The BoomBust vs the Two and Twenty Crowd: An Anecdotal Comparison

Reggie Middleton's picture

Yesterday, I sat through a conference sponsored by Andrew Schneider’s on
starting and marketing hedge funds. As I sat through the various
presentations focusing on transparency, performance results, etc., I
though to myself, ” You know Reg, you probably rank in the top echelon
of these guys in terms of absolute performance, and in terms of
transparency you actually publish what you do on the web for all to
see.” Shortly thereafter I glimpsed at the latest issue of HedgeWeekly2010_No21
and decided to compare my blog results with that of the top funds.

For 2008

fund 2008

As you can see, many funds were hurt in 2008, but there were some who
did quite well, with the top of the pile pulling just over 72%. That’s
pretty damn good! Below is an excerpt from the BoomBustBlog post “Updated 2008 performance”:

Below are the raw, absolute returns for
my proprietary account. These returns are calculated by calculating the
difference between my starting point and ending point, and is the
number that I use for comparison (since it is the number that shows how
much money I actually made).

gross avg. return
S&P return
all 2007 (6 months)
42.93% -8.23%
Q1 2008
50.03% 0.68%
Q2 2008
53.46% -8.66%
Q3 2008
32.40% -8.30%
all 2008
196.11% -8.69%
481.04% -35.72%
absolute return

to S&P 500

The numbers below are average monthly
numbers. They are posted for the sake of uniform comparison.

Click to enlarge to print quality


As can be plainly seen, we have
absolutely trounced all of the hedge fund indices, both for the year and
since inception.

Click to enlarge to print quality


2009 saw my performance dip to -39% for the year (see Year
End Note to BoomBustBlog Readers and Subscribers)
as compared to
the best of breed in funds of 229%. 2009 held my best quarter ever, and
my worst 3 quarters ever, plus a father diagnosed with cancer which
(admittedly) thoroughly distracted me.

This year was a disaster for many (if not most funds) and last month
was pretty bad for funds in general, with most big funds posting
negative numbers. 2010 saw the best of breed at 37% and many deep in
the negative. It should become apparent to many that most funds are
offering leveraged beta that simply amplifies the returns of the broad
market, in lieu of actual alpha and/or uncorrelated diversification.
In addition, it is obvious that very few hedge funds actually hedge!
My subscribers and I have done very well over this time period, showing
both alpha and a true lack of correlation.  As a matter of fact, the
research returns, if traded appropriately returned multiples of many of
the top funds in the report above for both the month and the year. Yes,
it looks as if I was right and simply had to ride out the bear market
rally. What tripped many firms up was riding that bear market rally
spike as if it was truly a fundamental bull market instead of the
central bank and government engineered ponzi scheme that it actually
was. The gist of the blog research returns for the year stemmed from the
Pan-European Sovereign Debt Crisis thesis that I started in January of
2009 and formalized in January of this year. See The
Coming (now arrived) Pan-European (soon to be global) Sovereign Debt
Crisis for details
. I have now started a bankruptcy
search to find those Ponzi scheme bull benefactors that will collapse in
the coming liquidity crunch.

Major Trades for the year…

In a recent Bloomberg article, it was pointed out how many funds were
caught with their pants down by the sovereign debt crisis (Boaz
Weinstein Profits From Credit Market Distress Handing Paulson Losses
The crisis was (and still is) an opportunity for significant gains.

I stopped posting blog and personal numbers as of last year due to
the work involved and the consequences of publishing personal
information. Readers can easily determine the success of this month,
quarter and year by going through the historical research. Hint: the
blog was probably on top of the best of breed performance list once
again. Here are some examples of…

400% plus on Greece and the Greek banks

Greece cds spreads

Yeah, that’s right! Listening to the former EC President would have
gotten you on the wrong side of the TRIPLING of CDS spreads. Not to fret
though, the ECB allocated 1 trillion dollars to alleviate this
problem, and now spreads have just more than doubled, but are still
rising. And for those of you who believed me over Prodi (I apologize
again for the “liar, liar pants on fire” bit, though)…

nbg - may 15 - June 8th

500 to 600% on Spain and Spanish banks

std opt. research time purchase

Due to the subscription nature of the content, I can’t reveal much
else, but we did well on German banks, US asset managers and the current
whipping boy of the media, Goldman Sachs (see The
Brown Stinky Stuff is Splattering Off the Fan Blades and Landing on
That Shiny New Building on the West Side Highway):

How Many Banks and Analysts Were Bearish On Goldman Before Today?

and Is
the Threat to the Banks Over? Implied Volatility Says So.
may ask why I’m being so generous in regards to the extent of this
quarter’s earning review. Well… A European institutional  subscriber
recently stated he was able to get the same content found in my
offerings from his investment bank research. Whaaatt!!! I told him that
he probably wasn’t reading the subscriber content. He wrote back
stating that that wasn’t the case. He also said that he doesn’t see any
fundamental analysis  in the work. I nearly fell out of my chair.
Hmmmm. Well, on the day that Goldman executives are due to testify
before the Senate, let’s review the opinions of the ONLY entity that I
know of that had a bearish perspective (rightfully and profitably so –
twice and counting) on Goldman Sachs. If I am not mistaken, nearly
every bank and analyst (save Meredith Whitney, you know I love you :mrgreen: ) had a strong buy or hold on this company both back
in 2008 and last month. So much for relying on that name brand
investment bank research.  For any others who may hold the sell side
propaganda machine in such high regard (or is it me in such low
regard), might I recommend the following two posts before we move on: For
Those Who Chose Not To Heed My Warning About Buying Products From
Name Brand Wall Street Banks,
vs. Broker, whom do you trust!”

Map those base Jumping, spilunking, sky diving drops in Goldman's<br />
  share price with the research linked below. This company is very, very<br />
   risky and the risks are there for all to see. All you have to do is<br />
look  for them!!!

Reconciling the 3 down quarters of 2009

Again, excerpted from Year
End Note to BoomBustBlog Readers and Subscribers:

…I tried to put it in perspective in
my year end note to subscribers and readers, though. A short term
outlook simply will not work with my investment style. I actually had
hedge fund structures and documents drawn up in 2007, and those
structures had a 2 year lock up period. It is impossible for me to
control securities prices (I’m not Goldman), hence I need time for  my
theses, to run their course to be proven right or wrong. 3 quarters
going against you may hurt, but it may happen. I can handle it,
particular with 36 quarters running in my favor… Reference this excerpt
from the afore-linked blog post:

Click any graphic to enlarge.


I need to run a delicate balance
here, for I definitely don’t want to understate how disappointed I am
in 2009’s performance, but at the same time it is pertinent that a
realistic view is attained. I don’t want to flagellate myself, yet
don’t want to be a braggart as well.

It has been 2 to 3 quarters of what I
consider under-performance thus far, and I see the fundamentals coming
to the fore in a very big way for the year 2010. To recap, I started
the blog 9/07, and my personal account return for that quarter was
about 14%, roughly annualized at 55%. The following year saw a time
weighted return of about 450%, and the first quarter of 2009 saw a rise
of around 50%, but I finished the year down 39%. Again, the last three
quarters have been very disappointing to me as I can imagine it has
been for others who are bearish, but I do want my subscribers and
readers to know that this blog’s (and particularly, my personal) record
bests the records of the vast majority of market participants – and by
a very wide margin.  We are talking in the range of about 150% annual
blended return for my own performance. I had 7 winning quarters out of
10, which although pales to  Goldman Sachs’ statistically impossible
97% win ratio (again, mine is unpowered by government hook-ups and
multi-billion dollar subsidies, but I am working on that), should be
commendable by most but is still quite disappointing to me. I need to
hold myself to a very high bar.

The significant drawdown from the
second and third quarters of this year stemmed from the fact that I
waited too long to adopt a market neutral stance. This fault has been
corrected and we plan to be well protected against extended movements
against the fundamentals in the future through going long volatility
via market neutral strategies, if the events call for it. The market
neutral strategies allowed me to trade the volatility in
lieu of the fundamentals and still benefit from the potential of the
fundamental research bearing fruit. See the researched strategy analysis
released for subscribers at the end of this blog post that proved
profitable in many of the preferred cases.

Although one could theorize that I
could have knocked it out of the park this year if I went net long, I
would not have done so. I am a fundamental investor and there were,
literally, absolutely no fundamental nor macro reasons to be long most
stocks, and the only reason to buy stocks was because the price of
stocks were going up. – that in and of itself should give the
fundamental investor pause. Now, this has been a glorious three
quarters for the momentum investor and swing trader, both of whom
relish in chasing trends, but the fundamental investor had to take a
back seat as profits and losses, assets and liabilities, balance sheet
strengths and insolvencies became inverse to share price performance in
the investment space. The weakest companies literally gained the most
while the strongest companies stood relatively motionless. I suspect
the shenanigans played by the “powers that be” will wither in 2010. See
the following articles for more on the possibility of significant
manipulation that postponed the inevitable crash in the markets. Even
for the optimistic, this must spur some thought:

If the pre-ordained crash is not the
case, I have polished the market neutral strategies so as to attempt to
prevent myself and my subscribers from being left out, or even worse,
hurt by extreme market rallies that fly in the face of the fundamentals
for an extended period of time. In essences, no more significant
drawdowns unless I am literally wrong, this time around. Remember, the
price of a stock’s movement in the short term does nothing to dictate
whether one’s thesis is right or wrong. I, for one, believe that
fundamental investors need to stick to their knitting and not become
momentum chasers when the breeze blows in a different direction. This
was painful for three quarters of this year, for the bulk of the year
was a trader’s market.

For the record, I would not
have taken the risk of forging ahead after the 2nd quarter
if I was managing outside money. The reason? I easily made my year’s
compensation, being up about 50% in Q1-09. Why jeopardize the 10% of
that gain I would have received on a 2 and 20 basis. If I was running
$100 million dollars, I would have been able to pocket a $10 million
incentive fee plus the AUM fee of 2%, which would have doubled. Better
to sit in cash and collect me fees. Now, since I didn’t have the
leverage of other’s money to incentivize me to do so, I plowed forward.
This was actually a time when greed would have been good.

For those who do not follow me,
please refer to The Great Global Macro Experiment, Revisited
for a glimpse into my investment style. Reference the graph from this
treatise below, and compare it to the actual graph of prices below

Understanding my proprietary
investment style


My 10 Year Track Record

Case Shiller index has been amplified
by a factor of 10x for the sake of comparison to the S&P 500.


In the spring of 2004, I sensed the
market getting much too overheated with the hurdle rate for risk
adjusted returns based on rental income becoming harder and harder to
attain upon property acquisition (which is where the money was made, in
my opinion), hence I started putting buildings up for sale in a very
heated market. I sold off the bulk of the properties between the end of
2004 and the 3rd quarter of 2005, with a final listing in the 1st
quarter of 2006. As you can see from the chart above, the NY market
peaked early 2006. My timing was apparently on point. To be honest, it
really had nothing to do with timing, and everything to do with the
fundamentals. You see, although rents and incomes in the areas that I
invested in had increased dramatically due to gentrification and a
bubblicious economy, they were increasing nowhere near enough to
justify the price spikes that were occurring. I would have loved to
have considered myself a really smart guy, which is why it appeared I
was making money at a clip that easily bested the broad equity market
and many other real estate investors, but the truth of the matter was
the market was simply in a over-heated bubble, and I was fully aware of
it. Sensing the top somewhere proximal, I decided it was time to go. I
believe that all who were in the real estate game at that time and had
access to a calculator or a spreadsheet knew the jig would be up
relatively soon. It’s just that they wanted to pick up every single
dime off of the table. I am of the mindset that it is always best to
leave a little money on the table. Don’t be greedy. Often, that last
dime costs about $1.20 to pick up!!!

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Zerozen's picture

Very interesting Reggie. Always like reading your stuff. Just out of curiosity, I get the impression you actually put your money where your mouth was? Are your investments up 400% or so over the last decade, or was it just your recommendations?

Reggie Middleton's picture

I started publishing my opinion about 3years ago. My personal numbers going back 10 years are pretty high. I haven't run the numbers but I am sure that the cumulative number is significantly higher than that. I do eat my own dog food, but I am a poor man as well so I need big returns just to eat.
in addition, you know thebsaying, past returns are not necessarily indicative of future results.