Stocktake: Return of George Soros not necessarily an omen

Concerns about the global economy have prompted the semi-retired George Soros to return to his trading desk, the Wall Street Journal reported last week. Should investors be worried?

Soros last came out of retirement in 2007 due to fears that the global banking system was headed for trouble. An investing legend, he is famed for foretelling and profiting from many past market upheavals.

No one is omniscient, however – not even Soros, who lost a bundle on Black Monday in 1987, in Russia in 1998, during the dotcom collapse in March 2000, and in March 2008, when he bought Bear Stearns stock days before it collapsed.

Furthermore, Soros is a flexible trader, unafraid to make market U-turns; he was bearish on dotcom stocks in 1999, then switched to a bullish position despite his horror over their valuations, before again shorting the sector after the bubble burst.

It’s wise to listen to Soros; trying to copy him is another matter.

Smart money is clueless about hedge funds

Institutional investors’ expectations of hedge fund returns are ridiculously unrealistic, judging by a new BNY Mellon and FT Remark survey.

The survey of more than 400 money managers found just 1 per cent expected their hedge fund investments to yield net annual returns of 6 to 8 per cent; roughly a third expected 9-11 per cent returns; a similar number plumped for 12-14 per cent; 32 per cent said they would net returns of 15-17 per cent; the remaining 5 per cent predicted returns of 18 per cent or more.

The average estimate is around 13 percent, an astonishingly optimistic assumption. Hedge funds have generated such returns only twice in the last 16 years, notes money manager and blogger Mebane Faber. Net returns averaged 7.63 per cent between 1995 and 2009; since then, increased competition has seen returns tail off substantially.

This was not a survey of individual investors with more money than sense; it was a survey of big institutional investors. The smart money can sometimes be pretty dumb.

Stocks poised to break out?

The S&P 500 is edging ever closer to May 2015’s all-time highs. Can it finally break out of its year-long trading range?

Traders will be rightly cautious as the index faces major technical resistance – stocks have retreated from current levels on five occasions over the last year.

Nevertheless, the index looks positioned for a breakout. Last week, the number of stocks trading above their 200-day moving average hit their highest levels in almost two years. The number of stocks hitting 52-week highs hit their highest level since October 2013. Momentum in crucial cyclical sectors has turned higher, says HSBC, indicating a US equity market "melt-up" is "becoming an increasing probability".

Any unexpected fundamental surprises may yet scupper the current advance, but bulls will be encouraged by market technicals.

Active funds must continue to shrink

There has been a huge rotation out of active funds over the last 15 years, promoting some unhappy fund managers to warn of an index fund bubble that will make markets less efficient.

If everyone indexed, this would be the case, which is why some active management will always be needed. However, it is the active funds, not their passive rivals, that need to shrink, as AllianceBernstein chief executive Peter Kraus admitted last week. Active funds continue to manage some $30 trillion in assets; for funds to beat their benchmarks, that number may need to fall by as much as a third, cautioned Kraus.

Size is a major problem for active investors. The biggest funds are forced to hold too many positions, thus wrecking their chances of outperformance.

The move away from active funds is a secular trend driven by the need for a bloated and underperforming industry to slim down to appropriate levels. As Kraus notes, that remains a long way away.

Oil doubles after big rally

Earlier this year, stocks were moving in almost perfect correlation with oil prices, with investors adopting an attitude of ‘Low oil prices bad, high oil prices good’. With oil having doubled in just three months, might that dynamic be about to change?

Oil’s rally has certainly been extraordinarily rapid; only twice – in mid-1990 and in early 2009 – has it rallied so far, so fast. However, oil’s collapse to a 13-year low of $26 in January was similarly extraordinary. Even now, prices have merely returned to October’s levels, and remain at less than half 2014’s high mark.

Since 1995, Citigroup noted recently, higher oil prices have been correlated with higher stock prices roughly 70 per cent of the time. Major oil price spikes can hurt equities, but only when oil is trading at lofty levels that hit consumers' wallets. Oil prices may have doubled, but they would have to hit much greater heights for equity investors to grow concerned.