I read an article on Bloomberg about Holocene Advisors. According to Bloomberg Holocene Advisors tripled its assets to $5.3 billion since its inception in 2017. That’s probably because Holocene is a beta neutral hedge fund (I will explain what that means in a bit) and returned 9% in 2017, 3% in 2018, and 14% in 2019 through October. Brandon Haley founded Holocene Advisors in April 2017 after working at billionaire Ken Griffin’s Citadel as an equity chief.
Brandon Haley didn’t have trouble raising $1.5 billion from clients in 2017. Holocene is a hedge fund in the true sense of the word. A real hedge fund doesn’t rely on rising markets to make money. Most hedge funds are 40-70% net long, which means their betas are in the neighborhood of 0.4 to 0.7. When the entire market goes up 28%, these hedge funds go up about 40% to 70% of this figure just because they are long the market. This has nothing to do with their stock picking skills. Yet, most of these hedge funds still charge 2% of their clients’ assets and 20% of their returns as fees. That’s why almost everybody hates them. This is probably the biggest travesty in the financial markets. Some hedge fund managers become billionaires because they discovered a legal way of cheating investors out of their savings. Most investors are (most likely unknowingly) invested in hedge funds through their pension funds, state or local governments, or labor unions.
A generation ago, there weren’t a lot of hedge funds, but they generated amazing returns. Investing got harder and harder over time, and the number of truly talented hedge fund managers declined, yet the total number of hedge funds skyrocketed. Nowadays, most hedge fund managers can’t generate any alpha yet manage to survive because their investors are truly dumb. Let’s do a little bit of math (not too complicated, 5th grade level math) and explain how hedge funds are able to manage to trick their gullible investors.
In 2019, the market return is about 28%. If you are an untalented hedge fund manager (untalented when it comes to investing, but of course you had to be extremely talented in marketing to raise billions of dollars from gullible pension funds, labor unions, and state and local retirement funds), you’d be 40-70% net long the market. This means without lifting a finger you’d generate 11.2% (40% of market’s 28% gain) to 19.6% (70% of market’s 28% gain) in gross returns. But since you are such a “gifted” hedge fund manager, you get to charge your clients a flat fee of 2 percentage points of their total assets and another 20% of their gains. Twenty percent of 11.2% is another 2.24% and twenty percent of 19.6% is 3.92%. So, you’d take away a total of 4.24 percentage points at the low end and 5.92% at the high end for being such a “brilliant” hedge fund manager in fees. That means your investors’ net returns would be anywhere from 6.96% (11.2% – 4.24%) to 13.68% (19.6% – 5.92%).
According to HFR, equity hedge funds returned an average of 10.24% in 2019. That’s the mid point of our estimated 6.96% – 13.68% range for the returns of untalented hedge fund managers. Unbelievable!!! Don’t you agree?
That pretty much proves our point that most hedge fund managers aren’t skilled investors. They are waaaaaaaaaaaaay too expensive. So, stay away from them. It doesn’t make sense to pay 4% to 6% of your assets every year to invest in a hedge fund because most of them won’t generate 10-20 percentage points of outperformance to DESERVE these sky-high fees.
At Insider Monkey we basically do two things. First, we get rid of ALL of these hedge fund fees, assuming that you aren’t one of our premium members who pay a few hundred dollars annually for our newsletters. Second, we do a pretty good job of identifying talented hedge fund managers. We have been publishing thousands of articles and sharing with investors the performance of the top 20 stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
These stocks returned 37.4% during the first 11 months of 2019 and BEAT THE MARKET BY 9.9 PERCENTAGE POINTS. This is our gift to you. We don’t charge a dime for it, just click the link above and see the list of hedge funds’ top 20 stock picks yourself. Interestingly, the stocks in this list don’t change very frequently either. The top 5 stocks at the end of September are the same 5 stocks at the end of June. You don’t have to trade in and out of stocks very frequently, and trading fees are zero nowadays anyway. Do yourself a favor and try investing at least a small portion of your portfolio in hedge funds’ top 20 stocks and subscribe to our free newsletter below to get our quarterly updates listing the changes:
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Back to Holocene Advisors. The investors in the market have been throwing money at Brandon Haley’s market neutral hedge fund because market neutral hedge funds will generate 0% in gross returns if they aren’t talented. Since Brandon Haley is generating positive returns while charging an arm and a leg, this implies that he generates alpha on the long and/or short side of his portfolio. This is rare nowadays.
Holocene Advisors top 5 stock picks were salesforce.com, inc. (NYSE:CRM), Linde plc (NYSE:LIN), Amazon.com, Inc. (NASDAQ:AMZN), General Motors Company (NYSE:GM), and United Technologies Corporation (NYSE:UTX) at the end of September. However, we have seen a lot of turnover among its top 5 picks so far this year. At some point this year stocks like Microsoft Corporation (NASDAQ:MSFT), Alibaba Group Holding Limited (NYSE:BABA), and PayPal Holdings, Inc. (NASDAQ:PYPL) also found themselves among Holocene’s top 5 list. salesforce.com inc., Amazon.com Inc, Microsoft Corporation, Alibaba Group Holding Limited, and PayPal Holdings are currently among our hedge fund top 20 stock picks list.
We have been tracking the performance of Holocene Advisors stock picks that have at least $1 billion in market capitalization for the past year. It is a new hedge fund, and it is very early for us to determine whether this is truly an exceptional hedge fund, but so far we haven’t seen an amazing performance from this fund. Holocene Advisors’ non-micro-cap US long stock picks lost an average of 16.3% during the fourth quarter of 2018, underperforming the S&P 500 Index by 2.7 percentage points. During the first 9 months of 2019 Holocene’s long picks as described above generated an average return of 27.1% vs. 20.4% for the S&P 500 ETFs.
We should clarify that our estimated returns are estimates and Holocene’s actual returns will differ depending on how dramatically it changes the weights of each stock in its portfolio. Nevertheless, we see that Holocene was able to beat the market by about 6.7 percentage points on the long side. This tells us that Holocene either generates a larger outperformance on the short side of its portfolio or generates additional alpha via short term trading. Nevertheless Holocene’s average long pick generates a small alpha and investors should pay attention to its picks. You can follow Holocene Advisors by entering your email address below and get notifications the next time it discloses its portfolio or we publish another article about it:
Disclosure: No positions. Visit Insider Monkey to create a free account and follow Holocene Advisors. We know other hedge funds that generated better, much better returns than Holocene. You can check 40 of these hedge funds on this page.