Tuesday, June 1, 2010

Bull or Bear: perhaps just business as usual

via bloomberg:

Hedge funds lost an average of 2.7 percent through May 27, according to the HFRX Global Hedge Fund Index, as the sovereign debt crisis in Europe triggered declines in stocks, the euro and commodities, and the gap in yields between U.S. short-term and long-term debt narrowed. It was the biggest decline since November 2008, when hedge funds lost 3 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy two months earlier.

Almost every strategy lost money in May, according to Hedge Fund Research Inc. in Chicago, as the Dow index of 30 big stocks sank 7.6 percent including dividends amid speculation that Greece’s debt problems would spread to nations such as Spain and Portugal. Some of the best-known funds saw their gains for this year erased.

“Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor,” said Brad Balter, who runs Balter Capital Management LLC, a Boston firm that invests in hedge funds for clients. “The only defense that seems to work in months like these is being in cash.”.......

The price swings in May haven’t changed managers’ views on whether global economies are rebounding or shrinking.

“Managers who are positive are still positive, and negative managers are still negative,” said Charles Krusen, head of Krusen Capital Management LLC, a New York-based firm that invests in hedge funds for clients."

The market's performance in May has triggered yet another round of debates on the nature of the recent rally. One thing interesting about such debate is that every time it occurs, someone will bring up a resembling incident in the past in order to give strength to his(her) take on the market. Talking about "this really looks like the 19xx, when the stock market rebounded xx% in x months and then crashed....."

It is important to recognize that the future is always somehow different from the past, and that there could never be two identical market phases. Just because stocks have gone up a lot doesn't mean the market will drop down any time soon. On the other hand, even if the market is really overheated, rallies might still go on. Indeed, differentiating artificially cheap stocks from real bargains has become much more difficult than a year earlier. Making perhaps just one transaction, out of hundreds of analysis, is after all the nature of the business. How will the asset management industry do a year from now, it seems, is a question that could only be answered with the help of hindsight.

This is a time full of uncertainty, and in assessing prices we have to first ask ourselves which standard we would like to use. By the standard of crisis, such as the one in 2008, stocks do not look cheap. However, if we buy the argument that 2012 is not the end of human civilization after all, as investors we have a harder decision to make. Although personally I am more concerned with individual companies than the general market, I'd like to point out that the many things our governments have done in the last two years (quantitative easing, bailouts, deficits, etc..), dealt unwisely in the slightest, will definitely materialize considerable consequences in the future. The question is, do we want to invest and live with the uncertainty, or divest, sit on cash and completely throw ourselves into the hands of the "unknown unknowns" of the future?

Yi Gao
Research Analyst
Analyze Capital LLC


  1. Nice Post. Turbulent times precede us. My question is where will the money from Fund managers flow over the next year? Will it be Emerging Markets? Precious metals? or plain old equities?

    I love the use of "unknown unknowns."

  2. Nice Post Yi, I like your style of blogging, and very cheeky point about 2012 I LOL'ed at that. It sounds to me that you are quite bearish on overall markets? And I see your interest lie in individual equities any stars or poor performers you want to maybe mention in your next blog? I can follow up with some complementing technical analysis ;-)


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