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Hedge funds beefing up after good returns, inflows in 2010

The hedge fund industry certainly took a drubbing in the bleak market years which were 2007 – 2008.  But, they’re back and they’re back on the heels of good performance and inflows in 2010.  Credit Suisse released its 2010 Hedge Fund Industry Review (.pdf)  today.

Few highlights:

  • Hedge funds, as measured by the Dow Jones Credit Suisse Hedge Fund Index, were up 10.95% for 2010 after posting positive performance for seven out of 12 months
  • On an asset-weighted basis, an estimated 81% of funds have surpassed previous high water marks as of December 31, 2010
  • The industry saw an estimated USD $8.5 billion in inflows for the fourth quarter, bringing overall inflows to $22.6 billion for the year. This represents the largest annual inflows into the space since 2007
  • The largest inflows in 2010 were seen in the Global Macro and Event Driven Sectors, up $16.8 billion and $13.9 billion respectively, while the largest outflows were seen in the Multi-Strategy sector which lost $16.9 billion
  • Including performance gains, current hedge fund industry assets under management (AUM) grew to $1.7 trillion as of December 31, 2010, up from $1.5 trillion on December 31, 2009
  • Research of returns from January 1996 through December 2010, indicates that smaller hedge funds (less than $100M AUM), have historically outperformed larger hedge funds (greater than $500M AUM) by 3.95% annually

Check out the whole report here.

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Best finance and investing podcasts

I’m continuing to time shift my consumption of audio: instead of listening to the radio in the car/work, I download a week’s worth of investing/finance/business podcasts on Sunday for my listening and learning.  I load up iTunes or other podcast apps I use, and have a listening library of great financial content for the whole week.

Here are a few of the best investing podcasts that I find I continue to download and listen to:

Personal Finance (tips on spending, managing money, saving)

Open Account (SuChin Pak): Umpqua Bank’s podcast is brought to life by SuChin Pak, an engaging thoughtful host. Listeners step inside Pak’s own relationship with money as she interviews people thrilled, confused, and stressed out about money.

Money, Markets, and More (Marketwatch): MM&M looks at the intersection of money, investing, and consumer behavior.  What are people doing with their money? Lively consumer tips and personal finance insights from MarketWatch reporters. This podcast took a hiatus earlier in the year and is now back in full-force. Part behavioral finance, part Smart Money.

Money for the Rest of Us (J. David Stein): David Stein is the former Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC. Through stories, analogies and easy to understand examples, David gives individuals the tools and confidence they need to navigate an increasingly complex and unpredictable investing landscape.

Radical Personal Finance (Joshua Sheats): Joshua’s podcast is an enjoyable and educational romp through investing and personal finance. I love how much David shares about his own process — very easy to relate to and the topics he covers reflect that.

Investing

Value Investing (John Mihaljevic): If you enjoy value investing, this is a wonderful podcast by a wonderful host. You may know Mihaljevic from the great work he does on his blog, The Manual of Ideas. His value investing podcast fits in perfectly with interviews from great investors like Howard Marks, Mohnish Pabrai, James Montier, and a whole lot more.

The Meb Faber Show (Meb Faber): Bestselling author and investment fund manager, Meb Faber has some of the investment world’s top professionals join him on his podcast as he explores real market wisdom from some of the smartest minds in investing. Good balance between high level thinking and actionable, practical advice with an emphasis on smart beta, trend following, and value investing.

Taking Stock (Bloomberg’s Pimm Fox): Long time markets pundit, Pimm Fox does a good job analyzing breaking news, market movements and interviewing some of the smartest people in the asset management industry.

Investing Insights (Morningstar): Investment industry authority Morningstar’s podcast gives stock/fund/ETF picks and also bubbles up tips, analyzes breaking news, and interviews industry heavies. (VIDEO)

Wealthtrack (Consuleo Mack): Consuelo has one of the best program’s around, regularly interviewing top asset managers and thought leaders in the investment field.  (also available in video)

Sound Investing (Paul Merriman): Named “Best Money Podcast” by Money Magazine in 2008, Sound Investing is hosted by best-selling author Paul Merriman.  Good interviews with advisors, market analysis and debunkery.

Trading

The Trend Following Manifesto with Michael Covel (Michael Covel): The author of Trend Following is on a tear with great content, great interviews of some of investing’s greatest minds/investors.

General Interest (Markets, Money, Investing, Business)

Planet Money (NPR): The Planet Money podcast has really come into its own in the past couple of years. Great look at global economics, investing, and the people and institutions that are the cast and characters of the whole system.

McKinsey on Finance (McKinsey): More academic in nature, global consultancy McKinsey describes its cutting-edge research on finance, investing, economics and corporate finance.

Marketplace Money (American Public Radio): Billed as “the money show for the rest of us”, this weekly program is entertaining even for investment professionals.  Looks at local/international stories and helps make sense of those events.

J.P. Morgan Insights (J.P. Morgan): Leverages the investment banks research to help make sense of markets, industries, and investing trends.

Options Action (CNBC): I’m not an options guy but I find this program enjoyable for the ideas, explanations, and applications of option theory. (Video)

Technical Analysis Podcast (Dorsey Wright): Dorsey, Wright is one of the most respected technical analysis shops and this podcast explores their research, markets, industries and asset classes.

This Week in Barron’s (Barron’s): Highlights top articles in the current edition of Barron’s magazine

Don’t forget to subscribe and listen to Tradestreaming’s own podcast, Tradestreaming Radio.

Have your own suggestions — what investment/finance/business themed podcasts do you enjoy listening to?

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Follow the Insiders: Insider buying/selling for 3 February, 2011

Today’s important activity

4 microcaps with CFO purchases in the last week (Seeking Alpha)

Insider buying vs. S&P500 (In Search of Alpha)

Insider selling and options trading may spell bad things for Protalix, $PLX (Seeking Alpha)

2 stocks seeing insider buying despite bearish crossovers (Seeking Alpha)

Who’s right: analysts ramp earnings estimates as management gets bearish (Zero Hedge)

Further reading

Read more recent insider transactions

Read more about insider transactions and how investors can profit

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Lunch price inflation: 8 strategies to profit in the age of social media

With the 24/7 nature of financial news, commentary and data,there are no more free lunches for investors.  In fact, given that access and dissemination have improved tremendously, lunches have gotten a lot more expensive. It’s harder and harder to cut through all the noise.

Financial content sites like Seeking Alpha and Stock Twits provide a window into long tail investment content.  Expert investment communities like Covestor and Wealthfront take this up a notch and provide real-time access to the tradestream — the collective flow of real, audited trades of investment advisors.

With these platforms, we no longer have to lose our lunch money.  We can play smarter by following the truly exceptional investors with well-documented, long-term investment returns.  Why recreate the wheel when you can copy others who are so successful?

I discuss these mimicking strategies at length in Tradestream.  In short, there are eight different types of investment mimicry, from cloning top hedge fund managers’ stock picks to identifying and piggybacking the next Warren Buffett.

  1. Blog bigwigs: The financial blogosphere has created a virtual stock research bonanza and enabled top researchers to strut their stuff.  These investment bloggers provide institutional-grade advice at the fraction of the cost.  How is $0 for your own, personalized stock research team?
  2. Present-day gurus: While most investors underperform, there are those few who are exceptional (for those interested, check out Forbes editor Matt Schifrin’s new book, The Warren Buffetts Next Door).  While you and I may not be gurus, Warren Buffett is.  Eddie Lampert is.  Seth Klarman is.  These superinvestors exhibit great long-term performance.  We can win, as well, by strategically  following their moves and tools like AlphaClone help a lot.
  3. Undiscovered experts: Thousands of people manage virtual and real portfolios, competing against one another for top performance.  As time elapses, expert investors emerge from the rabble.  Previously unknown and unsung top performers bubble up to the top.  Following their moves can lead to the promised land of profits.
  4. Rumor mills: Strategies can be developed to harness the information — or disinformation — inherent in most rumors.  Monitor these in real time or view them in the aggregate.  The information here is important even if you don’t trade on it.
  5. Insiders: Corporate insiders are notoriously good investors in their company’s stock, even when they trade legally.  And they should be: Given access to sales forecasts and operational metrics, these investors have a knack for buying low and selling high.  They too can be followed and followed profitably.
  6. Historical gurus: Stock screening allows investors to sort quickly through thousands of stocks for those select few that exhibit specific criteria.  Mimic screens allow us to search for the same parameters historical investors like Peter Lynch and Benjamin Graham used in their hunt for great stocks. Validea has created a whole business around helping investors do just that.
  7. Crowds: There is a lot of predictive power in the wisdom of the crowds.  Crowdsourcing can be used to locate good investments.  Here, changes in sentiment can be an investor’s key in determining the next winning investment.  Piqqem has made a lot of strides here and new firms like RecordedFuture (hear my recent podcast where I interview them)
  8. Co-lateral information: Not all tradable information is purely investment related.  Much of it exists in other forms.  Learn to recognize valuable resources that can be gleaned to aid our search for investing profits.  Google search data is just one example.

Some of these forms of flattery have been studied closely while others are so new that they’re just beginning to inspire research.  Regardless, all have been inspired by the sheer transparency that today’s Internet provides.

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The future of financial content, social media and investing (podcast)

tradestream radio, discussing investing and technology

In this week’s podcast, we interview Mick Weinstein, head of content at Covestor, a new investment platform that allows investors to shop for investment advisor like shopping for Pez on eBay. Mick was previously editor-in-chief at Seeking Alpha.

I’ve discussed Covestor and its do-it-yourself model at length both in my book, Tradestream, as well as on my blog.  Just as we’ve become accustomed to shop for mutual funds within a supermarket model, it’s been harder to do that within the investment advisory business.  Covestor and its competitor, Wealthfront, are changing all that.  And financial content will play a key role in the success of these types of firms.

Mick sits right at the edge of what’s happening in financial content and now brings his perspective to Covestor.  He’s working with the team there to build out its content platform beyond the transactional infrastructure the firm has invested in building.

We discuss:

  • how financial content is being used for lead generation in the finance field
  • Mick’s experience building and managing Seeking Alpha’s offering and content team
  • tips to building a successful financial content business
  • the compliance challenges for financial content when published by an investment firm
  • the future of investing

More resources

Learn more about Covestor and Mick Weinstein

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Want to make money in the stock market? Own it only when it’s closed

Great piece from the guys at Bespoke on a strategy they call Close to Open. While owning the S&P500 or its proxy, the ETF $SPY, since its inception in 1992, investors would have seen  a 193% return.

Not too shabby.

But instead of just buying and holding (or “buying and praying” as I like to call it), if investors had bought the $SPY at the end of each trading day and sold it when markets opened the next morning, investors would have seen their holdings rise by almost 400%!

This raises the question — why even trade when the market is open?

You say, no frickin’ way.

Well, Bespoke says, way.

Like the fabled, flux capacitor, the implications of this are just mind-blowing.

Source

Who Needs the Trading Day (Bespoke Investment Group)

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PortfolioRunner: New portfolio analytics tool to leave beta

New portfolio analytics tool, PortfolioRunner, is readying to leave its beta testing and formally launch.  Well, it’s actually more than an analytics tool.  Portfolio Runner does 3 things:

  1. makes stock recommendations: using a variety of technical, fundamental and crowdsourcing algorithms, PR suggest additions stocks to buy/sell
  2. risk management: PR helps investors determine size of individual positions and suggests an exit strategy for each position
  3. news analysis: PR makes it easy for investors to follow breaking news on the fly, determining whether the news is positive or negative for the stock, and extracting relevant info.

Check it out and let us know what you think of it in the comments below.

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The new new carry trade in the age of derivatives

Investors have made money for decades by borrowing in one currency with a low interest rate and exchanging it into a higher interest rate currency.  Called the carry trade, it made a lot of people of lot of money.

A new paper out by Della Corte, Sarno and Tsiakas has found another way to profit off the carry trade.  These economists use the forward volatility in foreign exchange to derive a very profitable strategy.  According to their research, Spot and Forward Volatility in Foreign Exchange, investors can buy and sell what’s called a forward volatility agreement (FVA).

Simply put (kinda), thes FVAs attempt to predict future volatility in a certain currency.  More specifically, the FVA sets a forward implied volatility by making a guess about future spot implied volatility.  These guesses tend to be wildly off:

Forward volatility is a poor predictor of future spot implied volatility

So, if forward vol is a bad predictor of future vol, investors can design strategies to take advantages of this.

For example, buying (selling) FVAs when forward implied volatility is lower (higher) than current spot implied volatility will consistently generate excess returns over time.

Interesting idea — as for me, I’ll stick with momo stocks like $AAPL and $PCLN but this sounds like a promising strategy for forex traders.

Source

Della Corte, P, L Sarno, and I Tsiakas (2010), “Spot and Forward Volatility in Foreign Exchange”, Journal of Financial Economics, forthcoming. Centre for Economic Policy Research Discussion Paper 7893.

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When searching for stock gains, use Google (search data)

A wealth of information creates a poverty of attention

Smart investors avail themselves of all valuable resources as inputs into the investment research process.  I write about this faculty in my book Tradestream in the chapter “Co-lateral Research“.  What co-lateral research means is all the non-financial/non-traditional sources of information that can be used by investors to connect-the-dots.

I’ve written about Google Domestic Trends, search volume data Google has made public and overlayed on top of stock index charts.  GDT continues to be a good resource for investors.

And now, there’s more research to support using Google search data to auger where markets are headed.

In In Search of Attention, researchers found that Google’s Search Volume Index captures retail investors’ attention in stocks.

Among our sample of Russell 3000 stocks, stocks that experienced an increase in ASVI [me: abnormal search volume index reading] this week are associated with an outperformance of more than30 basis points (bps) on a characteristic-adjusted basis during the subsequent two weeks. This initial positive price pressure is almost completely reversed by the end of the year.

The paper also finds that increased search volume leading up to hot IPOs may be responsible for that big first-day pop! that such issues experience.

As the first paper that has really looked at search data from an investing standpoint, this should be piped and smoked.  In fact, the authors conclude the paper with a somewhat foretelling statement:

Search volume is an objective way to reveal and quantify the interests of investors and therefore should have many other potential applications in fi…nance. We leave those for future research.

Bring it on.

Source

In search for attention (Da, Engelberg, Gao), November, 2010

HT: Net//Worth

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New investment managers added to Wealthfront

Wealthfront announced the addition of 3 new investment advisors on their investment platform.

As per the firm:

Towle & Co. (Value Strategy | Min. Outside Wealthfront: $500,000)
Towle specializes in a long-term, deep-value investment strategy that seeks to uncover significant discrepancies between stock market prices and underlying company values. Through Towle, you can invest in well-run companies with strong market positions and low price-to-sales ratios: a way to buy operating leverage and economic activity on the cheap!
Barton Investment Management (Growth Strategy | Min. Outside Wealthfront: $1,000,000)
Barton believes the market fails to appreciate and correctly value the full potential of enterprises that create new markets. Its concentrated portfolio of carefully-selected younger growth company stocks allows investors to capitalize on these market inefficiencies while supporting innovation.
CWC Advisors (Small Cap Strategy | Min. Outside Wealthfront: $1,000,000)
CWC began providing investment services in 2000 to high net worth individuals, and within a few years, attracted the interest of institutional investors. Its strategy consists primarily of contrarian U.S. companies with recent price under performance, corporate liquidity and/or fundamental valuations at historically low levels. Now you can invest with CWC, too.