# Academics fail to find stock picking skills



## drillinto (8 April 2007)

William Hutchings
www.financialnews-us.com
Mar 2007 

Two US academics have failed to find convincing evidence of hedge fund managers’ supposedly superior ability to manage money.

 Many academics have failed to find a reason to invest in hedge funds. John Griffin, associate professor at the University of Texas at Austin, and Jin Xu, an employee of hedge fund manager Zebra Capital, are the latest to join their ranks.

They said: “An underlying assumption by many is that the best and brightest migrate to the hedge fund industry. We find some weak statistical evidence that hedge funds are better at stock picking than mutual funds, 1.32% a year, but this result is driven by technology stock holdings in 1999 and 2000. The sector timing ability and average style choices of hedge funds are no better than those of mutual funds.

“Overall, our study raises serious questions about the proficiency of hedge fund managers.”

Griffin and Xu said they had avoided the reliance on published hedge fund indices favoured by other academics, whose work has been doubted because the indices suffer from self selection and survivorship bias.

They based their work on hedge fund managers’ quarterly filings with the Securities and Exchange Commission, showing their long equity positions between 1986 and 2004.

They found the average hedge fund turns over its portfolio almost twice as often as the average mutual fund, and prefers smaller stocks with low analyst coverage, less liquidity and more volatility.


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## stevo (8 April 2007)

drillinto
Unfortunately I had trouble following the link.


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## nizar (8 April 2007)

Have a look at LTCM.
They had on board a Nobel prize winner in Economics and a former Fed chairman.
Very smart fellows.
Went bankcrupt.

They say there are 2 types of people that dont make money in the stockmarket.
1. those that know nothing
2. those that know everything.

LTCM was of the former.


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## stoxclimber (8 April 2007)

nizar said:


> Have a look at LTCM.
> They had on board a Nobel prize winner in Economics and a former Fed chairman.
> Very smart fellows.
> Went bankcrupt.
> ...




LTCM was a risk arbitrage hedge fund, nothing to do with making money in the stock market [aside from M&A Arb, equity vol etc.]

I think it's a misrepresentation to say LTCM couldn't make money because they ended up not being able to meet margin calls - for ~4 years they had amazing returns for low volatility. More that it illustrates the problems with leverage and money management.

After all, the positions that created problems for LTCM ended up being very profitable for the banks that bought them..


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## nizar (8 April 2007)

stoxclimber said:


> LTCM was a risk arbitrage hedge fund, nothing to do with making money in the stock market [aside from M&A Arb, equity vol etc.]
> 
> I think it's a misrepresentation to say LTCM couldn't make money because they ended up not being able to meet margin calls - for ~4 years they had amazing returns for low volatility. More that it illustrates the problems with leverage and money management.
> 
> After all, the positions that created problems for LTCM ended up being very profitable for the banks that bought them..




Yeh your right.
But they were too leveraged, way too much...


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## Realist (8 April 2007)

This does not surprise me whatsoever.

With the fees they charge you are better off investing yourself.


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## BSD (8 April 2007)

Who cares?

In my portfolios, hedge funds are about risk management - non correlated strategies. 

If they underperform the MSCI by 4% when it booms but have 4% annual volatility, and still do 12% when the MSCI falls maintaining 4% annual volatility, they can rob me for 2% and 20% all week.

Hedge funds have a thousand more strategies than long-only equities - the relevence of this study is limited when identifying an appropriate allocation to hedge funds.

It just reflects poorly on the long only managers that make up a minute portion of an appropriately diversified strategy

How do the DIY investors go in convertible arbitrage and credit default swap trading Realist?


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## drillinto (24 June 2007)

Is investment blogging hard ?

http://abnormalreturns.com/2007/06/20/investment-blogging-is-hard/


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## drillinto (3 July 2007)

A guide to social investing websites

http://www.tradersnarrative.com/guide-to-social-investing-websites-661.html


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## drillinto (20 August 2007)

Market corrections are coming.

Jim Rogers 
Founder of the Rogers Raw Materials Index

We've had the worst bubble in credit we've ever had in American history. As the bubble got bigger and bigger, it spread to emerging markets and leveraged buyouts and all sorts of things. And it hasn't been cleaned out yet. I don't think you can have a bubble like this and clean it out in six months or even a year. It has always taken longer.

Look at homebuilders, for instance. Historically, when an industry goes through a retrenchment like this, you have two or three big companies going bankrupt and most of the companies in the industry losing money for a year or two or three. Well, we haven't gotten anywhere near that in the homebuilding business, so I think that bottom is a long way off. As far as the credit bubble, we have another several months, if not more, of mortgages that are going to reset and people who are going to find themselves with even higher monthly payments. There are many, many more losses to come, most of which we won't know about for weeks or months.

Normally you have markets go down 10% or so every couple of years. We haven't had a 10% correction in the stock market in nearly five years. I don't know if this is the beginning of it, but we've got a lot of corrections coming. It wouldn't surprise me to see a little bounce--say if a central bank cuts rates. But that will just lead to the markets falling further late this year or next year. It would be better for the market, it would be better for investors, and it would be better for the world if we went ahead and cleaned out the system. If they do cut rates in the U.S., it would be pure madness. Because the market's down 7% or 8% from an all-time high? My gosh, what's that going to say about the dollar? What's that going to say to foreign creditors? What's that going to say about inflation? The Federal Reserve was not founded to bail out Bear Stearns or a few hedge funds. It was founded to keep a stable currency and maintain its value.

I have been and continue to be short the investment banks and the commercial banks. If they bounce up, I'll probably short more. I'm certainly not buying anything. The market's only down 8%. I don't consider that a buying opportunity. The things that I'm short, some people probably think are buying opportunities, but I don't. I've been short the banks for close to a year, and for a while it was not fun. But I added to my positions, and now it's a lot of fun. 

Source: CNN, August 2007


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## drillinto (22 August 2007)

A Day In The Life Of: Leading fund manager Anthony Bolton 

The leading fund manager Anthony Bolton has been at the top of his trade since 1979, so the current volatile markets haven't fazed him. 

By Sean Farrell / The Independent, London, UK
18 August 2007 

6.40am 

Anthony Bolton catches the Thursday morning train from Haslemere, Surrey, to Waterloo and arrives at Fidelity International's Cannon Street office in the City of London just before 8am. When the markets open a few minutes later, shares are in free-fall.

Shares have dropped in recent weeks as jitters in the debt market, set off by defaults on US sub-prime mortgages, have spread to equity markets, and Thursday is the worst day so far.

Mr Bolton had been expecting markets to turn at some point because, after a four-year bull run fuelled by cheap debt, he believed investors were failing to differentiate enough between risky and non-risky assets.

"One thing I have learnt in following the market is that it is cyclical and that it doesn't go up for ever or down for ever. When it has been going up steadily for four years, there will be setbacks.

"When everyone is bullish, I like to be more cautious, and vice versa. I was expecting something to come along, and one never knows what the catalyst will be."

At 9am he has a meeting to catch up with Fidelity's chief investment officer, Michael Gordon, and despite the market turmoil his day proceeds as planned.

10am

Mr Bolton has a meeting with a company to quiz its management. These meetings play a key role in his investment decisions, and they are what he spends most of his time doing.

He has run Fidelity's Special Situations fund since 1979, and is stepping down at the end of this year, though he will stay on at Fidelity as a mentor and adviser. In preparation, the fund has already been split in two, with Mr Bolton now focusing on the UK side. Next month he will begin handing over to one of Fidelity's rising stars, Sanjeev Shah, but at the moment Mr Bolton remains in sole charge. Mr Shah is taking an extended break between jobs, which Mr Bolton says was a good move in light of market turbulence.

Mr Bolton's fund is usually weighted towards mid-size companies, but in preparation for more turbulent times he has moved towards large, well-capitalised stocks.

He says: "I want to have a more defensive portfolio than normal. Everything in the market had been valued in line, and if you are having to pay the same for it, why not have the best?"

Other measures available to him include put options and shorting individual stocks to help protect the fund from falling markets. "It's great to have them in this type of climate," he says. "Anyone who runs a mainly long-only fund can't go up when everything is going down, but one can protect oneself [from going down too far]."

11.30am

Mr Bolton has two conference calls with firms he has commissioned to research markets or sectors that he believes look promising. In between, he talks to Fidelity's communications department to make sure clients are being kept informed about what is going on in the market, and he agrees wording for a statement from him that is posted on Fidelity's website.

"My message to individual investors was: Don't panic but be prepared for volatile markets for a while," he says.

With the debt crisis causing chaos in equity markets, the next question is whether the financial turmoil will have a knock-on effect into the wider economy. Mr Bolton is less sanguine than those who believe healthy economic growth around the world will carry on undisturbed.

"My guess is it must have some effect, but how much remains to be seen. People have been saying the real world is fine, economic growth is good and companies are well-financed, but markets move on what the situation will be in six to 12 months' time... Will the world be as good then as it is now?"

3.45pm 

With credit markets at the centre of the financial maelstrom, Mr Bolton says it is important for him to understand as much as possible about what is going on in the debt world. After having lunch at his desk, he has two meetings with investment banks to get their views on the credit markets and the effect they will have on companies. The first is a conference call and the second is a face-to-face meeting including about 15 colleagues from Fidelity.

Banks and other financial services groups exposed to the debt markets have taken a hammering but, having sharply reduced his exposure to financial services before the crisis, Mr Bolton is now starting to think about increasing his holdings.

"For someone like myself, you go in a certain direction and then you swap and go back in another direction. You buy stocks you want on bad days and sell stocks you don't want on good days."

5pm

The FTSE 100 has closed down more than 4 per cent, its biggest drop since 2003, but Mr Bolton was a net buyer on the day, taking the opportunity to pick up shares in companies he believed had been oversold.

Mr Bolton normally leaves the office at about 6pm, but he has a meeting with a contact in London's West End at 5pm, after which he takes the train back from Waterloo to Haslemere.

His daughter Emma is getting married today and Mr Bolton has left the arrangements to his wife, Sarah. Markets may have been in uproar, but as far as the wedding was concerned, he says:"Things seemed to be all quiet - but I was probably well away from the house."


The CV

Name: Anthony Bolton

Position: Managing director and senior portfolio manager, Fidelity International

Education: MA in engineering and business studies from Cambridge University

Career: Investment analyst at Keyser Ullmann (1971-1976), fund manager at Schlesinger Investment Management Services (1976-1979). Joined Fidelity in 1979 as an investment director, becoming a managing director in 1990.


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## drillinto (19 September 2007)

The US FED decided to lower its target for the federal funds rate 50 basis points to 4.75%

How does the S&P500 responds to rate cuts ?

http://bespokeinvest.typepad.com/bespoke/2007/09/fed-easing-cycl.html


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## drillinto (9 March 2008)

Investment Advisers Are Increasingly Pessimistic About US Stocks

Stock sell-off weighs on investment advisers
Schwab survey reveals few bright spots for U.S. market over next six months

By Jonathan Burton, MarketWatch
March 5, 2008

SAN FRANCISCO (MarketWatch) -- Investment advisers are increasingly pessimistic about U.S. stocks, with many expecting further losses as higher inflation, rising unemployment and a weak housing sector take their toll, according to a survey released Wednesday.
The survey of 1,006 financial advisers by brokerage firm Charles Schwab & Co. Inc., taken in late January, showed investment professionals are much gloomier about the U.S. market's near-term prospects than they were in a similar poll in July. 
One-third of investment professionals now see the S&P 500 falling 10% or less in six months, yet a slightly greater percentage sees the index rising by that amount. 
A more bearish 9% are bracing for a sell-off greater than 10%, but the edge goes to bulls who expect a rally of the same proportion. 
Meanwhile, 13% of advisers said stock prices will be unchanged -- results concurrent with the last survey. 

Playing defense
Advisers who were upbeat last July guessed half-right, at least -- the S&P 500 rallied until early October before the credit crunch and other pressing economic concerns hit stocks. 
Those economic issues are top of mind for advisers nowadays as they map a strategy for a challenging market. Schwab's semiannual poll, called the Independent Advisor Outlook Study, was conducted from Jan. 17 to Jan. 28. 
About 80% of respondents see housing prices continuing to soften and the same number forecast higher unemployment in six months, compared to just 35% who did in the survey in July. In addition, a large percentage of advisers expect energy prices to decrease (42% versus 24% percent in July) in coming months. 
Moreover, 67% of advisers say clients are anxious about the impact of the subprime mortgage crisis on their portfolios and 51% say their clients have experienced a loss on property holdings in the last 12 months. 
"We're seeing a certain amount of concern by advisers in the market, more so than we saw last time," said Bernie Clark, a senior vice president at Schwab Institutional. "Clients are saying I'd like to be more conservative as well." 
Accordingly, many advisers are taking a defensive stance with clients' investment portfolios. 
About one-third of advisers say they'll invest more in large-cap U.S. and international stocks. Raising cash is part of the strategy for 28% of respondents, up from 16% in the previous survey, and 27% will boost bond positions, up from 18% last July. 

Seeking returns in health care, Hong Kong 
The study showed that health care is expected to be the top-performing sector in the next six months (at 46%, up from 33% in July), with consumer staples (35% versus 21%) and energy (35%, down from 41%) tied for second place. Utilities, many of which offer a cushion in the form of quarterly cash dividends, was the fourth most-favored sector, with 30% of advisers choosing the category compared with 11% in July. 
Advisers are less sanguine about technology, which 27% see as having the best potential, and materials, where just 12% are so inclined. 
The financial sector, however, staged a comeback, topping the list of 24% of advisers compared with 17% in July. 

Internationally, Hong Kong ranks as the No. 1 developed market for the next six months among 35% of advisers, with Singapore second at 32%. Japan and AUSTRALIA were tied for third at 23%. Enthusiasm for Japanese shares has deteriorated since the July survey, when 40% of advisers thought Japan would be the best-performing developed market. 
Among emerging markets, advisers expect the best results from China and India (tied at 36%), followed by Brazil (33%) and Russia (23%). 
Meanwhile, advisers anticipate investing less in U.S. small-cap stocks and their international counterparts in both developed countries and emerging markets.


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## drillinto (2 April 2008)

Can this rally last ?
By John Browne / Euro Pacific Capital
27 March 2008

http://www.europac.net/externalframeset.asp?from=home&id=12325


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