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 Portfolio.com):

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 vibrators.com 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.


Back in March of 2007 I wrote about how the option selling funds were a blowup waiting to happen. Below is an update of their “performance”.

The time to invest in these funds is when the VIX is at all times highs (now, 70s) rather than all time lows of around 10 a number of months ago. Although I wouldn’t invest in one of these funds at all, but if I HAD to, I would examine 2 ways to gain exposure.

1. Create a FOF of option sellers. This should help to minimize impact of any one fund blowing up. However, since most funds only trade one market, large risks remain. The performance of a an equal-weighted basket of these funds is in the below table as “AVERAGE” – and you can see the performance has been deteriorating.

2. Sell options on a broad portfolio of world futures markets. Only one fund to my knowledge (and only recently) has pursued this strategy (ACE). Selling options on a broad basket of uncorrelated futures markets makes more sense to me than one single market. I did a simple backtest of this strategy a few years back, and the results were promising.

Anyone wanna guess how many of these funds make it through October?

Click on the chart to enlarge:


I think Japan could have a monster year in 2009 – they are back to where they were in 1982, and have experienced three down years in a row – a setup that generates large returns of around 20-30% historically.


Nice forum with Julian Robertson and some of the Tiger Cubs at my alma mater.

Lots of investment picks after the jump.


New blog added to the blogroll -MarketSci. Any other good blogs I am missing?


Citadel is getting pounded this year as well.


It amazes me how fast people have shifted from inflationary fears to deflationary. I imagine it will not be too long before our governments inflate us back to the stratosphere.


CTAs offer no value over a simple benchmark.


Stocks have declined by about -45% from their highs. That means it would take 6 years compounding at 10% just to get back to even. (Corrected, thanks SB.)

When It Hits The Fan……

..all correlations go to 1.

This year has been marked by truly horrendous returns, not just in equity markets, but in nearly every market and strategy around. Where did that free lunch go?

As evidenced by the below table, the only strategies that (relatively) preserved capital were bonds, market neutral funds, managed futures, and obviously the short funds. I remember hearing quite a bit about the demise of managed futures in 2002-2003, and the death of trendfollowing.

I have written about managed futures many, many times on the blog before, and long-time readers know that I am a big fan. Commodities have different sources of risk premiums than capital assets, and this year goes to show how nicely a long short approach works (RYMFX and LSC).

The global tactical approach
has held up well this year. I once had a Nobel laureate refuse to read my paper because “market timing” is impossible.

Eeeesh, how many retirees won’t be retirees anymore because of their adherence to buy-and-hold?

Click on the table below to enlarge.

What Happens After Two Big Down Months In A Row?

With October shaping up to be as bad (and probably worse) than September, let’s look at what happens after two really bad months in a row. Here I define it by two months that each had worse than -9% performance.

Since 1900 in stocks, that has happened 7 times. The resulting three months of performance follows each group. Median return around 7%, average (because of the 91% observation) of 14%.

I don’t put much faith in this with only 7 observations, but it could set the stage for a nice holiday rally. Investors looking to speculate could put on half a position in November, and half in December with exits at the end of December and January.

10/1929 -19.71%
11/1929 -13.06%
12/1929 2.90%
1/1930 6.65%
2/1930 2.50%

4/1931 -9.20%
5/1931 -13.27%
6/1931 14.46%
7/1931 -7.06%
8/1931 1.47%

11/1931 -9.30%
12/1931 -13.90%
1/1932 -2.31%
2/1932 5.95%
3/1932 -11.32%

3/1932 -11.32%
4/1932 -19.75%
5/1932 -22.75%
6/1932 -0.05%
7/1932 38.51%
8/1932 38.28%
(+6.94%, 91.42%)

9/1937 -13.81%
10/1937 -9.67%
11/1937 -9.64%
12/1937 -4.5%
1/1938 2.05%
2/1938 6.73%
(-12.00%, 4.01%)


I guess when you return 870% in a year you can write whatever you want. . .


Another blogger pulls his content from Seeking Alpha.


TIPS yields
are pricing in less inflation.


A hedge fund that invests in guitars? Seriously?


Bogle and Bodie.


There is nowhere to hide in 2008


Cancer of the Devil


Going to a ballgame? It looks like a day or two before the game is the best bargain. . .


The end of buy and hold?


Nice quote (via KirkReport):

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.” – Thomas Jefferson

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