When you choose a hedge fund you do more than choose a firm with a solid history, you choose a professional broker with an impressive resume who will wine and dine you and take all of your investment concerns away. “You’re in good hands,” they’ll assure you. And you’ll believe them.
Alas, after analyzing a broad sample of 1,300 funds-of-funds from 1994 through 2009, Benoit Dewaele, Hugues Pirotte, Nils Tuchschmid and Erik Wallerstein published their disturbing findings.
Harvard MBAs vs. Monkeys
Their goal was to find out just how much value brokers actually created. The found, when you strip out the firms’ fees, just 22% delivered any “alpha,” or risk-adjusted investment gains, at all.
Better yet, they posed this question: How many firms added value (risk-adjusted returns above those of the underlying hedge-fund indices) by picking the right managers, and avoiding the wrong ones?
Answer: After deducting fees, only 5.7%.
This finding has led Brett Arends of MarketWatch to conclude a bunch of monkeys stolen from a zoo would do a better job than MBAs from Harvard.
“You couldn’t make it up. Nearly half of all Fund of Hedge Fund managers, the academics report, delivered “negative after-fees alpha when benchmarked against the hedge-fund indices.” In other words they couldn’t even keep up with the index.”
More Findings
You’ll notice the findings were calculated after deducting fees. That’s because the typically high fees associated with funds of hedge funds often cancel out out any added value.
Arends reports “As Ilia Dichev at Emory University and Gwen Yu at Harvard found, after looking at hedge-fund performances over the past 30 years, the average has done worse than a stock-market index fund — and not much better than a simple basket of Treasury bonds.”
Not very encouraging, is it?
“No wonder the monkeys in the zoo always seem to be laughing,” says Arends. “They’re looking at us.”
Business Section: Investing Ideas
OK, so there’s some evidence to suggest that hedge funds, as a group, don’t always beat the market.
So why don’t we take this conclusion and turn it upside down: If hedge funds are selling a certain stock, is that a signal to buy? If you’re a skeptic, you might view hedge fund trades as a contrarian signal.
To help you explore the topic, we collected data on about 200 stocks that have seen significant institutional selling during the last few months.
In addition, we collected data on insider buying, and identified which of those stocks have been boosted by bullish insider sentiment.
Hedge funds seem to think these stocks are in trouble, but insider executives think this pessimism is misplaced. Considering the research mentioned above, whose side are you on?
Use the Turbo Chart to Compare the Performance of the First Two Companies in the List to the S&P 500:
List sorted by relative size of institutional selling.
1. The Talbots Inc. (TLB, Earnings, Analysts, Financials): Operates as a specialty retailer and direct marketer of women’s apparel, accessories, and shoes in the United States and Canada. Institutional investors were net sellers of 17.2M shares, which represents about 30.16% of the company’s float of 57.02M shares. Over the last six months, insiders were net buyers of 32,000 shares, which represents about 0.06% of the company’s 57.02M share float.
2. Primo Water Corporation (PRMW, Earnings, Analysts, Financials): Provides multi-gallon purified bottled water, self-serve filtered drinking water, and water dispensers in the United States and Canada. Institutional investors were net sellers of 6.0M shares, which represents about 28.83% of the company’s float of 20.81M shares. Over the last six months, insiders were net buyers of 562,009 shares, which represents about 2.7% of the company’s 20.81M share float.
3. Exterran Holdings, Inc. (EXH, Earnings, Analysts, Financials): Provides operations, maintenance, service, and equipment for oil and natural gas industry. Institutional investors were net sellers of 10.3M shares, which represents about 16.77% of the company’s float of 61.43M shares. Over the last six months, insiders were net buyers of 29,500 shares, which represents about 0.05% of the company’s 61.43M share float.
4. Nanosphere, Inc. (NSPH, Earnings, Analysts, Financials): Develops, manufactures, and markets a molecular diagnostics platform, the Verigene System that enables genomic and protein testing on a single platform. Institutional investors were net sellers of 5.5M shares, which represents about 16.50% of the company’s float of 33.34M shares. Over the last six months, insiders were net buyers of 428,183 shares, which represents about 1.28% of the company’s 33.34M share float.
5. Blyth, Inc. (BTH, Earnings, Analysts, Financials): Operates as a multi-channel company in the home fragrance and decorative accessories industry. Institutional investors were net sellers of 692.5K shares, which represents about 14.99% of the company’s float of 4.62M shares. Over the last six months, insiders were net buyers of 399,000 shares, which represents about 8.64% of the company’s 4.62M share float.
6. Gentiva Health Services Inc. (GTIV, Earnings, Analysts, Financials): Provides home health services and hospice care in the United States. Institutional investors were net sellers of 4.3M shares, which represents about 14.95% of the company’s float of 28.76M shares. Over the last six months, insiders were net buyers of 336,622 shares, which represents about 1.17% of the company’s 28.76M share float.
7. Clearwire Corporation (CLWR, Earnings, Analysts, Financials): Provides wireless broadband services. Institutional investors were net sellers of 26.8M shares, which represents about 14.57% of the company’s float of 183.95M shares. Over the last six months, insiders were net buyers of 2,798,989 shares, which represents about 1.52% of the company’s 183.95M share float.
8. Gaylord Entertainment Co. (GET, Earnings, Analysts, Financials): Operates as a diversified hospitality and entertainment company in the United States. Institutional investors were net sellers of 5.3M shares, which represents about 14.56% of the company’s float of 36.41M shares. Over the last six months, insiders were net buyers of 4,266,250 shares, which represents about 11.72% of the company’s 36.41M share float.
9. RealD Inc. (RLD, Earnings, Analysts, Financials): Licenses stereoscopic three-dimensional or 3D technologies internationally. Institutional investors were net sellers of 6.2M shares, which represents about 14.44% of the company’s float of 42.94M shares. Over the last six months, insiders were net buyers of 115,315 shares, which represents about 0.27% of the company’s 42.94M share float.
10. Skilled Healthcare Group, Inc. (SKH, Earnings, Analysts, Financials): Operates skilled nursing facilities, assisted living facilities, hospices, home health providers, and a rehabilitation therapy business. Institutional investors were net sellers of 2.9M shares, which represents about 14.36% of the company’s float of 20.20M shares. Over the last six months, insiders were net buyers of 261,800 shares, which represents about 1.3% of the company’s 20.20M share float.
(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA)
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Analyze These Ideas: Getting Started
- Read descriptions for all companies mentioned
- Access a performance overview for all stocks in the list
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Dig Deeper: Access Company Snapshots, Charts, Filings
- The Talbots Inc. (TLB, Chart, Download SEC Filings)
- Primo Water Corporation (PRMW, Chart, Download SEC Filings)
- Exterran Holdings, Inc. (EXH, Chart, Download SEC Filings)
- Nanosphere, Inc. (NSPH, Chart, Download SEC Filings)
- Blyth, Inc. (BTH, Chart, Download SEC Filings)
- Gentiva Health Services Inc. (GTIV, Chart, Download SEC Filings)
- Clearwire Corporation (CLWR, Chart, Download SEC Filings)
- Gaylord Entertainment Co. (GET, Chart, Download SEC Filings)
- RealD Inc. (RLD, Chart, Download SEC Filings)
- Skilled Healthcare Group, Inc. (SKH, Chart, Download SEC Filings)
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Not surprising, given how ultra-short funds fared against others in 2007-2008. Allegedly very bright minds worked very hard to claim that a portfolio's average maturity was shortened by interest rate resets, i.e. wholly conflating duration and maturity in precisely the way a freshman mathematics major would not.
Fortunately for these guys, they are surrounded by Ivy league cohorts just as arrogant, ignorant and obtuse – so they're in little danger of being found out short of peforming substantially more poorly than a monkey would.