Monkey see, monkey do
These industry players have reaped hefty returns from their investments in industries, sectors and/or companies. For those wanting to emulate those returns, copying their choices seems to be the way to go.
However, it’s important to keep in mind the risks involved in this strategy. When an investment or trade goes against them, they are financially strong enough to absorb the losses. The everyday retail, or individual investor, may not be so financially strong.
The idea of using the investment strategies of hedge fund managers has been tried and proven to be effective for many. You may not have the funds to enter certain positions as these billionaire players, but you can put your money to work based on their leads.
Here, we’ll go over some of the things individuals should keep in mind if they decide to invest based on the moves of hedge fund managers. This includes the popular ones, David Einhorn, Bill Ackman, and Carl Icahn. And while he is not a hedge fund manager, Warren Buffet, also ranks high on the list of players whose investments are most often mimicked.
We’ll also note how our goKINFO.com platform can provide leads on how hedge fund managers are investing.
What to look out for
Hedge fund managers do not always get it right. After all, they are humans, not robots. There are times when their own personal sentiments may seep into their decisions to buy or sell a stock.
A classic and perfect example of hedge fund managers making troublesome choices stems from Bill Ackman of Pershing Square. In 2012, he began shorting diet and nutrition company Herbalife. He did so to the tune of $1 billion. Essentially, Ackman was convinced that the company would go out of a business after being found to be a pyramid scheme by federal regulators. If that happened, his returns would be phenomenal. The key word here is “if.”
Investors who followed Ackman’s lead and sold out of their positions in Herbalife saw much of the gains they had made evaporate. That was due to several reasons, including the company not being found to be a pyramid scheme, the company’s solid revenue gains, and another key hedge fund player going against Ackman’s stance by increasing his stake in the company.
These factors caused the company’s stock to rise, not fall like Ackman had predicted. In fact, since Ackman announced he was betting against Herbalife back in 2012, the stock has soared by more than 124%. For the investors who sold back then based on Ackman’s move, there is likely much regret.
This brings us to stressing the importance of you doing your own research before you dive into, or out of, a stock. In this Herbalife case, a red flag was raised when Carl Icahn, founder of Icahn Enterprises, increased his shares in Herbalife. Just as sophisticated as Ackman, Icahn disagreed largely with Ackman’s strategy for Herbalife. Investors who followed Icahn’s lead reaped the returns from that 124% price rise.
Also, federal regulators did not find Herbalife to be a pyramid scheme, as Ackman had alleged. It would have been wise for investors to not sell their stock solely because Ackman said the company would be deemed a scheme. Wise investors waited to hear from the agency about its determination.
In Herbalife’s case, the Federal Trade Commission made the determination that it was not a scheme. This was a public announcement, readily available to anyone who wanted to review the commission’s findings. Make sure you understand the different regulatory agencies that can companies and your investment.
Understand the managers’ logic and motivation
When hedge fund managers decide to enter, or exit a position, make sure you understand why they are making this move before you follow. If no information is readily available, the onus is on you to search for it.
Understand as much as you can about the manager’s strategies to see if it jives with how you are comfortable investing. Take Warren Buffet, for example. While he is not a hedge fund manager, he calls the shots at his Berkshire Hathaway. You will find few tech stock’s in his company’s holdings.
The rapid growth of many of the companies in this space, along with their significant expenditures, are off putting to the long-term strategy investor. If the thought of not having your portfolio heavily weighted with tech stocks is off putting to you, the “Buffet Way” may not be for you.
Mimic hedge fund manager tactics
You’ve likely heard it said, “if you can’t beat them, join them.” The saying is very appropriate when applied to investing like hedge fund managers. As you follow them, also adopt the tactics they use in evaluating a stock.
Many successful hedge fund managers look at a company’s fundamentals, such as cash flow. You should do the same. Notes Investopedia:
“Cash flow and the cash flow statement tracks money flow, so it can tell you if the company has generated a large sum from investments, or if it has taken in money from third parties, as well as how it’s performing operationally. Because of the detail and the breakup of the cash flow statement into three parts (operations, investing and financing), it’s considered to be a very valuable tool.” Investopedia
Using KINFO to get an overview
If you haven´t already, consider signing up for our free social investing site that features ways you can follow hedge funds with positions in stocks, exchange-traded funds (ETFs) and mutual funds that you are interested in. You can also follow insiders, like chief executives, as well as analysts.
KINFO tracks more than 2,000 hedge funds. You can review valuable information about these funds, such as their average yearly return, and even their highest return in relation to risk.
Following the strategies, philosophies and investment moves of hedge fund managers and influential investors can be beneficial. If nothing else, you can develop a better awareness of what motivates more experienced investors to buy, sell, or hold.
The key is doing your own research to make sure the person you’re emulating is not leading you off a cliff that you, unlike them, cannot afford to fall off.