Elite Wealth Management
For institutional investors, keeping secrets for long is an
impossible task. The Securities and Exchange Commission requires
these entities to file a 13F, a quarterly filing required of
investment managers of assets of $100 million or more, which
contains information regarding the asset manager's investment style
and potentially even a list of equities owned.
It's a good gauge of what an investment company did in the last
quarter. Taking a look back at prior quarters can paint a fairly
accurate picture of what direction they're assuming the market will
take and how they're positioning themselves to prepare - long,
short, equities, derivatives, and so on.
When an investor like George Soros suddenly increases a bearish
position by 605% in a quarter, it raises more than a few
For the quarter ending on June 30
, Soros Fund Management reported a large investment in puts,
options that give an investor the right, but not the obligation, to
sell a security at a given price, for an ETF that tracks the
Breaking Down Soros' Position
Normally, a large investment firm will place hedges on
positions, whether long or short, in order to mitigate risk.
However, Soros increased his put position from 1.6 million to 11.29
million shares. That's the equivalent of going from $299 million to
$2.2 billion in notional value.
Skeptical investors dismiss any worries about an imminent market
collapse due to the fact the Soros added to a few holdings like
) and Apple (
) as well as added 182 brand new stocks. They believe his short
position is simply a hedge or part of a longer term trading
I'm not sure it's that simple. Soros' total short position
leaped from 2.96% to 16.65% making it the largest part of his
holdings for the second quarter. That doesn't sound like a hedge,
it sounds like bearish speculation.
If we closely examine the stocks he did add to, it's clear he's
preparing for a worst-case scenario. Soros doubled down on gold
mining ETF's and added plenty of gold-based companies to his
portfolio. He increased his position in Market Vectors Gold Miners
ETF to 2.05 million shares worth around $54 million from 1.16
million shares in the first quarter. He also established a call
option investment worth 1.33 million shares of the Gold Miners
The gold addition is telling. Gold is an asset class that's
typically bought as a hedge against inflation or economic
uncertainty. Real interest rates are in danger of becoming negative
with the inflation rate at 2% and the yield on the 10-year treasury
at around 2.33%. That means the inflation-adjusted rate of return
is a scant 0.33%. If that figure declines, gold could see a rally,
but that doesn't appear to be Soros's line of thinking.
The general consensus is that
will actually fall in the next twelve months. Goldman Sachs
estimates that gold will fall to $1,050 an ounce, a drop of nearly
19%. Speculators have pared back stakes in gold futures by 15% for
the week ending August 5
So if Soros isn't adding gold to his portfolio as a bullish
sentiment, then the only reason left is as a hedge against a bear
market. But one firm, albeit a well-known one, establishing hedges
and speculating on a market declines isn't enough for us to
question the strength of the 5-year bull market yet.
Following In Soros' Footsteps
George Soros is perhaps most famous for his trade made back in
1992 when he shorted the British Pound for a net gain of $2 billion
and forced the Bank of England to devalue the currency. When he
takes steps to leverage himself to profit from a downfall,
investors tend to take notice.
Other major players share Soros' feelings on gold. Hedge fund
Pauslon & Co. owns 10.2 million shares of the SPDR Gold Trust (
) worth $1.21 billion and held on to his position for the second
quarter making no new changes. Other companies have a bullish
opinion about the precious metal as well like BlackRock Global and
U.S. Global Investors. It's enough to wonder what they know that
Wall Street doesn't.
Two of the most popular stocks for institutional investors have
been Facebook and Apple, both of which were bought in greater
numbers by numerous companies in the last quarter. At first glance,
such a move may seem to indicate a bullish sentiment by so-called
"smart money," but there's more to these companies than meets the
Both companies have their attention on the Chinese marketplace
as the next great growth opportunity. China's market though,
appears to be bracing for a fall. As counter-intuitive as it may
sound, that doesn't necessarily bode ill for these companies. The
Chinese market has rallied on both good and bad news which could
mean the government will step in with stimulus to support
The world's second largest economy is preparing for slowing
growth and government intervention while the U.S. markets continue
to hit new highs every week. There seems to be a disconnect on Wall
Street and investors should be cautious.
To Follow, Or Not To Follow?
Many investors follow 13F filings as if it were a Wall Street
cheat sheet. Following the moves of "smart money" should be a
beneficial strategy according to their thinking process, but they
fail to take into account several downsides.
First of all, the 13F reports are always a look back at what
institutional investors did in the prior quarter, not a
play-by-play breakdown of current strategies. Attempts to mimic a
13F means always being behind the curve.
The other big drawback is that hedge funds and other money
management firm are often quite large and invest in ways that the
retail investor cannot and should not. Strategies can include
equities, bonds, derivatives, currencies, swaps, and other exotic
instruments that work in tandem for large sums of money. Just to
initiate a position in the futures market usually costs at least
$50,000 making the strategies of firms investing in these markets
much different than the appropriate strategies for every-day
Still, there are takeaways to investment changes like the one's
Soros Fund Management made.
Concern for a market pullback is not just idle speculation.
Here's a few things to consider:
- Bull markets historically last about 5 years - 2014 marks
year number 5 for the current bull run.
- The average S&P 500 P/E ratio is 15 while the current
P/E is nearly 20.
- The strongest sector of the year has been Utilities,
typically a defensive sector that performs well in recessionary
stages, at 15% YTD.
- The weakest sector of the year has been Consumer Cyclicals,
typically strong in market expansions, at just 0.23% YTD.
Combine these facts with the strong short moves George Soros
made and a picture of a bear may begin to form in your head.
Investors should consider this a warning notice to begin protecting
your portfolio with appropriate hedges like covered calls and puts.
Caution is recommended in this environment and you can be sure that
we'll be keeping a close eye on what Mr. Soros does in the third
quarter this year.
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