How To Invest Like A Billion Dollar Hedge Fund
(This article demonstrates how large hedge funds invest on Wall Street. We are not indicating or promising in any way that you will make money from this information.)
“This can’t be right…”
I looked at my wife in disbelief.
“This can’t be right. Something must have gone wrong”, I repeated.
I had a pit in my stomach. I was nervous and sweating. Surely what I was staring at couldn’t be right.
There had to be some kind of malfunction.
It was 2007, and with my jaw dropped, I was glancing at what would become the new norm on Wall Street.
Hedge funds would hog this to themselves for as long as they possibly could.
Still, at the time I couldn’t believe my eyes.
So I hired a data scientist from Princeton University. He had more than one PHD and could definitely explain to me what had gone wrong.
I just kept thinking “This can’t be right…”
A week later they sent the data back to me with their analysis.
They really pulled it apart. Every single report that you can think of was run on this data.
And they confirmed it. The program we created spotted specific news events that have an outsized impact on the market.
In other words, out of 9,000 different news items released every single day, roughly 2% of it makes the market move.
Now it was finally possible for us to predict the average movement of a particular stock when such news events occur.
Before I knew it I was placing about $7.7 million worth of transactions every single day, and by the end of the year I had traded exactly 93,788,875 shares.
It was like a pinball machine.
Ping! I’d place another trade.
Ping! Let’s go short.
Ping! Long on this one and hold it until the end of the day.
It was simple. And it made sense. I could spend as little as 10 minutes per day doing it, or as much as 6 hours.
I would hold on to some stocks for one trading day, and others for 3 months.
I became so big that market makers started chasing my trades. I was just an ordinary guy, I didn’t even run in those circles.
Still, I knew that Wall Street was paying attention.
It wasn’t long until they came knocking on my door asking to buy my data.
Several hedge funds with billions in assets were knocking down my door. Even Business Wire (owned by Warren Buffet), and NASDAQ became my clients.
At first I was hesitant, because I was planning on setting up my own hedge fund.
However, they gave me an offer I couldn’t refuse. It meant that I didn’t have to worry about regulations, raising funds, or managing investor relations.
Anyone who’s been through it told me not to do it. The very thought of it sent shivers down my spine.
Instead, I could just sit back and get a fat fee from Wall Street every month. It seemed like a no brainer.
They slowly carved themselves out an unfair advantage (by the way, nowadays ordinary investors can have that unfair advantage too, more on that in a minute).
As you can imagine, until recently, retail traders and ordinary investors didn’t stand a chance.
The hedge funds and institutions who didn’t invest in data started falling behind too. Way behind.
Soon my data and methods of matching news up with specific stocks started being used everywhere. Check out this Wall Street Journal article:
For years this style of investing has only been available to the big guys.
However, now with cloud based computing you can dip your toe into this profitable pool as well.
There are lots of investment and trading strategies you can use.
And one stock trading strategy in particular has seen some incredible double digit gains over the last decade
Just a quick warning. You are about to see some pretty incredible results.
I want to make sure that you know that any past performance (whether it is back tested, live, or demo) does not guarantee future results.
This is in no way a promise that you are going to make a return.
Just because I made a lot of money doing this doesn’t mean you will. I have no idea how committed you are, or whether or not you have what it takes.
Having said that, as you are reading this right now, hedge funds and other ordinary investors are using this strategy to make bank.
Before I get into the results of this trading strategy, I want to make sure that you understand it fully.
So here, with all the dogmatism of brevity is the exact guide to trading like a billion-dollar hedge fund.
Step #1: Only invest in explosive or collapsing stocks
So what do I mean by that?
Well, the last thing you want to do is buy or short something and see it go nowhere.
Let me give you a couple of examples of the perfect moves. Not all of them will be this good, but it’ll paint a good picture.
Several years ago on August 1st 2012, a company called Knight Capital yielded a fat shorting opportunity that collapsed its share price by 64.56%.
It was 7:41am (in the premarket) and the $7.27 share price looked like it was about to fall hard.
Lo and behold, by the end of the day it fell like a stone and I promptly closed out the trade at $2.58.
Have a look at the chart below.
Before I reveal exactly what triggered me to go short, here are a couple of more recent examples:
On January 19th 2016 Eleven Biotherapeutics, Inc (EBIO). You could have shorted it from $1.05 to $0.52. That’s a total gain of 50.48%.
Again, the trade was placed in the pre-market at 6:45am. The exact deal ticket time was actually 06:45:07.
A specific news event happened that made that a valid short. I’ll tell you which one in a minute.
On June 6th 2016, at exactly 6:37:09am, a Mirati Therapeutics, Inc. (MRTX) short position yielded a huge 29.56% gain.
Price dropped from $14.48 to $10.20. Like before, one specific news event made this happen.
If you know what the news event is and you spot it, it becomes second nature.
The same is true for buying stocks.
On the morning of April 12th 2016 a lot of people will remember that parts of Texas were recovering from a crazy storm.
There were big hailstorms that were the size of baseballs. They tore up homes. It was terrible.
While that was happening in the background I saw something else interesting happening.
And at exactly 08:26:11am you could have gone long on Chesapeake Energy Corporation (CHK) in the pre-market session.
I’ll get into the ‘why’ in a minute. First, let me show you what happened.
At that time the price was $4.65. By the end of the day price closed at $6.05 which is when you should have exit.
That is a wonderful 23.14% gain in just a few hours.
I could literally show you more than a thousand examples, not all of them are big winners like this. Some lose, some win.
However, historically the winning investments happen far more frequently than the losing ones.
I think by now you get the point that investing or shorting a stock that is about to move is great.
However, HOW do you know that it is about to move?
There are normally only two things that drives the price of a stock.
- The actions of the company.
- The general direction of the market.
In order to get that explosive move, you need to focus on the actions of the company.
You want that ONE gem out of 5,000 companies that is either doing something good, or messing up badly, on that particular day.
I’ll go into a lot of detail on how to do that soon. First let’s talk about when you should be entering and exiting trades.
By the way, if you want to download today’s list of power stocks hedge funds are buying right now, simply click here and we’ll send them to you.
Step #2: The simple execution plan of when to buy and sell
There is a dirty little secret when it comes to profitable investing. Well, at least when it comes to stock returns.
WHEN you buy and sell is almost as important as what you buy and sell.
And this was unequivocally proven when 4 academics from 4 prestigious universities came together to answer one simple question:
“According to the data, when is the best time to be buying and selling stocks?”
Berkeley University of California, New York University, Rutgers State University of New Jersey, and Tel Aviv University were up for the task.
On July 22nd 2016, the paper was published in the Market Efficiency Journal, Vol. 8, No. 140.
It was later reported on Yahoo Finance:
I will save you the hassle of reading the 38 pages in that journal.
As it turns out, the time that is the most predictive of a stock’s return is the pre-market session.
However, that is ONLY true on news days such as earnings, analyst recommendation changes, and SEC filings.
According to the academics “the correlation is positive and significant”.
So, for the best results you should be placing orders in the pre-market session (before 9:30am EST).
But only on specific stocks who have specific news items coming out.
Now that you know when to enter a trade, when should you exit the trade?
This is where is gets incredibly simple and easy.
Simply exit the trade at the end of the trading day. You can even instruct your broker to liquidate all your positions just before the market closes.
It is simple. It is easy. And it is incredibly effective.
Step #3: How to pick the right stock (out of 5,000) that is about to move
Now that you know when you should be executing trades (in the pre-market) and when you should be closing them (at the end of the trading day)…
…Let’s talk about which stocks you should be picking.
The strategy we’ve been talking about is specifically designed around analyst actions.
Every day there are a handful of companies who get upgraded or downgraded by analysts.
Most of those announcements come out in the pre-market session.
The very first trade I told you about in this article was Knight Capital. You could have shorted it and made a 64% gain.
At 7:41am an announcement came out. A little know analyst company called Raymond James Financial downgraded Knight Capital.
42 seconds later I would place that short trade.
Don’t forget, this is during the pre-market session. The market officially opens at 9:30am.
Once the trade is entered you can relax and simply wait until the end of the day to exit it.
Here’s another example.
Earlier in the article I mentioned the hail storm in Texas.
Well, that same morning on April 12th, Tudor Pickering (another analyst) upgraded Chesapeake Energy from ‘Sell’ to ‘Hold’.
This happened at 8:24am.
11 seconds later I had my long position ready. Again, this is during the pre-market session.
So let’s do a quick recap:
- Pick stocks that are about to move.
- Enter trades in the premarket.
- Close trades at the end of the day.
- Use analyst actions to determine which stock to trade.
I’ll let you know how you can get a piece of software that actually fetches the Analyst Actions for you as they happen.
First, let’s look at how you will manage your risk.
QUICK SIDENOTE: To see a sample of stocks you might trade, download today’s list of “Power Stocks” that hedge funds are buying right now by clicking here.
Step #4: Mitigate your risk with this simple trick
This part isn’t as sexy, but it separates the men from the boys.
Get this right and you could find yourself with unfathomable financial freedom.
The key to lowering your risk is having a simple plan in place. We already have a trade execution plan, but now we need a daily trading plan.
After analyzing the tens of thousands of analyst actions, the simulated returns were incredible. We even accounted for 0.4% commision and slippage:
Let’s pretend you have a $10,000 stock trading account.
An easy way to limit your risk would be to diversify this over 10-20 stocks. Go long on some, and short on others.
Remember, you’re only holding these stocks for 1 day.
If you want to execute 10 trades per day (which is fairly quick and easy), then you’ll buy $1,000 worth of stock on each opportunity that presents itself.
Ideally you’ll want to go long on 50% of your trades and short on 50%.
There are way more sophisticated models we can go into, but this works really well.
Based on 79,000 trades (yes, you read that right) you could be pulling in 0.31% per trading day.
I know that doesn’t sound like a lot, but there are 20 trading days every single month, and historical performance has shown that getting 4-6% per month is fairly normal.
You need discipline though. Most people don’t have it. And again, past results do not guarantee future gains.
#5: How to execute this strategy with consistency and ease
I am about to throw a wrench in the works.
There are 5,000 stocks out there you can trade and 9,000 news events that happen every single day.
And then there are 553 analysts releasing information, upgrading and downgrading companies.
This simple trading strategy becomes a lot more complicated once you look at the sheer volume of data that needs to be analyzed.
No one human, or even a team of humans, can do this.
That’s why hedge funds buy our data.
News Quantified matches up news events with market data, and only picks those that are about to move a stock price.
You now have two choices
Choice #1 – go about your day and rely on the banks to take care of your money.
Or, you could go for choice #2. The smart choice that savvy investors and hedge funds on Wall Street go for.
Use this knowledge and information to take control of your financial future. You can start by downloading today’s list of power stocks.
We’ve already analyzed 9,000 news items so that you don’t have to.
Click here to learn more.