Hedge Funds and ETF Trading
Jeff Macke is a very intelligent man, a sharp trader, and someone with a lot of good ideas. So is Doug Kass. That makes them two excellent examples of a strange phenomenon in hedge fund management. It has important implications for those trading the individual stocks within ETF’s.
Macke was on CNBC tonight and described his trading in ETF’s. He said that he often had opinions about the price of oil or precious metals and did not want to deal with the eccentricities of individual stocks. He just bought or sold the ETF based upon his opinion of oil futures or gold futures. Doug Kass recently described a similar trade where he took a synthetic position in SPY with options.
This raises a question: Why don’t these big-time, highly visible traders have futures accounts? The futures are deep and liquid markets with favorable margin treatment, low commissions, and little slippage. For those steeped in the tradition of the Chicago options and futures markets, this is second nature. When trying to implement it in my fund, I learned that prime brokers did not even have the accounting set up right. It took a little work to get it going.
Why is this important? Well suppose that you trade in the upstream end of the energy market. Exploration and production stocks and oil services names should be mostly geared to expectations some years out. The biggest factors are long-term energy demand, future bookings, and capex spending by the integrated oil firms.
But that is not how they trade. If the big shots do not trade the futures, imagine what is happening with investment managers and individual investors. The latest example is the TV commercial of the construction guy in the Jaguar who "has a feel" for sectors, trading them on a laptop from the job site, even though he does not follow individual stocks. Sheesh!
For anyone who does want to do some homework on specific names, this ETF proxy trading generates opportunities for both buying and selling when the upstream stocks get out of line.
There are probably other similar chances, but energy seems to be the most obvious.