It can be very valuable to look at how hedge funds behave. You can see their successes and failures. You can see very rich people making dumb decisions, or poorly timed decisions to enter the market. When you start to see very rich people losing a lot of money, or are undergoing large paper losses, then your mind starts to believe that there are various inefficiencies in the market that you can take advantage of. There are many people who believe the financial markets are rigged, or are some mass conspiracy, or they don’t have an edge,etc. Once you see the world’s richest making poorly timed decisions, then that can tell you that there are many inefficiencies in the markets.
This is a forex website, but inefficiencies within human behavior extend to all markets, whether it is stocks or commodities, etc.
Take an example from this week. The big hedge funds are forced to disclose their equity positions in a 13F filing within 45 days of the end of a calendar quarter. So, if you were following the news earlier in the week there were a lot of reports on the various positions that the big hedge funds held. The one I will focus on the billionaire hedge fund manager John Paulson. In the filing, it disclosed that his hedge fund had bought 25 million shares of Hewlett Packard last quarter. Judging by the stock price, lets say he got in at an average price of $40. So his stake was worth $1 billion dollars earlier in the week. The stock experienced a sharp gap down on Tuesday as the company lowered its earning forecast for 2011. As I write this the stock is currently around $36.26, meaning that John Paulson’s position is down around 10% from the price he bought the 25 million shares at.
John Paulson Buys Hewlett Packard
Think about that for a moment.
Every day for the past four days he has had to go into the office and see the $100 million dollar paper loss on his screen. Now he is probably going to hold this stock for the long term, probably 1-2 years so it may bounce back and make him money. I don’t know if it will or not, but that is not the focus of this article.
But if you think about that for a little bit, you will notice many inefficiencies and poor market timing. John Paulson is the world’s richest hedge fund manager, plugged into ungodly amounts of order flow and information flow, analysis, etc, but he still had poor timing. The trade may still make him money, or a lot of money over the long run, BUT the key is that his market timing was off and he is holding through a 10% paper loss as we speak most likely.
Moral of the story: Even rich hedge fund managers can make poor investment and trading decisions. And their timing can often times be off, sometimes way off. Human Beings aren’t perfect, no matter how much money you have.
People who believe that there are no inefficiencies in the markets are just flat out wrong. They just need to look at the poor or horrendous market timing of some of the wealthiest people in the world to see glaring inefficiencies right in front of them.
What type of inefficiencies? Well for the very bold, there was a shorting opportunity in HPQ to take advantage of the 10% drop. Another type of trade is if you believe that HPQ is going to go higher, then you can buy it at current prices, which would be getting a better entry than Paulson. So you could “coattail” him but get in at a better price. If you search the other 13F Filings you could see other potential opportunities. Soros dumped many of his gold holdings, but Paulson is still holding on to his $4 billion dollar stake. Who is going to be right?
People who believe that there are no inefficiencies in the markets are just flat out wrong. They just need to look at the poor or horrendous market timing of some of the wealthiest people in the world to see glaring inefficiencies right in front of them.
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