Forex Market Commentaries - Taking A Bite Of Apple

Hedge Funds Are Surviving On A Low Calorie Diet By Taking A Bite Of Apple

Feb 24 • Market Commentaries • 2961 Views • Comments Off on Hedge Funds Are Surviving On A Low Calorie Diet By Taking A Bite Of Apple

“A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than other funds, but which is only open for investment from particular types of investors specified by regulators. These investors are typically institutions, such as pension funds, university endowments and foundations, or high net worth individuals. As a class, hedge funds invest in a diverse range of assets, but they most commonly trade liquid securities on public markets. They also employ a wide variety of investment strategies, and make use of techniques such as short selling and leverage…”

Hedge funds are for clever people right? They must employ the best Harvard, MIT or Cambridge educated maths genius quants. These guys must be the sharpest tools in the box, constantly tethered to their lab coding up algos in ‘hydron collider style’ bunkers buried deep in the side of mountains. Whilst their boss strokes his white cat laughing at us mere mortal retail traders who dream of riches as we put our “expert advisors” on the back end of our meta trader platform..

Or they could just be buying Apple shares from their iPhone..

Imagine that, the best and the brightest, the elite, the masters of the known financial universe just buy Apple stock and ride it. Nearly 30% of hedge funds owned Apple stock in the last quarter of 2011. Now you may be thinking what I’m thinking; that it’s a plot, a clever plan. One day, in unison and perfect fusion, they’re going to dump the stock at some time in 2012. It crashes back down to $200, retail investors panic, the funds buy it up and make a few billion as it rides back up to $500+..We’re obviously guilty of watching ‘Billy Ray Valentine’ in Trading Places too many times. Nope, there’s no sophist trickery at play here, hedge funds have been buying Apple ” ‘cos it always goes up, innit..”

A record 216 hedge funds were holding Apple stock at the end of 2011. At the end of Q3 209 hedge funds owned Apple, at the end of Q2 it was 181, at the end of Q1 it was 173..the pattern is clear. What is also clear is that as Apple goes, so does the entire hedge fund space…

Goldman Sachs notes:

30% of  fundamentally-driven hedge funds hold at least one share of AAPL. One out of five hedge funds has AAPL among its ten largest long positions. When among the top ten holdings, AAPL represents an average of 8% of total single-stock long equity exposure. In aggregate, hedge funds own only 4% of AAPL market cap with 1.6% average position across all funds.

 

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According to SEC regulations, all hedge funds must report what domestic stocks they own on a quarterly basis. The SEC gives funds 45 days from the end of the period to file the documents with the SEC. The fourth quarter ends Dec. 31, and hedge funds prefer to reveal information ‘at the death’ so they wait until the last day. Therefore, many funds reported their holdings earlier this week. What was really shocking is the number of funds which own Apple stock. Apple was the most widely held stock among hedge funds, according to research by HSBC. After the recent data was release, Apple is an even more “crowded trade.”

Beware The ‘Value Trap’
Jim Chanos is a legendary short seller, he first called Enron a fraud and called the Chinese bubble, once gave a presentation about value traps. These are stocks which seem to be cheap but in reality are losing bets. Chanos mentioned that many people will buy into a stock because they see other investors did, however, almost every stock has a great investor with significant money invested in the company. Chanos cited this example as a “value trap”.

Some fund managers have billions of dollars to allocate and are very limited in what they can buy. Apple being the largest stock in the world is therefore incredibly liquid and allows for a large investment and equally easy exit..

Perhaps the most crucial detail retail investors ignore is price. Apple now trades at a price earnings ratio of 14, even less minus its massive cash hoard, the stock is trading at around $516 today, it’s been as low as €315 last June. In 13-F fillings, money managers don’t have to reveal what date or price they bought at.

*The author of this article has no position in Apple, other than being a zombie for the iPad, the iMac and will soon be getting out of his HTC by being upgraded via T-Mobile with a new iPhone 4S..

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