The investment world is full of old wives' tales, outright
falsehoods and ideas that make sense in theory but fail time and
again when put into practice.
One such falsehood is the belief that the big money players
such as hedge funds and institutions never lose money. Nothing
could be further from the truth.
All one needs to do is look back to the 1998 Long-Term Capital
Management (LTCM) disaster to prove this point. LTCM was a hedge
fund managed by some of the market's smartest guys, including
Nobel Prize winners and top dogs from investment banks. Despite
that pedigree, the fund lost more than $4 billion in 1998 and was
forced to close its doors in 2000. Prior to that blowup, LTCM
returned 40%-plus annual returns. It just goes to show that the
big-money players can and do lose money.
At the same time, some funds earn huge returns for their
investors. It depends on the management, market environment and
present strategy. When all three factors work together, the fund
is in position to have a banner year.
As an investor who follows the big money flows, I look for
hedge funds that are earning outsize returns; I then research
their holdings for possible investment -- while always looking
forward, aware that a strategy that worked yesterday could flop
if conditions change.
This approach has led me to a case of a top hedge fund whose
glory days may be coming to an end.
Right now, Fortress Investment Group is the No. 1-performing
fund group in 2013, which is estimated to have earned more than
40% this year alone. Unlike most hedge fund groups, the firm is
publicly traded as
Fortress Investment Group (
. This enables investors to invest directly with the fund, as
well as purchase the group's top holdings. The shares have
returned more than 80% over the past 52 weeks.
Fortress is heavily biased toward the financial sector, with
more than 60% allocated to
Nationstar Mortgage Holdings (
, the second-largest U.S. mortgage originator and servicer.
Benefiting from banks leaving the mortgage business, Nationstar
reported incredible second-quarter results: Earnings per share (
) of $1.37 crushed estimates by nearly 40%, and revenue jumped
40% from the first quarter and close to 200% year over year.
But although I admire Fortress' performance, I think its glory
days are numbered. Despite the stellar performance, the technical
patterns of both Fortress and Nationstar are looking tired and
ready for a substantial pullback, and I don't like Fortress'
large exposure to just one company. While the majority ownership
has paid off handsomely so far, it's too much concentrated risk
for my taste. Let's take a closer look.
Fortress has printed a double top on the daily chart in the
$8.20 range. While the price remains substantially above the
200-day simple moving average in the $6.50 range and minor
support exists at $7.20, it would not surprise me to see this
stock drop to its 200-day simple moving average prior to breaking
$8.50 on the upside.
Nationstar Mortgage has been in an uptrend since the end of
April with shares up more than 60%. However, shares have hit
technical resistance at the $58 level. The 200-day simple moving
average is currently $41, which is just over $15 from the current
trading price. This chart also looks very tired to me, and
despite my penchant for buying pullbacks, I don't like this stock
at these levels. I would also not be surprised to see shares
around the 200-day simple moving average prior to $62.
Risks to Consider:
Betting against proven hedge funds and companies can be
risky. Remember, short positions go against the natural tendency
of the market to push higher. Always be sure to use stop orders
properly, particularly when shorting, and to diversify your
Action to Take -->
It's time to sell Fortress and Nationstar Mortgage. If you
embrace risk, it is my contention that now is a good time to
short both stocks. I would short Nationstar at the present level
with stops at $62 and a nine-month target of $41. Fortress also
appears to be a solid short with stops at $8.50 and a nine-month
target in the $6 range.