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Hot Hedge Fund Trades of 2010?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Tim Paradis of the Associated Press reports that the stock rally at start of 2010 augurs well -- maybe. An unexpectedly strong report on manufacturing activity Monday bolstered confidence that US factories will help sustain an economic recovery:
The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index read 55.9 in December after 53.6 in November. A reading above 50 indicates growth.
That is the fifth straight month of expansion and the highest reading for the index since April 2006. Analysts polled by Thomson Reuters had expected a reading of 54.3.
A separate report on construction spending sounded a more cautionary note. Construction activity fell in November for a seventh straight month as spending on both residential and commercial projects declined. The 0.6 per cent drop was bigger than the 0.4 per cent decline that economists had been expecting.
Still, the ISM report said new orders, a signal of future production, jumped last month to 65.5 from 60.3 in November. Indexes measuring production and employment also rose.
The ISM's manufacturing index first showed growth in August after 18 months of contraction. The index's peak in the last decade was 61.4 in May 2004. It bottomed at 32.9 in the midst of the recession in December 2008.
"Overall, this was a very strong report, and it suggests that the recovery in the U.S. manufacturing sector is gaining further traction," Millan Mulraine, an economist at TD Securities, wrote in a note to clients.
Recall what I went over in my last post on Outlook 2010. Get ready for a series of better-than expected economic reports out of the US, the next one being the jobs report on Friday.
So what about the stock market? Will it skyrocket up from here? I don't get excited by one strong day, especially this early in January. What I found interesting today was a series of interviews on Yahoo teck ticker focusing on hot hedge fund trades for 2010.
Start by listening to Lessons of the Hot Hedge Fund Trades of 2010: The Bull Market May Not Last Long:
2010 is off to a bullish start as the Dow posts a triple digit gain halfway through the first trading day of the New Year.
The question is, can the bulls continue to lead the charge in 2010?
Gregory Zuckerman, senior writer at the Wall Street Journal, who tracks hedge funds says many of the best managers remain long. "The smart money is fully invested and even leveraging up right now." But Zuckerman also warns, "they could turn on a dime."
Zuckerman points out several current popular trades could make the rich even richer but don't necessarily point to bullish returns for the rest of us.
- The Bet Against Japanese Bonds. As Henry reminds us in the clip, many an investor has been burnt betting on higher interest rates in Japan. Why will this trade finally work? The argument is that as the population gets older, there will be less domestic demand for bonds. Zuckerman notes, "already the biggest pension fund in Japan, which is the largest in the world, has said it may be a net seller as opposed to a buyer." Good news for those betting against Japan (Kyle Bass and David Einhorn) but potentially bad news for world markets as the effects ripple across the global debt markets.
- The PIIGS Trade. PIIGS Stands for Portugal, Ireland, Italy, Greece and Spain. It's another play against sovereign debt. We've already seen CDS prices rise on Greek debt as they tackle rising budgetary problems. The PIIGS trade is a belief that Greece is the first domino to fall in Europe. As Zuckerman describes it, hedges funds believe "2010 will be the year where we'll have real big issues in sovereign debt."
- Buy Gold. There seems to be some disagreement within the hedge fund community over this trade. John Paulson and David Einhorn are bullish. Both jumped on the bandwagon last year with solid results. Paulson, who famously made billions betting against the housing market in 2008 and then turned bullish with outstanding success in 2009, looks to increase his bet on gold in 2010. However, David Tepper, who's bullish bet on banks in 2009 netted his fund $7 billion, and Bill Ackman, the noted value investor, either don't believe in gold or see other ways to beat against a falling U.S. dollar.
The key in all this is that hedge funds are now "leveraging up", trying to squeeze out as much yield as possible on their trades. This means that the rally we saw since last March can extend further as hedge funds lever up.
Of course, Mr. Zuckerman is right, things can turn on a dime at the first sign of trouble. As far as hedge funds trading the hot gold trade, I happen to agree with David Tepper and Bill Ackman who don't believe in gold.
Again, focus on what the top hedge funds and institutional funds are buying, not what they're touting:
Brevan Howard Asset Management
Bridgewater Associates
Diamondback Capital Management
Grantham Mayo Van Otterloo and Co
JP Morgan Chase Co
Legg Mason Capital Management
Pershing Square Capital Management
Renaissance Technologies Corp.
Spinnaker Capital LP
Sprott Asset Management
Tudor Investment Corp.
Viking Global Investors LP
Data from MFFAIS.com is lagged but pay close attention to new holdings and where they're adding to their positions. There are many excellent ideas to trade, so do your own proper research and make a list of names from various sectors.
Finally, Reuters reports that JAL shares up on employee approval for pension cuts. It's sad to see shares of a company rising after employees approve pension cuts. Welcome to the New Normal.
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Leo, your contributions are awesome. thank you.
Love it when they flag my comments as junk! Must be driving the hedgies crazy...lol!
Nice report Leo.
Thanks, I added Diamondback Capital Management to the list.
"John Paulson and David Einhorn are bullish. Both jumped on
the [GOLD] bandwagon last year with solid results."
Just because Paulson announced he was into Gold doesn't mean
thats what he's really up to. Buffet is notorious for saying something
to create a market to sell into(Silver early 08, for example), why wouldn't
Paulson do the same?
Leo;
Just in case you missed it on the other thread.
Mais Cher' wat dis dat "Zero Hedgie"??
Anyone that didn't heed Bill Bonner in 2000 and didn't start buying gold at $280 on the dips was a fool. Anyone who did wether they believed in gold or not, is set...period. He also said sell equities into the rallies. Believers are emotional losers when it comes to trading. Start with the three P's on your list and see what the funds are selling.
Read my Outlook 2010 carefully to understand why I'm not so hot on gold. And why the three Ps? I happen to prefer Citadel over all the rest of them and think Ken Griffin is set to outperform them all. That is my intuition. Paulson had a spectacular 2008. But in the environment we are heading in, I am more confident with large multi-strategy shops like SAC, Citadel and Farallon. Also, RenTech is hungry to reestablish its place as the number one hedge fund. DE Shaw, Soros and Tudor are excellent hedge funds too. There are many top funds in this list and they're not all hedge funds!
***Note: I added SAC Capital and TPG Axon to the list. Might add a few others later.
And they are selling what?!??
Ummm, would you like me to hold your hand too???? Check the red for selling and understand that hedge fund portfolios turn over a lot throughout the year.
Leo,
"The key in all this is that hedge funds are now "leveraging up", trying to squeeze out as much yield as possible on their trades. This means that the rally we saw since last March can extend further as hedge funds lever up."
Do I read this properly as you warning the common man to stay out to not get caught in the next deleveraging cycle?
Not necessarily....they might be levering up because they feel confident about their stock selections or because they think Bubble Ben will stay on the sidelines throughout 2010. Of course, as the economic recovery becomes stronger, expectations on rate increases will shift, and hedge funds will reign in risk. Way too early to discuss the next deleveraging cycle.