Category Archives: Portfolio Management

Check Out Hedge Fund LIVE’s University Desk Standings

HedgeFundLIVE.com — One of Hedge Fund LIVE’s key initiatives is to partner with universities and invite investment clubs to join our University Channel.  Being part of our growing universe of trading desks will give students the unique opportunity to trade real money and gain exposure to HFL’s existing community as well as potential employers.

Additionally, these university desks will be competing against each other- the most profitable team at the end of this semester will receive 20% of total profits across all desks.  Be sure to check back frequently to view current University Standings.  You can also view each of their portfoliosand analyses to gain a better understanding of their investment strategies.  Alternatively, you can easily navigate to all of these features through the main desk page for each university (on Hedge Fund LIVE’s home page, click one of the drop downs under the University Desks button).

As of the end of 4.5.11, here are the University Standings:

COME JOIN OUR LIVE BROADCAST MON-FRI 8AM – 5PM AT HEDGEFUNDLIVE.COM. PICK A CHANNEL AND GET CONNECTED.


Check Out Hedge Fund LIVE’s University Desk Standings

HedgeFundLIVE.com — One of Hedge Fund LIVE’s key initiatives is to partner with universities and invite investment clubs to join our University Channel.  Being part of our growing universe of trading desks will give students the unique opportunity to trade real money and gain exposure to HFL’s existing community as well as potential employers.

Additionally, these university desks will be competing against each other- the most profitable team at the end of this semester will receive 20% of total profits across all desks.  Be sure to check back frequently to view current University Standings.  You can also view each of their portfolios and analyses to gain a better understanding of their investment strategies.  Alternatively, you can easily navigate to all of these features through the main desk page for each university (on Hedge Fund LIVE’s home page, click one of the drop downs under the University Desks button).

As of the end of 4.1.11, here are the University Standings:

COME JOIN OUR LIVE BROADCAST MON-FRI 8AM – 5PM AT HEDGEFUNDLIVE.COM. PICK A CHANNEL AND GET CONNECTED.


Check Out Hedge Fund LIVE’s University Desk Standings

HedgeFundLIVE.com — One of Hedge Fund LIVE’s key initiatives is to partner with universities and invite investment clubs to join our University Channel.  Being part of our growing universe of trading desks will give students the unique opportunity to trade real money and gain exposure to HFL’s existing community as well as potential employers.

Additionally, these university desks will be competing against each other- the most profitable team at the end of this semester will receive 20% of total profits across all desks.  Be sure to check back frequently to view current University Standings.  You can also view each of their portfoliosand analyses to gain a better understanding of their investment strategies.  Alternatively, you can easily navigate to all of these features through the main desk page for each university (on Hedge Fund LIVE’s home page, click one of the drop downs under the University Desks button).

As of the end of 3.15.11, here are the University Standings:

COME JOIN OUR LIVE BROADCAST MON-FRI 8AM – 5PM AT HEDGEFUNDLIVE.COM. PICK A CHANNEL AND GET CONNECTED.


Check Out Hedge Fund LIVE’s University Desk Standings

HedgeFundLIVE.com — One of Hedge Fund LIVE’s key initiatives is to partner with universities and invite investment clubs to join our University Channel.  Being part of our growing universe of trading desks will give students the unique opportunity to trade real money and gain exposure to HFL’s existing community as well as potential employers.

Additionally, these university desks will be competing against each other- the most profitable team at the end of this semester will receive 20% of total profits across all desks.  Be sure to check back frequently to view current University Standings.  You can also view each of their portfoliosand analyses to gain a better understanding of their investment strategies.  Alternatively, you can easily navigate to all of these features through the main desk page for each university (on Hedge Fund LIVE’s home page, click one of the drop downs under the University Desks button).

As of the end of 3.14.11, here are the University Standings:

COME JOIN OUR LIVE BROADCAST MON-FRI 8AM – 5PM AT HEDGEFUNDLIVE.COM. PICK A CHANNEL AND GET CONNECTED.


Hedge Funds- Why We Are Better

HedgeFundLive.com

Why we are better transparency.

Put us up against any other hedge fund and the one guarantee is our transparency. Four times a year, US securities regulators require fund managers to disclose their stock holdings. At hedge fund live, at any given time, your are able to view any of the traders portfolios, as well as watch the trading desk. I have mentioned this in a previous blog, that hedge fund live is truly innovative.

Mid day recap for Day Trade Well P&L is positive!


Sold CSCO, Asset Allocation

As an update of CEF’s investment fund, we just sold CSCO on Friday at $21.99 for a return of 12.25%. The fund’s current return is 11.49% after two and a half months and now mainly consists of a long position in COPX. Currently, we are researching a possible long play on ticker ABT.

After the first two weeks of school, most of the topics we have covered are still reviewing things we have learned before. In Portfolio Management we learn about asset allocation and investments utilizing the Capital Market Line and using concepts from optimization to find the most efficient portfolios. We see how this technology can be applied no matter what kind of assets a fund focuses on. I wonder if day traders etc. who are more focused on technical analysis also utilize these theories or if allocation is more focused on gut instinct and diversification simply comes through picking many different stocks that may not give the most efficient portfolio but is hopefully still less “risky” for the target rate of return.


Healthcare focused desk

One question that I would like to address is what is special about a health care focused desk?  After all, the health care index has been underperforming the S&P 500 over the past year.  There are several characteristics that make health care an attractive investment, whether it be to provide diversification to a core fund or be fund specific.

-First the health care sector itself is highly diversified and a health care portfolio can be constructed in many ways.  Several sectors include pharmaceuticals, biotech, medical devices, diagnostics, medical supplies, hospital providers, health care insurance, health care services, health information technology, generics, genomics, with many companies spanning several sectors-or integrating through various parts of the value chain.  Additionally, many sectors appear to be uncorrelated with each other.

-Due to the large number of firms, it is estimated that 80% of health care firms are not followed closely by Wall Street thus giving opportunities to capitalize on information asymmetries.

-Historically,  the health care industry has been non-cyclical and returns have been uncorrelated with broader equity markets and typically has a beta less than 1.  Prior to the financial crisis, growth had been fairly consistent for the past 40 years.

-Another key characteristic are binary events, meaning that a health care stock can go up or down depending on the direct failures and successes of the company, and are mostly uninfluenced by broader market conditions.  This makes betting on key events (i.e. drug approval) an important portfolio strategy to consider.

In terms of constructing our own portfolio strategy, we had to take all these characteristics into account.  One starting point was deciding how to hedge against binary events for a single company when it is not planned for (when not betting on events).  For example, we don’t know when suddenly a company’s product has a newly discovered side effect and needs to be recalled.  One way it to have a long-term put option to limit our losses or have a sector ETF for that firm.  I think we are leaning towards a sector ETF to manage the risks associated with a single company, even though the ETF itself has its own risks associated with it.

Thus, it is likely that a strategy involving reducing unplanned binary risks through diversification of health sectors and companies with a sector will be used so that it will allow us to gain exposure to only those binary events that we decide to bet on, using hopefully, our understanding and knowledge of the health care markets and companies.


A Background on One Asset Allocation Methodology

Asset allocation is an evolving art and science.  Like technical indicators and trading strategies that work in one market but not another, asset allocation must also be tweaked given the market conditions.  In other words, there is definitely not one fixed optimal asset allocation strategy.   In particular, the recent financial crisis has brought to light the shortcomings of various asset allocation methods.

Advisors can turn to modern portfolio theory, which has increasingly been coming under scrutiny.  As markets became more and more inefficient in recent years, correlations between asset classes approached nearly 1.0, and illiquidity grew to be a real problem, modern portfolio theory’s benefits from diversification deteriorated a bit.  Another allocation strategy that may be employed is risk parity.  Risk parity seeks to achieve diversification by having each asset class to contribute an equal amount of risk to the overall portfolio.  Those who use risk parity acknowledge that in portfolios stocks traditionally carry the most risk.  Therefore, risk parity will protect against losses from any particular asset class.  It will allocate 20-25% of risk to each asset class.  Now when each asset class receives equal risk contribution weighting, the natural result is that the fixed income asset class becomes the most heavily weighted, which makes sense given that fixed income generally carries lower risk and correlation to other classes.  With this methodology comes different returns, namely lower returns.  In order to try to boost returns then, risk parity portfolios employ leverage.  One note of caution here though is that using leverage will make the portfolio more sensitive to interest rate risk.  In other words, when rates increase, leverage will become expensive and at the same time the fixed income assets will decline in value.

The main focus for risk parity portfolio managers is forecasting future risk.  Whereas market weight portfolios will be conscious of price changes and rebalance accordingly, risk parity portfolios will adjust holding according to future risk projections.  For example, if a stock price moves higher and the risk remains constant, the portfolio manager must lighten up in that position.

I’ll conclude with the downside of risk parity.  People argue, who cares about risk weightings or other types of complex allocation strategies when at the end of the day absolute returns are all that matter?  Ok, sounds to me like a bit of a cop out response.  Other will argue that since fixed income receives the most weighting in these types of portfolios, when interest rates finally come off their historic lows (as we are witnessing in recent times), bonds will not fare as well as they have been.  The flaw I see in that argument is that the point of risk parity is not to speculate on future returns; as its name implies, it’s all about risk, and trying to control it.  Lastly, as I mentioned above, there is leverage risk, which is higher while portfolio returns are the same as traditional approaches to asset allocation.  However, bear in mind that the additional diversification helps reduce overall risk so that will offset the leverage risk.  Also, all the cash from their leverage would be able to cover potential losses (and margin calls) in the portfolios.


BBY, Stick In My Eye

I took Best Buy (BBY) long into earnings earlier this week.  I looked at the recent weakness in the name and thought other traders/portfolio managers were scared and sold early.  My opinion was that a meet or even slight miss might bring buying; the weak hands were out and would flood back in.  I was wrong.

But that was not my mistake.  I have and  will make many other losing trades in my career.  The mistake was in the construction of my portfolio.  I am meticulous about my overnight position sizing, and diversification.   BBY was my largest position.  But even though it wasn’t outsized in relation to the other positions, it was the name with the most risk.

Approximate  cost 1 year tuition at Cornell University:  $48,000.

Exact cost  1 trade without proper risk adjusted size for earnings:  $48,861.

Aprox MTD P&L:  $91,780


Rough Start

Below is a write up on Entropic, which at the time of the write was a solid long idea.  Entropic moved from $8.34 – $10.35 a nice 25% move in just a few days of work.  When doing research on ENTR and running the numbers it looked as if it would be extremely tough to meet EPS projections if the margins were to stay the same.  Needless to say a day after my write up ENTR raised guidance and the stock rallied about 16% that day, ENTR than grinded a bit higher finally topping out at $10.35.  By reading the CEO’s commentary I should have foresaw the fact they would raise guidance since he was extremely bullish regarding the quarter.

ENTR than released a statement that they would be issuing 10.8 million shares which was about 14% of the shares outstanding.  The stock held up on the news but the sellers finally came to the market and the stock got hit, trading down to $8.50, were I initiated a small position Friday.  I figured that the name had been extremely strong and 8.50 was a nice level of support and a 13% pull back from where stock was issued.  As I said earlier the shares issued diluted the value by about 14% so I figured $8.50 could be fundamental support as well.

Over the weekend I read as much commentary as I could on ENTR and didn’t feel great about my position.  I got the feeling that the majority of traders felt the stock has had a terrific run and earnings will need to be spectacular in order for the stock to stick above ten bucks.  I thought ENTR could possibly trade down to $8.00, which was a nice level of support and the bottom of the $8 - $10 range.  With a name as volatile as ENTR I needed to give it one ATR of breathing room, about 50 cents.

Anyway this morning we opened up and ENTR was trading flat but couldn’t really get going and I had a bad feeling about the trade.  Instead of blowing it out and revaluating the risk I stuck with the trade and before I could blink it went down through 8.50 and gapped to 8.35, a 2% downward gap.  I stayed calm and watched the stock trade all the way down to $7.70 before bouncing.  I ended up stopping myself out at the lows because I had no clue what the hell was going on and was at my daily limit.  ENTR rallied all the way back to $8.25, which ended up being a great selling opportunity as ENTR turned down and closed at the lows of the day.

Although I took a beating it was an educational experience, I had a feeling the stock was going to 8 or lower and it did.  Next time I have to trust my instincts and get out of the trade.  I’m not happy about the beating I took but I feel the lesson learned will pay off in the future.

I still think ENTR is a good long but right now it’s a nightmare, so I’ll sit on the sidelines and wait for it to find a level, gauge the sentiment and make the right trade.  And this time when I get the felling I had today I’ll get in with size and make the right trade.

Thesis

As we enter an era of Smart TV and everyone calling for death of Cable/Digital TV there is one final growth story.  With big names in tech like AAPL and GOOG, looking to compete with Hulu in bringing network television to the internet, Entropic Communications has become a major player in the TV chip set marketplace and I believe the majority of the growth is yet to come.

Business

Entropic was founded in 2001 with a vision to move high definition video into and throughout the home.  Entropic went public in 2007 and now stand as the leader in MoCA technology.  MoCA (multimedia over coax alliance) technology has changed how multiroom DVR and IPTV video delivery services are transferred throughout the house.  Entropic’s products include home networking, broadband access, DBS outdoor unit, and Silicon Tuner.

Home Networking

At the core of Entropic’s home networking business is their chip that allows you the ability to record and share digital videos simultaneously in every room.  These also build the technology that gives you the ability to access games from various locations in your house and merge/share media data throughout your home.

DBS Outdoor Solutions

In traditional satellite installation each tuner requires a unique cable from the satellite dish to the STB (set top box) to receive the full channel line up.  DBS outdoor solutions eliminates this and can support up to 12 tuners over a single cable and can leverage cabling already in the house.  This technology will lower the cost of upgrades and instillation.

Positives

-       With Entropic’s technology consumers are now able to watch any digitally recorded show on any other set-top box in the house at roughly 10 dollars more per STB per month.

-       A study shows that there are roughly 43 million digital TV subscribers with each owning three TV’s on average.  ENTR will receive 8 dollars per TV, making this a million dollar opportunity.  Entropics revenues in 2009 were $116 million.

-       Verizon Fios was the first service provider to launch this service and Entropic is expecting DirectTV, Comcast, Cox Communications, and Time Warner to do the same in the coming months.

-       Entropic is the major player in the MoCA market controlling 95% as of April and as competition continues to enter the market place ENTR is becoming a possible takeover target.   The Benchmark Company feels ENTR would be a good fit for Atheros because of their Broadcom-like bundling strategy.   Marvell also recently acquired DS2 Technology.  DS2 is not a direct competitor of ENTR but is in the no new wires business.

Negatives

-       Entropic’s stock has done very well in the last week closing on Friday at 8.35 ten cent’s off of the 52 Week high made that day.  The stock traded as low as 6.77 on August 25th so a pull back could be in the cards.

-       Looking at the numbers if ENTR keeps margin’s in-line with Q2 2010 it will be hard to meet the bottom line profit estimate of nine cents per share.

-       TTM P/E is high at 135, but this is a new growth story and their isn’t another pure play name in this space to compare with Entropic.

-        Competition is starting to enter the market and some analyst’s see Broadcom potentially taking 33% of the $1 billion market.

I like Entropic because of the potential growth and little competition.  Everyone has been speaking of death of cable/digital TV with the emergence of Smart TV, but, I believe it will take years to implement this strategy.  For example, look at Blockbuster and Netflix, people have been talking about the death of Blockbuster forever and Netflix has really just taken off the last few years.  Giving consumers the ability to watch any show at any hour from any STB in the house for a price of $10 a month has tremendous growth and this is the next logical step for home viewing.