Hedge fund managers want to buy more Apple stock but fear risk

Posted:
in AAPL Investors edited March 2015
The heads of major hedge funds are so bullish on shares of Apple that they wish they could buy more, but doing so would put them at too great a risk with less diversification.




The conundrum for hedge fund managers was spotlighted on Monday by Reuters, which noted that 174 funds hold large stakes of Apple in their diversified portfolios. Typically, funds have self-imposed guidelines that prevent them from holding 5 percent of their stake in any single company.

Some have a large stake, like the $136 million Burnham Fund, which has 15 percent of its money allocated in Apple. And John Burnham, the fund's manager, would like to buy even more, but doing so would put too much of his stock's performance based on a single company.

Still, he and others think shares of Apple remain greatly undervalued, even though they are up more than 12 percent so far this year.

Among the most bullish on Apple is activist investor Carl Icahn, who oversees diversified holding company Icahn Enterprises L.P. Last month, Icahn issued a note saying he believes shares of AAPL should be trading at $216 today, based on their current revenue stream and cash position.

For years now, Apple has been a popular choice among hedge fund investors, many of whom have gained considerably from Apple's recent performance on the market. Over the last two years, post-split prices on Apple have more than doubled, though AAPL is currently trading about $10 lower than its all-time high of $133.60.

Last November, one major hedge fund manager said that he believes Apple could achieve a trillion-dollar market cap. Currently, the market values Apple at about $723 billion, making it by far the largest company in the world by capitalization.
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Comments

  • Reply 1 of 41
    xixoxixo Posts: 417member
    That's why they call it "hedging". You're mitigating risk.

    "Stock prices have reached what looks like a permanently high plateau." Economist Irving Fisher on October 21, 1929 - 3 days before the crash.

    You only make a profit after you sell out. Just ask Bernie Madoff's ex-clients.
  • Reply 2 of 41
    MacProMacPro Posts: 18,006member
    sog35 wrote: »
    This makes ZERO sense.

    So these hedge funds won't buy more Apple but will buy more loser stocks to midigate risk?  How is buying loser stocks helping?

    Pure stupidity.  If I wanted market gains I would just buy an index fund that cost virutally ZERO in fees.

    If I'm paying a hedge fund 2% and 20% each year I expect much more.  And that includes having the balls to be over-weight on stocks they think are winners.

    They are between a rock and a hard place. By definition they are supposed to spread to avoid risk and yet as you say they lose because of it. I was just doing the math, our original purchase of AAPL, which our broker was dead against due to over weighting, is running at almost exactly a 1600% gain based on today's price. The stock our broker retained where he wanted and invested for safety is running 3%. In the end I guess it is a crap shoot for them.
  • Reply 3 of 41
    Unfortunately the fact that so many funds have hit their limit on the amount of AAPL shares they can own means the stock will be challenged moving forward. No matter how well the company does going forward those funds can't buy more and thus this problem limits the upside potential of the stock.

    I personally have a ton of exposure to AAPL but its worth noting that the "law" of large numbers isn't completely based on vapor...
  • Reply 4 of 41
    melgrossmelgross Posts: 31,381member
    sog35 wrote: »
    This makes ZERO sense.

    So these hedge funds won't buy more Apple but will buy more loser stocks to midigate risk?  How is buying loser stocks helping?

    Pure stupidity.  If I wanted market gains I would just buy an index fund that cost virutally ZERO in fees.

    If I'm paying a hedge fund 2% and 20% each year I expect much more.  And that includes having the balls to be over-weight on stocks they think are winners.

    Of course it makes sense. There is never a guarantee of anything. While I can hold a lot of Apple for a long time, the only person I'm responsible to is myself. When Apple was at $86 a number of years ago, the dropped to ablut 56, it bothered me, but I held it. When it was $205 and dropped to $78, I held it, and bought some more. When it was 703, and dropped to around $390, I held it.

    But fund managers need to answer to their clients. If a holding drops by a good deal, that's a problem. So they need to mitigate that by holding a diversified portfolio. Some funds are non diversified, holding just a few investments, but that's fairly rare.

    Even so, when you are a professional manager, you need to balance your investments.

    There is absolutely no way to have predicted Apple's performance over the past 12 years, or so.
  • Reply 5 of 41
    melgrossmelgross Posts: 31,381member
    sog35 wrote: »
    by who's defintion?

    Like I said if I want a low risk investment I would do an index fund that cost almost ZERO in fees.

    If I need to pay these clowns 2% and 20% every year I expect them to take RISKS so they can materially outperform the market.  You don't out perform the market by refusing to buy winners and load up on losers.

    Who wants 20% a year? The mafia! I don't know any fund that demands that much. 6% is more like it, and as far as I'm concerned, since I've only made my own decisions since I was 13, I would never use one.

    But hedge funds generally do well enough. Otherwise, they wouldn't exist. Could they do better? Sure. But again, there's no way to know in advance. I've been confident in Apple for a long time, but, as I said, I have only myself to answer to.
  • Reply 6 of 41
    kibitzerkibitzer Posts: 1,113member
    Simple solution. Investors who aren't happy with their fund portfolios should simply buy additional AAPL on their own. My investment manager won't go overweight on Apple, and I respect his approach to risk for his clients. If I want to take on more risk for the prospect of more return, I'll use money outside his management to buy shares. At my stage in life, his job is to provide income and save me from disasters, and he's done a good job of it. The rest is gravy.
  • Reply 7 of 41
    kibitzerkibitzer Posts: 1,113member
    sog35 wrote: »
    so why are you paying your 'adviser' 6% each year?

    I would fire his ass and go solo.  I did and I'm kicking these hedge funds ass ever since.

    people need to take responsibility.  When your adviser tells you 'sorry we lost it all' you have no one but yourself to blame.  These are the same clowns who suggested to buy tech stocks in 2000 and real estate EFTS in 2005
    You do your thing. Mine works for me. The point for me is not to lose it all. Remember Andy Zaky?

    http://fortune.com/2013/03/04/the-rise-and-fall-of-andy-zaky/

    ... And also this ...

    http://fortune.com/2013/03/06/losses-of-apple-gurus-clients-could-reach-into-the-billions/
  • Reply 8 of 41
    pfisherpfisher Posts: 758member
    Quote:

    Originally Posted by sog35 View Post

     

    This makes ZERO sense.

     

    So these hedge funds won't buy more Apple but will buy more loser stocks to midigate risk?  How is buying loser stocks helping?

     

    Pure stupidity.  If I wanted market gains I would just buy an index fund that cost virutally ZERO in fees.

     

    If I'm paying a hedge fund 2% and 20% each year I expect much more.  And that includes having the balls to be over-weight on stocks they think are winners.




    Personally, I see a lot of risk buying Apple. Too much of their profit hinges on the iPhone. They've done well this year, due to a bigger phone which a lot of people wanted and it drew people from Android. How do we know Apple hasn't plateaued? We don't. It very well not be any kind of growth stock, In a way it doesn't appear to be a growth stock due to dividends being given out. Apple may come under pressure to lower prices as it completes against itself for its own customers. Now many people have a great phone, such as the iPhone 6+, so do they need to upgrade every two years? Many will. But will a new phone draw more customers to Apple? Where will Apple's stellar growth come from? Just because Icahn says Apple should be over $200 doesn't make it so. He wants it to be over $200 like anyone else. I think if hedge funds want to make money, they will go look for smaller, growing companies. Ones with great potential to add to their portfolio. There is risk there, but great reward. Apple feels like risk and little reward now.

  • Reply 9 of 41
    blastdoorblastdoor Posts: 1,889member

    I've long wondered if this might be a big issue holding back Apple's stock price. 

     

    It's a real problem not just for hedge fund managers but for individual investors for whom AAPL represents a large share of their portfolio. I know it's an issue for me. 

     

    This creates an asymmetry between AAPL bulls and bears. The bulls would like to buy more, but they face this diversification constraint. The bears have no analogous constraint. 

     

    Perhaps the share buyback program helps with this issue. It allows AAPL owners to acquire a larger share of the company without actually making new stock purchase themselves. If nothing else, this is a more psychologically comforting way to increase ownership in AAPL for individual investors like me. 

  • Reply 10 of 41
    kibitzerkibitzer Posts: 1,113member
    sog35 wrote: »
    When did i say to buy short-term out of the money Calls?

    My point is if you need to make additional investment decisions in addition to your 'adviser' something is wrong with your adviser.

    My advisor is doing exactly what I expect of him, thank you. My side bet on AAPL is like taking some spare bucks to the casino, but I like AAPL odds better. By no means let me criticize your approach. If you think it works best for you and you're enjoying the ride, by all means ...
  • Reply 11 of 41
    This ceiling represents a threat to Apple's stock price.

    Regardless of how well Apple do, there is a limit to the share price because of the law of large numbers. The hedge fund ceiling is a manifestation of that law.
  • Reply 12 of 41
    maestro64maestro64 Posts: 4,453member
    sog35 wrote: »
    This makes ZERO sense.

    So these hedge funds won't buy more Apple but will buy more loser stocks to midigate risk?  How is buying loser stocks helping?

    Pure stupidity.  If I wanted market gains I would just buy an index fund that cost virutally ZERO in fees.

    If I'm paying a hedge fund 2% and 20% each year I expect much more.  And that includes having the balls to be over-weight on stocks they think are winners.

    I agree with you, they are suppose to hedge against down side risks. The Hedge fund guys have the same issue I have now. Way back I bought and sold apple and took the profits to put them into other things to spread the risk, then the price got too high to make buying and selling meaningful ( the spread between the lows and highs were small) Even though my other investments have done well, Apple has done far better to the point where Apple now makes up a significant portion of the portfolio value. The 10 point drop in the last month made for a big hit in may portfolio value. The only way to stop this from happening is to sell more of Apple and put it in stuff which does not have the same swings. I am not going to do it and just ride it out but I do not have to explains to anyone why my portfollio is up and down 10% in a month. I have some of my money being managed and I can tell you if it down more then the market or not pacing the upside and I am asking lots of questions.

    Fund manager are like me, want more of the stock because of the upside potential, but the down side risk it too high that other stocks can not offset it. Plus what other stock trade the opposite of Apple. The other issue with Apple we have everyone gunning for them, they are looking for any small reason to short the helll out of it. Do you want to have a large % of other people money's at this level of risk. Also, keep in mind many hedge fund managers have governement and companies retirement funds and they have to minimuze risk and make a certaint return.
  • Reply 13 of 41
    geekmeegeekmee Posts: 299member
    pfisher wrote: »

    Personally, I see a lot of risk buying Apple. Too much of their profit hinges on the iPhone. They've done well this year, due to a bigger phone which a lot of people wanted and it drew people from Android. How do we know Apple hasn't plateaued? We don't. It very well not be any kind of growth stock, In a way it doesn't appear to be a growth stock due to dividends being given out. Apple may come under pressure to lower prices as it completes against itself for its own customers. Now many people have a great phone, such as the iPhone 6+, so do they need to upgrade every two years? Many will. But will a new phone draw more customers to Apple? Where will Apple's stellar growth come from? Just because Icahn says Apple should be over $200 doesn't make it so. He wants it to be over $200 like anyone else. I think if hedge funds want to make money, they will go look for smaller, growing companies. Ones with great potential to add to their portfolio. There is risk there, but great reward. Apple feels like risk and little reward now.
    Yeah, Apple is a one trick pony.
  • Reply 14 of 41
    geekmeegeekmee Posts: 299member
    sog35 wrote: »
    So is Google.
    So is Exxon.
    So is BMW.
    So is Mercedez Benz
    So is Audi

    whats your point.

    Amazon has 100 tricks and makes money on none of them.

    My point is sarcasm... Which evidently I am not very good at.
  • Reply 15 of 41
    MacProMacPro Posts: 18,006member
    geekmee wrote: »
    My point is sarcasm... Which evidently I am not very good at.

    Hint /s :D
  • Reply 16 of 41
    jasenj1jasenj1 Posts: 910member

    Isn't it widely publicized that over 80% of actively managed funds underperform their benchmark? I wouldn't worry too much about what hedge fund managers fear.

     

    (Note: just because a managed fund may underperform its benchmark does not mean you are likely to do better. It only means that if you are looking to buy into a sector, it's probably best to buy a low-cost index fund rather than a fancy managed fund.)

  • Reply 17 of 41
    kibitzerkibitzer Posts: 1,113member
    sog35 wrote: »
    When did i say to sell all your shares and buy Call options?

    When did i say you should go 100% into Apple options?

    you are twisting my words.
    I twisted nothing. I said nothing about whatsoever about options, so maybe it's you who are trying to put words in other people's mouths. All I provided were links to articles about Andy Zaky, who played the Apple tune exclusively for years and years, including buying and holding. I was one of those, and I did 60% per year gains compounded annually, when I decided to get out in mid-2012 (and that was luck on my part more than anything else). It was great for Zaky and lots of his clients while it lasted ... until it didn't last. You're the guy who seems so fixated about the options aspect of the Zaky story. The lessons to be drawn from the Zaky saga are timeless. Don't let greed blind you. Past performance is not a guarantee of future results. Know when to hold 'em; know when to fold 'em.

    What is it about you that you always have to pick fights with everybody? I'm not your enemy.
  • Reply 18 of 41
    blastdoorblastdoor Posts: 1,889member
    Quote:

    Originally Posted by sog35 View Post

     

     

    Diversification is overrated.  Its just an excuse by the investment community for you to buy the stocks they are trying to push.




    Some people might over-emphasize it, but diversification unambiguously has value. Putting a large proportion of one's savings into a single asset is highly risky. I expect Apple to do well, but I don't know with certainty that Apple will do well. There is risk. 

     

    It is possible to reduce risk by owning assets whose prices have a low correlation with one another. Trading some expected gains for lower risk make sense for people who have only one life to live. 

  • Reply 19 of 41
    cm477cm477 Posts: 95member
    Quote:

    Originally Posted by sog35 View Post

     

     

    I would be more disappointing paying these managers 2% and 20% and realize I missed on 80% returns because they refused to buy winners even though it was obvious.  Have these clowns ever heard of selling covered calls on those Apple shares?  Or buying protective puts?  That's the way to hedge a strong overweight stock you hold instead of refusing to buy more.

     

    No wonder hedge funds have been outperformed by index funds the last 5 years.




    Hah. Try finding a broker that will take the other side of those trades, especially for a large hedge fund (though $136M is a very small fund). Hedge fund managers should be devising diversified portfolios, and derivative strategies, while helpful, have their own opportunity costs. Though hedge funds should earn their 2 and 20 by providing absolute return whatever the market does (up or down), most are glorified long-only funds that are positively correlated with the market. They should be seeking for new out-performers (and losers) rather than whining that they are limited by their risk profile. AAPL is a extremely liquid stock and most funds can trade in and out of it fairly easily. There is no need to camp out on a large position

  • Reply 20 of 41
    pfisherpfisher Posts: 758member
    Quote:

    Originally Posted by sog35 View Post

     

     

    99% of Google's profit is Search.

    99% of Exxon's profit is Oil.

     

    Whats your point again?

     

    You think Apple stopped growing?

    They just reported 30% revenue growth and 38% profit growth last quarter.  Which by the way totally BLOWS AWAY Google's growth numbers.  Apple only holds 20% of the smartphone market yet you say their growth is over?  What are you smoking!  China revenue up 50%. Emerging markets up 45%. US up 20%.  Europe up 25%.  Again what are smoking!

     

    Apple giving way to lower priced phones!  WTF!!! Where have you been!!!!  Apple just RAISED the prices on their phones with the 6/6+.  The average selling price on the iPhone HAS GONE UP 20% YoY!!!  None of your arguments are making any sense.  

     

    Man you seriously don't know anything about investing.  Invest in smaller growing companies?  Like GTAT?  Guess what?  Those smaller companies are smaller for a reason.  And a ton of them go BANKRUPT.

     

    All your arguments are what the media was saying in 2012.  You are totally out of date.  None of the FACTS back up a single word you said.

     

    You bring no FACTS to the table.  NOTHING.  No P/E ratio's, no Balance sheet analysis, no capital allocation, no revenue growth,  average selling price, growth in China, ect.   You are just spewing some random BS you heard on CNBC the last 2 years.


     

     

    Apple has grown a lot. People may be wondering if the machine is going to slow down. There are other stocks out there from other companies that don't have the popularity of Apple.  Also, I don't watch TV (not for about 8 years) and I've never seen CNBC. I do read the WSJ on Saturdays. It's clear I didn't have any evidence for what I wrote. It's conjecture. I said "we don't know" what the future holds. I know enough about investing from reading John Bogle's books and Bogleheads and that's good enough for me. Some of us are busy with jobs and kids and don't have time to read company balance sheets. The point about phones (or whatever is sold): when there is saturation of the market, maybe you do have to lower your prices as your product has matured or you can't bring more customers over. Funny, right after I wrote about cheaper phones, over on another rumor site was a story about Apple having a trade-in program for competitor phones. It's another tactic to get people to buy the iPhone because the phone itself is not selling itself to these potential customers. Anyway, people make begin to feel that Apple's reach the top and the growth has been too good so maybe it's time to stop buying she stock and diversify. Apple is a bit of a one-trick pony financially as the vast majority of its profits come from the iPhone. Google is more than search. Google's about information and that can be worth a lot of money. Search is incidental. Again, that's conjecture based on reading what can be found online anywhere.

     

    Happily 60/40 stocks/bond index funds, a chunk of Vanguard Wellington Admiral shares, a big chunk of Vanguard energy fund when it lost a ton of value. I feel very well-informed about investing and I'm happy with the low-cost funds and balance that I have. Hopefully, we are all comfortable and happy and educated with the risk we take. Buffet recently said: we can't time the market and we don't know what the future holds. Good to know. If you are younger, take bigger risks.

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