Altucher on How to Beat Hedge Funds

James Altucher talks up a simple way to beat hedge funds with examples Google Inc. (NASDAQ:GOOG) and Akamai Tech (NASDAQ:AKAM).

(WSJ.com | James Altucher) I once met with representatives of a very wealthy family from Switzerland. You know how people say, “If you had taken $10 and compounded it from 1700 on, you’d have a zillion dollar by now”? Well, this was the type of family that had been compounding its wealth since the 1300s. Many families like this have ungodly amounts of wealth stashed away.

Because of a book I had written called “Trade Like a Hedge Fund,” this family’s representatives asked me to help them evaluate a fund they were thinking of investing in. The fund managers were former NASA physicists (oooh, rocket scientists!) who were using the latest in chaos theory and advanced signal processing to model the markets and come up with predictive models.

“Whoa,” I said, “stop right there.” The phrase “chaos theory” ranks up there with “artificial intelligence” as an almost sure sign of a scam.

I do believe quantitative modeling could help predict the markets and the movement of stock prices. No need to get fancy, however. The best systems have few rules (so it’s harder to fudge them to get the desired returns in a model) and have a lot of common sense.

Like the 4×2 system. I’ve traded this system for years, and even though it has no fancy chaos theory, it works. Basically, if a stock falls in price for four days in a row (for instance, after a bad earnings report) chances are the selling is done. Within four days, everyone’s seen the news, everyone’s had a chance to sell and most of the sellers have probably already sold.

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SOURCE: http://blogs.wsj.com/financial-adviser/2010/02/11/a-simple-way-to-beat-hedge-funds/