The Return of Stock-picking

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It might feel like a thing of the past, but it's only a matter of time before stock-picking savvy will seriously matter again.

Right now, everything in the financial markets is correlating, says Alan Zafran, Partner at Luminous Capital. These days, it's not unheard of for 90 percent of all stocks on the S&P to move up or down the same direction on a single day. So stock-to-stock comparisons can feel redundant.

In 2012, however, Zafran predicts the markets will start balancing out, “returning to the mean.” Long/short equity financial managers and hedge funds with the skills to identify outperforming stocks will be the big winners.

“Once we return to an environment where stock picking matters, [hedge funds] with stock-picking skills and [quality] analysis will do well,” he says.

More generally, Zafran says he also expects an uptick in merger arbitrage as a consequence of low stock prices and companies suddenly flush with cash. For hedge funds with a certain set of skills, he also sees big opportunities in distressed credit funds.

To take advantage of privately negotiated distressed credit funds, he says investors need four specific things:

  • Capital, because the man with the gold makes the rules.
  • Relationships. Someone to make that phone call and avoid a bidding war.
  • Skill to find the value in the funds, beyond the obvious.
  • The internal structure to manage and service the fund. There needs to be people on the ground chasing down borrowers, he says. Many hedge funds don't have that ability.

Zafran has served as a financial adviser to wealthy families and institutional investors for the past 20 years. He began his career at Goldman Sachs and founded Luminous Capital with his partners in 2008. He will be moderating the opening panel at the Alpha Institute CIO Summit in New York City on October 26 and 27.

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Fake Stock-Picking Robot Threatens To Ruin Things For All The Legit Stock-Picking Robots Out There

Imagine, if you will, that you are a stock-picking robot. You've put in the time, come up through the trenches, and have finally started to garner the respect you deserve. Investors are flocking to your fund, begging to put in as much money as you'll let them. People were wary at first, not sure what to make of your style, but you've finally proved to them you're the real deal. Life is good. Then some two-bit hacks come along and threaten to destroy everything you've worked for, sullying the reputation of legitimate stock-picking robots with the one they used as a front for their scam. Starting at the age of sixteen, the defendants, twin brothers Alexander John Hunter and Thomas Edward Hunter, developed an elaborate scheme to manipulate the prices of penny stocks at the expense of unwitting investors. The Hunters concocted and hyped the tale of a “stock picking robot” named "Marl" that they claimed could identify penny stocks that were poised to appreciate sharply in value. In their email newsletters and websites (doublingstocks.com and daytradingrobot.com), the defendants represented that the “robot” was a highly sophisticated computer trading program and the product of extensive research and development. The defendants’ story was persuasive. Approximately 75,000 investors, the vast majority of whom lived in the United States, paid at least $1,200,000 for annual subscriptions to the Doubling Stocks newsletter and copies of the robot software. In reality, the “stock picking robot” was a work of fiction. Did "Marl" come up with brilliant investment ideas based on painstaking research, meetings with management, and complex analysis? No, in fact he did not. Defendant Alexander John Hunter, in seeking bids to create the software in 2007, described the requirements for the software to freelance software coders as follows: Need a small software program which will appear to the user that once running it is analyzing thousands of penny stocks. Every so often, the software will find a stock, and a message will appear from the system tray, and on the program showing the ticker symbol. IMPORTANT: This software does not actually find stocks at all. It should connect to my database and simply request any new stocks I have put in. Basically this is almost a “fake” piece of software and needs to simply appear advanced to the user... To say nothing of the fact that his purported credentials were bold-faced lies. On their doublingstocks.com website, the defendants referred to the stock-picking robot as “Marl”, combining the first names of its purported inventors, Michael Cohen (“Cohen”) and Carl Williamson. On doublingstocks.com, the defendants claimed that Michael Cohen “developed the famous ‘Global Alpha’ computer stock trading model” as a contractor for the Goldman Sachs Group, Inc. (“Goldman Sachs”). The Global Alpha program, the defendants claimed, in “most years is responsible for $4,000,000,000+ Annual Trading Profit.” The defendants’ representations about “Michael Cohen” were false. No such employee or contractor worked in that capacity at Goldman Sachs. SEC Charges British Twin Brothers Touting "Stock Picking Robot" in Internet Pump-and-Dump Scheme [SEC] SEC v. Hunter Brothers [SEC]

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