Follow the Smart Money

Published July 26, 2020 by Cedalion Advisor

We’ve all heard this phrase before. Anyone who has watched CNBC has seen the Najarian brothers show up to tout the newest unusual options activity. They even have a book aptly titled Follow the Smart Money. But do you really know how to follow the “smart money?”

The Cedalion Fund takes a completely different approach. We don’t believe in short term trades or volatility in the markets. We want to hold strong companies when they are underestimated, like buying Google ($GOOG) or Apple ($AAPL) back in 2010. To put it simply, we seek to understand what’s a short term trend and what is an uncrowded long-term opportunity.

To accomplish this, we take a 2 step process: (1) we observe what the top-performing, long-term, buy-and-hold hedge funds and investors are holding, and (2) we monitor the underlying activity in the equities to gauge a multitude of variables including relative strength and whether the trade is becoming crowded. For step 1, we monitor the public filings of a select handful of top hedge funds/investors, and for step 2, we monitor primarily unusual options trades.

With the advent of the internet and public information, there’s no better time for retail investors to monitor what the top performing hedge funds are doing. This is made possible through their 13F filings with the Securities and Exchange Commission (SEC). However, in most cases, the filings come out quarterly (unless the firm owns a certain percentage of the company, then they have to report buying/selling in a much shorter time horizon). This delay is usually not a huge issue with regards to the firms we monitor, but to more closely monitor their trades, we need to watch for unusual options activity.

Why do we follow unusual options instead of unusual volume or percentage change? Because options trades are a transparent market. If you’ve read the Cedalion Fund’s investment thesis, you know that we don’t participate in markets where we have incomplete information. Hedge funds and market makers can manipulate share volume and price, but every options trade is made public through the Chicago Board Options Exchange, or CBOE.

Although one can generate significant returns simply copying the exact trades of a select few hedge funds, we developed the Cedalion Fund to automate much of this process, be ahead of significant portfolio changes, and to be the professional hand in times of market volatility and fear.

We understand the average, non-institutional investor wants to learn more about the markets and understand how these big players are making moves. Our members will get access to our insights, opinions, and research, so remember subscribe.

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