This week was the 19th annual Ira Sohn conference. It is an opportunity to raise money for a good cause (pediatric cancer research and treatment), and hobnob with rock star hedge-fund managers. It has become a must-attend event.
Just remember one important thing: Ignore the stock tips.
It is true that the picks and pans at the Sohn conference can move individual stocks 10 percent or more. Yet, as a number of folks have pointed out, the picks of the pros typically underperform the broad market or even lose money. Traders don’t seem to care.
James Bianco, proprietor of eponymously named Bianco Research LLC, explains how the conference became such an important event:
“We would argue the Ira Sohn conference was made famous from David Einhorn’s June 2008 presentation arguing for shorting Lehman Brothers. A little more than three months later the bank filed for bankruptcy, netting Einhorn a 99.8% return (more if leveraged). Of course, Bill Miller’s Freddie Mac long that lost 96.9%, Michael Price’s Allied Irish long and Forest City longs that lost 91.7% and 82.7% respectively, as well as Richard Pzena’s Citibank long that lost 82.4% have been conveniently forgotten.
Ouch. Indeed, in 2008, Einhorn’s recommendation to sell short Lehman Brothers Holdings Inc. was the sole winning trade that year.
Stock pickers in subsequent years fared better, but still underperformed. As Bianco pointed out in a note to clients yesterday, the Sohn conference typically lags behind a simple index fund. That’s right, Vanguard’s John Bogle beats the collective wisdom from the best and the brightest hedgies.
A simple average of all the trades offered, the Ira Sohn panelists’ 2010 calls returned 21.85% versus a return of 25.01% for the S&P 500 over the same period. The 2008 calls underperformed as well. The Sohn panelists’ 2008 calls returned -42.05% in the ensuing year versus an SPX return of -35.40%.
The 2013 results were similarly disappointing: a 3.8 percent loss for the conference’s best picks versus the Standard & Poor’s 500 Index gain of 15.2 percent. The pattern was the same in 2012: a 19 percent gain for the Sohn picks versus 22 percent for the S&P 500. (Note the gains are calculated conference to conference, and not on the calendar year).
By coincidence, in addition to the Sohn conference, this week also saw the release of Institutional Investor’s Alpha Rich list. It details the top funds, not in terms of performance, but in terms of manager compensation. They are:
1. David Tepper (Appaloosa Management) – $3.5 billion
2. Steven Cohen (SAC Capital Advisors) – $2.4 billion
3. John Paulson (Paulson & Co.) – $2.3 billion
4. James Simons (Renaissance Technologies) – $2.2 billion
5. Kenneth Griffin (Citadel) – $950 million
6. Israel Englander (Millennium Management) – $850 million
7. Leon Cooperman (Omega Advisors) – $825 million
8. Lawrence Robbins (Glenview Capital Management) – $750 million
9. Daniel Loeb (Third Point) – $700 million
10. Paul Tudor Jones II (Tudor Investment Corp.) – $600 million
These hedge-fund managers are all very bright, skilled guys (and yes, they are all men). There is a modest overlap between the list of Sohn conference presenters and the highest-paid managers.
But it isn’t just their individual picks that underperform; the HFR Equity Hedge Fund Index — a basket of long and short positions — also would have cost you money, declining 5.9 percent since 2010 compared with a 61 percent gain in the S&P 500.
One can’t help but look at these results, and wonder: If the skill set isn’t stock-picking, then what is it?