By Gary Glover
In this popular series eight ordinary people are given a million dollars, a fortnight of intensive training and two months to run their own hedge fund.
The money was supplied by hedge fund manager Lex van Dam: he wanted to see if ordinary people could beat the professionals, and hoped for a positive return on his investment in spring 2008, similar to the well documented Turtle Trader concept.
6 Month Chart, Qantas v. Virgin Blue
The novice traders struggled to make money in the midst of a global credit crunch and by close of trading on the final day just three traders were left.
In conclusion although the team made a loss of 2.4% over the period they had in fact out performed professional hedge funds that were down over 5% for the same period. Two of the traders had made a profit which was significant considering the market conditions.
In distinguishing between the most and least successful traders, there appeared to be two very pronounced traits. The most successful traders always remained calm and they appeared to be able to “join the dots”, recognising that a certain piece of economic news or a major movement in a commodity or currency might influence different stocks in different ways.
Good traders can get a step ahead of the game by recognising how certain events might affect certain sectors or certain stocks in the future.
One example was the effect of rising energy prices. As energy prices went through the roof, this would have an effect on some companies positively - energy producers, refiners etc.
Other companies are negatively affected – airline, transport stocks being the obvious examples. Ask yourself how much have they hedged? And if you don’t know find out FAST. Armed with this information you have a potential insight into which is likely to perform better.
Will Qantas (ASX: QAN) or Virgin Blue( ASX: VBA) do better relative to each other if prices continue rising? There is a “pairs trade” right there. In other words buy the stock you expect to outperform and sell the other.
By recognising these issues early “joining the dots” you could profit from a move in these companies as the market slowly catches on to how these issues will influence each company.
Some recent examples of joining the dots in the Australian market would have been recognising that an appreciating Australian dollar will have a negative impact on companies who earn most of their profits overseas. Companies like CSL would be adversely affected as a result of our dollars recent strong performance.
Hedge funds are able to take long and short positions in the market place in order to hedge against any major broad based moves. In this example our Million dollar traders could be long a retailer who makes most profit in Australia and be short another retailer who makes most profit overseas if they believed that this strength in the Australian dollar was likely to persist or that it hadn’t been factored in to the market yet.
Trader and Advisor, Jason Blanchard from Novus Capital cites another other good example. With the appreciation in the Oil price in 2008 most oil stocks you would presume would go.
Once again there were numerous companies just as with gold producers in years gone by, that had hedged prices and did not benefit as much as expected. An even more fundamental error sometimes overlooked is whether the companies are in production and not merely exploring.
By the time a junior explorer gets into production the oil price could well have halved. Sound extreme? Well not when you consider oil price in recent years. After topping out at $US 140 per barrel it fell below $US40 within space of year.
So the parting message, do basic investigation, joining the dots and achieve better results from your trading.