Investing Expertise

A reader suggested a review of the stock market commentary of Mark Hulbert, editor of the Hulbert Financial Digest, which tracks the recommendations of a wide range of investing newsletters. He is also a regular columnist at MarketWatch. Because Mark Hulbert uses his Hulbert Stock Newsletter Sentiment Index (HSNSI) as a principal quantitative tool in formulating his market outlook, we evaluate the usefulness of that index in predicting stock market returns rather than his qualitative commentary. HSNSI “reflects the average recommended stock market exposure among a subset of short-term market timers tracked by the Hulbert Financial Digest.” Mark Hulbert presents HSNSI as a contrarian signal for future stock returns; when HSNSI is high (low), he views the outlook for stocks as materially bearish (bullish). Using a sample of 287 values of HSNSI over the period July 2002 through September 2013 (generated by searching MarketWatch.com for “HSNSI” and its predecessor “HSSI”) and contemporaneous daily closes of the S&P 500 Index, we find that: Keep Reading

What are the trading behaviors of the best-performing hedge funds? In his June 2013 paper entitled “How do Hedge Fund ‘Stars’ Create Value? Evidence from Their Daily Trades”, Russell Jame uses transaction-level data to investigate the magnitude and source of hedge fund equity trading profits. His sample includes name, equity trade dates (but not non-equity trades, if any), execution prices and transaction costs for 74 hedge funds and 579 other institutions over a 12-year period. He estimates performance by constructing buy and sell portfolios from trades and computing portfolio-level returns over intervals of the next 21, 63, 126 and 252 trading days (emphasizing 252 days as closest to the average holding period of a typical hedge fund). He excludes portfolios with fewer than ten stocks as too noisy. He considers gross return, gross DGTW-adjusted return (return on a stock less the value-weighted return on a benchmark portfolio with the same size, book-to-market and momentum characteristics as the stock) and net DGTW-adjusted return. Using detailed trading data as described during January 1999 through December 2010 and associated stock prices through December 2011, he finds that: Keep Reading

What works better for currency trading, technical or fundamental analysis? In their April 2013 working paper entitled “Exchange Rate Expectations of Chartists and Fundamentalists”, Christian Dick and Lukas Menkhoff compare the behavior and performance of technical analysts (chartists) and fundamental analysts (fundamentalists) based on monthly surveys of several hundred German professional dollar-euro exchange rate forecasters, in combination with respondent self-assessments regarding emphasis on technical and fundamental analysis. Forecasts are directional only (whether the dollar will depreciate, stay the same or appreciate versus the euro) at a six-month horizon. The authors examine three self-assessments (from 2004, 2007 and 2011) to classify forecasters as chartists (at least 40% weight to technical analysis), fundamentalists (at least 80% weight to fundamental analysis) or intermediates. Using responses from 396 survey respondents encompassing 33,861 monthly time-stamped forecasts and contemporaneous dollar-euro exchange rate data during January 1999 through September 2011 (153 months), they find that: Keep Reading

How do broker-employed stock analysts operate? In their March 2013 paper entitled “Inside the ‘Black Box’ of Sell-Side Financial Analysts”, Lawrence Brown, Andrew Call, Michael Clement and Nathan Sharp summarize the results of a survey and follow-up interviews designed to discover key inputs and incentives affecting sell-side equity analyst outputs, including earnings forecasts and stock recommendations. They conducted the 23-question survey via email during January 9 through February 6 of 2013, with a promise of strict confidentiality. Using information from 365 responses from sell-side analysts (10.9% of 3,341 targeted) and 18 detailed follow-up interviews (17 by telephone and one in person), they find that: Keep Reading

What proportion of long-short equity hedge fund managers effectively time the stock market? In their January 2013 paper entitled “Hedge Fund Managers’ Market Timing Skills”, Xin Li and Hany Shawky investigate whether long-short equity hedge funds (the oldest and largest hedge fund category) exhibit market timing skill by adjusting positions with market trends. Specifically, they examine hedge fund return correlations with the Fama-French model factors (market, size and book-to-market ratio) during three major crises: the Long-Term Capital Management (LTCM) collapse in the fall of 1998; the quant crisis in August 2007; and, the financial crisis in 2008. They also examine market timing behaviors of individual hedge funds over their respective lifetimes by relating fund beta to market return via a nonlinear function accounting for risk aversion and/or market liquidity. Using monthly returns for 1,571 long-short equity hedge funds having at least 48 months of returns, and contemporaneous Fama-French factor returns, during January 1994 through January 2011, they find that: Keep Reading

Andrew Abraham, founder of Abraham Investment Management, prefaces his 2013 book, The Bible of Compounding Money: The Complete Guide to Investing with World Class Money Managers, by stating: “I wrote this book because I wanted to separate the snake oil from reality when investing. …By investing with world class money managers I have compounded money and thus been able to live my dreams and enjoy this with my family. I have a complete set of rules for investing in and identifying world class money managers. It is both a quantitative approach as well as qualitative approach full of due diligence. I want to ‘try’ to buy the best managers, diversify among them and make sure they are liquid and transparent. Nothing is held back. Everything is disclosed.” Using examples of successful investors and drawing upon his own experience as a trader and investor, he concludes that: Keep Reading

What research is available on investment approaches, allocations and results for U.S. university endowments? In their January 2013 paper entitled “A Survey of University Endowment Management Research”, Georg Cejnek, Richard Franz, Otto Randl and Neal Stoughton summarize available research on university endowment money management and performance. They identify four streams of research: (1) governance structure and investment policy statement; (2) asset allocation; (3) performance; and, (4) spending. Based on this research, they conclude that: Keep Reading

Do analyst stock ratings usefully predict associated returns? In his November 2012 paper entitled “Are Stock Recommendations Useful”, Ireneus Stanislawek examines the relationship between stock ratings offered by sell-side analysts around the globe over the past decade and future stock returns. He defines an overall analyst rating ratio for a stock as the number of positive ratings minus the number of negative ratings, divided by the total number of ratings. He also considers the monthly change in this ratio for a stock, employing a lag to exclude the immediate impact of a rating change on stock price. Using monthly stock ratings and returns for MSCI World Index stocks (an average of 23,000 ratings per month) from the end of 2001 through mid-2012, he finds that: Keep Reading

Are there certain kinds of insider trades that are more exploitable than others? In their August 2012 paper entitled “Insider Trading Patterns”, David Cicero and Babajide Wintoki define and examine two kinds of insider trading: (1) isolated trades (no trades in prior or subsequent months; and, (2) sequenced trades (occurring in successive months). They hypothesize that when insiders have short-maturity (long-maturity) information, they tend toward isolated (sequenced) trading. They measure insider trading informativeness via post-trade abnormal returns to associated stocks, calculated relative to returns for matched stocks with no insider trading or via adjustment based on a four-factor (market, size, book-to-market, momentum) model of stock returns. Using a broad sample of insider trades in U.S. stocks aggregated monthly by insider, along with associated stock prices and firm characteristics, during January 1986 through December 2011, they find that: Keep Reading

Are investment advisors worth the price? In the August 2012 version of their paper entitled “The Impact of Financial Advisors on the Stock Portfolios of Retail Investors”, Marc Kramer and Robert Lensink investigate the impact of financial advisors on individual investor portfolio returns, risk, trading frequency and diversification. For sampled investors, the sponsoring bank standardizes strategic asset allocation advice, but the advisors made available to investors by the bank have great latitude in recommending specific stocks. While all investors are eligible for advice, each elects either an advisory relationship (randomly selected advisors) or self-directed trading. The study emphasizes controlling for any self-selection bias associated with the type of investors who seek advice, and focuses on common stock holdings to avoid any conflicts associated with mutual fund incentives. Using demographics and complete histories of common stock positions and trades for 5,661 individual advised and self-directed Dutch investors during April 2003 through August 2007 (193,418 monthly returns), they find that: Keep Reading