It’s the hedge funds’ fault.
When you see stock market sell-offs like we’ve seen over the past couple of weeks, you can be pretty sure some hedge funds are getting taken to the cleaners.
The reason is two and twenty.
Hedge fund managers generally take 2% of investment money up front, and then they take 20% of the profits. So all it takes is one good year… and a hedge fund manager can get stinking rich.
Take John Paulson, when he bet against the housing bubble. He made himself a billionaire with one good year when the housing bubble popped. He was touted as a new investing genius, money flooded into his fund, and he plowed it all into gold at the top and banks too soon.
He lost hundreds of millions when gold crashed. And he sold his $2.2 billion position in Bank of America at the post-crisis bottom around $6 at the end of 2011.
His cost average was around $13. He probably lost over $1 billion for his investors.
Then there’s the case of Bill Ackman, who single-handedly drove JC Penny (NYSE: JCP) to the brink of bankruptcy and lost over $500 million for his investors in the process.
Ackman bought a big stake in JC Penny, got on the Board of Directors, and then pushed the old CEO out and brought in Ron Johnson (the man who created the highly successful Apple stores). Johnson then burned a couple billion of JCP’s cash on a failed strategy that crushed the stock, got him fired, and got Ackman kicked off the Board.
Well played, sir. Well played…
Swinging for the Fences
It’s pretty clear to me that guys like Paulson and Ackman swing for the fences a lot. They aren’t content to be Tony Gwyn or Pete Rose. They gotta be Barry Bonds.
When you swing for the fences and connect, sure, it’s a big payday. But you’re gonna strike out a lot…
Given that two-and-twenty compensation, I can see why the hedge fund industry has grown from around $100 billion in 1997 to something like $2.5 trillion today.
I just can’t figure out why anyone would put money in a hedge fund. The performance stinks.
Hedge funds averaged 4% gains in 2012 and 7.4% in 2013. That was after losing 5.25% in 2011. During one of the all-time great bull markets, that’s just terrible.
Hedge funds reportedly lost 1.9% in March alone.
That’s because hedge fund managers all pile into the same momentum stocks and then use margin to boost their returns as they chase the fat payday. It is inevitable that, at some point, these stocks will start selling off.
At that point, managers will be forced to sell to meet margin requirements. Selling begets more selling, and they have no cash to buy when the selling stops.
That’s what happened in March. That’s why biotech and tech stocks got absolutely hammered, yet the S&P 500 only fell 3% from its all-time highs.
One hedge fund, Andor Capital Management, lost 18% in March. 18%!!
How you can lose 18% of your entire fund in one month is beyond me. But I bet they still kept that 2% “management” fee…
Know Thyself…
I have no problem admitting that I am just smart enough to know I’m not that smart. So I do solid research, I use what common sense I’ve been able to gather, and my Wealth Advisory portfolio performed in line with the S&P 500 for 2013 — right around 31%.
And you know what? I’m quite pleased with that. And so are my subscribers. We didn’t get lucky, and we didn’t take risks, either.
Our best performing stocks were Starbucks (+50%), Bank of America (+44%), Banco Santander (+63%), and Boeing (+81), fer cryin’ out loud…
None of these are momentum names. They aren’t going to double or triple this year. But they are going to pay you a nice dividend, probably grow that dividend, and give you solid returns year in and year out
Just Monday, while the Dow was down another 150 points, one of our portfolio stocks was acquired for a very nice premium. One of my readers wrote me to say:
QUESTCOR WAS A HOMERUN!!!
You guys really hit it out the park with this recommendation!!!
I was so impressed with the fundamentals of Questcor Pharmaceuticals that I bought in the $57-$60 range in both my personal brokerage account and 401k; needless to say, you all helped me achieve a nice return on my investment.
Per your recommendation, I also was an investor in Banco Santander, and the return was also sweet. Keep up the great work, and I eagerly look forward to the next “dividend growers” selection.
Thanks for all you do,
Proud Lifetime member of The Wealth Advisory
I can’t tell you The Wealth Advisory portfolio will do another 31% this year. But I feel pretty confident that, once again, we will beat most of the high-paid hedge fund managers out there.
Two of my three recommendations are showing nice gains this year (10% and 25%), and the one loser is down just 2%.
We will be adding dividend-paying oil and natural gas stocks this year. I’m also pretty bullish on Ford (NYSE: F). Car sales were off the charts in March, and Ford has the best growth in China of any car company. And with a forward P/E of 8, it is cheap.
Just thought you’d like to know…
Until next time,
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
