The Ultimate Long-Only Hedge Fund Strategy

The goal of any hedge fund is to invest in a variety of asset classes, from cash to cryptocurrency, in an effort to maximize returns and reduce risks. A hedge fund manager attempts to protect client assets by engaging in strategies that involve profiting in the securities markets whether the market goes up or down. The choice of strategy used by a particular hedge fund manager and the specific asset classes invested in depends on the talent of the hedge fund manager, but whichever strategy is implemented will likely be a proprietary solution developed in secret and not shared with the general public. Those who invest in hedge funds are generally wealthy individuals who meet certain income requirements and have expectations of significantly higher returns than the overall market. In addition, they are paying exceedingly high management fees to the hedge fund manager whose job is to deliver those outsized returns after fees.

Although there are always hedge fund managers who happen to provide investors with great returns over some periods of time, generally, in aggregate, they have not delivered on their promises of consistently outperforming the market on an absolute, or any other basis. Certainly, the high fees associated with investing in hedge funds have a lot to do with the dismal histories of the majority of hedge funds around the world but there could be other problems as well. Most hedge funds employ very smart and talented people with PhDs and other advanced degrees in mathematics and finance who spend their days searching for an advantage over other investors. These experts could be researching assorted topics and trying to discover innovative ideas and ways to invest across all asset classes with the ultimate goal of outperforming the S&P 500 or other relevant index. The search to discover something that no one else knows is not likely to be successful. In the end, you have a lot of smart people attempting to discover value for investors across asset classes from world equity markets to cryptocurrency or other assets with no expert consistently agreeing with the other. Employing these talented individuals is very costly which makes it difficult to reduce fees or operate at a profit.

Is there a better solution? We think so, and it is an equity-based long-only strategy that spotlights fundamental investing combined with identifying stocks that have characteristics that are indicative of future outperformance vs any index. In addition to identifying the perfect stocks for the hedge, there has to be the right combination of size, number of stocks, and trading frequency which limits large losses in volatile markets. Rather than focusing on buying and holding stocks forever, the strategy focuses on always holding stocks with the requisite characteristics and getting rid of those that are no longer ideal at the next trading interval. Putting it simply, we suggest holding the ideal characteristics forever rather than falling in love with a particular, company, sector, or industry. This approach takes full advantage of the fact that far too many investors overreact to short-term events, news, or actions taken or not taken by the federal government. Also, as investors overreact to these short-term events by selling or rotating out of the stock market, specific industries or sectors, huge opportunities are created for the savvy investor. Ultimately, the strategy pits fundamental strength against price weakness created by those investors who overreact and sell stocks out of fear, uncertainty, and doubt about future events that they cannot control or predict.

So, how has this approach performed historically? The long-term performance has been excellent with nearly a 25% return over the last 18 years. As far as consistency, the strategy outperformed the market in 13 of the past 18 years while never sustaining losses of more than 6% with losses occurring in only 2 of the 18-year periods. Of course, this includes the 2008 monetary crisis and the economic slowdown caused by COVID-19 during 2020 where the strategy returned over 70%. Big returns following crises are not unusual as the strategy exploits price inefficiencies resulting from price weakness in fundamentally strong stocks. Price weakness results from stocks being oversold for assorted reasons related to investor overreaction to short-term events which creates panic selling and thus opportunities for the strategy. Even with the market turbulence at the beginning of 2022, the strategy is currently in positive territory which puts it well ahead of all the major indexes.

This particular approach, developed exclusively in-house, has the advantage of being able to achieve outstanding returns without spending heavily on research and strategy development as the strategy utilizes common sense and fundamental principles. This approach would be great for Family Offices, multi-strategy hedge funds, ultra-high net worth individuals or any investor looking for a commonsense and low-cost solution that produces superior results vs any benchmark. The stocks selected for the strategy are highly liquid with selections coming from stocks that only have membership in the S&P 500. Given that the strategy capitalizes on the continued and constant overreaction to short-term events and news, future performance is highly likely to continue going forward. Fortunately, we know that the only thing we learn from history is that people do not learn from history and as long as this continues so will the success of this ultimate hedge. For details, please contact us at Investoristic.com.