Go Anywhere vs. the Crowd
The Beauty and Range of Hedgeye's Global Macro Process
South Africa, Mainland China Large Cap, Emerging Market Bonds, Gold, Small Cap Japan.
Does your portfolio look anything like that?
Those are just five of the 32 ETFs recommended (as of October 21) on the ETF Pro Plus product list of Hedgeye Risk Management.
There are also seven ETFs on the short side, including Mexico, Denmark, and U.S. Retail.
The list of long ideas in ETF Pro Plus is a replica of Keith McCullough’s holdings in his long-only portfolio or “Mucker Family Office”.
It’s an eclectic collection of investments and represents the beauty and range of the “Go Anywhere” strategy of the company’s Founder and CEO.
A snapshot of Hedgeye’s current ETF Pro Plus - Levels list (note that this week India-SMIN was removed)
McCullough has said that gold is the single best asset allocation during the current U.S. Quad 3 of slowing economic growth and rising inflation, and posted this tweet on X that gold has been the single best asset allocation since 1999.
The assets on the ETF Pro Plus list are from anywhere in the world. They all fit into the current Global Quad 2 setup of accelerating economic growth and rising inflation, and the U.S. Quad 3 environment of slowing growth and accelerating inflation. Plus, they all have positive signal strength and are bullish trade and trend.
Portfolio Managers vs. Hedgeye
Most discretionary portfolio managers (PMs) or investment counsellors in Canada and the U.S. have a mandate to make investment decisions for their clients’ accounts and, I’m generalizing, stick close to home in the stocks they select.
If they want some international exposure, they’re likely going to choose a large, multi-national company to eliminate the perceived risk of owning a foreign stock.
While there are some managers in Canada who have international mandates and look further afield, most are more comfortable, as are their clients, owning assets that are in their own backyard - financials, energy, materials, and industrials along with large-cap U.S. stocks - Microsoft, Home Depot, Visa, etc.
Courtesy: Vanguard
There’s nothing wrong with this home bias approach, but that strategy can hurt returns in the short and intermediate-term if the PM insists on holding onto a position despite it being in the wrong Quad, with no positive signal strength, and showing bearish trade and trend.
PMs are also often reluctant to sell a position because they don’t want to trigger capital gains for their clients. Fair enough.
McCullough has said he holds on to certain investments, as well - houses, physical gold and silver, and wine - but he’s happy to pay capital gains tax on a stock or ETF especially if it means getting out of a winner that has broken bullish trade and trends levels.
The Hedgeye way has investors keeping it simple, following the process, getting rid of losers and buying something that’s in the right Quad with positive signal strength and is bullish trade and trend.
VASP
McCullough’s volatility adjusted signalling process monitors over three thousand ETFs and spits out bullish and bearish ideas. These ideas are from any country or asset class as part of Hedgeye’s Go Anywhere strategy.
India has had the one of the most robust economies in the world for more than a year and that’s why McCullough’s signal has been flashing green light for 17 months on iShares Morgan Stanley Capital Index (MSCI) India ETF (INDA), which was added to ETF Pro Plus in June 2023.
The ETF rose as much as 40 percent after that but has pulled back recently as it posts lower highs and lower lows and has fallen below the low end of its weekly published Risk Range. The removal of iShares MSCI India Small-Cap ETF (SMIN) from the list suggests that INDA might be the next one to go.
Signal Strength Stocks
On the equity side, McCullough is always tracking of dozens of stocks for signal strength from the coverage universe of Hedgeye analysts. Currently, there are 61 stocks on the Signal Strength Stocks list, which is updated weekly.
The top six Hedgeye Signal Strength Stocks as of October 21.
The cream of this crop, the analysts’ Best Idea Longs that also have positive signal strength, get hand selected by McCullough for the Investing Ideas list, which currently contains 14 longs and seven shorts.
Since being added to the list on April 26 of this year, Philip Morris International (PM), mostly known as a tobacco company, has increased by over 36 percent.
Daniel Biolsi, Hedgeye’s Sector Head, Consumer Staples, has been highlighting on The Call that Philip Morris is getting about 40 percent of its revenue from Zyn nicotine pouches, and that number could rise to two-thirds in the next few years.
The Investing Ideas list added The Trade Desk (TTD), a global technology advertising platform, on August 9 of this year, and it has seen a nearly 20 percent increase since then.
Not that the stocks on the Investing Ideas list always go up. Naturally, the companies have setbacks from time to time to which Hedgeye analysts are always accountable.
A good example of that was this week when Newmont Corp. (NEM), the world’s largest gold producer, missed its earnings numbers “due to inflation and labour-related expenses” as Jay Van Sciver, Industrials & Materials Sector Head, explained in the Investing Ideas Newsletter, released every Saturday.
Newmont’s stock fell 15 percent last Thursday, the largest drop since 2008, but Van Sciver noted the shares are still higher by 17 percent since being added to the list and should recover from here.
Note that most of the Signal Strength and Investing Ideas stocks are from the U.S. but most Hedgeye analysts also cover some international stocks, such as Taiwan Semi, LVMH, and Adyen.
The main advantage of Hedgeye’s Go Anywhere strategy is that you can invest anywhere in the world. The ETFs or stocks recommended undergo thorough vetting, fall into the right Quad, possess positive signal strength, are bullish trade and trend, and analysts rank the top stocks as Best Idea longs.
If you believe your portfolio is too North American-centric, not diversified geographically and/or by asset class, and you suspect that some stocks or ETFs you own are mired in the wrong Quad and wouldn’t pass the signal strength test, then you may want to consider the Go Anywhere strategy.
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Disclosure: I do not have any financial arrangement with Hedgeye. I do not intend for this series to be instructional nor promotional. Dan Holland, Hedgeye’s Head of Media and Public Relations, has been gracious in making my writing available on Hedgeye’s website.
I’ve been a Hedgeye user for ten years and have always been enthusiastic about their values, people, and process. The cold hard fact is that I have not been able to parlay Hedgeye investment recommendations into investment success. There’s a glaring discrepancy between the presentation and the product.
One presentation that you wrote about last week: “The first rule of the Hedgeye investing process is preserve and protect your capital. The innovative risk management system created by Founder and CEO Keith McCullough is designed to prevent major drawdowns. Why wear a 75 percent plunge in a stock such as Meta between August 2021 and October 2022 if you can limit your loss to five or six per cent?”
Here’s some data for several of their products: 1) for 157 closed trades since Signal Strength began in February this year, 23% had losses from 10% to 33%; 2) for 142 closed trades since Top Stock Picks began in March, 22% had losses from 10% to 36%; 3) for 139 closed long trades in Investing Ideas from 2020 through May of this year, 23% had losses from 10% to 40% (plus a 95% loss on a stock Keith kept for perhaps instructive reasons); 4) even in ETF pro, where beta is significantly less, 7.5% of 226 closed long equity trades since July, 2018 had losses of 10% to 31%.
In markets, stuff happens; Hedgeye’s risk management system is not a magic bullet that limits losses to five or six percent.
Another example of the presentation/product discrepancy: Keith is fond of asking, “Who gets you out?” after exiting a position that subsequently goes south. Here’s some data regarding ETF Pro, July, 2018 through September, 2024: of 300+ closed long trades, post-sale, 53% were actually higher 1 month later, 52% were higher 3 months later, and 51% were higher 6 months later. Whatever sophisticated process led to the sell decisions, you were as likely to avoid gains as you were to avoid losses.
For all that Hedgeye talks about being data-driven and measuring and mapping everything – and their data presentation is indeed impressive – I am confident in saying that they don’t measure and map the investment results of their own products (the one exception being the win rate for trades in Macro Pro; but that data point doesn’t go far enough). In trying to understand my sub-par investment results, largely informed by ETF Pro and Investing Ideas, I did some grinding of my own.
For ETF Pro, the presentation: "This monthly macro strategy update is designed to select 10 to 20 essential ETF exposures within each of the seven major asset classes to keep you and your clients ahead of the next big market move." The data from July, 2018 through early September, 2024, long-only trades:
• Equities: 225 closed trades, 30% had positive returns, -0.86% average return
• Commodities: 56 closed trades, 32% positive returns, -0.48% average return
• Bonds: 53 closed trades, 30% positive returns, 0.50% average return (-1.74% since 2020)
• Currencies: 25 closed trades, 38% positive returns, 0.86% average return (-0.33% ex-gold)
• Alts (CTA, BTAL, KMLM): 9 closed trades, 0% positive returns, -4.73% average return
• Average hold time for all trades was 9.6 weeks; 46% of trades were 4 weeks or less.
If the equity trades had been invested in SPY, 58% would have been positive with a 2.18% average return (ETF Pro equity trades underperformed SPY by 300 basis points). For the closed equity trades, 56% would have been higher 1 month later, 51% would have been higher 3 months later, and 53% would have been higher 6 months later. In each of those cases, SPY would have been higher 1 month later 65% of the time, higher 3 months later 79% of the time, and higher 6 months later 80% of the time.
For Investing Ideas, the presentation: “. . . tailor-made for the thoughtful investor with a longer-term investment horizon seeking high-conviction opportunities they can keep in their portfolio for many months - in some instances, years to come. In a nutshell, Hedgeye CEO Keith McCullough handpicks the ‘best of the best’ long and short ideas delivered to him by our team of over 40 research analysts across multiple sectors.” The data from January 2020 through May, 2024:
• Of 148 closed long-only trades, only 36% had a positive return and only 32% did better than SPY for the same holding period. If SPY had been traded rather than the recommended stock, 77% of those SPY trades would have seen a positive return.
• Of 148 closed long-only trades, the average return was 8.87% vs. SPY at 5%. Trimmed for Gamestop (+906%) and Playboy (-94%), the average return of 146 trades was 3.43% underperforming SPY by 1.57%.
• Only 25% of the closed long-only trades were held longer than 92 days; only two trades were held longer than a year.
For Signal Strength Stocks, the presentation: “Each week, Signal Strength Stocks provides you a best-of-the-best list of stock picks. Here’s how it works. Our team covers hundreds of stocks (across Retail, Restaurants, Financials and everything in between). CEO Keith McCullough uses his proven buy low, sell high market signals to select the highest-flyers so you can make better investment decisions.” The data based on stock purchases from mid-February of this year, when the product launched, through October 18:
• As of October 18, 62 open stock positions showed an average return of 12.29%, bettering SPY at 6.01%.
• As of October 18, 157 closed stock positions averaged -3.22%, vs. SPY at 2.49% (only 17% of the positions did better than SPY and only 29% had positive returns; 68% of SPY returns were positive).
• The October 18 snapshot of all open and closed positions showed an average return of 1.17%, vs. SPY at 3.49%.
• Average hold time of closed positions was 45 days; 48% were held for 4 weeks or less.
For Top Stock Picks, the presentation: “BEST OF THE BEST, LONG TERM STOCK IDEAS - Top Stock Picks provides our most elite 20 stock ideas. . . This performance-driven list of long ideas is refreshed in real-time to turbocharge your portfolio . . . – spotting winners and cutting losers – so you can adjust your portfolio for long-term investing success.” The data based on stock purchases from product launch (March 28, 2024) through October 18:
• Of 142 closed trades, only 35% had a positive return and only 32% did better than SPY for the same holding period. If SPY had been traded rather than the recommended stock, 55% of those SPY trades would have seen a positive return.
• As of October 21, 22 open stock positions showed an average return of 9%, bettering SPY at 4.5%.
• As of October 21, 142 closed stock positions averaged -2.2%, vs. SPY at 1.12%
• The October 21 snapshot of all open and closed positions showed an average return of -0.69%, vs. SPY at 1.57%.
• Average hold time of closed positions was 25 days; 56% were held for 2 weeks or less.
Hedgeye prides itself on transparency and accountability, on developing a new approach to investing that leaves the Old Wall and SPY Monkeys in the dust. As the data show, the four Hedgeye products I examined look like sick puppies next to those SPY Monkeys, consistently underperforming by 160-300 basis points. I shared some of this information with Hedgeye and asked the pointed question, “If these were hockey players, would Keith put them in the game?”
For ten years, I’ve been an eager student of the Hedgeye process and still pay close attention to their macro outlook and insights in spite of being disillusioned with the investment products I’ve used and looked at. I like the team, and listening to the Macro Show is part of my daily routine. But I no longer share your enthusiasm for Hedgeye when it comes to the fundamental question of what to own and when. The real test for the integrity of Hedgeye is how they respond to the information I’ve presented – they need to measure and map their products and set reasonable benchmarks to determine success or failure. The key question is whether they can provide investors like you and me with products that live up to the promise and claims of a superior investment approach – so far, sadly, I must say they have failed.