You probably already know that hedge funds have been
dominating the financial news headlines recently.
I wish I could say the coverage of these uniqueinvestment
vehicles has been positive, but the media has focused on the few
bad actors in thehedge fund business and the sector's overall
lackluster returns. While there are bad apples in every business
and soliddue diligence should weed most of them out, it's the
lack of overall returns (or "alpha ," as market-beating returns
are called in the business) that has most investors
A fewfunds have bucked the trend, delivering market-busting
returnsyear after year. But they are usually difficult togain
access to, have high minimum investments and charge outrageous
There are ways for average investors to follow the lead of
these successful hedge funds without directlyinvesting .
Obviously, this isn't an exact replication, but enough clues can
be gleaned to help you gain alpha in your investing account.
The HFRX Global Hedge FundIndex is one metric used to track
overall hedge fund performance. The index has turned in abysmal
performance. Between 2003 and 2012, the index returned just 1.6%
annualized return, a small fraction of the 7.1% returns of the
S&P 500 over the same time. While things seem to be improving
with the HFRX index returning 3.2% so far this year, when
compared with the 13.8% returns of the S&P 500, things still
look very weak in the hedge fund business.
So why dowealthy individuals continue to invest in hedge
funds? The simple answer is that a few funds have posted outsize
returns for years, which keeps the attraction level high.
Clearly, everyone hopes their ownfund will start to deliver
outsize returns after they invest, but only a precious few have
One fund that has consistently produced impressive returns is
Jim Simon's Renaissance Technologies, more commonly known as
Rentech (not to be confused with the wood processing and
fertilizer company of the same name). Simons is a self-described
math nerd credited with several breakthrough theories in math and
physics. In 1978, Simons decided to turn his formidable
brainpower on thefinancial markets .
As you might imagine, Simon's funds are not like what you'd
expect from the typicalWall Street money management firm. He
hires employees with scientific backgrounds rather than financial
professionals. This breaking of the mold results in unique ideas
and out-of-the-box thinking, which have made Rentech one of the
world's top-performing hedge funds.
Simon's flagship fund, Medallion, requires aminimum investment
of several million dollars and charges a 5% management fee and a
jaw-dropping 44% performance fee. The fund is closed to new
investment and has returned an astounding annual average net of
38% (remember, that's after the high fees). Since its 1988
launch, the fund has lost money in only one year, 1989, which saw
a drawdown of 4%.
As you likely guessed, Rentech specializes inquant funds that
exploitmarket inefficiencies by using complex software. Not
surprisingly, managers at the Medallion funds are former military
software codebreaking specialists. With all this said, however,
Rentech is still required to file quarterly13F reports -- and by
studying the fund's holdings, investors can gain insight. Here's
what I learned from Rentech's first-quarter 13F report:
Rentech is extremely diversified with 3,244 total positions
and a total value of just over $42 billion. The fund increased
its holdings of these companies:
Rentech reduced its stake in the
Bank of Ireland (IRE)
and closed its positions in
Occidental Petroleum (OXY)
during the quarter.
The most compellingstock in Rentech's 13F is cyber-security
. Considering the business it's in, SAI seems like an excellent
"business interest" fit for the rocket-scientist types at
Rentech. SAI'searnings are down due to government spending cuts,
but the company has just landed a lucrative contract.
Most appealing, SAI plans to break its business into two
entities. SAI will continue dealing with government agencies, but
its technology-based division will now be known as Leidos.
Historically, this type of split has had a positive effect on
companies. I expect the same result with SAI, which also happens
tooffer a 3%yield .
Technically speaking,shares have been in an uptrend since June
24 before hittingresistance at $16. The price has fallen back
into my value buy zone with a $20 six-month target.
Risks to Consider:
A change in a fund's position in a company should not be used
alone as a buy or sell signal. However, when combined with solid
fundamental and technicalfactors , it can be a compelling
additional reason to follow along. Remember, even
hyper-successful funds like Rentech often sustain losses in
individualstocks . Always use stops and position size properly
Action to Take -->
I like SAI right now as a buy candidate. The new contract,
pending split and technical price level each make SAI a