Weekend Reads

A few new books in the mail for you to flip through while watching the Broncos game… :

This is a really interesting book for all those interested in CTAs.  I skimmed it but will have to go back and re-read as the Schwager review is pretty spot on.  It reminds me a bit of that Bridgewater piece on replicating basic hedge fund strategies with rules based investing  :

Following the Trend: Diversified Managed Futures Trading

“Following the Trend is an absolute must read for anyone with an interest in systematic trend following whether as an investor, trader, or aspiring manager. The book is at the same time comprehensive and easy to read. As someone who has designed these types of systems, it is absolutely clear to me that Clenow writes as a knowledgeable practitioner, not an armchair theoretician. I admired Clenow’s repeatedly pointing out real life difficulties and drawbacks and his refusal to use optimization or well-chosen examples as virtually all other books of this type tend to do. In short, this is a real life presentation of the subject matter. In one particularly innovative chapter, Clenow creates close replications of some of the best and largest trendfollowing funds by combining his set of simple, non-optimized rules with variations in portfolio composition and volatility level.”—Jack Schwager, Author of Market Wizard and Schwager on Futures series and Market Sense and Nonsense

I haven’t yet read this next book, but did see that Abraham profiles about 10-15 CTAs….

The Trend Following Bible: How Professional Traders Compound Wealth and Manage Risk

and I know I’ve mentioned the Quant Value book, as I read the reviewer electronic copy, but looking forward to taking a look again at the print publication…

Quantitative Value, + Web Site: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors

and lastly, a nice read from Dave Rosenberg at Gluskin Sheff, as well as a roundup of the academic alpha lit from Deutsche Bank coming up over on The Idea Farm

Top 100 Hedge Funds vs…..Themselves?

Bloomy has a new issue out with the “World’s 100 Richest Hedge Funds“.  (Downloadable PDF here. Had I realized there was 2011 data I would have run that too.  Perhaps in an update although my guess is that the clones trailed the returns last year as they tend to have similar returns on the downside but much higher beta on the upside.)

And while I just did an article on the efficacy of 13F investing, below I thought I would compare the returns of all of the funds I could find on the list vs. their clones on AlphaClone.  There were about 40 funds due to some repeats as well as a number of them never being listed on AC for various reasons.  If a fund had multiple funds on the list, I gave the fund the benefit of the doubt and picked the highest returning fund.  I didn’t edit out any funds even though many on the list I would never, ever, ever in my wildest dreams,  track for many reasons (turnover, inappropriate strategy, etc).  I deleted a few that listed credit or managed futures as the main strategy.

Average hedge fund:  14.5%

Average hedge fund clone:  22.8%

Average hedge fund clone minus 2&20 approximation:  16.24%

About 77% of the clones beat the underlying fund.  Which is about the same amount of clones that beat the S&P500 this year.

Father of Low Vol Investing

Billions have been pouring into low vol funds in the past few years.  While this phenomena that “risk does not equal return” feels new to many, it has been well known and published for over thirty years.

I was sad to hear that one of the all time great quants, and all time great independent market thinkers passed away recently – Bob Haugen.  Bob was writing about low vol investing since before I was born, and he has written many books that I can see right now on my bookshelf, all worth a re-read and certainly a first read if you have never read them.

While he is credited as one of the top 20 published authors in finance, his final paper is here, “Low Risk Stocks Outperform Within All Observable Markets in the World

Rest in peace Bob (obituary here)…

The Inefficient Stock Market


2013 Resolutions

(On a personal note, this is an awesome bucket list of dream trips and must do trips for 2013!  Personally the Powder Highway looks like it is right up my alley…)



It’s been six years and over 1,200 posts on the blog, and as the year begins I thought I’d give readers a few updates on what is coming in 2013.

While my core business is money management (which I try to not talk about on the blog), research is and always will be the driving factor behind what I do.  I spent the vast majority of my time there, and it is certainly what fascinates me, keeps me thinking late into the evening and gets me out of bed in the morning.

I hope to publish 3 new books in 2013, and will see how the self published eBook format goes for Shareholder Yield (which has been done for a year now, hopefully out this month as we have been waiting on the SEC).  I have a case study I’ll publish on the blog once the book comes out to illustrate my experiences self-publishing, good and bad.

I’m excited to announce that I’ll be soon adding a premium feature to this blog.  The biggest area of interest from readers of the blog has always been alpha ideas and tactical systems.  So, I’m committing to publishing a premium piece per month that will take a longer/deeper look at a lot of quant systems, with a focus on actionable ideas and trades.

One of the reasons for doing this is that it will force me to write more.  I find that writing my research ideas down helps to hone the process, and often readers provide feedback that is useful and often stimulates ideas I had never considered.

Since someone is squatting on the WorldBeta.com domain (and wants $6k for it), the blog may get a new name.  I have a few ideas, but send me your domain name suggestions and the winner will get a free subscription to the service.  Two current candidates are Faber Research and Cambria Quantitative Research.  But please, let me hear the ideas, good and bad!

I will tailor the content to what readers are most interested in (including a bit of FAQ/mailbag questions), but a few of the  early pieces will be:

A Quant Approach to Tactical Asset Allocation Update, including:

-expanding from 5 to 10+ asset classes

-affects of alternative cash management strategies

-combining value, trend,  and momentum strategies

-long/short strategies


-different position sizing ideas

Currency Investing Strategies

Alternative Tactical Yield Strategies

Special, one-off tactical ideas and trades

CAPE Updates

and more…


So, a happy close to 2012, and best wishes to all for a prosperous and profitable 2013! (and go Broncos!)




Travel and Talks

Below is a short list of talks I’ll be giving in the first few months of 2013.  At one conference I follow Malcolm Gladwell directly prior to happy hour.  Over under on attendees I’m guessing is 10?

Best ideas online conference January 7-8

Berkeley, CA, AAII, January 19th

Salt Lake and Park City Utah, January 20-23

San Diego, TD Ameritrade Coference, January 30-31

Bogota, Colombia, Investors Forum, February 7-8

Miami, IndexUniverse, February 10-13

LA, AAII, February 16th

Denver, Institutional Investor, March 7th


9% Alpha with Munger & Van Gogh

I’ve always believed in learning from other investment greats as mentors, and that is the tagline from my other site The Idea Farm:

“I believe in the discipline of mastering the best that other people have ever figured out.  I don’t believe in just sitting there and trying to dream it up all yourself.  Nobody’s that smart.”  - Charlie Munger

and also one from Vincent:

“I believe I do much better for the time being by first copying some good things than by working without that foundation.” – Van Gogh (HT Janiczek)

I’ve written dozens of posts on this blog on the topic of 13F investing.  For those new to the blog you can search the archives for “13F” and find all of the posts.

Many people have not gotten their hands dirty with 13Fs, databases, or stocks in general so they resort to stories or analogies to explain why 13F forensics should not work.  There is so much misinformation in the 13F space, and most comments are simply not based in a firm understanding of what works and what doesn’t, but rather guesses.   But that is what most financial commentary is (ie all of the commentary surrounding buy and hold and market timing, what drives stocks, often has the feel of debating religion or politics).  So often stories are convincing because they sound true – but that is the beauty of being a quant, like Fama says, “it it’s in the data”…

13F tracking rests on two questions:

-Can anyone beat the market?

-Can you pick a manager ahead of time that will beat the market in the future?

Most of the academic literature suggests no to both answers (on aggregate).  But does that mean someone cannot answer yes to both questions?  Of course not.

We published The Ivy Portfolio back in 2009, and ever since my book came out in 2009 I’ve tracked a group of hedge fund managers we mentioned in the book that would be good funds to track through 13F stock picks.  Last year’s post is here:  7% alpha. (older post here The Value of Ira Sohn.)  There are reams of academic papers on the subject including this paper from my friend Wes at Empirical Finance that demonstrates ability to follow managers and disclosures, but one simple example is that following Buffett since the 1970s would have resulted in >10% outperformance per year – and he has beaten by 8% per annum since ’00.  So much for all those detractors that say he isn’t a good stockpicker!

We can all backtest until the cows come home but all that matters is real time performance of course.

All data courtesy AlphaClone.

From the list in the book (a handful of funds were never added to the database, but this is all real time so it does not matter):

2009 82% of funds beat S&P, average fund 56.07%, S&P 26.5%, 29.57% alpha

2010 73% of funds beat S&P, average fund 24.76%, S&P 15.1%, 9.66% alpha

2011 33% of funds beat S&P, average fund -4.63%, S&P 2.10%, -6.73% alpha

2012 68% of funds beat S&P, average fund 25.01%, S&P 16.00%, 9.01% alpha

77% of funds beat the S&P 500 over the period, and the average fund beat the S&P500 by 9% per year.

Impressive real time results, and not to mention 13F tracking would have kept you out of Galleon.

So, at the end of the day would you rather listen to Seth Klarman or your local broker when picking stocks?

Top funds that did over 30% a year include:

Akre, Pershing Square, Abrams, ValueAct, Pabrai, Eagle Value

The top five funds of 2012 were (all above 40% returns):

Second Curve, King St, Appaloosa, Chesapeake, and Jana

The bottom five funds of 2012 were:

Baupost, T2, Private, Relational, and Maverick

Here is a chart of all of the funds, and the black dotted line is the S&P 500.

Funds included in analysis:

Abingdon Capital Management
Abrams Capital
Akre Capital Management
Alson Capital Partners
Appaloosa Management
Atlantic Investment Management
Barrington Partners
Baupost Group
Bridger Management
Cannell Capital LLC
Chesapeake Partners Management
Chieftain Capital Management (BW)
Cobalt Capital Management
Defiance Asset Management
Eagle Value Partners (Witmer)
Eminence Capital
Fine Capital Partners
Glenhill Advisors
Glenview Capital Management
Highfields Capital Management
Icahn Capital LP
Jana Partners
King Street Capital
Lane Five Capital
Libra Advisors
Lone Pine Capital
Maverick Capital
Newcastle Partners
Omega Advisors
Pabrai Mohnish
Pennant Capital Management
Perry Capital
Pershing Square Capital Management
Private Capital Management
Relational Investors
SAB Capital Management
Scion Capital
Second Curve Capital
SemperVic Partners
Shamrock Activist Value
Steel Partners
T2 Partners Management
Thames River
Third Point
Tiger Global Management
Tontine Associates
Trafelet Capital Management
ValueAct Holdings
Viking Global Investors
Wyser-Pratt Management
Yaupon Partners

Quant Value

A great new book out from Wes Gray and Toby Carlisle:  Quantitative Value, + Web Site: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors.

My blurb:  ”Gray and Carlisle take you behind the curtains to build a black box based on the best value minds in finance.  They combine academia’s best ideas with the ideas of Buffet, Graham, and Thorp, to develop a quant system that performs in markets both good and bad.”


Unrelated, but  I did a post last year that is a simple system that updates once a year, picking the top asset classes based on prior year momentum.  This would have you in international REITs and foreign stocks for 2013….some asset class returns for 2013:

Click to enlarge:


The Last Five

As we wind down 2012, I’m going to summarize a few of my favorite posts from 2012.  But first, I thought it would be worthwhile to take a look at the first few months of The Idea Farm

In the first four months we have sent out 35 emails that represent publications that would have cost over $50,000 to subscribe to!  Indeed, there are a handful of publications that are impossible to subscribe to (they are only for institutional clients, but allowed us to send out an issue).  We hope you are enjoying the research as much as we are, and please forward and share the emails with all of your friends if you like.  

Research Affiliates on market forecasts and global CAPE ratios

SumZero Elite on changes in technology, and investment implications

Citigroup Velocity on global equity valuations

Bob Brinker on all things fixed income

SuperInvestor Insight on ideas from Robertson, Montier, and Ainslie


Why Active ETFs Spell Doom for Active Mutual Funds

People still don’t understand the tax benefits of ETFs.  I think they are beginning to, but the big difference will not be for indexes, which are often more tax efficient, but for active equity mutual funds.  Look at this article and see how much was lost to taxes for various funds, then realize that most ETFs don’t pay any meaningful capital gains.

Scott Cendrowski’s article from Fortune


If you then consider hedge funds, it is even worse.  Check out Wes’s piece Hedge Fund Hurt Locker, as well as our old piece access to hedge funds.

Great paper “Rules of Prudence for Individual Investors” by Mark Kritzman of Windham Capital.  Table below:

Year of the Tiger (Stocks)?

Actually this is the year of the Dragon (2010 was the year of the Tiger).  I’ve been writing about 13F investing since this blog began 6! years ago, back when I had to compile all the 13F filings by hand in Excel (search the archives for 13F for lots of articles).  We also did a chapter on 13F investing in The Ivy Portfolio, and there very well may be a book coming out soon on the topic.

There is a nice article out on the Tiger Cubs, although now it is impossible to track the amount of cubs, grandcubs, cousin cubs that have spawned since the closing of Tiger Management in the late 1990′s.  Since many of these analysts and PMs grew up learning a methodology from their mentor Julian Robertson (always been a huge fan), there is often a similar style in the way the manage money.  And since many are also friends, it is no surprise they often own the same stocks.  (Similar to how many trendfollowers have similar methods and will often have the same positions on.)

There is a group on AlphaClone that tracks 21 Tiger Cubs, and if you look at the 10 most popular stocks across the funds, rebalance quarterly, it beats the market by about 7% a year since 2000.  Not bad!  Over half the funds own Google, Apple, and Priceline.  Next most popular are Visa, Amazon, Qualcomm, and Equinix.  The portfolio would be up almost 30% YTD after being down 2% last year.


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