The "Smart Money" Hedges - aka Carl Icahn is Smart Money!

by Wayne Ferbert on November 20th, 2013

Carl Icahn runs a very large hedge fund – so it shouldn’t surprise anyone that his fund occasionally ‘hedges’ its investments. But in general, they are a long-short fund that makes the majority of its returns by owning companies and agitating for changes to unlock value.
So, when they hedge, it is typically just to be defensive – and they hedge more when they believe they need to be more defensive. Earlier this week, Carl Icahn announced that this was one of those times.
Icahn occasionally writes letters on the Shareholders Square Table and this week his quote was: “Often when we are concerned about the market, we hedge to some extent and this is one of those times.”
He subsequently pointed out that his fund has had hedges in place at least since 2009 – as he said his funds returns would have been materially better without the hedges since 2009. But he pointed out that they don’t try to time the hedges because the market can be very unpredictable in short time periods.
Let’s face it – no one is looking back on the last 600 days in the market and saying: “Oh, I wish I was hedged.”
But it is clear that Icahn always has some sort of hedging program in place. More than likely, the hedges adjust on two factors: (1) according to the industries they have concentration and (2) the firms current bias on being defensive.
Icahn’s funds have generated +27% annual returns since January 1, 2009, according to his letter – and that was after the cost of hedging. So, his funds are certainly beating the broad market (that $1 billion they made on the NetFlix trade is certainly helping those returns). With these kind of results, he certainly is admired and thought of as ‘smart money’ on Wall Street.
But interestingly, they are always hedged – and sometimes, more than other times – like now.

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