How’s that for a sensational headline.
For one of my classes (FINC 421) we started our own hedge funds. We were given $30M in a program called StockTrak with the ability to buy 50% on margin, access to Bloomberg, and a few basic QUANT rules. Over 3 months we were able to generate over 20% return, which is amazing.
Our professor started this project to see if a student-run, QUANT-based hedge fund would be possible here at Texas A&M. After these great results, there’s a pretty good chance we’ll be getting a hedge fund here in the next few years. We already have a student-run stock portfolio (The Tanner Fund).
Here’s the presentation we’re giving tomorrow on our results:
‘The Real American Gladiators’ is the name of our Hedge Fund; I’m not sure who came up with that name.
For those that are interested, here’s a few details on how we made so much:
- We downloaded the most recent data on about 7000 stocks from Bloomberg, rated them based on (Free Cash Flow)/(Enterprise Value) and Return on Invested Capital, then sorted them from most undervalued to most overvalued.
- After eliminating all with a market cap below $1B, we went $30M long on the first 10 and $30M short on the last 10. This long-short strategy allowed us to make money despite market conditions. In effect, we were betting that one group of stocks was relatively mispriced against another.
- After 2 weeks we closed out our positions and repeated.
- After about 4 trades we integrated Reversal into our strategy – that is the concept that the best performing stocks this month will be the worst performers next month (see graph in slideshow for more details).
- Towards the end of the presentation we show what “our fees” were. This is based on a management fee of 20% profits + .5% of assets under management.
- I was amazed at how well these QUANT strategies worked. We had such great results because we were unemotional (never using our “gut”) and made our trades a few hours after computing the data, while it was still fresh and relevant.
- While the annualized return is 115%, I don’t think we could expect that high of a yearly return. I think our portfolio did so well because of the increased volatility in the market recently. I don’t think these results are typical; however, I do think the QUANT strategies would continually beat the market. Just not as much as we were able to do over the past 3 months.
Bill Erickson is a WordPress Consultant who builds custom websites using WordPress as a CMS and Thesis as a framework. He’s a cofounder and resident of The Creative Space, and a cofounder of the BIL Conference (the open analog to the TED Conference).
