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Hedge Fund Alpha – Quarterly Newsletter

Our flagship small-cap hedge fund strategy returned 102% in its first 3 years, vs. 48.7% gain for the S&P 500 index ETF (SPY) during the same period. Our stock picks also managed to outperform the S&P 500 index by more than 10 percentage points in each of 2012, 2013, and 2014. Our monthly returns are presented below.

The majority of active fund managers can’t beat their benchmarks after taking into account the fees they charge. In fact, the majority of investment professionals you come across can’t beat the market. If beating the market is so darn difficult, how did we do it?

Our research director has a Ph.D. in financial economics and he has been doing quantitative stock research for more than a decade. This doesn’t guarantee that he can beat the market but it means that he can at least do high quality research and understand the research done by other academics.

He analyzed the quarterly 13F filings made by almost all of the active and dead hedge funds covering the 13-year period between 1999 and 2012. His research revealed that ordinary investors could have outperformed the S&P 500 index by nearly 12 percentage points per year during this 10 year period by imitating certain hedge fund stock picks. The stock market returned 0.32% per month during this 13 year period, yet our strategy returned an average of 1.27% per month.

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Our thesis is very simple. Hedge funds are strongly incentivized to outperform the market. Some hedge fund managers make billions of dollars in a single year if they generate decent returns. They hire the smartest students graduating from the best universities in the world. They hire those students’ professors. They hire the top experts and consultants in the field to gain just a tiny edge over other investors – including you. And sometimes they cheat and get their hands on illegal inside information. However, we think that hedge funds are more likely to get an edge over ordinary investors in small-cap stocks because these stocks aren’t well-covered and well-researched by a lot of investors. So, we formed our thesis:

When several hedge fund managers buy the same small-cap stocks, those small-cap stocks should outperform the market on average.

This is a very simple and intuitive thesis. Think about it. If hedge funds can’t beat the market by picking under-researched small-cap stocks, they sure can’t beat  the market by picking large cap stocks that are followed by everyone.

We weren’t surprised that hedge funds’ most popular small-cap stock picks outperformed the market by 12 percentage points per year in our back tests.

However, this is only the first step. The real test is measuring the performance of this strategy in real life. There are a lot of strategies that worked in the past that don’t work anymore.

We launched our quarterly newsletter at the end of August 2012 and started sharing the stock picks of our small-cap hedge fund strategy with our premium subscribers. In its first year our small-cap strategy’s stock picks returned 47.6% and beat the S&P 500 index by more than 29 percentage points. In its second year our strategy’s stock picks returned 35.8% and beat the S&P 500 index by more than 10 percentage points. In its third year our strategy’s stock picks returned 0.8% and beat the S&P 500 Index’s 0.4% return by 0.4 percentage points. Since its inception at the end of August 2012, this strategy returned 102% through the end of August 2015. If you have been investing in Vanguard’s or Fidelity’s S&P 500 index funds, you are 53.3 percentage points behind our subscribers. Our returns in the second half of 2015 have been disappointing but our strategy is still way ahead of its benchmark on a cumulative basis.

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Here are the monthly returns of this strategy:

Best Investment Newsletter Returns

There aren’t any gimmicks. We pick 15 stocks every quarter and invest equal amounts on each position. In order for you to evaluate whether this strategy is the right one for you, we will share ALL of OUR stock picks in our first two years.

Issue 1 (Published on August 31, 2012 at 1 pm. Returns are calculated starting September 4th through November 16th): Our Small-Cap Strategy outperformed the market by 7.1 percentage points in 2.5 months.

 

Small-Cap Strategy Return: 4.2%

S&P 500 ETF (SPY) Return: -2.9%

1. United Rentals (URI): 20.6%

2. Lennar (LEN): 11.5%

3. Amylin Pharmaceuticals (AMLN): This stock was acquired on August 9th by Bristol Myers and we weren’t able to buy this stock for our portfolio.

4. Gen-Probe Inc (GPRO): This stock was acquired on August 1st and we weren’t able to buy this stock for our portfolio.

5. Visteon (VC): 5.2%

6. Hologic Inc (HOLX): -0.7%

7. W.R. Grace (GRA): 8.0%

8. American Eagle Outfitters (AEO): -10.7%

9. Louisiana-Pacific Corp (LPX): 18.0%

10. Owens Corning (OC): -3.5%

11. Ariba (ARBA): 0.2%  (Ariba was acquired by SAP on October 1st)

12. Lear (LEA): 4.7%

13. US Airways (LCC): 10.3%

14. Corrections Corp of America (CXW): -1.6%

15. Walter Energy (WLT): -11.0%

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Issue 2 (Published on November 16, 2012 at 1 pm. Returns are calculated starting November 19th through February 15th): Our Small-Cap Strategy outperformed the market by 13.4 percentage points in 3 months.

 

Small-Cap Strategy Return: 25.7%

S&P 500 ETF (SPY) Return: 12.3%

1. United Rentals (URI): 40.9%

2. Visteon (VC): 16.5%

3. TripAdvisor (TRIP): 16.8%

4. W.R. Grace (GRA): 17.7%

5. Marvel (MRVL): 27.2%

6. Medicis Pharmaceuticals (MRX): 2.3% (MRX was acquired by VRX on December 10th)

7. Chicago Bridge & Iron (CBI): 45.6%

8. Ocwen Financial (OCN): 18.6%

9. Lear (LEA): 37.3%

10. Six Flags (SIX): 16.9%

11. Dollar Thrifty Automotive (DTG): This stock was acquired by Hertz on November 19th

12. Sally Beauty Holdings (SBH): 12.1%

13. E*Trade Financial (ETFC): 42.4%

14. Questcor Pharmaceuticals (QCOR): 16.5%

15. Dana Holding Corp (DAN): 32.5%

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Issue 3 (Published on February 15, 2013 at 1 pm. Returns are calculated starting February 19th through May 16th): Our Small-Cap Strategy outperformed the market by 3.4 percentage points in 3 months.

 

Small-Cap Strategy Return: 12.6%

S&P 500 ETF (SPY) Return: 9.2%

1. United Rentals (URI): 4.8%

2. Gardner Denver Inc (GDI): 9.1%

3. MetroPCS Communications (PCS): 14.4% (This stock was acquired by T-Mobile on May 1st)

4. Visteon (VC): 13.6%

5. W.R. Grace (GRA): 7.5%

6. Lear (LEA): 7.9%

7. Owens Corning (OC): 3.1%

8. Genworth Financial (GNW): 17.1%

9. Abercrombie&Fitch (ANF): 5.1%

10. Allscripts Healthcare Solutions (MDRX): 25.1%

11. Brookdale Senior Living (BKD): 4%

12. Ocwen Financial (OCN): 8.4%

13. US Airways (LCC): 31.9%

14. Hillshire Brands (HSH): 14.9%

15. Sally Beauty Holdings (SBH): 13.8%

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Issue 4 (Published on May 16, 2013 at 1 pm. Returns are calculated starting May 17th through August 15th): Our Small-Cap Strategy outperformed the market by 1.1 percentage points in 3 months.

 

Small-Cap Strategy Return: 2.3%

S&P 500 ETF (SPY) Return: 1.2%

1. United Rentals (URI): -5.9%

2. Visteon (VC): 10.8%

3. Lamar Advertising (LAMR): -9.7%

4. US Airways (LCC): -17.8%

5. W.R. Grace (GRA): 1.3%

6. MetroPCS Communications (PCS): This stock was acquired by T-Mobile on May 1st

7. Owens Corning (OC): -14.3%

8. CommonWealth REIT (CWH): 26.9%

9. Newcastle Investment Corp (NCT): -4.5%

10. Fortinet Inc (FTNT): 9.2%

11. Carter’s Inc (CRI): -1.2%

12. Genworth Financial (GNW): 16.7%

13. Lear (LEA): 19.1%

14. Dean Foods (DF): 8.6%

15. Community Health Systems (CYH): -7.4%

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Issue 5 (Published on August 15, 2013 at 1 pm. Returns are calculated starting August 16th through November 15th): Our Small-Cap Strategy outperformed the market by 2.9 percentage points in 3 months.

Small-Cap Strategy Return: 11.6%

S&P 500 ETF (SPY) Return: 8.7%

1. W.R. Grace (GRA): 18.5%

2. Owens Corning (OC): -2.2%

3. United Rentals (URI): 26.8%

4. Lamar Advertising (LAMR): 17.0%

5. JC Penney (JCP): -34.7%

6. Warner Chilcott (WCRX): 7.1% until it was acquired by Actavis on Oct 1st

7. Smithfield Foods (SFD): 1.7% until it was acquired on Sept 26th

8. Assured Guaranty (AGO): 11.5%

9. Tenet Healthcare (THC): 5.3%

10. T-Mobile US (TMUS):  7.9%

11. Avis Budget (CAR): 22.0%

12. Copart (CPRT): -0.1%

13. Visteon (VC):  7.4%

14. US Airways (LCC): 52.0%

15. Lear (LEA): 13.9%

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Issue 6 (Published on November 15, 2013 at 1 pm. Returns are calculated starting November 16th through February 18th): Our Small-Cap Strategy outperformed the market by 2.0 percentage points in 3 months.

Small-Cap Strategy Return: 4.9%

S&P 500 ETF (SPY) Return: 2.9%

1. JC Penney (JCP): -32.3%

2. Assured Guaranty (AGO): 0.3%

3. Tibco Software (TIBX): -10.9 %

4. Owens Corning (OC): 20.5%

5. Community Health Systems (CYH): -2.6%

6. Lamar Advertising (LAMR): 0.7%

7. KAR Auction Services (KAR): -2.3%

8. Visteon (VC):  10.2%

9. US Airways (LCC)/ American Airlines (AAL): 43.6%

10. Cablevision (CVC): 11.4%

11. Louisiana Pacific (LPX): 6.5%

12. eTrade Financial (ETFC): 27.7%

13. Brookdale Senior Living (BKD): 0.4%

14. Huntsman Corporation (HUN): 2.5%

15. Compuware (CPWR): -1.9%

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Issue 7 (Published on February 16, 2014 at 1 pm. Returns are calculated starting February 19th through May 16th): Our Small-Cap Strategy underperformed the market by 2.0 percentage points in 3 months (yes, our strategy can’t beat the market in every single month or quarter).

Small-Cap Strategy Return: 0.6%

S&P 500 ETF (SPY) Return: 2.5%

1. American Airlines (AAL): 12.3%

2. Assured Guaranty (AGO): 3.2%

3. NorthStar Realty Finance (NRF): 9.8%

4. SunEdison (SUNE): 15.9%

5. Lamar Advertising (LAMR): -3.0%

6. Visteon (VC): 7.6%

7. Zynga (ZNGA): -35.0%

8. KAR Auction Services (KAR):  5.6%

9. Avis Budget Group (CAR): 41.7%

10. Community Health Systems (CYH): -10.5%

11. Owens Corning (OC): -8.6%

12. Tibco Software (TIBX): -10.9 %

13. Huntsman Corporation (HUN): 8.0%

14. eTrade Financial (ETFC): -11.0%

15. Louisiana Pacific (LPX): -18.2 %

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Issue 8 (Published on May 16, 2014 at 1 pm. Returns are calculated starting May 19th through August 15th): Our Small-Cap Strategy outperformed the market by 4.4 percentage points in 3 months.

Small-Cap Strategy Return: 9.0%

S&P 500 ETF (SPY) Return: 4.6%

1. American Airlines (AAL): 2.0%

2. SunEdison (SUNE): 21.3%

3. NorthStar Realty Finance (NRF): 20.2% (NRF split into two companies on June 30th: NRF and NSAM. NSAM returned 4.2% and NRF returned 8.7% between 7/1 and 8/15. We used the average return of these two stocks in our overall return calculations.)

4. Community Health Systems (CYH): 37.0%

5. Lamar Advertising (LAMR): 4.3%

6. Avis Budget Group (CAR): 23.5%

7. Visteon (VC): 8.3%

8. Zynga (ZNGA): -13.1%

9. Brookdale Senior Living (BKD): 4.7%

10. Huntsman Corporation (HUN): 6.5%

11. Assured Guaranty (AGO): -1.6%

12. eTrade Financial (ETFC): 6.4%

13. KAR Auction Services (KAR):  0.3%

14. MGIC Investment Corp (MTG): -3.9%

15. Newfield Exploration (NFX): 21.5%

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SEE OUR LATEST 15 STOCK PICKS

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Frequently Asked Questions

1. How many issues do you produce in a year, and when are they typically released?

Our primary premium newsletter is produced quarterly and is published around February 14th, May 15th, August 14th, and November 14th of each year.

2. Do you offer any other services besides the quarterly newsletter?

We also publish a monthly  healthcare newsletter, which costs $229 per month or $449 per year with an annual subscription. In each monthly newsletter, a top-tier hedge fund manager is interviewed and/or analyzed, and 1-2 novel investment ideas are shared.

3. What would I get if I were to subscribe?

Premium newsletter members will receive access to our small-cap hedge fund strategy, which has outperformed the market by about 12 percentage points per year in back-tests covering a 13-year period; this strategy beat the market by more than 53 percentage points in its first 3 years of availability. More than 70 pages in length, the premium newsletter also covers billionaire investors’ best stock picks, and offers an additional ‘secret’ strategy.

4. Does your newsletter give alerts on when to buy and sell and the position percentages of one’s portfolio?

Each quarter we show our subscribers what to sell, what to buy, and what to maintain in their portfolios, within the confines of our strategies.

5. Is there a trial period for your services?

All premium members receive a partial refund if cancelled within 14 days of purchase.

6. Can I cancel after 14 days?

After the 14-day trial period, membership is final for four quarterly issues, i.e., one full year.

7. So how many issues do I actually receive? Does a membership include past quarterly reports too?

Yes. If you are subscribed to our quarterly newsletter you will receive access to all archived issues and 4 new issues over the next 12 months. If you are subscribed to our monthly newsletter you won’t have access to our archived issues.

8. What sized companies do you focus on?

In our market-beating small cap strategy, the name speaks for itself. The list of stocks we focus on has market values between $1 billion and $10 billion.

9. Do you guarantee that I can beat the market by following your strategy?

No. Our strategy outperformed the market in the past and in our backtests. However, this doesn’t guarantee that it will outperform the market in the future and on a consistent basis. Professional investors know that there aren’t any stock picking strategies that can beat the market consistently. Bernie Madoff was offering a strategy that was able to deliver consistently profitable results but we all know how that ended. If you decide to imitate our strategy you should be aware of occasional losses and underperformance as we experienced in 2015.

10. How can I pay for Insider Monkey’s premium services?

Premium subscribers may pay via Paypal, check or credit card.

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