No. of Recommendations: 3
So you are saying the actively managed short positions, that were picked by the advisors after charging a very high fee, could be easily replaced by shorting the SPY? Where's the Alpha?

Shorting SPY would actually have outperformed HDGE since inception -- what I compared it to in my previous post was SH, which is an inverse daily ETF with all the inevitable warts that carries.

Since HDGE's inceptions 25 months ago, HDGE -30.01%, SH -26.44%, SPY +19.10%. Shorting SPY would have cost you about -23.20% (because when you short you owe payments in lieu of dividends, and there may also be borrow fees though that's unlikely in this particular case at a decent broker with SPY being so incredibly liquid).

Clearly the market in the last 2 years has not only been up in general, it has particularly favored stocks with low earnings quality. For everything there is a season, and a time for every purpose under Heaven: this was clearly (in hindsight) the time and season for buying junk;-).

A season clearly WILL come when quality pays and junk suffers -- who knows when (the market can stay irrational, &c).

A different worry is whether EQ does a good job identifying quality vs junk. I sampled the list of FLAG's 400 holdings, to see what it is that they're keeping out (by EQ score), and was a bit surprised to see that essentially all giants of the modern economy (cloud, entertainment, credit card &c industries) are out, with the exception of troubled YHOO -- no Google, eBay, Oracle, IBM, Liberty Interactive, Disney, Activision, Comcast, News Corp, Visa, Mastercard, &c.

Easy to research yourself at http://www.flagetf.com/funds/flag_holdings of course. So I wonder -- maybe it just so happens that accounting in all of these "new-economy" industries is truly a disaster, but perhaps instead it could be the case that JDV's EQ formulas don't really properly account for such `intangible services` firms, for which for example "inventory" is a very different concept (if at all meaningful, in fact) than for the more familiar kind of firm which mostly produces and/or resells physical goods.

Warren Buffett, not exactly inexperienced in matters of accounting, for example, holds IBM (one of the large caps excluded from FLAG thus implicitly deemed to have low EQ by JDV's formulas) as one of the largest positions in BRK's stocks portfolio (it's been rapidly accumulated a couple years ago as WB surpassed his distaste for "tech" companies by deciding that IBM is really about "business consultancy" these days instead).

Has WB let himself be fooled by some aggressive-accounting trick which the EQ formulas cleverly caught in IBM's 10-Q and 10-K filings? It's possible, of course. But maybe, as an alternative possibility, WB might have interpreted the accounting in those filings more accurately and correctly than those mechanical formulas possibly could.

If these doubts of mine are at all founded, they might help explain the apparent underperformance of HDGE and FLAG -- as the economy gradually shifts more towards provision of such "intangibles", a bias towards eschewing or underweighting firms focused on them (in FLAG), or worse towards shorting them (in HDGE), could conceivably produce longer term underperformance, not just cyclical/seasonal based.

Of course, nothing stops JDV from pondering these issues I'm highlighting, deep-diving into the various companies I've mentioned (many are TMF recs, of course, in one or more services), and tweaking his proprietary EQ computations to make it all better going forward.
Print the post  

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement