What Is a Hulbert Rating In-Depth Guide to Hulbert Ratings Investment Newsletters

Core Description

• Hulbert Rating offers an independent, risk-adjusted measurement to assess investment newsletters’ true long-term performance.
• It systematically reconstructs portfolios based on published recommendations, accounting for costs, risk, and market conditions to allow fair comparisons.
• By focusing on actual results rather than marketing claims, Hulbert Rating aids investors, advisors, and publishers in differentiating genuine skill from luck or market tailwinds.

Definition and Background

A Hulbert Rating is an independently derived score assigned to investment newsletters that tracks the audited, risk-adjusted performance of their portfolio recommendations over time. The system was pioneered in the 1980s by Mark Hulbert, who aimed to bring objective analysis to a field traditionally filled with unverified performance claims. Initially, it focused on tallying simple returns, but it evolved to account for risk, transaction costs, and survivorship bias, making its scores much more reliable.

The Objective:
Rather than relying on self-reported or selective performance figures, Hulbert Ratings reconstruct each newsletter’s model portfolio using time-stamped buy, sell, and cash recommendations. Each trade is credited with actual real-world pricing, transaction costs, dividends, and corporate actions. This process provides a robust, apples-to-apples basis for comparing different newsletters, regardless of their investment style or market focus.

Background:
Today, Hulbert Ratings, LLC maintains the methodology, emphasizing long-term, risk-sensitive evaluation that reduces the influence of lucky streaks and allows persistent skill to be reflected. Its history includes adding controls for window-dressing, requiring continuous coverage of newsletters—even those that eventually ceased publication—to avoid survivorship bias. This approach helps both retail and professional investors objectively assess which advisory services have demonstrated real skill.

Calculation Methods and Applications

How Hulbert Rating Is Calculated

1. Recommendation Tracking
   Every action (buy, sell, hold, or allocate to cash) recommended by an investment newsletter is time-stamped and recorded. The system uses objective pricing conventions, often the next trading day’s closing price, to prevent any hindsight adjustment.

2. Model Portfolio Construction
   Using only information available at the time, portfolios are built to mirror published recommendations. All trades are executed at realistic prices, and explicit rules are set for handling cash, dividends, stock splits, and other corporate actions.

3. Return Computation
   Returns are calculated with a time-weighted approach—variable deposits or withdrawals by individual subscribers do not affect the core results. This isolates the signal of the newsletter’s recommendations.

4. Adjustment for Costs
   Comprehensive cost modeling incorporates commissions, bid-ask spreads, slippage, and, when possible, subscription fees. This ensures net (not gross) performance figures are presented.

5. Risk Adjustment
   To address excessive risk-taking, the Hulbert Rating utilizes methodologies similar to the Sharpe ratio—annualizing returns and dividing by portfolio volatility (standard deviation of returns). Downside risk, drawdowns, and periods underwater are also considered, making the score more comprehensive than a simple return figure.

6. Benchmarking
   Each newsletter is compared to an appropriate benchmark, such as the S&P 500 for U.S. equity strategies or specialized indices for niche segments. The primary focus is on excess return above this benchmark, adjusted for risk.

7. Annualization and Longevity
   All figures are annualized and reported over several horizons (3, 5, 10 years, or since inception), favoring longer-term, robust records over short-lived hot streaks.

Example Application (Synthetic Case)

A hypothetical U.S. technology stock newsletter began publishing in 2010. Over 10 years, it issued time-stamped signals that, when followed, resulted in an annualized return of 14%, compared to the S&P 500’s 11% over the same period. However, its volatility was 16%, versus the benchmark’s 13%. After accounting for transaction costs and cash drag, the annualized risk-adjusted excess return (Sharpe-like score) was 0.19. This rating reflects both its performance above the benchmark and the higher risk taken to achieve it—allowing investors to compare this tech-focused strategy to others with different risk-return profiles.

Comparison, Advantages, and Common Misconceptions

Advantages

• Independent Auditing: Scores are based on tracked, verifiable, time-stamped recommendations—avoiding cherry-picking or hypothetical backtests.
• Risk-Adjusted Metrics: By penalizing volatility, drawdowns, and inconsistent performance, the Hulbert Rating identifies strategies with sustainable results.
• Comparability: Investors can assess various newsletters (value, growth, momentum, sector-specific, etc.) on a standardized basis, independent of marketing narratives.
• Survivorship Bias Control: The system maintains data from newsletters that have closed or merged, providing an accurate record that includes both successful and discontinued strategies.
• Useful for Multiple Audiences: Retail investors, professional advisors, academics, and financial journalists use Hulbert Ratings for due diligence and benchmarking.

Limitations

• Selective Coverage: Only newsletters tracked and audited by the Hulbert system are included; many new or niche publications may be absent.
• Complex Methodology: Changes to backfills or calculation methods can complicate historical comparability.
• Composite Rating May Obscure Details: A composite score may hide factors like style drift, tax impacts, or liquidity constraints.
• No Predictive Power: Scores describe historical results; they do not guarantee future performance due to changing markets, editorial teams, or strategies.
• Implementation Gaps: Real-world execution in illiquid assets or frequent-trading strategies may differ from model assumptions.

Common Misconceptions

It predicts the future.

A high Hulbert Rating summarizes a track record. It is a tool for due diligence, not a prediction of future outcomes.

It rates individual stocks or funds.

Hulbert Ratings measure newsletters’ aggregate model portfolios, not their underlying asset picks or the advisability of specific funds.

Raw returns tell the full story.

Risk adjustment is crucial. A newsletter with smoother returns and lower drawdowns may offer more value than a volatile top performer.

All costs are always reflected.

While transaction costs and fees are modeled, tax treatment and certain subscriber-specific frictions are not always captured.

One rating fits all.

Varied mandates require different benchmarks. Comparing a niche sector newsletter to a broad-market index may be misleading.

Comparison to Other Metrics

Practical Guide

Understanding and Using the Hulbert Rating

To make the most of the Hulbert Rating, investors should interpret the score as a summary of process quality, not as a guarantee of future results. Here is a step-by-step guide for evaluating and applying these rankings:

1. Select the Appropriate Benchmark

Match the newsletter’s focus to the right benchmark. For example, a U.S. small-cap equity letter should be compared to a small-cap index, not the S&P 500. Avoid mismatched comparisons.

2. Prioritize Long-Term, Risk-Adjusted Results

Look past recent periods of strong performance. Favor records that span five or more years, through various market conditions. Place greater emphasis on risk-adjusted metrics (Sharpe, drawdown) over simple annualized returns.

3. Scrutinize Data Integrity

Check for third-party timestamping, out-of-sample signals, cost inclusions, and complete archives. Insist on transparency in methodology for increased confidence.

4. Align Strategies to Your Investment Goals

Each strategy has a different holding period, sector focus, and turnover rate. Compare these features to your liquidity needs, risk tolerance, and review preferences.

5. Test Before Committing

Consider paper-trading a newsletter’s recommendations for at least one quarter. This helps assess real-world execution risks from liquidity, slippage, and tax considerations.

6. Manage Portfolio Integration

Map exposure from newsletter recommendations within your overall portfolio. Use tools from your broker, such as staged orders or alerts, to control risk. Segregate high-turnover or experimental allocations from core holdings.

7. Set Controls and Monitor Ongoing Performance

Begin with modest position sizing. Monitor realized returns, tracking error, and costs on a quarterly basis. If results continually lag the risk-adjusted benchmark, consider adjusting or ceasing allocation.

Sample Case Study (Synthetic, Not Investment Advice)

An investor reviews three U.S. equity newsletters tracked by the Hulbert system from 2012 to 2022:

• Letter A: Risk-adjusted return of 7% compared to the S&P 500’s 8%; lower drawdown and turnover.
• Letter B: 10% annualized return, but with higher volatility, matching the S&P 500 on a risk-adjusted basis.
• Letter C: Modest 6% return but smooth performance and lowest drawdown.

The investor, prioritizing capital preservation, increases allocation to Letter C despite its lowest headline return, illustrating the utility of a risk-adjusted approach.

Resources for Learning and Improvement

• Official Hulbert Website
  Visit hulbertratings.com for methodology, scope of coverage, and FAQs. The site explains all major conventions, including how results are collected, risk is adjusted, and survivorship bias is handled.

• Mark Hulbert Columns
  Explore archives at MarketWatch and various financial publications for real-world examples, methodology retrospectives, and periodic newsletter audits.

• Academic Literature
  Research such as Graham and Harvey (1996) provides empirical analysis of investment newsletter value, persistence, and bias control.

• Books on Investment Measurement
  Notable titles include:

  • Active Portfolio Management by Grinold & Kahn
  • Expected Returns by Ilmanen
  • Practical Performance Measurement by Carl Bacon

• Regulatory Information
  Consult SEC guidance regarding newsletters, the Investment Advisers Act, the Marketing Rule, and anti-fraud provisions for legal context. NFA/CFTC guidance applies if derivatives are involved.

• Market Data Platforms
  Tools like Morningstar Direct, WRDS, and CRSP offer context for evaluating risk and factor exposures across benchmarks.

• Media and Case Studies
  Historic analysis in Forbes’ Hulbert Financial Digest and major news outlets often review newsletter performance and provide insight into long-term outcomes.

• Broker Education Hubs
  Many brokers provide webinars and written guides to understand third-party ratings with a focus on risk control and effective implementation.

FAQs

What is a Hulbert Rating?

A Hulbert Rating independently scores the long-term, risk-adjusted performance of an investment newsletter by tracking realized, audited returns versus benchmarks. It assists investors in distinguishing between skill and favorable market conditions.

How are returns tracked and verified?

Each recommendation is time-stamped and added to a model portfolio, with trades executed at objective prices. Dividends, costs, and corporate actions are included, and the process is standardized to avoid cherry-picking.

What does “risk-adjusted” mean here?

Risk-adjusted performance considers volatility and drawdowns. High returns achieved with large swings in value are penalized, highlighting repeatable results over raw gains.

Why are long-term results emphasized?

Short periods may be influenced by luck or particular market conditions. Multi-year windows capture performance across different cycles, reducing noise and revealing process quality.

Does a high Hulbert Rating predict future success?

No. The score reflects historical results under specific circumstances. Market conditions, editorial changes, and strategy alterations can affect future outcomes.

Are all costs included?

Transaction costs and typical trading frictions are modeled, but taxes and individual-specific factors may vary. It is important to always review the methodology for exclusions.

Are newsletters across all sectors covered?

Coverage can include a diverse range, from equities and fixed income to options and metals. However, not every segment is exhaustively tracked, and new or niche strategies may be underrepresented.

How should investors use Hulbert Ratings?

They should be used as one screen in a broader due diligence process. Cross-check the rating methodology, match the score to your objectives, and monitor ongoing real-world results before allocating capital.

Conclusion

The Hulbert Rating is a rigorous, independently constructed measure of investment newsletter performance, providing both retail and professional investors with a valuable tool for identifying sustainable skill. By insisting on risk-adjusted, benchmarked, and audited tracking, the rating provides a fair, long-term comparison across different strategies. However, like all historical data, it cannot predict future outcomes—due diligence, alignment with individual objectives, and regular review remain essential. With a clear understanding of how Hulbert Ratings work, investors can navigate the complex landscape of investment advice more confidently, focusing on process quality and evidence-based results.