When Markets Collide

I don’t really like responding to comments in the comment section because I feel like no one reads them. I am going to start including reader questions with answers at the end of some posts. At the end of this post is one related to my last rant on the hedge fund space.


I just signed up, and at $1/day, a subscription to Bespoke Premium is a steal.


I was at the NAAIM conference earlier this week, and I heard a great analogy this week about drawdowns and time frames. Greg Morris said that investing in stocks for the long run is nice – if you’re a Sequoia Tree or a Giant Tortoise (or an endowment).

Recovering from a -30% loss (at 10% returns) requires about 4 years to get back to even, a -40% loss 6 years, and a -80% loss an insurmountable 20 years. . .


Quote of the day, “All progress is based upon a universal, innate desire on the part of every organism to live beyond its income.” – Samuel Butler


PIMCO manager/Harvard endowment/PIMCO manager El-Erian has some new Summer reading for you – When Markets Collide: Investment Strategies for the Age of Global Economic Change


Popular Mechanics puts the Aptera in the lead spot to win the X-prize. With oil hitting new highs, I really should have put down the deposit for one of these instead of that SUV.


My response to comments are below:

Hedge funds are over rated.

I don’t want it to seem that I am a cheerleader for hedge funds across the board because there are plenty of crappy ones. However, I don’t see why they should be limited to rich people. I like the option to invest in hedge funds. As I mentioned in another post, “hedge fund” is just a legal structure (and typically a fee structure).

So why don’t you start a service that provides knowledge of and access to these foreign alternatives to the small American investor. Isn’t that doable? Just a service that covers the 50 or so listed FOFs in London, along with education as to how to integrate them with a multi-asset conventional portfolio ( a la Yale endowment, etc, which you write so much about) would be huge.

You would not only be a hero, but considering that the hedge fund industry is over $2 trillion, and the little guy here still has no viable access, you might stand to make a pile as well.

I would absolutely love to. For an example, about 10 of the 40 odd FOFs listed abroad had investments in the Paulson funds (which were up 200-500+% in 07). However, a US investor really can’t invest in them due to PFIC rules and their tax implications (namely you get hammered at current income taxes and have to mark to market the positions). I am convinced that Powershares is either unaware of these implications for their PFP fund, or are not admitting to it. They haven’t surfaced because the fund has gone straight down, but when it goes up I imagine the holders will get a very nasty surprise with their tax distributions. I hope I am wrong.

As far as I can tell, the individual funds should be OK for tax deferred accounts (IRA, etc).

To try and get around the taxable problem I have been chatting with the index providers about developing an index on the foreign listed funds – I’ve owned the domain listedhedgefunds.com for some time but have just been waiting for someone else to do it. I think with some clever financial engineering and maybe some swaps you could get around the tax problems. Stay tuned.

As an aside I was reading an article in Futures magazine last night written by Daniel Collins. It detailed the difficulty in developing alternative funds for the retail market. He used the Frontier Funds as an example, whose prospectus is 535 pages long. So onerous are the listing requirements that the CIO estimates the breakeven cost on most of their products at 2.25%. The cost structure ends up being around 4% and 20%, which is higher than Winton’s 1% and 20%, but the minimum goes from $1M to $1,000. (The article also mentioned Peregrine Financial’s CTA seeding program.)

[PS - I liked the comment posted for an educational requirement to invest in alternatives (or really any listed product) instead of the accredited rule. Why not have a dimple DMV driving test style test use could take online to invest in them? I know a lot of uninformed rich people as well as many brilliant and versed non-accredited individuals.]

Why The World Is Backwards

This post is in honor of the 10th anniversary of Bre-X.

I am going to go on a bit of a rant. It makes me so angry to see how difficult it is for US investors to invest in hedge funds. Not only that, but the mis(education) of investors to the riskiness of hedge funds is a tragedy. Foreign govements and investors are decades ahead of US investors in this regard, and I have written plenty on the foreign listed hedge fund industry in the past.

The fact that individuals can logon to their online brokerage site and buy dog-sh!t penny stocks that are 10,000X more risky than most hedge funds or FOFs. Ditto for OJ futures on 10% margin, ditto for stock fraud which is probably 1000 times larger than all of the hedge fund blow ups combined. How about an example?

My girlfriend and I were driving to breakfast the other day (Auntie Em’s in Eagle Rock which is amazing btw) and we passed this billboard.

How is it possibly legal for a pink sheets company trading at $.05 to advertise their stock symbol on a LA freeway, but a hedge fund manager cannot even let it slip that he even runs a fund? Out of curiosity, I pulled up the page for the company, Copper King Mining. Not only is the CEO wasting shareholder money advertising their stock symbol on billboards, but they hired Peterman from Seinfeld to be the spokesman for the company! Peterman!!

A few gems from their website:

Over the next five years, Copper King is projected to extract:

230,200,000 lbs. Copper
115,100 ounces Gold
11,510,000 ounces Silver

Based upon current market prices, the value of these minerals would be:

Copper: $893 M
Gold: $112 M
Silver: $234 M

It is estimated that with current proven reserves Copper King could process 2400 tons or ore per day for approximately 10 years producing almost $282,100 per day of revenue or $102,966,500 annually. Of course, proven reserves are a small fraction of what is believed to be in the Milford Mineral Belt.

Unbelieveable. And just when I thought my billboard was a unique find, how about this press release:

Copper King Mining Corporation (Pink Sheets: CPRK), under the direction of its PR Firm Alexander Lindale L.L.C., has installed 55 full-sized billboards in LA County with 24 to follow in Utah. The billboards invite people to come and view the website for Copper King.

In conjunction with the billboards, there will be the release of a several-minute video news release on Copper King Mining that will be sent to several thousand TV stations via satellite uplink, and several thousand radio talk shows, newspapers and trade magazines. The purpose of the advertising blitz is to bring public awareness to Copper King Mining, a major employer in Milford, Utah, and provide an educational experience in the history and development of copper in the United States.

Truly depressing.

Contrarianism and The Market Portfolio

I like to think about what the most contrarian position is in the financial markets. It really has to be long term bullish on the dollar, right? (Leave a comment with any other suggestions.)

In a somewhat related note, want some Yuan? New currency income ETFs launch.


Apparently, institutional investors are good at intra-quarter timing of trades.


I don’t understand why there are not any funds that attempt to track the global market portfolio as defined by market cap? Seems like a simple portfolio to own (owning everything). I wrote an article last Summer about the topic, and came up with some rough figures. I think the PowerShares Autonomic (could they have come up with a worse name?) ETFs are close, but still no commodity holdings.

James Picerno at the Capital Spectator has a nice article here.


I love it – become an instapreneur.


I wonder if any investors in private equity hedge their holdings – either on a constant or tactical basis? It would make sense to me to use a simple moving average to hedge a PE portfolio since the biggest threat is a long bear market which dries up deals and exits.

Here is a list of the top 50 Private Equity firms.


Want to know when you are going to run out of money? Retirement Forecaster is a nice (free) program.


Yesterday I walked past the (very nice) offices of Superfund, a great marketing company ….errr, I mean a managed futures offering. Their fees border on the absurd:

Charges to each Series per year (payable pro rata on a monthly basis): 1.85% Management Fee, 1% Organization and Offering Expenses, 0.15% Operating Expenses, 4% Selling Commission, 3.75% Brokerage Fee AND very high round trip costs (Performance results are reported net of all fees and expenses)

Incentive Fee: The Incentive Fee is calculated on a monthly basis and applies to any new appreciation, if any, only. The Incentive Fee is 25%.

Old Bloomberg article here.


Posts have been light due to all of my traveling (and flights getting canceled). I hope to catch up later this week. Although I forgot how much I love NYC (even when it is rainy and nasty like it is right now). One of these days some one will figure out why the pizza here is so much better than in LA.


Sat down with the Mark Yusko in Chapel Hill (he used to run the UNC endowment). Lots of moving parts at his firm Morgan Creek, who manages the Endowment Fund (Salient), the Hatteras Funds, and the Tiger Select Funds. I think their late stage VC fund is pretty interesting.


Also sat down with the manager of Quantitative when I was in Charlottesville. Jaffray is one of those people I could talk to for hours – extremely interesting. Not a bad equity curve either (from IASG):


I am not sure why Lehman wouldn’t launch a foreign listed hedge fund (or private equity) ETN first, but here is a copycat private equity ETN. I wonder if the ETN structure will get around the foreign listed funds getting taxed as current income?


Lots of different commodity indexes.


Nice day for hedge consensus and best ideas holding Mastercard (MA). Third Point, Marsico, Viking, Tiger, Ruane Cuniff, Lone Pine, Atticus, Bridger, Blue Ridge, Heebner, and DE Shaw all owned it as of the last 13F.


If you have nothing else to do, a paper from the Journal of Psychoanalysis.


Longleaf, Dodge and Cox, and Sequoia are all reopening.


I wish they offered this class when I was at Virginia. In an unrelated note, they just dedicated a building to Julian Robertson this past weekend led by head donor John Griffin (Blue Ridge Capital).


I picked a bad week to leave LA – the Milken conference looks pretty interesting, and even has a panel on Econoblogging. At least most of the content is online.

If anyone is attending the Dresdner Kleinwort Listed Hedge Fund Conference in London on April 30th, please let me know how it goes (and pass along any good materials).


Arnott takes his case to the masses: The Fundamental Index: A Better Way to Invest.


The Wizard of Winton

“…I know about random walks, and when you draw these charts every day, after a bit you think, “That is no random walk.” All the university professors will say, “Well, if you watch the charts for a thousand years, that’s what it is.” Physicists, however, are not like mathematicians. They are empiricists. They study the world; they study data.

Mathematicians can be satisfied with the purely ­theoretical. I became convinced that markets a) weren’t efficient and b) absolutely trended. Later on, when people were able to back-test these theories, that turned out to be true. How do you harness this to make money?

We trade everything using trend-following systems, and it works. By simulation, you come up with ideas and hypotheses, and you test those. Over the years, what we’ve done, essentially, is conduct experiments. But instead of using a microscope or a telescope, the computer is our laboratory instrument. And instead of looking at the stars, we’re looking at data and simulation languages. It’s a very tricky field. It’s fraught with potholes and tricks. It’s treacherous. The more you get into science and the more you talk to ­scientists in other fields, the more you find out it’s all kind of like that”

Just how well does it work? 20% a year with no down years. Chart via IASG.com:


I just noticed that there are a lot of emails that readers have sent that ended up in my Gmail spam folder. If you have emailed me lately and didn’t get a response, please resend . . .


I’ll be in North Carolina, Virginia, and NYC in the upcoming weeks. Drop me a line if you would like to meet up!


I haven’t decided what I am going to do with the Google App Builder yet, but it is pretty cool.


Quote of the day, “”If you have a trading system or a trading plan and then override it or don’t follow it, then you don’t have a trading system or a trading plan.” -Bill Dunn


I read this book this week, and really enjoyed it. But $500? Seriously?

Global Tactical Asset Allocation: Exploiting the opportunity of relative movements across asset classes and financial markets


It would be cool if there was a wiki-style source for info on hedge funds and their returns.


The Asus 900 is getting good reviews. (Disclosure: Cambria is an investor in Xandros.)


Sound advice from Paul Merriman


I love incentive based businesses, and RecycleBank is a good one.


Real interest rates (tbills – CPI rate) are negative, which usually means gold is going higher.


Iceland’s deep freeze


Aggregating the Aggregators (Big Picture)


RealScoop lets you know “I DID NOT have sexual relations with that woman” was not that believable.


I was mistaken when I posted that the T Rowe Price Capital Appreciation Fund (PRWCX) had a down year last year. It did not, and that makes for 18 positive years in a row which I find quite amazing. Gabelli ABC (GABCX) and First Eagle Overseas (SGOVX) both have 14 positive years in a row.

Likewise, an investor could do a lot worse than owning the funds held in the New Century Alternatives Fund (NCHPX). (Fact Sheet)


With another currency carry ETF launching, why haven’t the providers launched the currency momentum and value strategies?


The Diversification Premium


David Einhorn, “Private Profits and Socialized Risk” (Via Whitney Tilson)


What Warren Buffett thinks (Fortune)


Lots of reading to keep you busy at the Journal of Financial Transformation.


One of my favorite screens is to look for companies trading below cash. While you have to be careful because there are plenty of landmines, an enterprising analyst can find some real gems with very little risk. Burn rate is obviously a huge consideration, as is debt levels and insider buying. The below companies are trading below cash, below book value, and over $10m market cap:



A little bluegrass to take you into the weekend, from Ed Seykota over at the TradingTribe. . .

Alpha Engines

Ray Dailo has a good comment in the great book 2020 Vision (which, for whatever reason is only available through Mercer in Australia).

“Because I believe that all criteria for investing (that is, good betting strategies) should have a logic that isn’t time specific, I believe that the alpha generators that make up the ultimate alpha generator should be timeless and universal. By that I mean that they should have worked over very longtime horizons and in all countries’ markets.”

I have mentioned a number of different ways to think about and quantify momentum and mean reversion here on World Beta. My personal belief is that as long as humans are involved in the financial markets, the markets will continue to be driven by the emotions of greed and fear. I believe this aspect of the market is a simple example of an alpha generator that is “timeless and universal”.

Real estate falling is an example, as is (maybe) the run up in commodity prices. At some point commodities will quit going up, and real estate and stocks will bounce and continue moving upwards. I have no idea when. (Although 2009 is looking good for Japan if this year is negative.) Jim Rogers touches on some of these topics in his interview in this weekend’s Barrons.

I published a very simple timing model that is based on momentum. There are many, many variants and offshoots one can take the model. For the most part, the take away is that for similar risk, a momentum model generates a little over 3% excess annual returns. You can tweak things and make some improvements, but I consider that the base case for a simple, timeless alpha that is rooted in human psychology.

I wanted to mention another approach to capturing some of this alpha as people have been emailing in asking some questions about reaching for extra return without using leverage.

Question: What about an ‘always in’ method using cross-market momentum?

Using the five asset classes, select the top 3 ranked on the past 12 month return, and update monthly. (So, once a month you look at the five ETFs and hold the 3 with the top performance over the past year. Update it again the following month. Right now the three asset classes would be Bonds, Commodities, and Foreign Stocks.)

The results are virtually identical to the timing model leveraged at 150%. This makes intuitive sense because on average the timing model is 70% long. 70% leveraged 150% is roughly 100% invested on average.

The results are just about the same return (14%+), the same vol (9.5%), the same Sharpe (.80s), and the same drawdown (-15%). The investor would have a little more turnover (about 110% vs. 70% for the moving average model), but not that bad. The yearly returns have a correlation over .8. (And a similar .8 correlation with buy and hold.) Clearly they are capturing similar behavior in the markets.

(There is a lazy man’s version of the cross market momentum that only updates once a year. Besides the benefit of annual maintenance, it is more tax efficient for taxable accounts. Returns are similar with slightly reduced CAGR.)

And because I know people are going to ask, holding just the top asset class results in about 17% CAGR, but with high vol of 18% and drawdown (-45%). The top 2 asset classes is about 16% CAGR, 12% vol, and max drawdown of about -25%.

Another talking head (and academic!) misconception one often hears in the investment soapboxes is that “momentum is dead”.

When using the leveraged timing model at 150% (or the near identical cross-market momentum) to try and equalize the risk with buy and hold, since 1973, it outperformed buy and hold 26 of out the last 36 years. That is roughly 72% of the time. (With a lower drawdown of -15% compared to buy and hold -20%).

What about recently? It has outperformed 9 of the past 10 years.

By the way, lots of practitioners and academics sort on 12 month return excluding the recent month due to 1-month mean reversion. This may work with time series data, but with cross market momentum this is completely backwards. Below is the one month returns for the five asset classes since 1972 sorted on previous month returns. The method is simply sorts the past month returns for the five asset classes, then orders them for the next month.

For example, if the S&P was the best performing asset class last month, it would be ranked #1 for this month. Ditto for #2-#5 and repeated monthly. As you can see, the majority of the gains for the 5 asset classes come from the #1 and #2 performing asset class over the previous month. Instead of mean reversion you see momentum. (B&H is simply the five asset classes equally weighted.)

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