How To Beat The Market By 20 Percentage Points

Hedge funds are much better investors than you are made to believe by the financial press. Even hedge fund indices hide the truth about hedge funds’ amazing talent in picking winners and losers. Our research has shown that hedge funds’ top small-cap picks outperformed the market by nearly a percentage point per month between 1999 and 2012. We launched an investment newsletter that shares the stock picks of this strategy in real-time. This strategy returned 131.4% between the end of August 2012 and February, 2015. S&P 500 ETF (SPY) gained only 57.2% during the same period. Hedge funds’ top stock picks significantly outperformed the market.

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However our advice to you is to dump your hedge funds.

The fact is that most hedge fund investors don’t make as much money as they did in the nineties and the first half of the past decade, where alpha in excess of 10% was the norm. Aggregately speaking, hedge funds’ alpha has been in decline over the past decade for several reasons. They are as follows:

1) A greater level of competition within the hedge fund industry has caused profit margins to shrink.

2) Hedge funds got bigger and started investing in less profitable areas.

3) There are a lot of unskilled hedge fund managers who are trying to get rich by being “lucky”.

4) Equity hedge funds charge an arm and a leg for beta exposure.

Our research has shown that hedge funds have a small edge when it comes to large-cap stock picks and a large edge when it comes to small-cap stock picks. We created a 50-stock portfolio of the most popular large-cap stocks among fund managers. Between 1999 and 2012, this 50-stock portfolio underperformed the market by less than 1 percentage point per year but its annual alpha was 0.7 percentage points (read the details here).

It should be clear to you, then, that hedge funds’ large-cap stock picks are marginally better than the S&P 500 index because of their lower risk profile. However, if you are a hedge fund client you won’t see much outperformance in this space because you have to surrender 2% of your assets and 20% of each year’s return to your hedge fund manager. If your hedge fund invested entirely in large-cap stocks in 2014, its gross return would have been 13.5% but YOUR net return would have been only 8.8%, because you have to pay 2 percent flat fee and 2.7 percentage points of performance fee as if they accomplished something significant!!

Hedge funds can’t generate enough alpha in the large-cap space to justify their high fees. They invest in the large caps because they have too much money to manage, and they don’t want to give up juicy management fees that enable them buy condos on New York City’s Park Avenue. How do hedge fund managers get away with this?

The answer is simple.

They generate significantly higher alpha in their small-cap stock investments. Generally speaking, there are fewer analysts covering the little guys, and these stocks are less efficiently priced. Hedge funds spend enormous resources to analyze and uncover data about these stocks because this is one of the places where they can generate significant outperformance. Our analysis also shows that this is also a fertile ground for piggyback investors.

Between June 1999 and August 2012, the 15 most popular small-cap stocks among hedge funds managed to return 127 basis points per month.

It is not a typo. Reread it.

This outperformance wasn’t due to high risk either. Our small-cap strategy’s monthly alpha was 81 basis points during this 13-year period (read the details here). This isn’t even the end of the story.

We launched a newsletter at the end of August 2012 that lists the stock picks of this small-cap strategy. During the 2.5 years between September 2012 and February 2015 hedge funds’ most popular small-cap stock picks returned 131.4% vs. 57.2% return for the S&P 500 ETF. This corresponds to an average monthly return of 2.95% for these stocks versus 1.55% for SPY.

Our proposition is very simple: dump your hedge funds and imitate their small-cap stock picks. You don’t have to surrender 2% of your assets and 20% of your returns. You don’t have to invest in hedge funds’ large-cap picks which usually underperform the market. Finally, you don’t have to worry about fraud/mismanagement and you will have instant access to your funds. Click viewer appreciation button on page top to donate for blog upkeep

by Meena Krishnamsetty

Source: http://www.insidermonkey.com/hedge-fund/education-center/how-to-beat-the-market-by-20-percentage-points/1

Explosive Stocks Under $10

OCLR FATE CBAY BLDP AINV

This screen is a bit of a departure from my normal stock screens.

But I do at times scan for stocks under $10. And that's one of the screens I'm running for myself right now.Usually I require my screens to have a minimum price of $10 per share.

Penny Stocks

One dollar is a common threshold when screening for stocks. A lot of investors actively avoid penny stocks due to the speculative nature, the often wide bid/ask spreads, and the excessive volatility that is all too common in stocks under $1.00.

But some, of course, work out spectacularly well. And that's probably what keeps people interested in them.

Seeing a stock make a 100% return or 200% return or more from a base of 50 cents, for example, seems easier than investing in a $50 stock or $100 stock and seeing that double or triple.

$5 Stocks

Five dollars is another common minimum when screening for stocks since many institutional investors won't even consider a stock if it's trading under $5. And since institutional investors are usually the ones that can move a stock; having stocks that are open to them is usually a bonus.

And quite frankly, lots of cheap stocks are cheap for a reason, i.e., that's all they're worth.

Stocks Under $10But being over $5 does put them into a different category of consideration. Maybe not the best category, but a step up from stocks less than a dollar.

My minimum has typically been $10. With over 10,000 stocks out there, this minimum quickly lets me cull down several thousand stocks with a click of a button.

That doesn't mean there aren't any good stocks below that price point, because there are.

And I can recall several sub-$10 stocks in the past that worked out exceptionally well. Maybe it's because I use them sparingly. Or maybe it's because I'm ultra picky in selecting them.

Either way, there can be a place for cheaper stocks in your portfolio sometimes.

And that's what we're looking at today.

Screen Parameters

• Price less than or equal to $10

• Average Dollar Volume greater than or equal to $1,000,000
(Price x volume shows you how much money is trading in and out of the stock on a daily basis.)

• Weekly Volume greater than Previous Week's Volume (any two out of three weeks)
(Want to see increasing volume to show greater investor interest and demand.)

• Zacks Rank less than or equal to 3
(No Sells or Strong Sells.)

• Average Broker Rating less than or equal to 3.5
(Average Broker Rating of a Hold or Better.)

• # of Analysts in Rating greater than or equal to 2
(Minimum of at least two analysts covering the stock.)

• % Change F1 Earnings Estimate Revisions -- 12 Weeks greater than or equal to 0
(Preferably upward earnings estimate revisions, but definitely no downward revisions.)

Stocks

Here are 5 stocks that made it through this week's screen:

(AINV - Free Report) Apollo Investment Corp.
(BLDP - Free Report) Ballard Power Systems
(CBAY - Free Report) Cymabay Therapeutics
(FATE - Free Report) Fate Therpautics
(OCLR - Free Report) Oclaro, Inc.

I think each one of these picks has big potential. And the entire list is worth a thorough analysis.

I would not suggest filling up an entire portfolio of stocks under $10 though. But adding a careful selection of some of the best cheap stock names could add some excess returns to your bottom line, not to mention a little excitement to your stock picking process as well.

By Kevin Matras

Source:https://www.zacks.com/commentary/105701/explosive-stocks-under-10

Where the rich make their income

What's the secret to making money like the rich? Capital gains.

A study from the non-partisan Tax Policy Center looked at the sources of income for American taxpayers of different income levels. It found that the higher you go up the income ladder, the greater share of income comes from capital gains.

For the 99 percent of taxpayers making less than $500,000, salaries and wages account for 75 percent of their adjusted gross income for 2012, the latest period available from Internal Revenue Service returns. Of the remaining income, about half came from retirement programs such as pensions, annuities and Individual Retirement Accounts.

For taxpayers making $500,000 to $1 million, salaries and wages account for more than half of earnings.

Read MoreHow much these CEOs earn in an HOUR

But for those making $10 million or more, salaries and wages only account for around 15 percent of their income. Their real money comes from capital gains, with capital gains accounting for about half of their earnings. Another 15 percent to 20 percent came from interest and dividends. About 25 percent of their income came from business income, which means they owned or held a stake in a private company.

Dimas Ardian | Bloomberg | Getty Images

It's no surprise that the really rich make their money from, well, money. But Roberton Williams of the Tax Policy Center said the data doesn't mean that all of the wealthy are just sitting around making millions from the stock market every year. Many of the people in that $10 million-or-more group don't repeat their mega-earnings every year. Their income came from a one-time sale of a business or asset, leading to a capital gain.

Read MoreStates with the most multimillionaires

"A lot of the people at the very top are there because they sold a major asset or business they've built for years," he said. "It's a one-time big payday."

Williams said one of his previous studies found that among those in the top 1 percent, about half were only in the 1 percent for one year over the course of a decade.

From a policy perspective, Williams said the importance of capital gains to the wealthy could be seen in two ways.

Some have argued for hiking the capital gains tax from its current federal rate of 20 percent (plus 3.8 percent for top earners under the Affordable Care Act's Net Investment Income tax). This includesPresident Barack Obama, who proposed raising the rate to 24.2 percent in his 2015 budget. The argument is that because the capital gains rate is lower than the income tax on salaries and wages, the very rich sometimes pay lower rates than everyday earners. (RememberWarren Buffett and his secretary.)

Read MoreMore millionaires than ever are living in the US

"It looks like a ripe area to tax," Williams said.

By Robert Frank
Source: http://www.cnbc.com/id/102573238