Despite their reputation for their investment prowess, hedge funds haven’t exactly set the financial world on fire over the past five years. As a recent Bloomberg article pointed out, hedge funds have underperformed the S&P 500 by 97 percentage points since the end of 2008.
Warren Buffett agrees.
In 2008, The “Oracle of Omaha” made a $1-million bet against the industry with hedge fund Protégé Partners. The terms were straightforward. Protégé Partners picked a group of hedge funds that it expected to outperform an S&P 500 index fund over the course of 10 years. According to Fortune, thanks to the huge run-up in the S&P 500 in the last few years, hedge funds are already getting trounced. And barring another market meltdown like 2008, they have little hope of catching up.
There are a couple of reasons for hedge funds’ poor showing.
First, if you’re focused on managing your downside, it’s hard to beat a good old-fashioned bull market. There are times — and the last five years is one of them — when being “dumb and long” is the single best strategy.
Second, to talk about an “average” hedge fund is misleading. There are a wide range of arcane hedge-fund strategies, each one looking to slice and dice the financial markets in a different way. Global macro funds bet on movements in interest rate currencies and commodities. Long-short funds buy good stocks and sell bad ones. Activist hedge funds — the strategy that made Carl Icahn wealthier than George Soros — generate big gains by pressuring companies to get their financial acts together.
Different strategies yield different results.
A “New” Hedge-Fund Strategy
Hedge funds account for 15% of my firm Global Guru Capital’s “Ivy Plus” Investment Program, which tracks the asset allocation of the Harvard University endowment. And although the program has performed as advertised, it has been no thanks to stellar performance by hedge fund index-tracking exchange-traded funds (ETF).
That’s why, in 2014, I swapped some of the “Ivy Plus” Investment Program’s index-tracking ETFs for the Global X Guru Index ETF (GURU), which tracks the favorite stock picks of the biggest hedge fund managers. GURU also is a current recommendation in my monthly newsletter, The Alpha Investor Letter.
All hedge funds with more than $100 million in U.S. equity investments are required to publish their holdings in a publicly available document called the 13F every quarter.
The Global X Guru Index ETF (GURU) uses a proprietary methodology to compile the highest conviction ideas from a select pool of hedge funds where the 13F information is most valuable. It then invests in these ideas through the transparent, cost-efficient and easily accessible format of an ETF. The strategy rose 47.27% in 2013.
Critics suggest that 13F data is outdated, by definition, and offers investors no edge. That may be so. But cutting out the high fees of hedge funds, while getting some of their highest conviction ideas, is also a big edge. Although hindsight is always 20:20, take a look at the one-year charts of top three current stock picks in Global X Guru Index ETF (GURU) and decide for yourself.
1. NXP Semiconductors NV (NXPI)
Netherlands-based NXP Semiconductors invents, designs and manufactures high-performance, mixed-signal solutions for radio frequency, analog, power management, interface, security and digital processing. It counts Apple (AAPL) as one of its biggest customers.
NVXP has gained over 76% over the past 12 months, and it is up over 20% in 2014. NXPI is currently trading at just 11.77 times forward earnings, while the stock is expected to grow by nearly 36% per year over the next five years. That puts its Price Earnings to Growth (PEG) ratio at a rock bottom 0.38., confirming that it trades at a very steep discount to its growth rate. Note the stock has a beta of 2.55, so it is far more volatile than the market.
2. Micron Technology Inc. (MU)
Micron Technology (MU) is also in the semiconductor space, with its main business products including DRAM, NAND flash and NOR flash memory. Its customers include companies in the computing, consumer, networking and automotive, industrial, embedded and mobile industries.
Micron has gained over 200% in the past 12 months, and it is up over 13% in 2014. Micron still looks cheap with the stock currently trading at a forward price-to-earnings (P/E) ratio of only 9.74, compared to 12.53 for Sandisk. The company expects further earnings growth going forward after its strategic acquisition of Elpida. The stock has a beta of 1.86.
3. Thermo Fisher Scientific, Inc. (TMO)
Thermo Fisher Scientific (TMO) provides analytical instruments, equipment, reagents and consumables, software and services for research, manufacture, analysis, discovery and diagnostics.
Thermo Fisher has gained over 69% in the past 12 months, and it is up over 10% in 2014. The Federal Trade Commission recently announced approval of TMO’s $13.6 billion acquisition of Life Technologies Corp (LIFE). The company also announced earnings of 1.43 cents per share (EPS) for the last quarter, beating consensus estimates. By taking into account of the integration Life Technologies (LIFE) business in 2014, Thermo issued 2014 guidance for both revenues and earnings guidance that are well above current market expectations.
Goldman Sachs recently upgraded Thermo Fisher based on better-than-expected organic growth and earnings, improving end-markets, and valuation, and raised its price target to $153 from $114 — about 24% above its current price. Thermo Fisher is also a current recommendation in my trading service Bull Market Alert.
In case you missed it, I encourage you to read my e-letter column from last week about how to profit from the surprisingly red hot initial public offering market. I also invite you to comment in the space provided below.