Invest Like A Hedge Fund Manager

Published in Investing on 16 October 2012

When speculators expect the market to rise, these are the shares they buy.

'Risk-on/risk-off' is the latest market jargon. When investors are expecting a market rise, they switch to 'risk-on' mode. When they want to protect themselves against falls, they go 'risk-off'.

When the market goes risk-on, investors rush toward the assets that they expect will benefit. In particular, this may mean moving out of bonds and into shares.

However, if they want to take on as much risk as possible, they will go for 'high-beta' shares. These are the shares that have historically exaggerated the market's moves.

For example, a share with a beta of 1.5 has, on average, risen 1.5% each time the market has advanced 1%. Conversely, a high beta share is also expected to fall faster than the wider market.

Hedge-fund managers are famous for ruthlessly seeking out short-term gains. And one of the very best ways to profit from a market advance is to load up on high-beta shares.

The ten shares below are the largest companies with a beta greater than 2.1. Remember that a share's beta is not fixed and can change with time. Just because these shares are currently high beta does not guarantee they will actually rise sharply if the market takes off.

CompanyPrice (p)BetaP/E (forecast)Yield (forecast, %)Market Cap (£m)
Barclays (LSE:BARC),462
Royal Bank of Scotland (LSE:RBS)273.52.413.70.017,057
Kazakhmys (LSE:KAZ)7182.78.01.63,760
GKN (LSE:GKN)2172.28.73.23,538
Vedanta Resources (LSE:VED)10922.69.23.02,902
Travis Perkins (LSE:TPK)11032.411.62.22,695
DS Smith (LSE:SMDS),866
Taylor Wimpey (LSE:TW)56.92.614.91.31,836
Gulf Keystone Petroleum (LSE:GKP)204.83.9N/A*0.01,795
Barratt Developments (LSE:BDEV)1782.313.70.91,738

Data from Stockopedia *forecast to be loss making

Four of these look particularly interesting.


After being beaten down by the eurozone crisis and the LIBOR scandal, Barclays is on the up. Shares in the bank have risen a whopping 46% in the last three months alone. Both the dividend and earnings are forecast to rise sharply.

Banks are often regarded as geared plays on the financial markets and economy. As such, we shouldn't be surprised they often have high betas.

At the time of former chief exec Bob Diamond's departure, the market was close to writing Barclays off. Now the company has a new boss. Meanwhile, fears over the fate of the eurozone have reduced and US banks are talking favourably about the American housing market.

Barclays is expected to deliver EPS (earnings per share) of 33.3p for 2012, rising to 36.5p for 2013. Today's share price suggests the market does not believe Barclays will meet these figures. However, in the absence of a trading statement to suggest otherwise, sentiment is improving.


As a supplier of engineering services and parts to the automotive industry, GKN is exposed to the sharp end of the world economy. This is demonstrated by the company's share price journey over the last five years.

During the worst of the financial crisis, shares in GKN traded well under 100p. The company reported a small loss for 2008 and cancelled its dividend in 2009.

Since then, the company's recovery has been significant. Indeed, sales and net profits are well ahead of what was achieved before the credit crunch, while the dividend has been restored and is growing fast. At the half-year stage this year, GKN reported a 16% increase in sales, which led to a 32% increase in EPS and a dividend hike of 20%.

GKN is expected to deliver another two years of earnings and dividend growth. On consensus forecasts, the projections put the company on a 2013 P/E of 7.6 and a prospective dividend yield of 3.7%.

Travis Perkins

As a builder's merchant and building supplies firm, Travis Perkins is another company exposed to the vagaries of the UK economy.

Travis Perkins last week updated the market on trading, with the company announcing a disappointing 1.7% decline in like-for-like sales. Given that its consumer division reported a 6.7% decline, the finger is being pointed at the company's DIY chain Wickes. The news saw the shares fall slightly.

Management did reassure the market that it expects to meet consensus forecasts of around 95p EPS for the year.

This puts the shares on a 2012 P/E of 11.5. Expectations are that growth will return in 2013, meaning the P/E falls to 10.5. By this time, the dividend is also expected to have recovered to the level it stood at before the financial crisis.

With the economy still feeling uncertain, the market clearly has faith in Travis Perkins' recovery.

Gulf Keystone Petroleum

Gulf Keystone Petroleum (GKP) is one of the biggest companies on AIM today. It is also one of the most successful investments you could have possibly made in the last ten years.

Shares in GKP soared in 2009 following a significant oil discovery in Kurdistan. In less than three years, the shares rose from 12.5p to over 400p.

The exploration success earned GKP a huge private-investor following. By my estimates, nearly one quarter of the shares in GKP are owned by retail punters. Private investors have the habit of panicking when markets fall and becoming over-enthusiastic when things pick up. This can result in significant volatility in the GKP share price.

Gulf Keystone plans to take its Kurdistan discovery into production in 2013, and hopes to initially extract around 40,000 barrels of oil a day. The company then hopes this production rate will hit 150,000 barrels per day by 2015.

Successful investment in oil explorers such as Gulf Keystone Petroleum can deliver massive gains. To help you find the next big winner, The Motley Fool has prepared a free report "How to Unearth Great Oil & Gas Shares". Enjoy the report now. It will be delivered to your inbox immediately.

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Further investment opportunities:

> David owns shares in Royal Bank of Scotland.

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