Wednesday, April 8, 2009

Heebner zigs but the market zags

Ken Heebner’s CGM Focus Fund has had a superb long term record, but this year Heebner has been struggling. The fund is -13.7% to April 6 YTD, which is 6.9% behind the S&P 500.

Bullish too early?
When I reverse engineer Heebner’s macro exposures, it seems that he got bullish too early and is now in the process of reversing course. As an example, the chart below shows his beta exposure to the S&P 500. He raised his market exposure early and as the market tanked he pulled back, just in time for the bear market rally.

Drilling down to his sector exposures, we can see that he got long the financials a little early and is now selling:

We are also seeing a similar story on cyclical exposure:

Ken Heebner has a bottom-up driven investment process but takes big macro bets as a result of his bottom-up analysis. This style can work well when the economy is showing a trend, but I believe that Heebner tried to call the turning point a little early and got hurt.

The CTA curse?
I wrote before that trend following CTAs are also struggling as the macro backdrop is trying to find its footing as the economy stabilizes. However, stabilization is not equal an upturn and a bull market revival is not yet in sight. In a nutshell, that may be Heebner’s problem.

In a future post, I will highlight a venerable old fund that is showing signs of revival.


Sentiment_Al said...

It would be interesting to discuss what models ARE successful in a non-trending / bottoming environment. It makes sense that trend followers, momentum-based, CTAs, and such have trouble when the free-fall stops and an new bull hasn't taken over. But what works? Channel identification? Contrarian sentiment trading? I'll be interested in reading your upcoming post about a venerable fund that's now back to doing well.

keithpiccirillo said...

Heebner uses a top down approach!
Per the prospectus page 6.
In the SAI section on style management, "it first analyzes the overall economic factors that may affect a potential investment".
So maybe you want to reconsider or clarify?

keithpiccirillo said...

I am certain that your reverse engineering has accounted for his sleight switch from big banks to insurers correct?
I assume that parameters of several weeks yield better predictive indicators than those of only a week.
Thanks with much respect.

Cam Hui, CFA said...


To me, top down analysis is analyzing economic and other statistics to forecast future trends.

Heebner seems to analyze things by looking at what is happening on the ground. What are companies saying about their industry, what are traders saying about conditions in individual markets, etc. From that analysis, he arrives at a top down view and bets on it.

Is that bottom up analysis? To me it is.

keithpiccirillo said...

Honestly, I never doubted you for a minute. I would like more input/clarity on the reverse engineering time frame in which you entered his positions on insurance though if you could.

Cam Hui, CFA said...


The analysis is based on daily returns of the mutual fund and is therefore in "real-time". I am not looking at any of his reported positions, as those tend to be reported with a lag.


keithpiccirillo said...

Very thoughtful of you to respond once again.
Thanks for the insight, and I thoroughly enjoy your insightful posts.