HFA Investments

HFA Investments made an impressive debut on the Australian Stock Exchange yesterday with its stock leaping from $1.10 to close at $1.39. “It has been a pretty healthy day,” HFA founder and chief executive Spencer Young said. He was happy with the institutional investors who had supported the offering. HFA is a fund of hedge funds group with $2.1 billion under management. Fund of hedge funds groups invest in different hedge funds to produce a low-risk blended return. HFA’s ready acceptance by the public market reflects the growing popularity of hedge funds in Australia.

Shares in Pengana Hedge Fund Managers and Everest Babcock & Brown have recently recovered from long periods of underperformance and the global hedge fund business is doing better after a difficult 2005. The Credit Suisse/Tremont hedge fund index was up 5.46 per cent in the first three months of the year.

Mr Young thinks that his group has some distinct advantages over its peers. “We have a very strong distribution capability,” he said. The group had 15,000 investors, whom it reached through financial planners. “We have a unique business. It is the equivalent of a mutual fund in the fund of hedge funds business.” HFA’s sales force travels the country educating financial planners on the attractions of hedge funds. The rationale for the IPO was partially to fund expansion.

But it was also to crystallise the position of HFA’s senior executives, who are also among the group’s largest investors. Mr Young made more than $66 million from the float, part of which he will reinvest in a 12.6 per cent stake in HFA. The names of his colleagues stud the list of HFA’s top 20 investors. HFA was owned by MFS before the sale, and MFS remains the largest shareholder with just under 38 per cent, followed by Mr Young.


Stock Market Dow Theory

This “trend following” theory is one of the oldest technical theories that states that the market has discernable cycles. The hypothesis is predicated on the idea that each cycle lasts between two to ten years, and within the cycle there are primary, secondary and minor trends.

The goal of the theory is to determine changes in the major trends or movements of the market. That is, markets tend to move in the direction of a trend once it becomes established, until it demonstrates a reversal. So in simple terms, the Dow Theory is interested in the direction of a trend and doesn’t offer any forecasting ability for determining the ultimate duration of a trend.

The 3 trends according to Nik Halik are:

  • Uptrend: three successive higher peaks (highs) and three higher troughs (lows)
  • Downtrend: three successive lower peaks and three lower troughs
  • Sideways Channel: peaks and troughs don’t successively rise or fall

Drilling down further, according to Nik Halik, Dow Theory is based on the concept that the end-of-day market prices reflect every significant factor that affects supply and demand – volume of trade, fluctuations in exchange rates, commodity prices, interest rates, and so on.

In other words, the closing price is a combined judgement of all market participants. It is these minor short-term trends that are of interest to contrarian and professional equity and option traders who have the experience and ability to enter into significant number of intra-week trades. They overlay their knowledge of technical indicators along with their market knowledge on top of the Dow Theory to judge the extent and strength of the short-term moves.


Stock Market Clubs and Webinars

The markets expected the Fed to lower the fed funds rate by 25bps to 50 bps and the discount rate by 50bps. The Fed only lowered both by 25bps, hence the sharp correction on Tuesday. But the markets are already rebounding sharply this morning. And don’t worry, the Fed will have to lower rates further as the economy finally weakens more early to mid next year.

Our leading index has been saying that the economy would remain bouyant into late this year and then start weakening early next year, so the upside surprises in the economy are not unexpected to us. The Fed is simply reacting to the fact that employment reports and other indicators currently show that the economy is not that weak at this point, so they are being a bit more cautious while recognizing that the housing and subprime crisis is still ominous down the road.

We have seen extreme oversold readings on the market and a follow through confirmation on the Nasdaq that suggests that we will continue to see more upside action ahead. But, we are also seeing some of our technical indicators getting rapidly overbought on these recent rallies, which as we warned earlier, suggests that this will be a choppy rally at first and we may see another substantial correction in the weeks ahead and that we could even go back and retest the recent lows again at worst. We think such a retest is more likely on the Dow and S&P than the Nasdaq, QQQQ (Nasdaq 100), EEM (emerging markets) and EPP (Asia ex-Japan).

For now, if this current correction continues, there should be near term support at around 2,615 on the Nasdaq, 13,250 on the Dow, 1,460 on the S&P 500, 152 on the EEM and 164 on the EPP. We also continue to like the health care sector (IYH) as it has held up well during the recent correction and is leading in this rally.

It is also a great diversification play for your portfolio, as are the emerging markets, Asia and Europe and forex uk. So, we would suggest adding in the health care sector as well on any setbacks ahead. We will watch for a more substantial setback and buying opportunity between late December and January. For now the greatest threat would be geopolitical events that cause oil prices to spike temporarily, now that the markets already expect further Fed easing ahead and have discounted a weakening economy.