'This bull is learning': A hedge fund explains why stocks are crushing everyone

The stock market bull run is crushing hedge funds that can't figure out why stocks keep rising, despite indicators that they should be falling.

Caerus Investors, a small New York-based equity hedge fund, just released its second quarter letter, which provides some insights into what's going on.

Business Insider viewed a copy, and here are some of the more interesting points:

• "Never can we remember a stretch in the market with as many people fighting the bull. The wall of worry is as treacherous as we have seen."
• "At every troubled juncture, the market has confounded its participants, successfully shrugged off bad news and galloped triumphantly to a new high. This bull is learning, adjusting and becoming harder to predict."
• "This bull is learning, adjusting and becoming harder to predict....The greatest bullfighter of all time, Manolete, was gored to death by a Miura bull, an event that left Spain in a state of shock in 1947. Many contemporary hedge fund managers can probably relate."

The firm's Caerus Select Strategy, which focuses on consumer stocks, returned 8.8% annualized since it launched in July 2011. The strategy is roughly flat for the year, rising 0.63% through July 29, according to the letter. The firm managed $181 million, including trading allocations from separate accounts, as of June 1.

Here are some excerpts from the letter (emphasis ours).

Fear the bull market

"Never can we remember a stretch in the market with as many people fighting the bull. The wall of worry is as treacherous as we have seen.

The rise of Donald Trump and global political populism, turmoil at the major party conventions in the United States, escalation of radical Islamic terrorism, the coup attempt in Turkey and related fallout, China's debt crisis, yuan weakness and related economic slowdown, the EU's troubled bank sector, negative interest rates throughout much of the developed world, the renewed bear market in oil, and, last but not least, Brexit, could individually or collectively upend the global economy and yet equities markets continue to rise.

All of these concerns have justifiably kept most participants conservatively positioned. Yet, at every troubled juncture, the market has confounded its participants, successfully shrugged off bad news and galloped triumphantly to a new high. This bull is learning, adjusting and becoming harder to predict.

...

The greatest bullfighter of all time, Manolete, was gored to death by a Miura bull, an event that left Spain in a state of shock in 1947. Many contemporary hedge fund managers can probably relate.

While we at Caerus have largely stayed away from this fight, we admit to being somewhat confounded by the run in many consumer stocks. Fundamentals within the broader consumer discretionary universe remain somewhat muted, as evidenced by many second quarter earnings reports. Lodging Revenue per Available Room ("RevPar"), apparel spending and meals away from home continue to exhibit weak trends. More recently, Ford threw cold water on the recent rally in the auto sector with dismal second half guidance.