By Michael Kramer of Mott Capital
The S&P 500 continues to push higher, with the index now up nearly 12 percent so far in 2017. Data from Eurekehedge suggests that as a group hedge funds are underperforming the S&P 500 by as much as 9 percentage point. The lack of performance could help quietly push the S&P 500 another 4 percent higher on towards 2,600, while volatility remains at historically low levels.
The chase for performance is likely to push some of the best performing stock in 2017 even higher. Many of the hedge funds will find themselves in the unenviable position of having to prove their relevance and want to show they at least had some of the best performers in their portfolio.
Many of the most well-known hedge fund managers in the world engage in philanthropy, and in doing so, they often reveal their favorite hedge funds through a review of their foundation's public filings. Bill Ackman's Pershing Square Foundation invested in several hedge funds during the fiscal years that ended in September 2019 and September 2020.
S&P 500 Continues To Run Higher
The S&P 500 continues to creep higher closing above 2,500 at 2,506. My expectation is for the market to continue to climb getting somewhere close to 2,600, about 4 percent from current levels. At 2,600 the market would be trading at 20 times 2018 forward EPS estimates, based on data provided by YCharts. According to Wall Street’s estimates, earnings are expected to rise by about 15 percent in 2018, to $131.13. When adjusted for growth the S&P 500 would be trading at roughly 1.3 times growth, which would suggest the market is just about fully valued at that level.
Chase For Performance
Something to consider going into the fourth quarter will be the chase for performance. Meaning all the funds that have underperformed so far in 2017, will begin adding positions of the best-performing stocks to their portfolio to dress their positions up going into the year-end.
The Eurekahedge North American Hedge Fund Index is up only 3.3 percent so far in 2017. According to the website, the index is made up of 663 constituent funds, and designed as a broad measure of hedge funds investing only in North America. The S&P 500 Total Return Index is up about 13.50 percent so far in 2017. It leaves many hedge fund looking for performance going into the final quarter, stocks that have had stellar gains could see these funds begin to pile in during the fourth quarter, for appearance reasons.
Historically Low Volatility
Additionally, volatility continues to remain low with the VIX index currently trading at only 10.18, while the 30-Day Rolling Volatility for the S&P 500 SPDR ETF (SPY) is at 9.2 percent. Again, both of these numbers represent very low historical levels.
With the third quarter coming to a close, start thinking about the chase for performance likely to come in the fourth quarter. Think of all those underperforming Hedge Funds out there, that need to give their investors a reason why they should not cash out.
Disclaimer : Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.