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.)

Optimizing on Happiness

The market is up today. Are you as happy today as you were sad yesterday when the market was down?

Fish see the bait, but not the hook; men see the profit, but not the peril – Chinese proverb

People want to be happy. If you ask people what their goal is in life they often respond “happiness” or some derivative thereof.

An interesting observation is that many people follow investment approaches that they believe will yield the best return, and optimize on maximizing total returns. According the the Nobel winning research of Kahneman and Tversky published in 1979, people strongly to prefer avoiding losses than acquiring gains. Here is the wiki on prospect theory.

If someone were optimizing their “happiness in life” rather than just returns, then many people would rethink their investment programs. Losses and downside volatility become much more of a focus than pure return. The first and biggest step is a good asset allocation. Using some non-correlated alternatives could be another move forward.

I have mentioned a simple timing model as a method to further reduce one’s risk and drawdowns. While the Sharpe ratio is a decent metric, it does not distinguish between up volatility and down volatility, nor does it touch on drawdowns. Timing increases the Sharpe ratio from around .55 for buy and hold to around .85 for timing. Maximum drawdown decreases from around -20% to -10%.

MAR is a measure of return / maxdrawdown. It takes MAR from .6 for B&H to 1.25 for Timing. And the Ulcer Index, which measures the length and severity of drawdowns, improves from 4% down to 1.65%. The Information Ratio is around .55. Sortino is above the Sharpe (always a good sign).

Lots of investment jargon there, but the bottom line is that these metrics could all be called happiness metrics rather than statistics ratios. And that’s what it is all about at the end of the day. . .(This post reminds me a little of Bhutan’s GNP figure – gross national happiness.)

And joy is, after all, the end of life. We do not live to eat and make money. We eat and make money to be able to live. That is what life means and what life is for. -George Mallory

Have a great weekend.

Emmanuelle in Hedge Fund Land

There have been over 30 films based on the Emanuelle franchise, a softcore film series that began in the 1960′s. According to Wikipedia, it remains one of the most successful films in French history. What does this have to do with hedge funds?

Boussard & Gavaudan is a hedge fund listed on the Euronext in Amsterdam. It has the distinction of having two Goldman alums, both with the first name Emmanuel. The fund invests in a feeder fund to the Sark fund (about $4 billion AUM). These strategies include convertible bond arb, volatility arb, gamma trading, merger arb, special situations arb, catalyst driven long/short strategies, capital structure arb, credit long/short, distressed, and value strategies. (No wonder they have over 50 employees.)

Since 2003, the fund has returned about 10% per year with volatility down around 5%. Boussard is trading at about a -15% discount.

Manager: Boussard & Gavaudan Asset Management (BGAM)
Location: London, Paris
Listing: Euronext (Amsterdam)
Symbol: BGHL (Yahoo BGHL.AS)
Fund AUM ($): ~$1.5 billion
Currency share classes: €

Book Cover Design Contest

Longtime readers know that I am a big fan of user generated content and paid participation in media. So for those who haven’t heard, I have been working on putting together some of the concepts mentioned on WorldBeta into a book. The tentative title is “The Ivy Portfolio: How to Invest Like the Top Endowments Harvard and Yale”. (Or something like that, if you have better suggestions please let me know.)

It is not meant to be another asset allocation book, or a primer on hedge funds and private equity (plenty of those), but rather a simple guidebook to implementing such a portfolio. Most long time readers will be familiar with some of the material, but my intention is to try and reach a broader audience. If Wiley would let me I would have priced the book ala Radiohead, but that does not look too likely.

I have started a book cover design contest over on, and you can view the contest here. If you know of any designers, pass along the link. The best cover/ideas will get incorporated into the final and there is a (small) prize for the best design.

Part 1 of the book will demonstrate how to construct a strategic asset allocation that resembles the Policy Portfolios of Yale and Harvard.

Part 2 of the book will show you how to reduce your risk by applying a simple quantitative market timing system. It will cover an approach to tactical asset allocation that an investor can use to reduce the risk and drawdowns associated with investing in risky asset classes.

Part 3 of the book will show you how to follow the smart money by piggybacking the top hedge funds and their security selection capabilities to form a stock portfolio.

Is there anything that readers would like to see included in the book? Any topics of interest not mentioned above?

In Response

to my last post a few readers mentioned Ken Heebner (I am a happy shareholder of CGMFX). Up 80% last year. From


Cool new blog on the blogroll, Off the Beaten Path. Found it while searching for info on FTAR (a stock I own in my IRA).

Building an All-Weather Portfolio

The best fund manager of our time? You’ve got to be kidding me. Never heard of Simons, Tudor, Cohen, Robertson, Soros. . .


Trader Daily had a review of the top 10 hedge fund earners for 2007, and Bridgewater’s ($150 BILLION AUM) Ray Dalio made the list at around $500 million.

If you have been around since the beginning of the blog, you would know that the subtitle is from one of the Bridgewater strategy pieces here – “Engineering Targeted Returns and Risk“. In the article Dalio details how he designed an all-weather portfolio for his family trust.

I did my best to replicate the quarterly returns based on correlation, and could only get to about 0.8 as the highest correlation. Can anyone else do better?

Below are the quarterly returns from the portfolio:

3Q96 10.15%
4Q96 7.16
1Q97 -5.46
2Q97 9.81
3Q97 11.30
4Q97 -0.47
1Q98 2.75
2Q98 -0.68
3Q98 -0.81
4Q98 -2.02
1Q99 4.36
2Q99 1.5
3Q99 4.14
4Q99 4.78
1Q00 3.07
2Q00 3.64
3Q00 -2.63
4Q00 5.68
1Q01 -4.88
2Q01 -0.69
3Q01 -1.46
4Q01 1.00
1Q02 3.15
2Q02 1.7
3Q02 1.89
4Q02 3.06
1Q03 0.76
2Q03 8.47
3Q03 1.72
4Q03 4.96
1Q04 7.52
2Q04 -3.33
3Q04 7.05
4Q04 5.76
1Q05 2.17
2Q05 7.32
3Q05 3.88
4Q05 1.42


PIMCO was the first to offer a portable alpha strategy (StocksPLUS). They now have a book out on the concept – Portable Alpha Theory and Practice: What Investors Really Need to Know


When you have the worlds largest endowment at $35 billion, why do your students pay tuition at all? From MetaFilter:

Pay to play. The children of big-donor Harvard alums are systematically given preference over legacy offspring of lesser means. Additionally David Karen, now a professor at Bryn Mawr, concluded that alumni children at Harvard lose most of their admissions advantage if they apply for financial aid.

—-’s First Annual Blog Index
…what, no World Beta?


The top ten hedge fund earners of 2007.

“We decided that systematic trading was best. Fundamental trading gave me ulcers.” – Simons

No uclers in 2007, Medallion up 70%.


Pertrac 2007 Hedge Fund Database study

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