Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Year End


Our hedge fund is opportunistic. This simply means that we are not wed to one particular strategy no matter the expected return for risk. We look at cash as an asset: if there is nothing to do, we just put the capital in the bank.

One trade we do almost every year end is to buy a basket of stocks that have underperformed the market against selling S&P futures. We sometimes adjust this portfolio to be beta neutral, although being beta positive often is a better return for higher risk.

I describe this trade for educational purposes, not as a recommendation.

In December many funds sell stocks that have underperformed for the year in order to generate tax losses. They do this to offset capital gains taken against profitable positions during the year. I cringe a little when I think about this for it certainly goes against what I believe is prudent investment policy, but it occurs nonetheless. Ah, the human element in things is not necessarily rational.

The trick is to decide when this tax selling is nearly finished. We have noticed statistically that in the last few years this seems to be occurring a little later in the month of December. So a week or so before the last trading day of the year we begin to build the portfolio.

We then wait. Over the next month or so into early February this basket of stocks usually begins to outperform the market in general as the tax selling stops and then the same funds that sold the stocks out for year end begin to actually buy them back (individual investors as well as funds must wait thirty days to buy these stocks back in order to avoid "wash sale rules").

Year end capital flows should be quite strong given the low interest rates (real rates are actually negative). The human element is not necessarily considering the risk: year end bonus money, not finding much in return in other financial assets, is likely to find its way into stocks no matter how abhorrent it seems to me.
< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos