Profiting from Hedge Funds: Winning Strategies for the Little Guy

"Profiting from Hedge Funds is a unique window into the investment strategies of top hedge fund managers. In this book, John Konnayil Vincent breaks down the strategies of some of the most respected investors today including David Einhorn, Warren Buffett, George Soros, and Bill Ackman. One of the biggest mistakes I see many hedge fund managers make is innovating before mastering the fundamentals and emulating the best practices of their peers. This is a must–read for every hedge fund portfolio manager or trader, as it can help them model their trades after, and gain insight into, the thinking of some of the most successful investment managers in the world."
Richard C. Wilson, Managing Director and Founder of the 103,000–member Hedge Fund Group and their Certified Hedge Fund Professional (CHP) certificate program

"In Profiting from Hedge Funds, John Konnayil Vincent has written a comprehensive book that makes a compelling case for using hedge fund public filings to develop winning long–term investment strategies. The book explores in detail all the attributes required to succeed from manager selection to model construction and brings them together into a single, repeatable investment discipline. An extremely valuable tool for those who wish to leverage the valuable information sources that are hedge fund public filings."
Mazin Jadallah, CEO of AlphaClone LLC

"Successful investing requires the right combination of hard work, learning from past experiences, patience, and luck. There are no free lunches in the market and no shortcuts to success. John Vincent′s book is an outstanding resource for investors who have a strong grasp of the basics and are looking to expand their investment horizon with different strategies and by learning from the experiences of successful investors. The book is a delight to read, and the first chapter, which walks you through how to read and use a 13F SEC filing, is in itself worth the price of admission."
Asif Suria, Founder of Insider Trade Reports

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

John Konnayil Vincent received his BTech in computer science from the University of Kerala, India, and his Master′s degree in information systems from the University of Hawai′i at M–anoa. John worked with various software development groups in the San Francisco Bay Area for almost two decades. Highlights of that career include several inventions in the database technology field that were awarded patents, as well as performance awards. More recently, he made a career shift into wealth management. His writings related to stock market activity have appeared on Seeking Alpha and other websites.