Hedge fund managers have been complaining all year that financial markets were acting a bit too well-behaved to make any money in the absence of market-moving volatility.
Well, be careful what you wish for — because September and October served up an epic return of volatility in stocks, bonds, commodity, and currency markets. And yet some of the most legendary masters-of-the-universe still failed to perform … in fact many produced dismal losses for their investors this year.
Hedge funds typically bet on major macroeconomic events and attempt to profit from turbulent markets. And they got exactly what they wanted last month. But some of the biggest names, including Ray Dalio’s Bridgewater Associates, Fortress Investment Group, plus funds run by Paul Tudor Jones and John Paulson, all posted losses in October.
|Hedge funds typically bet on major macroeconomic events and attempt to profit from turbulent markets.|
* The Fortress Macro Fund was down 1.8 percent last month and has declined 6.6 percent year-to-date,
* Despite big swings in crude oil, the dollar and gold, Tudor’s main fund declined 1.6 percent in October and is down 0.5 percent year to date,
* And Paulson’s Advantage Fund plunged 14 percent in October alone, and is now down about 25 percent year to date!
These hedge fund wizards were all humbled as equity and debt markets first sold off violently early in October, only to turn around on a dime at mid-month and close higher. The S&P 500 Index for example was nearly 10 percent off its highs on October 15 — knocking on the door of a correction — but rebounded to end October up 2.3 percent!
And it’s not just the best and brightest that come up short, the industry as a whole is no longer producing stellar returns to justify its high fees. The average hedge fund is up just 2 percent in 2014, through the end of October, compared with an 11 percent gain in the S&P 500 Index.
I’m certainly not trying to minimize the accomplishments of these legendary hedge fund investors; their past track records speak for themselves.
Paul Tudor Jones made 125.9 percent, after fees by correctly calling the 1987 stock market crash.
And John Paulson is best known for earning a cool $15 billion during the 2007 financial crisis by betting against the troubled housing market and toxic sub-prime loans.
These two managers are still among the smartest guys in the business, no question. But this reversal of fortune for even some of the best and brightest investors shows you just how difficult it is to consistently outperform markets.
And the recent roller-coaster ride that stocks, bonds and commodities have experienced makes it even more difficult for the average investor to stay ahead.
But there is a better way; a relatively simple approach to following trends in financial markets, without falling victim to market volatility.
At last year’s Orlando Money Show, I was fortunate to meet and talk-shop with Mebane Faber. Meb wrote the book, literally, on how to avoid bear markets using simple trend-following strategies combined with proper asset allocation.
In his fascinating book, the Ivy Portfolio, and in subsequent research, Meb demonstrates the virtues of keeping it simple.
First, compile a list of liquid, low-cost exchange traded funds (ETFs) that are designed to track the major asset classes: Stocks, bonds, commodities, real estate, etc …
Second, buy these asset class ETFs ONLY if they are trading above their 10-month moving average, a very simple definition of an up-trending market …
Third, focus your investments on just the very best performing ETFs to enhance returns, buying only a few ETFs with the highest near-term returns (over three, six & 12 months), and …
Fourth, invest, rebalance monthly, and repeat! What could be easier?
Oh, and Faber found that, by ignoring market gyrations, this simple month-end investment strategy would have outperformed the S&P 500 by almost 2-to-1 (16.4 percent vs. 9.3 percent) from 1973-2008, while taking on less risk in the process!
Taking a page out of Faber’s book, and based on further research of my own, I’m convinced this simple trend-following approach works just as well for sector ETFs and even single-country funds. At Weiss we developed and tested our own system for selecting the top-5 ETFs from a list of more than 30 based on the simple traits of trend and performance.
The results, shown in the chart above, beat the S&P 500 by a 3-to-1 margin since 2005 (372.9 percent vs. 124.1 percent), while also taking on less risk.
Bottom line: If volatile markets make you nervous as an investor — or worse, paralyzed with indecision — consider adopting an easy-to-use approach that works in both bull and bear markets alike, and most markets in between.
With a disciplined, straightforward approach like this, you’ll sleep easier at night with the potential to outperform the market … not to mention those high-priced hedge fund wizards!