Investment

A (deep) contrarian view: Buy the basket of top holdings in US Hedge Funds

by Angel Sanz

BUY THE BASKET OF TOP HOLDINGS IN US HEDGE FUNDS

CURRENT SITUATION

Source: Bloomberg

2016 has been a very tough year for active managers, especially in the equity US market (both hedge funds and long only funds). From 31-Dec-15 to 30-April-16, the SP500 NTR has gained 1.73% whereas the Tremont Long-Short Index has dropped 4.52%. Several reasons may explain this:

• Metals and oil prices “unexpectedly” rebounded very quickly and the basic resources companies outperformed dramatically the market. Hedge fund managers were underexposed or short these sectors.
• World economic growth data disappointed again, long-term rates dropped and as a consequence the low volatility interest rate sensitive sectors (consumer staples, utilities, telco services) also outperformed. Hedge fund managers were underexposed or short these sectors.
• Momentum factor has not performed this year, and hedge funds are typically momentum oriented.

On a quarterly basis, Goldman Sachs update a list with the 50 stocks that most frequently appear among the largest 10 holdings of hedge funds. This list is called GSTHHVIP, from now on, the BASKET. In the graph above you can see the relative performance of the BASKET versus the S&P500 Net Total Return. This has been the second worst period for the BASKET (relative to the index) for the last 10 years with a relative underperformance of 11.5% during the last 11 months.

EXPECTATIONS

The “unexpected” sector rotation that took place during the first 5 months of the year has started to revert and fundamentals are becoming (again) more important than technical factors.
Typical low growth or very cyclical companies are starting to underperform whereas more stable or growth companies like information technology or health care have started to outperform.
Correlation between stocks and correlation between sectors have decreased to lower levels, typical symptoms of a “more rational” market.
Hedge funds, though expensive sometimes, are still the most talented people in the industry and after periods of underperformance they tend to recover (See chart).
From the sector point of view the basket is overweighting Consumer Discretionary and Health Care companies which is in line with our market view.
From the technical point of view, the MACD signal (indicates changes in a security’s underlying price trend, so you can identify turning points) is giving a very strong indication to buy the BASKET index relative to the SP500

RECOMMENDATION

Buy the BASKET and short the SP500. This trade has a historical volatility of about 6%, so it can be implemented with 2 times leverage. Historically, the beta of this basket has been 0.13.
Time horizon for this trade: In the past, it took between 3 months to 9 months to grasp the profits of this trade.
Why do not make a trade long the HF top holdings and short the HF less owned stocks? Because the least owned stocks have outperformed the market in the past (surprise, surprise!)
Why do not make a trade similar to this with the overweight positions of the mutual fund industry? Because the data is only 4 years old and the relative performance has historically be less important.

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Antonio Mira
CHIEF FINANCIAL OFFICER, MEMBER OF THE EXECUTIVE COMMITTEE

Antonio Mira joined NS Partners in 2006 as Group Chief Financial Officer. He heads the corporate functions and is involved in coordinating and implementing the decisions of the Executive Committee.
An experienced bank auditor, Antonio started his career in 1995 with Arthur Andersen, where he worked for some 7 years before joining Ernst & Young in 2002 as a Senior Manager.
Antonio is a Swiss chartered accountant and a Business graduate of Lausanne University (HEC).

Sébastien Poiret
DEPUTY HEAD OF WEALTH MANAGEMENT

Sébastien Poiret joined NS Partners in 2008 and manages funds of hedge funds and private client mandates. He also oversees the development of the Group’s offices in Mauritius.

Prior to joining NS Partners, he served as a Trader, Head of Manager research and Portfolio Manager in the USA and Switzerland for a single hedge fund (1998-2004) and for Optimal (2004-2008), Grupo Santander’s fund-of-hedge funds operations.

Sébastien holds a Bachelor’s degree in Corporate Finance from the ESPEME Business School (EDHEC Group) and an MBA in Finance and Economics from the Institute of Business Administration, both in Nice.

Abir Oreibi
BOARD DIRECTOR

Abir Oreibi joined the Board of the NS Partners Group in 2018, where she brings her truly international perspective and rich experience.
Among many other ventures, Abir set up Alibaba.com’s first European office. After living and working in Shanghai, Hong Kong, Bangkok and London, she now lives in Geneva, where she is CEO of Lift Events, an organization that identifies technology trends, their business and social impact through the organization of events and open innovation programs. Issues related to the challenges and opportunities created by new technologies as well as the strategic responses from organizations are at the heart of Lift’s activities.
Abir holds a BA in Political Sciences from the University of Geneva. She is an investor, and member of advisory and innovation boards.

Romain Pidoux, CAIA

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Romain Pidoux joined NS Partners in 2011 and heads the Group’s Risk Management.
He started his financial career in 2005 as Head of Quantitative Analysis for a Swiss Family Office, selecting funds and managing portfolio allocation. In 2008, he switched to the alternative world and joined Peak Partners as hedge funds analyst.
He is a Chartered Alternative Investment Analyst (CAIA) and holds a Master’s degree in international relations from the Graduate Institute of International Studies at Geneva University.

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