“Hindsight bias adds to the ruckus caused by knowing the outcome.”
- Annie Duke
Since I’ve worked for and with hedge funds for going on 22 years (and called my company Hedgeye), let’s just say the texts I’ve been getting all week have been both bountiful and colorful. Both my friends and foes have lots of feelings right now.
It’s commonplace for hedgies to go on and on and on about the performance of other hedge funds. “Yeah, we’re having tough month, but did you hear what these guys are down?” That yip yap happens 100% of the time during a major drawdown.
As Annie reminds us, it’s just human nature to behave that way. “It’s not just you with your own decisions. It’s you with other people’s decisions… and other people with your decisions…”
“Do you know what’s worse than spending your life with the regret of thinking you should have known?”
“Having that regret PLUS having everyone else telling you I told you so.” -How To Decide, pg 29
Back to the Global Macro Grind…
There’s everyone on Wall Street telling you should have known, then there’s everyone on Main Street tweeting at you. Since we Masters of the Hedge Fund Universe are sooo much smarter than The People, the 2nd part of everyone is really getting to people.
But there’s no crying in long/short stock picking…
So let’s be better than this and stop whining about Maxi Avatars and Wall Street Bets. The Game is changing – it always does - and only those of us who are willing to embrace the uncertainty of change are going to get it right next.
Hindsight Bias: “the tendency to believe an event, after it occurs, was predictable or inevitable.” -How To Decide, pg 29
In hindsight, the Economic Quads are predictable. That’s why we use PREDICTIVE tracking algos to predict them. In hindsight, the back-tested returns, by Asset Class, Sector Style, and Factor Exposure are what they are too – history.
As I pointed out yesterday, the epic and US centric de-grossing of US Equity Long/Short books didn’t affect major Asset Classes (FX, Rates, Commodities) or related risk markets like High Yield. That’s not where hedge fund crowding risk was.
The risk was where the leverage was:
A) Crowded & Concentrated US Equity Longs and...
B) Consensus Shorts
So if you have friends who want to whine about #WSB, let them whine. The winning Hedge Fund and Long Only books were the ones that were:
A) Long Cheap High Short Interest Stocks …
B) Long Expensive High Short Interest Growth Stocks… and
C) Short Long-term Treasuries, Gold, Gold Miners, Utilities, etc.
Every one of those things is back-tested and textbook long/short positioning for #Quad2.
‘But, but, this is ridiculous Keith… this stock is through everyone’s price target… it makes no sense… these WSB guys are bad guys…’ blah blah blah
And the guys who drove epically positive Hedge Fund returns on Long Bitcoins and Tesla are all the good guys?
Let’s be honest – this has nothing to do with being a good or a bad guy (why are they all guys anyway?). This has everything to do with the most basic thing that matters more than any other thing on Wall Street – who is making and losing money.
While consensus de-grossed, if you haven’t been grossing up your gross long exposure to HIGH SHORT INTEREST names, I think you need to be more flexible. Yesterday on The Pitch (6 of my analysts pitched 6 long ideas in 60 minutes):
A) McGough pitched a #Quad2 Retailer (DBI) – it trades at 3x his EPS number and has 12% SHORT INTEREST
B) Van Sciver pitched a #Quad2 Airline Stocks (SAVE) – it trades at 3x his EPS number and has 14% SHORT INTEREST
C) Tobin pitched a #Quad2 Healthcare Long (GDRX) – it’s a big TAM multiple bet and has 34% SHORT INTEREST
Are these hedge fund hotels? Yeah, on the short side. But who is legitimately whining about getting squeezed in names that either trade at 3x earnings or, on the growth side, have Ron Baron and Tiger Global Long of it vs. 34% SHORT INTEREST?
No more whining, guys. Focus on winning – that’s what we all get paid to do.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.01-1.15% (bullish)
SPX 3 (bullish)
RUT 2095-2186 (bullish)
NASDAQ 12,990-13,815 (bullish)
Tech (XLK) 127.46-136.00 (bullish)
Energy (XLE) 39.43-44.58 (bullish)
Financials (XLF) 28.71-31.60 (bullish)
Utilities (XLU) 61.50-64.17 (bearish)
Gold Miners (GDX) 33.21-36.30 (bearish)
VIX 18.19-34.04 (bearish)
USD 89.81-90.84 (bearish)
Oil (WTI) 52.00-53.72 (bullish)
Gold 1 (bearish)
TSLA 810-891 (bullish)
Bitcoin 30,309-37,770 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
