Invest Like a Hedge Fund Managerhttp://www.fool.com/investing/international/2012/10/16/invest-like-a-hedge-fund-manager.aspx David O'Hara
October 16, 2012
LONDON -- "Risk-on" and "risk-off" are the latest additions to market jargon. When investors are expecting a market rise, they switch to "risk-on" mode. When they want to protect themselves against falls, they go "risk-off."
When the market goes risk-on, investors rush toward the assets they expect will benefit. In particular, this may mean moving out of bonds and into shares.
However, if they want to take on as much risk as possible, they will go for "high-beta" shares. These are the shares that have historically exaggerated the market's moves. For example, a share with a beta of 1.5 has, on average, risen 1.5% each time the market has advanced 1%. Conversely, a high-beta share is also expected to fall faster than the wider market.
Hedge fund managers are famous for ruthlessly seeking out short-term gains. And one of the best ways to profit from a market advance is to load up on high-beta shares. The 10 shares below are the largest companies with a beta greater than 2.1. Remember that a share's beta is not fixed and can change with time. Just because these shares are currently high-beta does not guarantee they will actually rise sharply if the market takes off.
Source: Stockopedia. *Forecast to be loss-making.
Four of these look particularly interesting.
Banks are often regarded as geared plays on the financial markets and economy. As such, we shouldn't be surprised that they often have high betas.
At the time of former chief exec Bob Diamond's departure, the market was close to writing Barclays off. Now the company has a new boss. Meanwhile, fears over the fate of the eurozone have receded, and U.S. banks are talking favorably about the American housing market.
Barclays is expected to deliver EPS of 33.3 pence for 2012, rising to 36.5 pence for 2013. Today's share price suggests the market does not believe Barclays will meet these figures. However, in the absence of a trading statement to suggest otherwise, sentiment is improving.
Since then, the company's recovery has been significant. Indeed, sales and net profits are well-ahead of what was achieved before the credit crunch, while the dividend has been restored and is growing fast. At the half-year stage this year, GKN reported a 16% increase in sales, which led to a 32% increase in EPS and a dividend hike of 20%.
GKN is expected to deliver another two years of earnings and dividend growth. On consensus forecasts, the projections put the company on a 2013 P/E of 7.6 and a prospective dividend yield of 3.7%.
Last week Travis Perkins updated the market on trading, announcing a disappointing 1.7% decline in like-for-like sales. Given that its cons