place between September 9 and 13.

Even Japanese equities have been net bought since the middle of February as well.

Hedge Fund Positioning – Fed to keep rates lower for longer

In his September 22 “Breakfast with Dave” note, reputed economist Dave Rosenberg of Gluskin Sheff noted that markets had not really been expecting the Federal Reserve to hike going into this week’s meeting. In fact, he said the markets had priced in only a 20% chance of a rate hike.

“Three hawkish dissents did not through the bulls off course” he added. “Nor did the press statement which left December rate-hike odds a tad above 50%.”

He explained that the “dot plots” set forth by the Fed removed the likelihood of a rate hike next year or next year and left the expected funds rate 50 basis points lower than where it was estimated to be three months ago. In other words, it lowered the rate from 2.125% to 1.875%. Also the terminal funds rate was slashed again, from 3% to 2.755%.

According to Rosenberg, “Lower for longer on rates was all over the Fed’s commentary.”

Hedge Fund Positioning – Long/ short ratio movements mixed

In keeping with the bullish hedge fund flow trends, the Morgan Stanley team also observed earlier this week that compared to the recent past, the long/ short ratio is high. However, looking out over the long term, it actually isn’t.

Their Global Long/Short ratio is the ratio between the total global long and short exposures across all of the various hedge fund strategies. They report that this ratio is hovering around the highest levels they have observed in a year but remains far below the highs they observed in 2013 through the first half of 2015.

The Morgan Stanley team added that the ratio’s six-month z-score registered “fairly extreme levels” beginning at the end of July and warned that when this has happened in recent years, “modest” global equity pullbacks have occurred.

Hedge Fund Positioning 3 — Hedge Fund Positioning

However, they see little cause for concern right now, despite the fact that the last time the z-score was this high and the long/ short ratio was this low was in the middle of 2009. Because of what happened in 2009, it might make sense to expect another major pullback in the near future and hedge fund flows might shift back to selling.

In this particular case though, they don’t see hedge funds as being “extremely” bullish, which is why they see a lower risk of a repeat episode.

The post Hedge Fund Positioning Bullish Around FOMC, BoJ Commentary appeared first on ValueWalk.

George Soros Part Six and Seven: Volatility and trading mentality

When reading about George Soros, it is very easy to conclude that he is either the undisputed champion of predicting the direction of financial markets or his significant influence in the world has been the driver of his returns over the years. There are many who believe Soros’ impressive trading performance over the years can be traced to the latter. But it is all too easy to make this assumption.

George Soros photo — Photo by Niccolò Caranti

There are several periods in the Quantum Fund’s life where the trading decisions made by Soros and his team could have quite as easily bankrupted the fund and its investors as produced profits. Indeed, when Soros broke the Bank of England the Quantum Fund was risking more than $10 billion worth of losses if the trade didn’t play out as expected (although it should be said that Soros only decided to go all in when it looked as if the Bank of England would capitulate and the risk of losing was much reduced).

Unless you spend time digging through Soros literature to find information on the billionaire’s losing trades and near misses, it’s difficult to believe that Soros never actually made any mistakes in his career. But he did. In one week during 1987, the Quantum Fund lost a staggering $840 million, and it was Soros’ aggressive positioning and trading that exacerbated investor losses.

The George Soros roller coaster

The Quantum Fund’s troubles in 1987 are detailed in More Money Than God by Sebastian Mallaby. At the end of September 1997, a few weeks before the October crash — now known as Black Monday — the Quantum Fund was up by 60% year-to-date. Soros believed that the Japanese equity market was heading towards a cliff and at some point, during the next few months a stock market crisis would occur in Tokyo.

Soros positioned the Quantum Fund according to this view shorting Japanese equities, however, at the same time the fund was long the US market. The story goes that on October 14, the Financial Times published an article written by Soros which claimed that the crash would arrive in Tokyo, which set off a chain reaction.

In the days following the publication of the piece, US equities began to decline and finally on October 19 the market capitulated. The Dow Jones lost 22.6% of its value in one day. By being short Japan but long the US, Soros was hedged, so relative to the rest the market on Black Monday Soros did fairly well. In the days following troubles began to emerge for the Quantum Fund.

In the days after Black Monday, US equities rallied, and Soros’ strategy started to pay off but on Wednesday the Nikki followed suit jumping by as much as 9.3% in a single day, the index’s biggest one-day gain since 1949. In typical Soros style, the Quantum Fund had built a large oversized position against the Japanese market structured via futures in Hong Kong due to greater liquidity. Unfortunately, even though Soros had attempted to design his position in a way that would allow him to get in and out with as little friction as possible, the market’s 9.3% gain coupled with his intention to sell first Hong Kong’s regulators to halt futures trading. The Quantum Fund had been bitten by its own mistake.

To add insult to injury, after two days of gains on Thursday, October 22, US indexes declined and Soros tried to book gains. Once again the Quantum Fund’s mammoth futures position worked against it. Noting that there was a large seller in the market, traders across Wall Street intensified their selling of US futures. Once again the Quantum Fund was stuck. By the end of the week, the Quantum Fund was sitting on losses of 10%, not 10% on the week, 10% year-to-date. In five trading days, the fund had been gone from being up 60% on the year to being down by 10%, a loss of $840 million.

How did the world’s greatest hedge fund manager react to this loss? He kept trading. After unwinding the positions in US and Japanese equity futures, Soros concluded that the dollar was overvalued. In typical Soros style, the Quantum Fund placed a sizeable leveraged bet against the dollar only a few weeks after Black Monday. This time around the trade worked out and value of the dollar fell generating attractive but not overwhelming profits for the Quantum Fund and its investors. By the end of 1987 Soros had erased all of the Black Monday week losses and the fund was back in the black for the year. The Quantum Fund ended 1987 up 13%.

George Soros – Volatile trading

The events of 1987 are very revealing; not only do they show that Soros made costly mistakes, but they also show that George Soros is a very headstrong trader. 1987 could have been a disastrous year for the Quantum Fund, going from 60% up to 10% down in a single week is nothing short of gambling and would have prompted investors to seriously question Soros’ ability to look after their cash and achieve steady long-term returns without being wiped out overnight.

The Quantum fund’s volatile returns during 1987 were just a side-effect of the aggressive trading strategy Soros employed. I have covered briefly the trading strategy Soros used during his career already earlier in the series, but it’s hard to truly appreciate the strategy without understanding some key trading examples. The trades against the Bank of England, Bank of Thailand, Bank of Japan and the events of 1987, showcase Soros’ trading style from several different angles, but they all showcase the same trading mentality.

The main takeaway from all of these cases is that Soros cared more about the risk-reward profile than anything else. Stanley Druckenmiller, one of the Quantum Fund’s most celebrated money managers, has stated the most important thing he learnt from Soros over the years is, “it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong… It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as George Soros is concerned, when you’re

The post George Soros Part Six and Seven: Volatility and trading mentality appeared first on ValueWalk.

Hedge Fund/Family Office Consulting Job

An example of my short corporate career

UIZ: You are called in to interview for a six-figure consulting job for a family office. The family wants to establish an investment policy and procedure for investing. You are asked whether you would recommend investing in IPOs or other hedge funds. You reply that before recommending any asset class you would first determine:__________________________? Also, as a “value” (redundant) investor you would seek to buy from _______________ sellers. In case you need a hint, Ben Graham would have given you the answer in The Intelligent Investor.

One of the family members plops two annotated charts: 1 shows a reverse head and shoulders pattern on pork bellies and chart 2 shows blood spatter on the right of the chart. Which one has more predictive value as to where the market is headed?

Please answer in a few words–two or three–but no more than a sentence. GOOD LUCK!

One response to “Hedge Fund/Family Office Consulting Job”

PK | Reply

Intrinsic Value
Panic
Same

The post Hedge Fund/Family Office Consulting Job – Quick Quiz appeared first on ValueWalk.

The great hedge fund reversal? It’s been a wild year in the markets as hedge funds have struggled for returns, with the early part of this year being a horrendous one for many funds with widespread financial carnage punishing even the best of the best. Apparently things have been so strange this year, that hedge funds saw their fortunes change, with the worst becoming the best through the first part of this year, according to analysts at Morgan Stanley Prime Brokerage team.

Also see

The great hedge fund reversal

In their September 27 “Hedge Fund Thought Piece,” John Schlegel and team highlighted their analysis of cumulative hedge fund returns from January 2015 through August 2016. They found that the average fund in the bottom quartile between January 2015 and February 2016 was down 10.6%. However, the funds in that bottom quartile during that time frame were up by an average of 9.3% between March and August 2016. In fact, they actually beat all of the other quartiles.

Why such dramatic performance shifts?

The Morgan Stanley team believes that reversals running both across and within hedge fund strategies drove this dramatic shift in performance.

Schlegel and team compared the reversals that have taken place over the last 18 months to those observed from 2008 to 2009 and 2011 to 2012.

Factor biases become a tailwind for hedge fund longs

They explained that among Equity Long/ Short funds, each fund’s net exposure levels drove at least some of the shift. However, they also found that reversals in some factors contributed to the change in performance among these funds as well. They observed that market beta explains some of the reversal among this cohort of funds because higher net funds took a greater hit from the drawdown and have recorded bigger rebounds since the middle of February.

They attribute the reversals among other equity fund categories to factor biases, however. Schlegel and team observed that over the last couple of years, factor biases have shifted from being a major headwind between March 2014 and February 2016 to being a “modest” tailwind now, particularly for any long positions held by hedge funds right now.

The analysts add that short positions had also benefitted from factor biases before February, but that tailwind sharply reversed after that point. They peg the factor contribution to total alpha in the U.S. as still being in the negative year to date. This is also the second time it has been negative within the last three years. However, it’s improving, having shifted from -2.8% at the end of the first quarter to -1.7% year to date at the end of August.

Alpha excluding style factors is now in the green, although it’s still not as good as it was between 2012 and 2015.

The post The Great Hedge Fund Reversal: When The Worst Became The Best appeared first on ValueWalk.

Hedge fund net exposure – Hedge fund clients of Credit Suisse’s prime brokerage unit pushed their net exposure to an all-time peak last week as they looked to profit from recent market movements.

According to the Swiss bank’s 30 September Prime Services Risk & Portfolio Advisory Market Color report, which details the positioning of Credit Suisse’s professional and institutional investors, through September 28 close, equity long/short managers pushed net equity exposure to an all-time peak of 24.9%, equivalent to a 66% equity long/short ratio.

The most favoured sectors by these managers are Software & Services and Financials longs. Segments sensitive to regulation risk (Pharma, Financials) and trade (Mexican Peso) experienced outsized price changes on the week but saw little change in positioning. Info Tech net long equity exposure in the third quarter reached an all-time high of 34% of total net exposure. On a gross basis, according to Credit Suisse’s info managers re-engaged the market by adding both long and shorts during the third quarter, taking net exposure to a post Q1 high, but still well below the January peak.

Hedge fund next exposure hedge-fund-net-exposure hedge fund net exposure — hedge fund net exposure

hedge-fund-net-exposure-2 hedge fund net exposure — hedge fund net exposure

Hedge fund net exposure – Hedge fund data shows favourable trends

An analysis of the sectors favoured by hedge funds and institutional businesses that transact with Credit Suisse shows that while Info Tech was one of the most favoured sectors by institutional investors during the third quarter, it is not the most crowded sector tracked. According to Credit Suisse, the crowding in Consumer Staples longs is greater than the crowding of Info-Tech longs in Q1 as measured by the greater concentration of popular names (77% compared to 70%) and reduced liquidity. Credit Suisse concludes that due to the crowding in the Consumer Staple sector, evidence suggests a negatively skewed return profile going forward.

Also see Horseman Global details short case against consumer Staples

According to Credit Suisse’s data hedge fund leverage has reached a post-crisis high in the past few months. Average leverage hit 3.01 times at the end of September, and median leverage hit 2.9 times, the highest prints since 2007.

Outside the equity long/short space, the data shows that macro/CTA funds have maintained their clear version for US equities. The aversion for US equities by these funds appears to have arisen just before the September Fed meeting. Still, like equity long/short funds macro/CTA funds still have an above average net exposure to the market at 23%. Managers increased gold net exposure to a post-2012 peak of 49% net long.

Finally, Credit Suisse’s estimates for September suggest hedge fund strategies will post a second month of outperformance for the month. Equity-based strategies including long/short, risk arb and multi-strats benefitted from single stock outperformance and merger closures. CTAs rallied 1 to 2% after a difficult start to the month, likely to close +50 to 100 BPs on the back of the rebound in Bunds, JGBs and US Treasuries.

The post CS: Hedge fund net exposure hits all-time high, Surpassing 2007 Peak appeared first on ValueWalk.

George Soros Quantum Fund — Photo by Norway UN (New York)

Across this ten-part series, I’m taking a look at Soros’ life, trading career, and political involvements. In the first eight parts of this series, I’m covering the beginnings of Soros’ Quantum Fund, Soros’ trades against the Bank of Thailand and possibly Soros’ most famous trade against the British pound in 1992. All of the previous parts in the series can be found at the links below.

In this, part eight of the ten-part series, I’m looking at the trading strategy that’s helped Soros achieve notoriety over the years: Reflexivity

George Soros Part Eight: Reflexivity

Throughout this ten-part series, I have touched on the trading strategy used by George Soros over the years several times. In parts six and seven I covered the billionaire’s trading mentality, which may seem erratic to some but there is logic behind the Soros way of trading.

Soros has written and spoken many times before about his idea of reflexivity in financial markets. His theory of reflexivity is based on the information he gathered studying philosophy.

Put simply, the theory of reflexivity is a positive feedback mechanism whereby a move in the market makes participants more enthusiastic about their positions, causing the market to move even more in that direction. As Soros explained in a speech at the World Economy A Laboratory Conference in Washington on April 26, 1994, “reality helps shape the participants’ thinking, and the participants’ thinking helps shape a reality in an unending process.” He continued, “the situation participants have to deal with does not consist of facts independently given but facts which will be shaped by the decision of the participants.” To put it another way, reflexivity is the idea that people’s biases and actions can affect the direction of the underlying economy, undermining the conventional theory that markets tend towards some sort of equilibrium. It could be argued that investors’ reaction to any comments from the Federal Reserve regarding interest rates today is the perfect example of this reflexivity.

Soros started building his reflexivity while studying at the London School of Economics in 1947. Soros was able to study under one of the greatest philosophers of science of the 20th century, Karl Popper originator of the term “open society.” Popper’s teachings have played an enormous part in Soros’ career and the development of reflexivity.

Karl Popper defined his open society theory in a two-volume book published in the 1940s. The key message in these two books is the need to have a critical mind and develop “critical rationalism.” We live in an imperfect society that is not free from conflicts. To challenge this, a person has to conscientiously adopt an analytical method of thinking and go through a process of trial and error to promote the growth of human knowledge.

Popper argued that the empirical truth cannot be known with absolute certainty. Even scientific laws can’t be verified beyond a shadow of a doubt: they can only be falsified by testing. What’s more, Ideologies which claim to be in possession of the ultimate truth are making a false claim; therefore, they can be imposed on society only by force.

These arguments led Soros, who was reading Popper alongside his economics studies, to question the assumptions of economic theory and the theory of reflexivity was born.

Karl Popper’s teachings and the subject of reflexivity are two extensive subjects and there’s not enough room for me to go into detail on each one here. So, I have included a number of links at the bottom of this article for those readers who are interested in conducting further research.

In its simplest form, Soros’ theory of reflexivity is closely related to the greater fool theory, momentum trading and the madness of crowds. At its core is the idea that humans don’t follow any set path making it impossible to predict with any accuracy the outcome of any large complex systems such as the economy. Momentum rules and participants are governed by a positive feedback loop, which influences their decisions. It is easy to join the dots and see this theory playing out in some of the greatest trades Soros has placed over the years. When betting against the Bank of England, Bank of Thailand and Bank of Japan, Soros was banking on his reflexivity theory playing out…and it did. In each case, it was the market’s reaction that forced central banks to make policy mistakes, which Soros was then able to take advantage of validating his theory.

All in all, if there’s one thing you take away from this series it should be an understanding of the theory of reflexivity and how it can influence and impact your trading and trading decisions.

The post George Soros Part Eight: Reflexivity and Karl Popper appeared first on ValueWalk.

Hedge fund investors – According to the September Goldman Sachs Prime Services Capital Introduction Hedge Fund Fee Survey, management fees that fall as assets grow, incentive fee hurdles and clawbacks on performance fees are the “most compelling” hedge fund compensation structures for allocators.

Bloomberg details the Goldman Sachs report in its latest Bloomberg Brief Hedge Funds Edition.

Goldman’s survey polled 364 allocators representing around $725 billion and hedge fund assets. The results of the survey clearly showed that allocators want hedge funds to provide more flexibility for clients. Other attractive fee structures, as well as those mentioned above, include discounts for loyalty and/or larger tickets, better fees for longer lock-ups and incentive fees that rise with performance, the survey found. The single most compelling fee structure according to the results would be declining management fees as assets under management grow. The report finds that on average allocators are paying about 1.57% in management fees and 17.44% in incentive fees. Tim Ng, CIO at Clearbook Global Advisors who was interviewed for the Bloomberg piece said “”We would be willing to look at a fee structure whereby its a 1% management fee or lower, and a lower hurdle or agreed-upon hurdle for performance where they would be paid the 20%.” Clearbrook has about $2 billion of its $20 billion under management invested in hedge funds.

Investors are pulling money from hedge funds across the board, citing low returns and high fees. So, the hedge fund industry is being forced to adapt or die. According to the Goldman survey, almost 40% of respondents said at least one manager in their portfolio proactively reduced management fees over the past year. Offered management fee reductions ranged from 25 basis points to 100 basis points.

Hedge fund investors – Hedge fund industry changing

In other hedge fund industry news, according to Bloomberg’s research institutional investor demand for quant strategies has been increasing as a proportion of all hedge funds searches. There were 73 searches for quant funds in the third quarter of 2016 compared with 212 mandates overall. Total new hedge fund mandates have been on the decline this year after reaching a peak of 276 in the fourth quarter of 2015.

Hedge fund investors bloomberg-1 hedge fund — Hedge fund investors

As quant funds are in demand, merger arbitrage funds are rapidly falling out of favour with investors. Speculating on M&A is becoming too hard, with more than 200 deals worth $251 billion collapsing this year, after $1.2 trillion were pulled in 2015. When deals fall apart they impact hedge fund returns and when combined with other pressures facing the hedge fund industry investors are quick to withdraw their cash. Investors have withdrawn $31 billion from M&A managers so far this year and 37 event driven hedge funds have closed during 2016 while only 29 started according to data from Eurekahedge. This is the second year in a row more M&A funds have closed then opened.

bloomberg-2 hedge fund

The post Hedge Fund Investors Want More Fee Flexibility appeared first on ValueWalk.

Hedge Fund Alpha – Hedge fund performance continues to improve as the year drags on, with small gains reported for the month of September. However, funds still aren’t having a spectacular time of things, as on average, they gained less than 1% during the month.

Also see

Hedge fund performance on the rise

Morgan Stanley Prime Brokerage analyst John Schlegel and team said in their October 6 “September 2016 Hedge Fund Recap” that the average hedge fund performance across all strategies was a gain of 0.66%. Here’s a quick summary of recent hedge fund performance:

Year to date, funds are only up 1.68%, on average. The analysts added that American Equity Long/ Short funds posted an average return of 0.83% in the month, setting their year-to-date return at 2.59%. Global Equity Long/ Short hedge fund performance amounted to a 1.1% gain in September, bringing the average fund in this category to a year-to-date increase of around 15 basis points.

The Morgan Stanley team added that stock picking alpha was positive last month with long positions continuing to rebound around the world.

This is good news for long-only funds, as this is the first time this year that longs have flipped into the green, and it has come only after a rebound lasting three months. For the full third quarter, long alpha was the best since the first quarter of 2013 and comes after four hard quarters.

Hedge funds buy global equities

They explained that U.S. style factors are continued to help long positions and take a bite out of shorts in September, just as they have been doing in recent months.

They also report that size is the biggest contributing factor to this trend because of the continuing preference for small caps.

Hedge funds were net buyers of global equities last month, but only marginally. Asia, excluding Japan, racked up the majority of the buying. Equity Long/ Short fund leverage declined on a net basis month over month across regions. Gross, on the other hand, was more mixed.

Hedge funds buy cyclicals

The MS team reports that in the U.S., net activity tapered off in September, although hedge funds bought cyclicals and sold defensives.

They add that net exposure to cyclicals stood at its highest level this year, while exposure to defensives reached its lowest level since 2014. In the U.S., Technology is still the favorite sector among hedge funds with the highest net buying year to date. Interestingly, Energy is close on its heels after it made huge gains in September.

They found that Europe was the most-sold part of the world after a big reversal, as September’s net selling followed two months of net buying. Information Technology recorded the most sales of any sector in Europe in another big reversal after six months of net buying. The Long/ Short ratio in Europe edged lower slightly between August and September, while European Equity Long/ Short leverage declined 4% on a net basis but increased 6% on a gross basis month over month.

In Asia, net buying continued for the fourth month in a row as hedge funds boosted Asian stocks. Long/ Short ratios neared their highest level in a year, both for Japan and also Asia ex-Japan. Chinese Information technology ADRs were still a favorite of hedge funds, marking the third month in a row for this trend. Hedge funds also reversed to moderate net sales of Japanese equities as the Nikkei 225 slipped 2.6% during September.

The post Hedge Fund Alpha Positive In Q3; First Time Since Q3 2013 appeared first on ValueWalk.

Across this ten-part series, I’m taking a look at Soros’ life, trading career, and political involvements. In the first eight parts of this series, I’ve covered the beginnings of Soros’ Quantum Fund, Soros’ trades against the Bank of Thailand and possibly Soros’ most famous trade against the British pound in 1992. Alongside these infamous trades, I also covered Soros’ trading mentality over the years and why he has been able to make so much money while others have struggled.

This penultimate part of the series is devoted to Soros’ highly controversial political career.

George Soros part nine: Political controversy

George Soros has to be one of the most controversial figures in the field finance. A search of the billionaire online turns up hundreds of articles, but only a few of these are related to his trading prowess. The rest are full of conspiracy theories and hearsay about Soros’ influence on the stage of world politics.

Most of the political speculation surrounding Soros is just that, speculation. It is unlikely that he is the evil mastermind most portray him as. The billionaire’s philanthropic work is more tangible. Over the years Soros has given billions to charities around the world and helped spark debates as well as political change via his giving.

George Soros began his philanthropic activity in 1979, and he established the Open Society Foundations in 1984. The foundations are a nod to Soros’ teacher and mentor Karl Popper (one of the greatest philosophers of science of the 20th century) who, as I covered in the last part of this series, originally coined the term “open society.” Popper’s “open society” is based on the notion that we live in an imperfect society that is not free from conflicts. To challenge this, a person has to conscientiously adopt an analytical method of thinking and go through a process of trial and error to promote the growth of human knowledge. Further, Popper highlights the idea that humans need to have a critical mind and develop “critical rationalism.”

Under Soros (and with his funding) the Open Society Foundation’s work to develop Popper’s thinking into the world around us today. Indeed, the foundations fund a range of global initiatives “to advance justice, education, public health, business development and the central theme is improving education, to help foster the idea of an open society where rights are respected, government is accountable, and no one has the monopoly on the truth. Assistance programs include establishing after-school programs in New York City, funding the arts, lending financial assistance to the Russian university system, fighting disease and combating “brain drain” in Eastern Europe. The foundations have provided school and university fees for thousands of promising students, including young Roma, refugees from armed conflicts, and young people from other marginalized groups.

Soros’ charitable actions are not just designed to foster free thinking and political debate his actions are born out of his own hardships at the beginning of his life and a desire to use his wealth to improve the lives of others. According to the Open Society Foundations, Soros once wrote, “my success in the financial markets has given me a greater degree of independence than most other people.” He continued, “this allows me to take a stand on controversial issues: In fact, it obliges me to do so because others cannot.” Perhaps this is why so many see the billionaire as a threat. The desire of Soros to change political thinking is bound to have ruffled some feathers. Soros began his philanthropy in 1979, giving scholarships to black South Africans under apartheid, which was frowned upon by many support the regime. Then in the 1980s, he helped undermine Communism in the Eastern Bloc by providing Xerox machines to copy banned texts, once again a move that may have stoked ill feelings.

There is no evidence to justify the accusation that Soros may or may not be involved in the activities which conspiracy theorists accuse him of although it is easy to see how his activities through the Open Societies can be described as being destabilizing.

One event initiated the former hedge fund manager’s charitable nature at the beginning of his life. When Soros arrived in London after fleeing the Nazis in Hungary as a child, he struggled to make ends meet taking any job that was offered to scrape together a meager living. When he got into school at the London School of Economics, Soros worked at night as a waiter to fund his tuition and living expenses. When his tutor found out that he was living on the breadline she submitted his name to the Quakers and soon Soros received a check for £40 (around £1,500 today) as a gift from the organization. This gift made a lifelong impression.

“And it touched me, I must say; I felt then that this is a very nice way to help people,” Soros said in an interview during 2009. “And so it gives me personal satisfaction to be able to do it on a much larger scale.” Source.

The post George Soros Part Nine: Political Controversy appeared first on ValueWalk.

It seems not a day goes by without some media outlet proclaiming the end of the hedge fund industry. At first glance, it may appear as if the industry is dying. Several high-profile asset managers have withdrawn funds from hedge funds over the past few years; it is widely reported that several high-profile fund managers are struggling to keep investors invest in their funds.

Also see

Q3 2016 hedge fund letters

Notable industry names have cut fees to increase their appeal to investors over the past 12 months. Andrew Law’s macro hedge fund Caxton Associates has dropped his annual management fee from 2.6% to between 2.2% and 2.5% while Paul Tudor Jones has slashed his annual management charge on one of his funds from 2.75% to 2.25% and cutting performance fees from 27% to 25%.

2/20 Gone: Average Hedge Fund Performance Fee Falls To 17.6%; Also Under Pressure In Asia

But aside from these arguably overdue fee reductions, the hedge fund industry’s outlook is not as bleak as many journalists would have you believe.

The Hedge Fund Industry Is Not Shrinking As Fast As You Think

According to Eurekahedge’s October hedge fund industry report, some sections of the hedge fund industry are still attracting assets and generating gains for investors.

Figures for August show managers reported performance-based gains of $5.6 billion while recording net asset outflows of $7.0 billion. While preliminary data for September shows that managers have posted performance-based gains of $3.0 billion while recording net outflows of $8.8 billion. Bringing the current assets under management of the global hedge fund industry to a total of $2.25 trillion down 0.26% month-on-month.

Year-to-date investors have pulled $8.7 billion from hedge funds around the world, the fastest rate of withdrawals since 2009. Including investment gains, total hedge fund assets under management are up by $10.4 billion a year-to-date, compared to growth of $91.8 billion for the same period in 2015.

Still, not all hedge funds are created equal, and a more in-depth look at the data shows that the industry is experiencing more of a rebalancing than terminal decline. Specifically, while billion-dollar hedge funds have seen year-to-date outflows of $21.2 billion, sub-billion-dollar hedge funds have reported inflows of $12.5 billion over the same period. CTA/managed futures strategies have seen inflows of $11 billion year-to-date the highest ever year-to-date investor inflows. CTA/managed futures hedge fund industry has seen its asset base grow by $17.1 billion over the past nine months. Funds following multi-strategy and relative value strategies saw inflows of $7.7 billion and $4.7 billion respectively.

The event-driven hedge funds space, which according to Eurekahedge’s figures manages a total $207.5 billion, $14.0 billion investor redemptions over the past nine months, the strategy’s steepest year-to-date outflows on record and up from $1.5 billion outflows over the same period last year.

The North American hedge fund industry ($1.49 trillion in total) has grown by $13.1 billion over the year with most of this growth attributed to performance-based gains ($18.5 billion year-to-date) while redemptions totaling $5.5 billion were recorded.

The Eurekahedge Hedge Fund Index was up 0.48% in September while underlying markets (MSCI World Index) rose 0.19% over the same period.

The post The Hedge Fund Industry Is Not Shrinking As Fast As You Think appeared first on ValueWalk.

Aristides Capital LLC is having a relatively good year. The firm’s two funds, Aristides Fund LP and Aristides Fund QP gained 2.98% and 3.12% respectively during August.

Year-to-date, Aristides Fund LP is up 10.76%, and Aristides Fund QP, LP is up 10.62%. Since inception (August 15, 2008) Aristides Fund LP is up 290.64% or 18.16% annualized. On a dollar-weighted basis, the two funds added approximately 297 basis points of alpha last month, bringing year-to-date alpha to positive 917 +/- 78 basis points according to a letter to investors reviewed by ValueWalk.

As of 1 October, the two funds managed a combined $86.6 million.

Aristides Capital profiting on oil

The main contributor to Aristides’ gains during September’s was SAExploration, which contributed “roughly two percentage points net.” When the company filed a registration statement, Aristides exited the position. However, the fund still remains invested in SAE with $3.1 million ($4.4 million face) of bonds and a potential obligation for an additional $1.5 million draw on a Sr Term Loan.

SAE was 6.7% of Aristides’ net asset value at the end of September. Christopher M. Brown Managing Member of Aristides Capital LLC expects the position to continue to produce returns for the fund even after recent gains:

“My expectation is that as the company receives further project awards and successfully receives the State of Alaska tax credits, the debt will trade much closer to par, at which point we would plan to harvest more profit.”

Moving away from SAE, the firm’s community bank book was a particular highlight, led by Hingham Institution for Savings and Bank of Utica performed well throughout September but these strong performers were offset by Electromed. The company’s stock fell after a soft earnings report, but this was something Chris and team were prepared for:

“We knew when we bought it that earnings could be lumpy from quarter-to-quarter, and we had expected this quarter to be somewhat weak due to some extra expenses from recent sales force hires. We still believe it is a company with high margins, high return on invested capital, and solid long-term organic growth, trading at a very reasonable valuation.”

Aside from the long-term positions, Aristides engages in short-term trading, which has been very successful helping to boost returns in a flat market when times are quiet:

“ One good trade every day, even if the profit is small, like one basis point, makes everything else much easier and more fun, because it’s a reminder to yourself that this job can be fun like a game, and that you are pretty good at the game. Sometimes the profits are more than a basis point or two, which is even more fun. Last Friday, for example, I made a news-driven put option trade for $9,500 that very quickly turned into a $97,000 profit, in spite of taking profits too soon.”

Lastly, the fund ended the third quarter with 32% cash as the team sees few attractive opportunities in the current market. Unfortunately, this cash will be used up as a large client is planning to withdraw funds at the end of the year. The cash build isn’t related to the client exodus.

The post Aristides Up 11 Percent YTD Boosted By SAExploration Long appeared first on ValueWalk.