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3 NEGIBO TTM — The Search Engine That Complains About Everything

3 NEGIBO TTM — The Search Engine That Complains About Everything

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Hedge Fund Research vs. Traditional Research



25



Table 2: Search Results From NEGIBOT™ on “Kindle”

Tynan on Technology (beta) " Blog Archive " Amazon's wonderful terrible

... The Kindle is amazing and awful, grand and terrible. ... Two stupid

things that really pleased me. The RIAA vs. the mothers of prevention

...http://www.dantynan.com/2008/06/15/amazons-wonderful-terribleamazing-awful-kindle/ [Yahoo!]

Investing Insights Buy Amazon - Kindle is the iPod of books - Business

Week That creates terrible chicken-and-egg dilemmas between the devices

and the ... take out this basic and stupid restriction, the Kindle, so loving

gifted to me,

...http://www.businessweek.com/investing/insights/blog/archives/2007/11/

buy_amazon_-_ki.html [Yahoo!]

Blogrunner: Amazon Kindle vs. Sony Reader, New eBooks and iPhone:

First ... ... important observation about Amazon's new electronic book reader:

It's terrible. ... eBook readers are stupid. Related " Nikhil Pahwa |

contentSutra.com

...http://www.blogrunner.com/snapshot/D/3/0/amazon_kindle_vs_sony_

reader_new_ebooks_and_iphone_firstlook_comparison/ [Yahoo!]



In case you were wondering, there is also POSIBOT™, the optimistic

search engine. In short, vertical search engines, such as deepVertical™,

which “search topics an inch wide and a mile deep™” may be of greater

value to hedge fund managers and analysts than traditional search

engines.



2.4 Google Alerts

The major financial portals, such as Yahoo! Finance, Microsoft Investor,

Google Finance, and SmartMoney.com do an excellent job of

aggregating national news sources, such as Reuters, Associated Press

(AP), PR Newswire and many others. However, in many cases the most

comprehensive and valuable information about a firm is uncovered by

local news sources, as well as in blogs and user groups. Fortunately,

Google Alerts allows you to track companies or phrases “as-it-happens”



J. Longo



26



with emails sent directly to your inbox. Not only does Google Alerts

track national and international news articles, but also local articles,

blogs, video, and user groups.

The service costs nothing and works best with a Gmail account since

the emails on a specific search term (e.g. Goldman Sachs) are aggregated

under a single heading despite the fact that one hundred alerts may have

occurred on your search string in the past twenty-four hours. Table 3

shows a sample list of Google Alerts.

Table 3: Google Alerts on Selected Finance Terms

Your Google Alerts

Google Alert - UBS - Google Blogs Alert for: UBS Re: Discussion on Dillon Read Capital Management (UBS) Author: Hedge …

Google Alert - Morgan Stanley - Google News Alert for: Morgan Stanley, Bank of America Cuts Goldman Sachs (GS) and Morgan Stanley …

Google Alert - Lehman Brothers - Google News Alert for: Lehman Brothers, Market Snapshots: US Stocks Turn Mostly Higher As …

Google Alert - Citigroup - Google Blogs Alert for: Citigroup, Citigroup - too big to fail By rss@LiveVideo.com (StocksAtBottom …



2.5 Network of Experts to Help Generate Alpha

One or more highly competent investment professionals manage most

hedge funds and a team of analysts often backs the larger ones as well.

Regardless of size, hedge funds can and should also tap into the

resources of others that can add value to their investment processes —

what we shall term as a “network of experts.” Let’s look at several

examples of how many hedge funds tap experts beyond their own walls

in their quest for alpha.

One former Head of Research at a bulge bracket sell-side research

firm told me one method he used for uncovering experts in a specific

industry. During the course of his meetings with people working in a

particular field, he would ask, “Who is the smartest person you know in

this industry?” He would get a name and then proceed to call the person,

stating to the effect, “I heard you are the smartest person in the

industry…” Most individuals would be flattered to hear that comment

and give you at least a few minutes of their time. To obtain a substantial

amount of an expert’s time it will likely cost you significant consulting



Hedge Fund Research vs. Traditional Research



27



fees (and perhaps be well worth it). At least the initial conversation may

tell you enough about whether you would like to proceed further.

There are several specific sources for finding experts in even the

narrowest of fields. Let’s briefly mention three virtual research firms

used widely by hedge fund managers. Gerson Lehrman Group (GLG)

(http://www.glgroup.com/) provides a platform to access more than

200,000 subject matter experts on a worldwide basis. According

to an article posted on GLG’s website, the experts charge their

clients anywhere from $50 to $2,000 per hour while GLG earns

money by providing clients with access to its database of experts.3

GLG’s fees are $70,000 and up for six months of access to

their platform. Other well-known firms that provide access to a

virtual network of experts (for a fee) include Standard and Poor’s

Vista Research (http://www.vistaresearch.com/) and Reuters Insight

(http://www.reutersinsight.com/)

It is not a secret that hedge fund managers often share information

with other managers about their positions. In fact, many managers are

eager to share (primarily long) positions, once they have been established

with the expectation that further buying will push up the price of their

holdings. For example, David Einhorn of Greenlight Capital in his recent

book, Fooling Some of the People All of the Time: A Long Short Story,

notes the following tense exchange he had with the SEC when they

probed his short position in Allied Capital:

“Have you ever met regularly or irregularly with a

group of fund managers that would include Whitney

Tilson [of Tilson Capital Partners] and Bill Ackman

[of Gotham Partners]?” he asked. ‘Well, Bill Ackman

was in the Richard Shuster group for a period of time,’ I

said, referring to an informal quarterly ‘idea dinner’ of

money managers, which I sometimes attend. Richard

Shuster ran a small hedge fund called Arbor Partners and

organized the dinners. Idea dinners are commonplace.

Some, including Richard Shuster’s, are self-formed,

while institutional salesmen or the investment banks

sponsor others. Generally, at an idea dinner each



28



J. Longo



participant presents one or two investment ideas and gets

grilled by the group. ‘He hasn’t come for a while, maybe

several years,’ …

While it is true that I share investment ideas with other

fund managers, this works best as a two-way street. No

one likes a freeloader. So as a general matter, I share

more ideas with others who share back. I don’t keep

score about who shares what with me, and the practice is

quite informal.”

Sharing ideas with hedge fund managers is somewhat of a “Catch 22”

situation. Star managers might not give a new manager the time of the

day. Perhaps one solution is that emerging managers are likely to be able

to network with other emerging managers, while larger, more established

managers have a high likelihood of networking with most funds.



2.6 Obtaining Alpha Generating Ideas From Websites and Books

Occasionally, it is possible to obtain alpha generating ideas through

websites at zero to nominal cost. We distinguish these websites, which

present a clear argument for buying or selling a security, relative to the

resources that provide specific pieces of an investment mosaic.

ValueInvestorsClub.com provides high quality, value oriented ideas to its

250 members, but admission is selective and obtained through an

application process. The website, founded by Joel Greenblatt of Gotham

Capital, awards $5,000 a week to the member with the best investment

idea.

SeekingAlpha.com is open to the general public and provides a list of

long and short ideas on a daily basis, as well as highlighting investment

related articles from other publications. Mark Cuban is majority owner of

ShareSlueth.com, a website that primarily uncovers short picks. It

has an impressive track record, but the volume of investment ideas is

far less than those in ValueInvestorsClub.com and SeekingAlpha.com. A

comprehensive, but not exhaustive, list of websites for hedge fund



Hedge Fund Research vs. Traditional Research



29



managers and analysts is located in Appendix A. Additionally, an

annotated reading list is located in Appendix B. Hedge fund managers

often obtain investment ideas after reading about the thoughts and

strategies of successful managers in the industry. The reading list also

contains core books in investments, financial statement analysts, short

selling, investor psychology, and technical analysis.



3. Putting It All Together In a Hedge Fund Dashboard

This chapter noted how hedge fund research is distinct in many respects

from long only research and discussed various resources and techniques

that may help a manager deliver sustainable alpha. Disparate information

sources and concepts are often best presented in an investment mosaic

or dashboard. The CFA Institute promotes the Mosaic Theory, which

suggests analysts weave together bits and pieces of public (and

sometimes proprietary) information into a unique picture that generates

alpha. A sample hedge fund dashboard is shown in Figure 3. The

dashboard lists macro variables, industry contacts, valuation parameters,

watch lists, and so forth. In practice, hedge fund managers may wish to

create several dashboards pertaining to different time horizons and

securities and have them updated on a real-time basis.



Composite Index

Long / Short Equity

Equity Market Neutral

Short Bias

Event-Driven

Distressed/Restructuring

Merger Arbitrage

Global Macro

Convertible Arbitrage

Multistrategy

Fund of Funds Composite



30



Hedge Fund Category Performance in % (7/31/08)



Current Interest Rates and Spreads (8/21/08)

July



YTD



-2.17

-2.63

-1.26

0.07

-1.33

-1.74

0.37

-2.78

-1.97

-1.44

-2.73



-3.43

-6.29

1.04

10.00

-3.61

-4.33

-0.22

3.71

-8.46

-3.80

-5.03



Source: www.HedgeFundResearch.com



Source: www.BondsOnline.com



List of Industry / Sector / Country Experts

S&P 500 - Fundamental Analysis (8/21/08)

Expertise

Financials

Consumer

Healthcare

Technology

Capital Goods

Energy

Utilities



Jose Maradona (212) 000-2001

Ivan Yukos (212) 000-2002

Sunny Patel (212) 000-2003

Carolyn Xie (212) 000-2004

Bjorn Andersen (212) 000-2005



Brazil

Russia

India

China

Euro Region



Trailing P/E

Forward P/E

Dividend Yield

Est. EPS



Earnings Calendar



13.4x

13.0x

2.2%

$29.24



Company

Dell

Apple

BP Amoco

Infosys



Macro Indicators



Investor Psychology - VIX Index (8/21/08)



8/22/2008 8/22/2007

10 Year Treasury

3.87%

4.61%

Nymex Crude Oil $ 114.59 $ 69.48

Gold

$ 822.70 $ 656.70

Dollar / Euro

0.67

0.74

Dollar / Yen

110

115



New Positions of "Star" Hedge Fund Managers

Name

Stock

Soros

Petrobras

Kroger

Icahn

Yahoo

Emisphere Technologies

Klarman

United Healthcare

Liberty Media



Date

6/30/08

6/30/08

6/30/08

6/30/08

6/30/08

6/30/08



Date

August 15th

July 21st

July 18th

July 23rd



Change

-16.05%

64.93%

25.28%

-9.46%

-4.35%



15

0



30

45



Economic Calendar

FOIA Research List

Event

Consumer Conf.

FOMC Minutes

GDP

Initial Claims

Chicago PMI



Date

8/26/08

8/26/08

8/28/08

8/28/08

8/29/08



On Deck



Time

10:00 AM

2:00 PM

8:30 AM

8:30 AM

9:45 AM



Source: Yahoo! Finance



Figure 3: Sample Hedge Fund Dashboard



LEH

MER

AIG

WMT

MVL

FMD

ALD



CROX

TASR

MSFT

INTC

SBUX

ETFC

NVDA



UA

FDX

KYN

AIG

INTC

NVDA

MSFT



J. Longo



Contact

John Morgan (212) 000-1000

Brian Lynch (212) 000-1001

Karen Sachs (212) 000-1002

Mark Stanley (212) 000-1003

Eva Lehman (212) 000-1004

Tom Pickens (212) 000-1005

Erica Jeffries (212) 000-1006



Hedge Fund Research vs. Traditional Research



31



Hedge Fund Alpha Tear Sheet — Chapter 2











Sustainable alpha is not possible without high quality research.

Hedge fund research is often distinct from traditional long only

research. Some of these differences are listed below:

o Hedge fund research generally has a shorter-term orientation.

o Hedge fund research has a greater focus on short selling.

o Hedge fund research is more dynamic in nature.

o Hedge fund research often involves combinations of

securities.

There are many ways a hedge fund manager can utilize research

in order to generate alpha. The following techniques were

discussed in this chapter:

o The Freedom of Information Act (FOIA).

o Channel checks.

o Negibot™ — the search engine that complains about

everything.

o Google Alerts.

o Network of internal and external experts.

o Financial websites.

o Creating hedge fund mosaics or dashboards.



32



J. Longo



End Notes

1



The Bloomberg article by Cho and Heiskanen (2007) discusses

iSuppli’s approach to estimating the profit margins on the iPhone.



2



The Huberty report analyzing Steve Jobs’ airline expenditures is

discussed in Richards (2008).

3



An estimate of GLG’s fees is discussed in Baird (2008).



References

Baird, Roger, “Investment Matchmaking: A New Industry That Is

Beating The Crunch,” City A.M., July 21, 2008.

Cho, Kevin and Ville Heiskanen, “Apple’s IPhone Sells for Double

Costs, ISuppli Says,” Bloomberg, July 3, 2007.

www.bloomberg.com/apps/news?pid=20601087&sid=aGfLsPKqLcTc&

refer=home

Einhorn, David, Fooling Some of the People All of the Time: A Long

Short Story, Wiley, 2008.

Richards, Jonathan, “Apple gears up for June launch of 3G iPhone,”

Times Online, February 29, 2008.



3

ACHIEVING HEDGE FUND ALPHA IN BRAZIL



Jorge Barreiro and John M. Longo, PhD, CFA

Duff and Phelps; Rutgers Business School & The MDE Group



1. Introduction

The purpose of this chapter is to provide a basic overview of the

Brazilian (or Brasilian) financial markets and its dynamics, with the

ultimate goal of identifying hedge fund strategies that are most likely to

generate alpha in this region. Accordingly, it is necessary to discuss

some of the common financial instruments that exist in Brazilian

markets, regulation, and investor behavior. The global bear market of

2008 has wreaked havoc on nearly all financial markets. However, the

enormous foreign exchange reserves of the Brazil, Russia, India, and

China (BRIC) countries as of late 2008 puts them in much better position

to rebound from the large losses, relative to prior crises in their

respective countries. The nascent and rapidly evolving nature of the

Brazilian financial markets, as well as with the other (BRIC) countries,

may make it a fertile source of alpha in the decades ahead.

Table 1 lists current (2007) GDP and 2050 projected GDP for the

BRIC countries and those of other large economies.1 The projected

results, if realized, are simply breathtaking. Brazil’s economy, currently

ranked (by GDP) 10th in the world, is projected to move to 4th. Russia,

currently ranked 11th by GDP is projected to move to 6th. India, currently

ranked 12th, is projected to move to 3rd. Incredibly, China’s economy in

2050 is projected to be nearly twice the size of the United States’, while



33



J. Barreiro and J. Longo



34



it currently has less than one quarter of the United States’ $13.8 trillion

GDP. China, with its $1.8 trillion in reserves is likely to emerge from the

global stock market crash of 2008 in a stronger than ever position. We

discuss hedge fund strategies for China in Chapter 6.

Table 1: 2007 GDP and Projected 2050 GDP



Source: Wilson and Stupnytska (2007)



2. Brazilian Economy

Brazil’s economy, with 2007 GDP of approximately $1.5 trillion, is the

second largest in the Americas, and among the ten largest in the world.

Since 2000, GDP has grown at an astounding 11.7% annual rate. Growth

was fueled primarily by a rise in commodities, a decrease in inflation,

and expansion of international trade. Although China and India get most

of the publicity related to the BRIC countries, it is interesting to note that

Brazil’s GDP exceeds India’s by more than 10%, despite having less

than 20% of India’s population.

Brazil is well known for its rich natural resources, but surprisingly its

largest exports are in the transportation industry. Embraer is Brazil’s

leading aerospace company, amassing approximately $6 billion in sales

in 2007. Table 2 shows Brazil’s leading export industries and markets.



Achieving Hedge Fund Alpha in Brazil



35



Brazil, rich in sugarcane crops due in part to its warm climate, is the

world’s leading producer of ethanol. Its petroleum-based exports are

certain to increase over the long term after Petrobras’ recent discovery of

the massive Tupi and Jupiter oil fields in the Santos Basin. Brazilian

President Luiz Inacio Lula de Silva, said the country would consider

membership in the Organization of Petroleum Exporting Countries

(OPEC) once the new oil field discoveries are capable of substantial

production. 2

Table 2: Leading Brazilian Export Industries and Markets

Biggest Exports, 2007

Transport Equipment & Parts

Metallurgical Products

Soybeans, Meal & Oils



% of

Total

12.5

11.6

8.2



Chemical Products



1.9



Leading Export Markets, 2007

United States

Argentina

China

Germany



% of

Total

15.8

9.0

6.7

4.5



Source: Economist.com



3. Overview of Brazilian Financial Markets

3.1 Brazilian Stock Market

Brazil’s only current stock exchange is the Bolsa de Valores de Sao

Paulo (BOVESPA), which has roots dating back to 1890. According to

De Medeiros (2005), Bovespa and other Brazilian exchanges were at one

time official entities linked to finance departments of state governments.

The Securities Act of 1965 ushered in the modern era of the stock

exchange that exists at present. In 2000, BOVESPA emerged as the

monopolistic stock exchange of Brazil after it merged with its primary

competitor, Bolsa de Valores do Rio de Janeiro (BVRJ). In May, 2008,

BOVESPA merged with Brazil’s largest derivatives exchange, Bolsa de

Mercadorias & Futuros (BM&F), creating the world’s third largest

exchange. The combined firm is now known as BM&FBOVESPA.



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