Remember a couple of weeks ago when all the hedgies gathered in Las Vegas to spout their wisdom onto the world at the annual SALT conference? Think back to all the doom and gloom. Sell stocks! Buy bonds! Buy the VIX! Buy gold! Carl Icahn is net short 150%! Negativity was definitely the order of the day.
The trading masses followed these “hedge fund mavens” with the usual fervor. And why not? These hedge fund managers are worth billions and they sure sound smart.
The hedgies’ footprints are easy to spot.
Have a look at the most recent flow of funds:
Out of equities, into bonds…
How about gold? Recall all the family office guys falling all over themselves with bullishness. Smart guys like Druckenmiller proclaiming it their number one holding. Investors piggybacked that call and sent GLD shares outstanding to new highs for this move even as prices were dipping.
And let’s not forget the infamous buy VIX recommendation. The overwhelming bearishness has pushed VXX shares outstanding to all time highs.
It’s tough to fade these hedge fund guys. If you dare suggest they might be wrong, you feel like an idiot as the crowds push their positions higher as the news hits the tape.
Yet let’s have a look at how these calls have done lately. The following charts are the trading activity over the past month.
How about gold? It was universally applauded by the hedgies:
Ooops… Not the best timing. Maybe that’s a one off. How about long VIX?
Nope. That’s dripping lower.
Maybe bonds? After all rates are going down everywhere. Surely US bonds will be higher.
Great. Finally one that hasn’t gone straight down. But have a look at the last couple of weeks. On a short term basis, the trend is definitely lower.
How about the last one? Surely stocks will be down.
The short S&P 500 call was much better than the other three. In fact it even had a profitable P&L for a bit. Unfortunately it has pushed back higher.
I created a SALT recommendation doomer portfolio of equal parts; long gold, long VXX, long bonds and short S&P 500. Here is what that looks like:
I know this is sacrilege to suggest, but I think the pain from the hedge fund unwind has just started. I know all the hedgies’ arguments sound great, yet when they all agree, it almost always means you should walk in the other direction. Quickly.
As I was researching this piece, I stumbled across a report about a CIC (Chinese Investment Corp) executive who lambasted hedge funds for their herd behaviour. The ironic part is that she did so at the same SALT conference where they were agreeing with each other about the coming apocalypse. From Bloomberg:
China Investment Corp.’s Roslyn Zhang, a managing director at the nation’s sovereign wealth fund, criticized hedge fund managers for everything from herding into bets against the yuan to lacking skills to make money.
“Over the last couple years I’m kind of disappointed by the performance,” she said Wednesday at the SkyBridge Alternatives Conference in Las Vegas. Zhang, who oversees fixed-income and absolute-return investments, said CIC is a “sizable” investor in the industry.
Chinese individual investors have been faulted for crowding into markets and driving up prices, but hedge fund managers are equally to blame for their “herd mentality,” Zhang said.
“All kinds of strategies, they run different strategies, they all have the same trade,” Zhang said.
I make all sorts of mistakes all the time. As Jackson Browne sings, “don’t remind me of my failures, I have not forgotten them.” But following these hedgies in their all too clever strategies is not one of them. Don’t be afraid to fade them.
I can’t remember if it was Bobby Orr or Wayne Gretzky, but once at an away game a fan held up a big sign that read: “Hit Him. He is not God.”
Fade the hedgies. They are not gods. Just look at how they drive.
Thanks for reading,