Profiting from Hedge Funds
Winning Strategies for the Little Guy
Wiley Trading Series

Learn to apply the strategies of top hedge fund managers to your personal investment portfolio The most successful hedge fund managers and superstar investors outperform the markets impressively, while most fund managers—and individual investors as well—usually underperform the market averages. Based on the figures released by the Edgar System each quarter, this book analyzes the performance of hedge fund managers controlling at least $100 million in Assets Under Management to help other investors close the gap between themselves and the industry′s top fund managers. With model portfolios that produced solid returns, examination of the tactics of the best fund managers, and a set of effective strategies for sound absolute returns, Profiting from Hedge Funds is the perfect guide for investors who want to improve their game by learning from the best. Includes fascinating insights into the investment styles of the most successful hedge fund managers Features model portfolios based on the holdings and activity of high–performing money managers Offers key lessons for success that work across all portfolios

Acknowledgments xiii Preface xv Part One: Tracking 12 of the Greatest Money Managers 1 Chapter 1 Introduction 3 13Fs: A Window into Hedge Fund Activity 6 Filtering 13Fs for Relevant Activity 8 Raw 13F Filings from EDGAR 11 Notes 15 Chapter 2 Bill Ackman 17 Philosophy and Style 18 Marquee Trades 19 Portfolio Analysis 20 Notes 23 Chapter 3 Bruce Berkowitz 25 Philosophy and Style 26 Marquee Trades 27 Portfolio Analysis 28 Notes 31 Chapter 4 Warren Buffett 33 Philosophy and Style 34 Marquee Trades 35 Portfolio Analysis 37 Notes 39 Chapter 5 Ian Cumming and Joseph S. Steinberg 41 Philosophy and Style 42 Marquee Trades 43 Portfolio Analysis 44 Notes 46 Chapter 6 David Einhorn 47 Philosophy and Style 48 Marquee Trades 49 Portfolio Analysis 50 Notes 53 Chapter 7 Carl Icahn 55 Philosophy and Style 56 Marquee Trades 57 Portfolio Analysis 58 Notes 60 Chapter 8 Seth Klarman 63 Philosophy and Style 64 Marquee Trades 65 Portfolio Analysis 66 Notes 68 Chapter 9 John Paulson 69 Philosophy and Style 70 Marquee Trades 71 Portfolio Analysis 72 Notes 74 Chapter 10 Wilbur Ross 77 Philosophy and Style 78 Marquee Trades 78 Portfolio Analysis 79 Notes 82 Chapter 11 George Soros 85 Philosophy and Style 86 Marquee Trades 87 Portfolio Analysis 88 Notes 91 Chapter 12 David Swensen 93 Philosophy and Style 94 Marquee Trades 95 Portfolio Analysis 96 Notes 98 Chapter 13 Prem Watsa 101 Philosophy and Style 102 Marquee Trades 103 Portfolio Analysis 105 Notes 107 Part Two: Mechanical Approaches to Following the Masters 109 Chapter 14 Introduction 111 Manager Selection 113 Asset Allocation and Sentiment Capture 119 Risk Avoidance 121 Constructing Model Portfolios Mechanically: A Primer 122 Equal Allocation Largest Positions 123 Equal Allocation Largest New Positions 124 Weighted Allocation Largest Positions 124 Weighted Allocation Largest New Positions 126 10–5–2 Allocation Largest Positions 128 10–5–2 Allocation Largest New Positions 131 Notes 133 Chapter 15 Equal Allocation Models 135 Portfolio Management and Performance Analysis 136 Bill Ackman: Largest Three 136 Warren Buffett: Largest Three 138 David Einhorn: Largest Three 141 Combined Portfolio: Largest Positions 143 Combined Portfolio: Largest New Positions 145 Summary 146 Chapter 16 Weighted Allocation Models 149 Portfolio Management and Performance Analysis 150 Bill Ackman: Largest Three 151 Warren Buff ett: Largest Three 153 David Einhorn: Largest Three 155 Combined Portfolio: Largest Positions 157 Combined Portfolio: Largest New Positions 159 Summary 161 Chapter 17 Ten–Five–Two (10–5–2) Allocation Models 163 Portfolio Management and Performance Analysis 164 Bill Ackman 165 Warren Buffett 168 David Einhorn 172 Summary 174 Chapter 18 Alternate Models 177 Portfolio Management and Performance Analysis 178 Bill Ackman: Exact Match Approximation Model 179 David Swensen: Asset Allocation Model 183 Sector Rotation Model 185 Simple Moving Average (SMA) Based Model 188 Summary 191 Note 192 Part Three: Learning from the Masters 193 Chapter 19 Introduction 195 Beating the Managers at Their Own Game 198 Trading Alongside the Managers 203 Summary 206 Notes 207 Chapter 20 Fundamental Analysis 209 Margin of Safety 212 Basic Checklist 215 Business Understanding 216 Business Sector and the Company’s Standing 216 Management Integrity and Competency 217 Valuation 217 Emotional Stance 218 Quantitative Measures 219 Profitability Indicators 219 Management Effectiveness 220 Liquidity Indicators 222 Valuation Indicators 224 Fair Value Estimates 227 Risk–Free Equivalent Fair Value 227 Fair Values Based on Earnings Growth 228 Fair Values Based on Benjamin Graham’s Teachings 230 Fair Values Using Present Discounted Value 234 Summary 240 Notes 241 Chapter 21 Types of Positions and Sizing 243 Diversification and Hedging 244 Keeping Your Powder Dry 251 Building and Sizing Positions 253 Low Probability Positions 261 Summary 262 Notes 263 Chapter 22 Conclusion 265 Ad Hoc Cloning Strategies 268 Mechanical Cloning Strategies 269 Implementing Manager Strategies 272 About the Author 273 Index 275