via Zero Hedge, all seven parts of Trader – The Documentary.  Highly recommended viewing.

Persistence in Hedge Fund Returns

One more reason to like AlphaClone. . .

Do Hot Hands Exist Among Hedge Fund Managers?


In measuring performance persistence, we use hedge fund style benchmarks. This allows us to identify managers with valuable skills, and also to control for option-like features inherent in returns from hedge fund strategies. We take into account the possibility that reported asset values may be based on stale prices. We develop a statistical model that relates a hedge fund’s performance to its decision to liquidate or close in order to infer the performance of a hedge fund that left the database. While we find significant performance persistence among superior funds, we find little evidence of persistence among inferior funds.

Seven Sins of Fund Management

A couple years old, but great read!

Seven Sins of Fund Management


Really enjoyed Fox’s book The Myth of the Rational Market, and I’m going to add it to the Reading List.  Although I wish Fox would have mentioned Andrew Lo in the book and his AMH.


My first pass at the FAQ is finally up!  email more questions to with FAQ in the subject line.


My paper just passed 30,000 downloads.  Next stop, Market Efficiency, no irony there…


Does Einhorn have Buffett’s ear?


Costs of higher education Parts 1, 2, and 3.


Interesting news that Covestor is launching their Multi-Manager platform.  I am really surprised this received SEC approval, but congrats Perry and team for getting it done where others could not (namely Vestopia, Cake, and Ka-ching – which I include because it uses “fantasy” portfolios rather than real money).

I have some real concerns about conflicts of interest and their fiduciary role (ie minimum trading volume in a stock is only 10,000 shares traded), but time will tell how that plays out.

I think Covestor will be successful as a company.  I do not, however, think the underlying investors will have the same success.  This has nothing to do with Covestor of course, but everything to do with investor behavior – namely chasing the hot hand.  (ie check out all the DALBAR studies and the recent Bogle ETF studies.)  One could call this a massive exercise in survivor bias (check out the underperforming Marketocracy mutual fund as an example).

This could be a decent option for smallish RIAs and BDs to essentially outsource their back-office, or to completely eliminate client interactions (positive or negative for the advisor, depending).

What a Difference a Year Makes! Endowment, Buy and Hold, and Tactical Returns

In my last post I examined the performance of the endowments (estimated) versus some publicly traded asset classes, allocations, and tactical models.  Below I am going to expand a bit and see exactly what a difference this past year made.

Every reporter has been all over the story including Barron’s , WSJ , Vanity Fair, and Bloomberg – although NONE have mentioned my book.  That is a bit frustrating, but to be expected.  It is a better story to talk about how much money these endowments have lost rather than review or mention a slightly academic book (with lots of data and tables) that would have shielded investors from the bear markets.

(Note:  The endowments have not reported an official number for their 2009 returns, which end June 30th, but estimates center around -25% to -35%. )

Below are some returns from the endowments from 1985-2008, followed by 1985-2009 (and remember these are for fiscal year ending June 30th!!):

(Data sources: Global Financial Data, Harvard and Yale Annual Reports)

US Stocks – S&P 500

Foreign Stocks – MSCI EAFE

Bonds – 10 Year US Govt

Commodities – GSCI


Buy and Hold is an equally-weighted, monthly rebalanced allocation to the above 5 asset classes

Harvard and Yale are approximate returns for 2009 (probably ranging from -25% to -40%)

60/40 is the old 60% stocks, 40% bonds allocation

Timing model is from my 2007 paper, Rotation is from my 2009 book.


Some observations, 1985-2008:

-Harvard and Yale’s returns are highly correlated at .91, suggesting they follow similar strategies and allocations.

-Harvard and Yale beat any one asset class by roughly 3-5%.

-Harvard and Yale beat most indexed allocation models by 4-5% with similar volatility.

-Harvard and Yale are highly correlated to equity markets, as well as a diversified buy and hold including real assets.

Some observations, 1985-2009:

-Harvard and Yale’s returns are even more highly correlated at .95, suggesting they follow similar strategies and allocations.

-The bear markets of 2008/2009 knocked a full 2% off the compounded returns of the endowments.

-Harvard and Yale still beat any one asset class by roughly 3-5%.

-Harvard and Yale still beat most indexed allocation models by 3-4% with similar volatility.

– The endowments’ Sharpe Ratio took a heavy beating, knocking it down to the .60 range from over 1.0.  (A nice rule of thumb is that most asset classes have Sharpe Ratios of around .2, a diversified allocation is around .4, and momentum style models can get you up to .7 and .8.  To get higher than that you need AlphaClone ,ha.)

– The timing model now has a higher Sharpe Ratio than the endowments, largely due to avoiding the bear markets of 2008 and 2009.  The leveraged timing model (at 2X at broker call rate) would have outperformed the endowments on an absolute and risk adjusted basis.

-The Buy and Hold allocation now has a whopping .9 correlation to the Harvard and Yale endowments.

Some comments:

What is some of the advice you give individual investors?

1.  Diversify across equities, bonds, and real assets.  More bonds the less risk you want.

2.  Avoid taxes.

3.  Avoid fees.

4.  Index.

A simple portfolio we advised in the book was:

US Stocks:  VTI, SPY

Foreign Stocks: VEU, EFA

Bonds: BND, AGG

Real Estate:  VNQ, IYR

Commodities: GSG, DBC, LSC

We further split these allocations into 10 and 20 asset classes in the book.  Next,

5.  Use risk management (ie the timing model).

6.  Seek alpha (via hedge-like mutual funds, AlphaClone, etc.)

Is the endowment model broken?

Just looking at the data, the endowment model has outperformed anything over the time period studied.  The biggest criticism for the endowments is that they did not manage their risk, liquidity, and “tail-risk” enough. I think that is a fair criticism.  But, in general, diversification works (most of the time).

There is a great paper coming out of a wealth management shop here in LA that deconstructs the Yale returns even further (ie adding value and small cap tilts, a little leverage, etc).  They find that most of the outperformance is due to, surprise, the private equity allocation.  As we mentioned in the book, is the PE game over now that there is so much competition?  TBD.

Is buy and hold dead?

Anyone that makes this statement usually does not have a healthy respect for history if last year changed their opinion of buy and hold.  EVERY asset class is great sometimes, and horrendous other times (gold, bonds, S&P 500, foreign currencies, and Argentinean stocks included).  Buy and hold has never worked in periods of serious market stress.  Just ask those Tulip/South Seas buy and holders.

With a diversified portfolio of world asset classes (or a 60/40 portfolio) I think you need to be able to accept a 50%+ drawdown.  With a single asset class or security you need to be able to accept an 80-100% drawdown or total loss of capital.  I think using risk management via a trendfollowing method fits me personally.

How is the model allocated now?

You can follow timing updates here.


For some reason StockCharts keeps breaking my link to make the timing updates public. I have contacted them no less than 20 times phone, email, and fax with no response. If it is accidental, fine. If they are doing it to require people to subscribe to see the charts that is really sh!tty.

Are there any alternatives for public charting that use total return? If this happens again, I am going to start publishing the updates on my own newsletter style (but I really don’t want to).

The Endowment Model vs. the Timing Model, 2009 Returns

Both Barron’s and the WSJ penned articles on the endowments sorry performance for 2009 (and neither mentioned my book – FAIL).

Lots of readers have emailed in asking me to comment on the endowment performance, as well as to compare it to the timing model.

Below are asset class returns for June 30th, 2008 to June 30th 2009 (ie the endowment fiscal year).

US Stocks – S&P 500

Foreign Stocks – MSCI EAFE

Bonds – 10 Year US Govt

Commodities – GSCI


Buy and Hold is an equally-weighted, monthly rebalanced allocation to the above 5 asset classes

Endowments is an approximate return for the largest endowments in 2009 (probably ranging from -25% to -40%)

60/40 is the old 60% stocks, 40% bonds allocation

Timing Model is from my 2007 paper and 2009 book.

timing endow

The buy and hold allocation would have experienced a 46% drawdown – yikes!  How many investors can sit through that?  (And if you read the DALBAR study you know they don’t!)

Remember, the timing model is not intended to outperform buy and hold by much over the long run, but is rather intended to manage risk effectively.  It did just that with a max drawdown 1/7th the size of buy and hold…


I’m not sure why the timing updates link was broken, but it is now fixed.


A Complete Toolkit for Fighting Inflation


Cool new website for tracking hedge fund investor letters


Europe on the Brink


John Henry Staging a Comeback (PS nice timing Merrill)


Meet the Man Who Beats Buffett


Top 20 Papers and Books in Modern Finance

I am doing a post that links to what I consider to be some of the top papers and books in modern finance over the past 100 years. Before I do, please leave a comment with your favorites or recommendations. Think Fama, M&M, Markowitz, Graham, etc…

Nice Ibbotson Interview

Excerpt from AllAboutAlpha:

Q4: Your “ABCs of Hedge Funds: Alphas, Betas, and Costs” has been a popular research paper on Have you updated it?  Have you changed your views?

Peng Chen, Kevin Zhu, and I are in the midst of updating the results.  The preliminary results show that hedge fund alphas are still positive, although not as high or significant as before.  The results also show that the majority of the returns can be classified as beta, then fees, then net alpha, in that order.  Despite the fact that alpha makes up the minority of the return, it is still noteworthy that the net alphas are positive.  This is in contrast to the mutual fund industry where there is little evidence of aggregate positive alpha, even on a gross level.  On a net level, aggregate mutual fund alpha is usually negative.

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