Value Investing
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Value Investing

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    Value Investing Value Investing Document Transcript

    • Value Investing in U.S. & China U.S. Hedge Fund According to data collected by BlackRock between 1997- 2011 in U.S., if we invest 15% of a portfolio into hedge funds, about 0.3%- 0.5% of additional return will added to the traditional portfolio; while reducing risk to the traditional portfolio is about 0.2%- 1.2%. The diversification benefits of hedge funds arethought to be the result of hedge fund managers seeking market inefficiencies and lower correlation with traditional investments and markets. In addition, the difference between good hedge fund performance at an annualized 24.3% and bad hedge fund performance at an annualized -18.1% is very wide 42.4%. This shows the significance of selecting a good hedge fund manager for maximizing portfolio performance.In my opinion, the additional contribution to performance of a15% allocation to hedge fund will be is lowered by the bad hedge funds present in the time period. What matters is that the hedge fund has a good manager and good team with a special approach for outperforming the market and average hedge funds. Relative value and long/short equity hedge funds have a somewhat large positive (0.6, 0.9) correlation with stocks and smaller, negative (-0.2, -0.4) correlations with bonds. A well-diversified portfolio (60% stocks & 40% bonds)withshows higher correlationto stock market indices (0.99) than a pure hedge fund portfolio. A portfolio balanced betweenU.S. & international stocks showed increasing correlation in the resent past, with an R-squared of 0.54 from 1980 to 1990 increasing to 0.88for the period 1990-2000.According to BlackRock, hedge funds during 1997- 2011 showed about 50% of the volatility of stocks. Thus, adding a 15% exposure to hedge funds into the whole portfolio helps reduce the volatility of portfolio performance. Picking a good hedge fund will definitely offer superior diversification benefits. Even though future
    • performance is independent of historical performance, investors can still try to choose the right hedge fund for them according their risk preference, fee structures, hedge fund strategies, and hedge fund team structures. Cannell Capital Cannell Capital is a long/short equity hedge fund using multiple- strategies, including market neutral and relative value strategies. It’s one of the good performaninghedge fundssince 1992. In my opinion, it offers diversification benefits for the portfolio superior to the hedge fund show in BlackRock’s data. One of the reasons is that Cannell Capital seeks North American small-cap investment opportunities that are neglected by the market. Small-cap investments have higher volatility, being more sensitive to economic news. Those investments in companies that have excellent growthpotential and good management teams, whole being fairly to undervalued to the market may be the best investments. Cannell also shorts companies that is considers to be over- priced by the market. This helps create a low correlation with traditional investments and to capture higher profits from market inefficiency. In addition, the long/short strategy can control the net exposure of the portfolio and manage volatility to a certain extent. Cannell Capital’s investment style is based on a combination of fundamental, bottom-up, and quantitative analysis with internal and external research. This gives the firm the ability to generate attractive absolute returns for its clients. Another reason for Cannell’s superior performance characteristics that Cannell Capital applies value-investing theories and invests in those companies with cheap price. These investments have lower value-at-risk and protect investors from the downside market risks. Chinese Hedge Fund According to Moody’s, the projected growth for 2013 is 2% for developed countries and 5.7% for emerging markets, while the growth rate of China is projected to be
    • 7%.Wikipedia states that 0.1% of China’s GDP belongs to hedge funds, while 80% of bank deposits belongs to the wealthiest 20% of the high-net-worth population. As we can see, the growingnumber these high-net-worth individuals can be a very beneficial for hedge fund development. In China, some hedge funds are private and some are backed by the government. According to Clifford Changes, hedge fund in China are expected to growth to 0.4% of GDP in the next 10 years. One representative is the Sunshine Fund, a closed-end fund regulated by China Banking Regulatory Commission, reached assets-under-management of about 190 billion RMB in 2011. Other private funds are subjected to additional regulations; while are “underground funds” that is funded by private capital are unregulated. Due to the importance of the Chinese government and regulation to doing business in China, I recommend investing in those companies that have positive relationships with government and will experience positive impactsdriven by regulations under eventdriven strategies. In addition, investing in Chinese equities, which trade at a cheap price,will help limit the downside losses from a value investing point of view. For a five-year horizon, the price movements of both U.S. and Chinese stock markets can be summarized by collecting historical data from Finance.Yhaoo! and Finance.Sina. The historical performance of the stock markets in U.S. & China between 2008 and 2012 is as follows:
    • 2008- 2013 Stock Markets (U.S. & China) 4400 3900 3400 2900 2400 1900 1400 900 Shanghai Composite Shenzhen Composite S & P 500 2013 Q3 2012 Q3 2011 Q3 2010 Q3 2009 Q3 2008 400 Russell 2000 Collected from Finance.Yahoo! &Finance.Sina. (06.21.13) (adjusting Shenzhen Composite by dividing 3.6 Starting Point of Up & Down U.S. Down China Up Down Up 2008 May Dec Apr Dec 2009 Feb Jul Sep 2010 Apr Aug Mar Jun 2011 Apr Sep Mar Dec 2012 Apr Jun May Nov 2013 Jan Jan
    • Recommendation Long Period Short Period China September -March March- September U.S. June- April April- June Correlation between U.S. and China Market Shenzhen Composite Shanghai Composite S&P 500 0.0770 0.0216 Russell 2000 0.0372 -0.0819 As can be seen in the above graph and charts, after collecting the starting month of stock markets for each year, we can estimate the approximate time for long/short decision in a passive investing style. In China, the time period recommended for taking more long positions and less short positions is between last year’s September and next year’s March. The rest of time is recommended for more short positions and less long positions. We called it “sell in March and go away”. In U.S., the time period recommended for taking more long positions and less short positions is between last year’s June and next year’s April. The rest of time is recommended for more short positions and less long positions. We called it “sell in May and go away” according to Seeking Alpha.By applying long/ short seasonal strategies in both U.S. & China stock market, both net exposure and correlation can be reduced. It is easier to obtain profits by taking more long positions in U.S. and short positions in China.
    • Appendix
    • BlackRock- Alternative Investment Education Center (03.08.2013) BlackRock- Alternative Investment Education Center (03.08.2013)
    • BlackRock- Alternative Investment Education Center (03.08.2013) BlackRock- Alternative Investment Education Center (03.08.2013) Reference BlackRock. (2014, March 8th). Capitalizing on Market Inefficiencies in Global Stock
    • Markets. Retrieved on 2013, June 21st, from https://www2.blackrock.com/us/financial-professionals/tools/alternative-investmentseducation-center/capitalizing-on-market-inefficiencies-in-global-stock-markets BlackRock. (2014, March 8th). Diversification is Difficult When Correlations are Rising. Retrieved on 2013, June 21st, from https://www2.blackrock.com/us/financial-professionals/tools/alternative-investmentseducation-center/diversification-is-difficult-when-correlations-are-rising BlackRock. (2014, March 8th). Market Volatility Can Erode a Portfolio's Value. Retrieved on 2013, June 21st, from https://www2.blackrock.com/us/financial-professionals/tools/alternative-investmentseducation-center/market-volatility-can-erode-a-portfolios-value BlackRock. (2014, March 8th). Using the versatility of hedge funds. Retrieved on 2013, June 21st, from https://www2.blackrock.com/us/financial-professionals/tools/alternative-investmentseducation-center/using-the-versatility-of-hedge-funds?cmp=alternatives&chn=PPC&c =bing&kw=hedge%20fund Hedge Fund in China. (2012 Oct). Retrieved on 2013, June 21st, from Clifford Change. Russell 2000 Historical Prices. Retrieved on 2013, June 21st, from Finance.Yahoo http://finance.yahoo.com/q/hp?s=%5ERUT+Historical+Prices Testing the Statistical Theory ‘Sell In May and Go Away’. Retrieved on 2013, June 24th, form http://seekingalpha.com/article/1493282-testing-the-statistical-theory-sell-in-may-and -go-away Shanghai Composite Historical Prices. Retrieved on 2013, June 21st, from Finance.Sina. http://vip.stock.finance.sina.com.cn/corp/go.php/vMS_MarketHistory/stockid/000001 /type/S.phtml Shenzhan Composite Historical Prices. Retrieved on 2013, June 21st, from Finance.Sina.
    • http://vip.stock.finance.sina.com.cn/corp/go.php/vMS_MarketHistory/stockid/399001 /type/S.phtml?year=2008&jidu=1 S&P 500 Historical Prices. Retrieved on 2013, June 21st, from Finance.Yahoo http://finance.yahoo.com/q/hp?s=%5EGSPC+Historical+Prices Wikipedia. (2013, March 8th). Hedge fund industry in the People’s Republic of China. Retrieved on 2013, June 21st, from http://en.wikipedia.org/wiki/Hedge_fund_industry_in_the_People%27s_Republic_of_ China