Bonds: What Hedge Funds' "Record Reversal" Tells You

Would you invest alongside the "brightest professionals on Wall Street"?

by Bob Stokes
Updated: May 17, 2017

Maxwell Edison may have majored in medicine, as the Beatles sang, but many of the "brainiacs" on Wall Street are hedge fund managers. Even so, their performance record at key market turns often leaves a lot to be desired. See this eye-opening bond market chart.

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[Editor's Note: The text version of the story is below.]

Hedge fund managers are reputed to be the smartest of all investors.

As a result, they're not worried about where their next meal is coming from. Forbes said:

In total, the 25 highest-earning hedge fund managers and traders made $24.3 billion in 2013. The lowest earning hedge fund managers on our list made $280 million [that] year.

You might think that mimicking the trading of all that highly paid brain-power would pay off big.

But consider this from chapter 17 of Robert Prechter's just-published book, The Socionomic Theory of Finance:

In 2015, more hedge funds closed than in any year since 2009. It came as a direct consequence of their managers having invested together on the wrong side of the same markets.

But here's what you need to know about another group of investors you don't often hear about in the mainstream financial media (The Elliott Wave Theorist, August 2016):

Commercials ...have a history of being mostly on the right side of the markets they trade.

Commercials are insiders and tend to buy low and sell high. By contrast, hedge funds tend to extrapolate present trends into the future, so they're usually on the wrong side of the market at the turns.  

With that in mind, look at this chart from our May 15 Short Term Update (note that Large Speculators means the same as hedge funds and trend-followers):

The most recent Commitment of Traders report shows that Large Speculators remain near their largest net-long position in futures and options for 10-year T-notes in over four years.

The Short Term Update also notes the speed at which Large Speculators have acquired their positions, and says this might very well be a red flag.

But another important factor in the analysis of the bond market is the Elliott wave chart pattern in bonds.

When our analyst combines that price pattern with what the Commitment of Traders report is suggesting, a picture emerges that should set off alarm bells for every bond investor.

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