Connors Research Traders Journal (Volume 29): How This Hedge Fund Has Achieved Over 30% a Year For Two Decades

Here is a fascinating article from Institutional Investor magazine on Joseph Edelman, a hedge fund manager who has achieved over 30% annual returns after fees for two decades. Edelman runs Perceptive Advisors, a multi-billion hedge fund which primarily focuses on one sector – the biotechnology sector. I’d suggest you read the article first and then we’ll together look at, and learn from, the likely reasons he’s been able to achieve what few others have been able to do.  Here is the story: The 41% Man

The 7 Likely Reasons for Their Success 

1. Edelman is investing and trading in an industry which is predominated with stocks that have the potential to make asymmetrical returns. Nearly year after year a number of biotechnology companies have major breakthroughs and see the price of their stock move up hundred and sometimes thousands of percent. This is like the venture capital industry; one can have plenty of companies under-perform and even go to zero, and still make tremendous returns if their portfolio is fortunate enough to own for example an early stage Facebook, or Uber or any other tech company that has risen tens and even hundreds of times in value. Moves like this rarely happen in the majority of industries – they do happen though especially in industries like technology and biotechnology.
2. It appears they use superior money management principles. In my opinion, it’s as powerful as their stock selection.
3. They buy on the way up. It’s well-known analysts often underestimate the impact of events and this further ties to the academic study mentioned in Buy The Fear, Sell The Greed that statistically shows that investors tend to under-react when stocks make 52-week highs. These structural behavioral inefficiencies are likely part of the formula that has allowed them to achieve these outstanding returns.
4. They are single-minded in one industry. Unlike many other hedge funds, especially macro hedge funds, they go deep where others go wide.
5. They don’t need a big staff with hundreds of PhDs and quants to achieve these returns. Streamlined decision making makes for smarter decision making.
6. They trade both on the long and short side. They know stock prices go both up and down – their short book either smooths returns and/or is an alpha generator for them.
7. They use options wisely. Most great traders and investors do the same – even Warren Buffett who may be one of the most profitable options traders in history. Options trading, applied correctly, become a weapon for the best traders and funds.

You may not trade biotechnology stocks but you can replicate the process above. In summary, this process is:

1. Buy stocks (or any investment) that has the potential to achieve asymmetrical returns.
2. Money management is as important as stock selection.
3. This one is for investors, not traders – if you have conviction, and the fundamentals support it, buy more on the way up.
4. Be single-minded in your focus. They’re great in one industry. Unlike CNBC which bounces everyone all over the place, Perceptive Advisors focuses on one thing and they do that one thing better than anyone else.
5. Streamline decision-making processes.
6. Trade both on the long side and the short side. Yes, this is the longest bull market in history. It’s a wonderful anomaly. Eventually, a bear market in the US is going to occur because that’s simply the way markets work. Learn how to trade both sides.
7. Make options a weapon for you. They potentially limit your risk, potentially allow you to achieve asymmetrical returns, and they potentially add to returns by bringing in additional income. Many of the greatest traders and investors use them – you may want to do the same for yourself.

I hope you enjoy and learn from this issue of the Connors Research Traders Journal.

Larry Connors

Connors Research, LLC.

P.S. I’m conducting two webinars next week on strategies for short-term trading and for our upcoming 10 week Swing Trading College. If you are looking to improve your Swing Trading, and are looking for new quantified strategies to improve your trading, please click here to reserve your spot.

My new book Buy the Fear, Sell the Greed – 7 Behavioral Quant Strategies for Traders, is now available on Amazon. Click here to order your copy today.

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