I think before anyone writes an article, there should be a preface or introduction with the author’s background explaining why he is qualified to offer advice on the topic.
So before I give my opinion on the most overrated and underrated hedge fund managers, as well as the best hedge fund strategies, I will give you my bio.
I have over 15-years of experience in the hedge fund industry. I started my career working for what they call on the street “the Big Ugly’s.” These are hedge fund managers with the classic pedigree: Harvard MBA- Goldman Sachs (alums).
The fund I worked for managed around $1.5 billion dollars and used all the numerous classic hedge fund strategies: Long-Short Equity, Convertible Arbitrage, Distressed and M&A.
After that I worked for an $11 billion dollar fund of funds, where I basically had the opportunity to see the performance numbers and investment styles of the best hedge fund managers in the world.
Along the way, I have interviewed and had meetings with some of the top hedge fund managers in the world.
Through this experience I have gathered some insight on the best performing hedge fund strategies and managers.
The Best Hedge Fund Strategies:
1) Long-Short Healthcare- This strategy has proven to provide the best alpha (meaning returns are not determined by beta –an underlying benchmark — rather, purely skill-driven). Basically the top manager in the biotech and pharma space have delivered some of the best 10 and 15 year returns, while keeping drawdowns and losses to a minimum. There are two multi-billion dollar healthcare hedge funds that have 10-year plus track record of 40% annualized returns without a losing year. Also I happen to know a good deal of talented analysts in this space from my years spent at The Johns Hopkins University.
2) Activist Investing- is by far the best long only strategy available. Biotech and activist are the only two long-only strategies that have little or no correlation to the overall stock indices. Why? Activist investors create news and they create value. Think Carl Icahn, Bill Ackman, Dan Loeb … they create news and value in stocks regardless of what the overall stock market is doing. Change is the recipe for revaluing a stock. And these guys are change-makers.
3) Distressed- This strategy is simple, and offers by far the best returns of any strategy out there. Basically hedge funds and private equity funds loan money to companies on the verge of (or in) bankruptcy. If they can keep the company alive there are huge, and I mean huge, returns to be made. Some of the biggest returns I have ever seen have come from distressed investments. I am talking about 10,000% plus returns. But you have to have patient, as these types of investments do take time to play out. David Tepper is the best hedge fund manager I have ever seen in this space. He has generated almost 40% annualized returns for more than 20 years.
The Worst Performing or Overrated Hedge Fund Strategies
1) Convertible Arbitrage- This worked for years in the 1990′s and early 2000s but is completely dead now, as the markets have become too efficient, with so many hedge funds trading in this space.
2) Long Short Equity- Basic long-short equity has performed horribly over the past 5 years. Shorting has always been a very difficult strategy. There are a litany of forces working against you, not the least of which are short selling restrictions and government policy responses (in times of turmoil). Moreover, there has been incredible growth in ETF’s where even bad stocks are purchased and bid up by index funds and ETF companies.
3) M&A- Again another strategy that has been hurt by the huge number of funds and trading desks that are involved in this space now.
If you are looking to invest in a hedge fund, I would start with the first three categories, and then narrow it down to a mix of some of the best established managers — only managers with strong track records of generating market beating returns and avoiding annual losses and huge drawdowns.
If you don’t have $10 million (a common minimum to participate in the top performing funds) and you don’t want to pay the huge 2% management fee and 20% performance fee, you can just join our online service for self-directed investors, The Billionaires Portfolio.
Our Billionaires Portfolio, consists of 20 of the best stocks from the best hedge fund managers in the activist, biotech and distressed space all equal weighted and hand selected by me. I only pick stocks from the best hedge fund managers (both established and emerging managers) that have the biggest potential return combined with the lowest downside risk. It’s like an actively managed fund of funds for just $297 a quarter.
Through our Billionaires Portfolio the average/everyday investor can co-invest with the top hedge funds in the world for only $297. That my friends is a pretty good deal!