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


Looks like we’re not the only one that is heavy in cash – Cohen moves most of his fund to money markets for the rest of the year.


Closed-end funds are bouncing off their lows, and by bouncing I mean rocketing up. Check out ETFConnect for a good screener.


Interesting quote from this article on junk bonds, which are trading at record spreads to Treasuries:

“The recent selloff has shocked junk investors, who had grown used to monthly returns in a range of negative 1% to positive 2%. Based on some statistical measures, September’s 8% drop should have occurred only once in 27,777 years, according to Leverage World, a weekly publication of Garman Research.”


Taleb, who knows a little bit more about real world distributions than the previous quote, has a fund that is up over 50% this year. (Hat Tip SB.)


Stocks for the long run? Iceland is down 92%. That means it will take an investor 27 years to get BACK TO EVEN (compounding at 10% tax-free).

Investing is risky.

Dead Cat Bounce or the Bottom?

Taking a look at Bespoke’s data for the ten best days in stocks since 1900, 4 are during a bear market, and 4 are near (or at) the market bottom. Where are we? (I have no idea). Interesting to note is 8 of the ten came during the 1929-1939 time period, and the only other one right after Black Monday.

(Click on the chart to enlarge. I did my best to eyeball the dates, so if they look a little off I apologize.)

Weekend LinkFest

Great interview with Grantham from GMO in this weekend’s Barrrons. My favorite quote:

Barrons: Do you think we will learn anything from all of this turmoil?

G: We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.


Nice stats from the guys over at Blackstar Funds:

YTD Performance of:

5-Star Mutual Funds*:  -40%
S&P500:  -38%

*An average of the 200 largest mutual funds rated 5-stars by Morningstar


How this bear market compares.


I had no idea the Tulane B-school students from Ricchiuti’s Burkenroad Reports ran a mutual fund – and they’re doing great! 

Hancock Horizon Fund – HYBUX


From the Wiki from the Panic of 1907:

Despite his ill health, J.P. Morgan testified before the Pujo Committee, facing several grueling days of questioning from Samuel Untermyer. Untermyer and Morgan’s famous exchange about the fundamentally psychological nature banking—that it is an industry built on trust—is oft quoted to this day:

Untermyer: Is not commercial credit based primarily upon money or property?
Morgan: No, sir. The first thing is character.
Untermyer: Before money or property?
Morgan: Before money or anything else. Money cannot buy it … a man I do not trust could not get money from me on all the bonds in Christendom.
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