I have written a lot lately on this blog about my stock replacement strategy. As you remember the stock replacement strategy is buying deep in the money call and put options to replace buying the actual stock. The advantage of using options is that gives you free juiced leverage 10 to 20 times, with limited downside and low capital requirements (you only have to put 1/10 or 1/20 of the amount compared to buying the actual stock).
And this stock replacement strategy allows you to trade with an account as little as $5000 to make a $1000 a day swing trading and day trading stocks.
The key to this strategy is to find highly volatile, liquid stocks that have options with high trading volume so that you have a very small spread when you buy the option. What this means is when you are day trading or swing trading stock options, you only want to buy puts and calls that have very tight spreads, (the spread is the difference between the bid and ask). You want the spread to be pennies.
Next, you need to understand that in the short term (anywhere from 1 to 5 days) price action, money flows and technicals drive 95% of the stock price in the short term. So you need to know what chart patterns work in the short term and luckily there are a few great ones that work almost all of the time.
Lastly, you need to use my secret stock replacement technique, that is only buy options that are deep deep in the money, so that the option moves almost one for one with the stock.
So to use this secret stock replacement technique of day trading swing trading options you need the follow these rules every time:
1) Only trade stocks that have options that are very liquid with high volume, so that you when you buy the put or call the spread is very low, (it should be pennies) so that you are not paying a big premium on every trade.
2) Only trade volatile stocks with great short term chart patterns. Like Lululemon (LULU) today.
3) And most importantly, you want to use my secret stock replacement strategy of only buying deep in the money calls and puts, in which the options moves almost one for one with the stock.
His name is “J”, and he runs a $40 million fund which has generated an incredible 54% annualized return over the last five years. To put this in perspective if you would have invested just $15,000 in J’s fund in 2009 you would now have more than $130,000 dollars!
J returned 264.38% in 2009 and had 2 stocks that went up 1000% or more. Even more impressive his fund only lost 9% in 2008 versus a 37% loss in the S&P 500. J has not only crushed the market indices but he has done it with less risk.
To put J’s 54% annualized return in perspective, no other mutual fund or hedge fund in the world has a better 5 year track record. This means over the last 5 years not one fund (over 18,000 funds) has better performance than his.
The name of this fund and the manager is…
I give you a lot in this blog, but this one … I won’t give everything away for free. To get the rest of this post you must subscribe to The Billionaire’s Portfolio.
So I called the bottom, now I am telling you Apple is going to $700.
Technically you can see from the chart below that Apple is ready to break out of a bullish inverse head and shoulders pattern, if it closes above $545, this pattern projects a price target of $700 for Apple.
Furthermore every stock needs a catalyst to move it. I believe Apple has two catalysts that will move its stock price up. First according to trim tabs research Value Based Mutual Funds have been purchasing Apple stock at a record pace, this has not always been the case as many value managers never purchased Apple during its big move over the last couple of years.
Secondly Apple will come out with a smart watch, many analysts think this will be released around September of 2014. This will be a game changer as it will be the first product in years that will actually get people excited about Apple the company again. More importantly it will increase Apple’s growth prospects which will cause sell side analysts to raise their earnings/revenue estimates as well as their price targets.
So what is the secret to hedge funds bringing in so much money?
Its simple, the best hedge funds do exactly what their name implies – they hedge and when you have bumps in the market like this year, hedge funds will outperform all the indices and those dinosaur mutual funds as well.
But its 2014 so no need to lock your money up with a fund of funds or hedge fund simply follow the: BillionairesPortfolio.com.
We piggyback the world’s best hedge fund’s stock picks, and we opportunistically hedge those positions with put options and inverse leveraged etfs, all for just $297 dollars.
My former boss, a former Goldman Sachs Fund Manager and Harvard MBA who managed money for some of the biggest pension funds and endowments in the country, had a special formula for investing in stocks during volatile times.
The formula had the following criteria:
1) A Market Cap greater then $10 Billion
2) Five Year Projected Annualized Earnings Growth greater than 5%
3) A dividend yield greater than the 10 year treasury bond.
The reasoning behind the screen is simple, you want a stock whose earnings are growing because it offers protection against inflation, secondly large brand name companies are less volatile and more recession proof than smaller unknown companies and buying stocks with dividend yields higher than the 10 year treasury bond allows you to get stock like returns with bond like risk.
Will Meade
President of The Billionaires Portfolio
What is the number 1 trading secret of the most successful and wealthiest hedge fund managers? Its Asymmetrical investing. What is asymmetrical investing? Its a low risk trade that also has the potential for huge or unlimited upside. Think John Paulson in 2007.
Paulson bought cheap credit-default swaps on subprime-mortgage assets, his capital risk was relatively small but the potential payout, huge. Paulson’s asymmetric trade made an almost 700% gain in 20007.
Another example, Jeffrey Altman of Owl Creek, in 2008 Altman purchased millions of Fannie Mae and Freddie Mac preferred shares for 2 cents on the dollar, today the preferred shares of Fannie Mae and Freddie Mac sell for almost 40 cents on the dollar, a 2000% return.
At Billionairesportfolio.com all we do is look for asymmetric trades, in fact right now we have two stocks in our portfolio that I think have the potential to return 300% or more by the end of 2014.
Will Meade
President of The Billionaires Portfolio
Back in 2010, Perry Capital a distressed and event driven hedge fund purchased $500 Million of Fannie Mae (FNMA) and Freddie Mac (FMCC) shares at $2 cents on the dollar
Today, both companies Fannie and Freddie are selling at over $5 a share and Perry Capital’s $500 million dollar investment is now worth more than $33 Billion a 6700% return.
That means if you would have invested $1500 into Fannie Mae’s or Freddie Mac’s stock back in 2010 you would now have an more than $100,000 dollars!
These type of home run trades are exactly what we look for in our premium research service The Billionaires Portfolio.
We are the first and only research service that actively manages a portfolio of stocks owned by the world’s best billionaire investors and hedge funds that also have the potential to make multiples of returns, (200% 500%, 1000%, even 6700%.)
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!
Forbes released the newest World’s Billionaires List this week. Now that you know who they are, let’s talk about what stocks they are buying.
At billionairesportfolio.com we track all of the stock holdings of the top billionaire investors. Here are the most recent stock purchases by some of the world’s richest, most powerful investors, including the richest man in the world, Bill Gates.
1) Bill Gates, through his Gates Foundation, recently purchased a stake in Air Products and Chemicals (APD).
2) Warren Buffett, number four on the new Forbes World’s Billionaires list, recently purchased Goldman Sachs (GS), Exxon Mobil (XOM), Liberty Global (LBTYA) and Suncor Energy (SU)
3) Carl Icahn, the 25th wealthiest man in the world, recently purchased Hologic Inc (HOLX), Talisman Energy (TLM) and Apple (APPL).
4) George Soros, another hedge fund icon, is the 26th richest man in the world. He recently purchased JP Morgan (JPM) Essent Group (ESNT), Barrick Gold Corp (ABX), Citigroup (C) and Leucadia National (LUK).
5) John Paulson comes in at number 78 on the Forbes World’s Billionaires list. He recently purchased Extended Stay America (STAY), American Airlines (AAL), Compuware Corporation (CPWR) and Digital Realty Trust (DLR).
Will Meade
President of The Billionaires Portfolio
I have been blessed in that I have worked for and had clients who were Billionaires. But there is one Billionaire I met during my hedge fund days that I will never forget, because he was one of the best options traders I have ever seen.
He had a 5 Step system for trading options that I use for my all my options trading today. I am going to share this with you today and I call this ” The Billionaires 5 Rules of Options Trading”
1) Never ever buy an Option (a Put or a Call) unless there is a catalyst or event. This means you only buy an option when there is an event that will dramatically move the price of the stock up or down. These events or catalysts can be anything from: Earnings Announcements, Fed Meetings, Economic Releases, an Activist Hedge Fund buying a stock to any type of corporate change, CEO, sale of a business unit, merger or acquisition. The key is to buy the option before this event occurs, you never ever want to buy an option after the catalyst or event. So in summary only buy an option when there is catalyst or event that will dramatically alter the price of the stock.
2) This Catalyst or Event must occur before the option expires. An easy example of this is Earnings, you only want to buy an option that expires more than a week after the earnings date. Again this means when you buy an option make sure you leave yourself enough time so that your option does not expire before the catalyst or event occurs.
3) The Option must be Cheap. This can be hard to measure but I like to keep it simple, I personally don’t like paying more than a $1 for any option. But if its a high priced stock, I will only buy the option it gives me at least 25 times leverage or more on the stock. Meaning divide the price of the stock by the actual option price. For example if the stock of XYZ is $100 do not pay more than $4 for the option on that stock, that’s the easiest way to make sure the option is cheap.
4) Only buy options in stocks that have low volatility. This means you want to buy options on stocks that have moved sideways of flat for months at a time. Look at a chart if there has not been a significant uptrend or downtrend in the last 3 to 4 months, there is a good chance that the volatility in the stock is low and the options are cheap. Also if you have options software, you can compare the stock and its options implied volatility and underlying volatility to its historical implied and underlying volatility. This may sound confusing but its the same premise value investors use, they buy stocks when they are cheap in comparison to what they historically sold for, so you want to buy options when the volatility is low or lower than what it historically has sold for.
5) Only buy options if you can make 300% or more on the option. This is very important, too many people buy options with no exit plan or profit target. You have to set a goal or sell point when you buy an option and to make it worthwhile from a risk reward standpoint. The option should have at least a 300% or more upside. Why 300%? because there is a good chance when you buy an option, you will lose the entire value or premium of the option (or 100% of your investment in the option) therefore to be rewarded for that risk you need to be able to make 300% or more in that option. Simply stated only buy an option when you have at least a 3 to 1 reward to risk scenario.
