Asset Allocation Backtester, Quant Funds, and Market Timing

Of the 10,002 US Stock Mutual Funds Morningstar tracks, ZERO are up on the year and the average performance is -43.63%.

Of the 2,892 Foreign Stock Mutual Funds, ZERO are up on the year, ZERO are down less than -10%, and the average performance is -50.75%.


It is about time for the Hedge Fund Masters update, but since AlphaClone is (finally) getting near launch, I am going to stop with the updates and let users play around there. . .and check out Market Folly for more info on tracking the funds through 13Fs:


Lone Pine
Pershing Square


Druckenmiller’s funds have never posted an annual loss.


Wondering how these declines fit into a historical context? Are you a data junkie and want to backtest virtually any buy and hold asset allocation portfolio for free? AssetPlay can do it:

Backtester here
Data Sources here
Domestic Index Returns
Bond Index Returns


Morningstar likes LSC,
and so do I.


Time for a bounce? I think we could see a nice rally here in December and January, and if Fosback has anything to say about it, a good entry would be Monday at the close.


I don’t like it when people group “hedge funds” together. Ditto for “quant funds”. It is like describing the average dog. While they all have four legs, a tail, and like table scraps – there is a considerable difference between a Great Dane, a Beagle, and a Bulldog. A better description would be “hedge (or quant) funds that do the same thing.”

Asness chimes in on some quantery here.


Here is a nice post contrasting two market timing systems, but Michael, you gotta include the cash returns!


Whatever happened to the guys in Hoop Dreams?


If you get paid $60,000 per speaking appearance, I think you can afford a better home page.


Let Detroit go bankrupt


NAAIM $10,000 prize for the best paper in active investing. Full description here:

In the face of $9.8 trillion in equity losses since October 2007, $7.4 trillion of which have hit Main Street portfolios either directly or indirectly , individual investors continued to be deluged with the same old advice. “Even in downturns, it’s best to ride out the market.” Ernie Ankrim, chief investment strategist, Russell Investments.

It’s time academics and the financial media take a second look at that advice. To that extent, we are issuing a request for papers on the viability and use of active management. A $10,000 prize will be awarded by NAAIM to the best paper.

Our query concerns the practice of multiple trading decisions, both buy and sell, throughout a calendar year using trading methodologies such as tactical allocation, exploitable market inefficiencies, hedging techniques, position sizing, dynamic asset allocation, sector rotation and long-short strategies including the effectiveness of trading restrictions and risk management techniques involving mutual funds, individual securities, ETF’s, options or financial futures or derivatives.

You Should Listen to Jim Rogers

From December 2007:

Rogers, who is short Fannie Mae shares, is also short Citigroup (C, news, msgs) and highly negative on its prospects, too.

“Technically, it’s bankrupt, with gigantic off-balance-sheet derivatives positions whose value it cannot possibly know,” he says. Though he believes some large banks can and will go under in the next year or two under the weight of billions of dollars worth of bad loans and blown-up derivatives positions, he doubts the government will allow Citi or Fannie to fail. “They’ll nationalize them in some way. It’s wrong, but they can’t let the two largest lenders in the nation go down.”

The fund manager, who has traveled extensively in emerging markets and lives part of the year in Asia, says sovereign wealth funds in Abu Dhabi and Singapore that recently made large investments in Citigroup and UBS AG (UBS, news, msgs) are likely to lose a lot of money on their ploys. “They’re making a big mistake; these banks have many more problems still ahead. They should wait until these companies are really on the ropes a few years from now . . . and trading at $5 a share.”

Well, with Citi down about 90% to $7, they might just get their chance. . .

Global Multi-Asset Fund

PIMCO has a new fund out managed by El-Erian and crew – Global Multi-Asset PGMDX.  Although it looks expensive with a 1.5% managment fee. 

Fact sheet here.

Interview with the managers here.


A cool art site to pick up art on the cheap.


Nice quote I saw at a coffee shop this AM:

“The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn, like fabulous yellow Roman candles exploding like spiders across the stars, and in the middle, you see the blue center-light pop, and everybody goes ahh…” Jack Kerouac, from On the Road

Weekend Linkfest

I always save old copies of Barrons that had investment ideas I found interesting, but wanted to revisit at a later time. I then end up losing them and forgetting about the investment thesis – which is why ImpactOven looks like a cool new site.


The consumer is definitely not buying.


Because of the high taxes in Denmark, the #1 finisher in the World Series of Poker actually comes in 2nd.


Some historical perspective on corporate bond yields and the unemployment rate.


Trimming the hedges.


A similar system to my model to help keep you out of bear markets. . .


Ron Paul answers your questions.


This is sad to see – deCode looks like they are in serious trouble. This was almost my first job after college – I wonder where I would be today had I taken it. . .


Why the US should move to make hedge funds available to the retail investor. You know I agree.


I wrote an article on Forbes moving into the aggregator space a year ago. Their “offer” was to manage the ads on the bloggers site, and then to take 60% of the revenue from the ads on the bloggers site. Wha?

To make matters worse, all they have done is run ads for the Forbes network for the ENTIRE PERIOD. Ridiculous. The fact that everyone keeps bungling the aggregator opportunity makes me want to start Bloggerator just out of spite.


PS I’m trying out Disqus’s comments plug-in, let me know what you think of it. . .

Vonnegut on the Financial Markets

I really miss Kurt Vonnegut.

From Galapagos, circa 1985:

The thing was, though: When James Wait got there, a worldwide financial crisis, a sudden revision of human opinions as to the value of money and stocks and bonds and mortgages and so on, bits of paper, had ruined the tourist business not only in Ecuador, but practically everywhere…Ecuador, after all, like the Galapagos Islands, was mostly lava and ash, and so could not begin to feed its nine million people. It was bankrupt, and so could no longer buy food from countries with plenty of topsoil, so the seaport of Guayaquil was idle, and the people were beginning to starve to death…Neighboring Peru and Columbia were bankrupt, too…Mexico and Chile and Brazil and Argentina were likewise bankrupt – and Indonesia and the Philippines and Pakistan and India and Thailand and and Italy and Ireland and Belgium and Turkey. Whole nations were suddenly in the same situation as the San Mateo, unable to buy with their paper money and coins, or their written promises to pay later, even the barest essentials. ..They were suddenly saying to people with nothing but paper representations of wealth, “Wake up, you idiots! Whatever made you think paper was so valuable?”

The financial crisis, was simply the latest in a series of murderous twentieth century catastrophes which had originated entirely in human brains. From the violence people were doing to themselves and each other, and to all other living things, for that matter, a visitor from another planet might have assumed that the environment had gone haywire, and that people were in such a frenzy because Nature was about to kill them all.

But the planet a million years ago was as moist and nourishing as it is today – and unique, in that respect, in the entire Milky Way. All that had changed was people’s opinion of the place.

Wahoo Wha??

A lot of the endowments are struggling with the recent market meltdown. Unfortunately, my alma mater happens to be one of the worst performers.

As an aside, I have always wondered why investors in private equity don’t hedge their portfolios against long bear markets? The biggest risk factors to a PE portfolio are a bad economy coupled with a long stock market decline – the exits disappear, there is no liquidity, funding is scarce, multiples contract, and the underlying businesses face tougher conditions. Why in the world wouldn’t you hedge that, or even run the allocation with a constant % hedge?

Using something as simple as a long term moving average would work to take out some of the volatility and drawdowns. If you used the US private equity ETF PSP (yes, I know that is not a good proxy for private equity, but this is just an example), and used a long term moving average and assuming you sold (or hedged) the position at 20, which is very conservative, you would have avoided (or hedged out) a 60%+ decline. Isn’t that the main risk you face as a private equity investor?


The Baltic Dry Index is down 93%.

A new book on the way from Michael Lewis (and here is a link to his articles on Bloomy and more here at

Panic: The Story of Modern Financial Insanity

Product Description
A masterful account of today’s money culture, showing how the underpricing of risk leads to catastrophe.

When it comes to markets, the first deadly sin is greed. Michael Lewis is our jungle guide through five of the most violent and costly upheavals in recent financial history: the crash of ’87, the Russian default (and the subsequent collapse of Long-Term Capital Management), the Asian currency crisis of 1999, the Internet bubble, and the current sub-prime mortgage disaster. With his trademark humor and brilliant anecdotes, Lewis paints the mood and market factors leading up to each event, weaves contemporary accounts to show what people thought was happening at the time, and then, with the luxury of hindsight, analyzes what actually happened and what we should have learned from experience.

As he proved in Liar’s Poker, The New New Thing, and Moneyball, Lewis is without peer in his understanding of market forces and human foibles. He is also, arguably, the funniest serious writer in America.

also on the way:

Quantitative Strategies for Achieving Alpha


It looks like the adult VC shop AdultVest is having a good year. That is no surprise with the domain going for a million bucks. (Hat Tip: KP)


Some recent commentary from Hussman.


Whenever you hear “the death of” something, it is usually a good time to invest.


If you need some humor in these markets, how about Conan O’Brien’s top 15 funniest moments? Even better, the top 10 most controversial moments in South Park history, and the 20 funniest moments on The Office. I recently watched the #3 South Park on a Virgin America flight (which is 10x the airline of any competitor btw), and I swear half the airplane was dying laughing. . . (Hat Tip: Sea).

"Risk is what you make of it."

With lots of hedge funds turning in horrendous performance numbers, if I was Ken Griffin (and my flagship fund was down 44%), I would ask the CME to quit running these ads. . .

2nd Blogiversary

World Beta just reached its second year blogging – 400 posts and counting! Rainy and nasty here in Portland.


It looks like Farallon and JANA are down about -20 to -30% this year. . .this would be Farallon’s first down year in existence (22 years). Macro, merger arb, and market neutral are doing ok – which echos my post on the publicly listed mutual funds.

Clarium, while down only -3% this year, is in a -38% drawdown (thanks for the catch, # fixed).

Passport was down -38% in October! (-44% YTD.)


October was the worst month ever for junk bonds, MSCI EAFE, REITs, and commodities (CRB) – and plenty bad for everything else as well. Are we setting up for a X-mas rally? (I think so, and I love Japan, more in a follow up post.)

The Lazy Portfolios may be lazy, but they sure are getting hammered this year.


In the mail: Mr. Market Miscalculates: The Bubble Years and Beyond by Jim Grant. And pre-ordered – The Ascent of Money: A Financial History of the World by Ferguson.


Oh Mr. Moon, moon, bright and shiny moon. . .


Any thoughts on WikiWire (the little gadget added at the end of posts)? Useful? Not useful? Annoying?


In San Francisco (Tues and Friday) and Portland (Wed and Thurs) this week.


I wanted to comment on the CTA performance paper I mentioned the other day. From the paper:

We focus on commodity trading advisors, a subset of hedge funds, and show that during the period 1994-2007 CTA excess returns to investors (i.e., net of fees) averaged 85 basis points per annum over US T-bills, which is insignificantly different from zero. We estimate that CTAs on average earned gross excess returns (i.e., before fees) of 5.4%, which implies that funds captured most of their performance through charging fees. Yet, even before fees we find that CTAs display no alpha relative to simple futures strategies that are in the public domain.

So, these funds do a good job of caputring alpha(or at least the beta of the strategy) but charge way too much. I am a huge fan of managed futures, but it is nothing more than a long/short approach to commodities (though some trade finanaicals and interest rates) very similar to my paper. The marketers for these funds always compare graphs that show the benefit of adding them to a standard 60/40 stocks bonds allocation, but never to a balanced allocation including commodities (where the benefits are much more muted).

I also think this is an area that was formerly alpha that has now been commoditized to alternative beta. Most (the paper estimates 75%) of CTAs are just simple trendfollowers that can be captured with some standard strategies. As an example, RYMFX was the first public mutual fund to come out trading managed futures, and cost a more expenseive fee of around 1.7%. Competition will bring those fees down, and the LSC ETN charges around 75 bps.

One could substitute LSC for some of all of the commodities portion of the allocation I mentioned.

Here is also a great paper from Conquest Capital on “The Beta of Managed Futures“. (Hat Tip: RR).


Over the past 38 years, yesterDAYs return would rank as the 19th best YEAR for the MSCI EAFE Index.


It’s all about risk management!

Nice quote from El-Erian in Sep ’07:

You’ve suggested the benefits of diversification have been getting diluted, as more institutional investors follow the “endowment” model.

It’s getting very crowded, not only in terms of asset allocations, but in terms of finding the right implementation vehicles. There’s a limit to how much superior investment expertise is out there. So the asset allocation is going to be less potent because there are more people doing it. And then the global liquidity situation is changing as well. So our view is that performance in future needs something more — two things more: first, better risk management, because correlated risk has become a big issue, and diversified asset allocation no longer gives you the risk mitigating characteristics it used to. Second, is identifying new secular themes that will play out over the next five years, and trying to be a first mover in those, and that’s what we’re working very hard at doing.

Page 119 of 159« First...102030...117118119120121...130140150...Last »
Web Statistics