Long Way Down

Here is the graphic from the last post of 30 country ETFs we track, and you can see the US is holding up much better than the rest of the world (note that the all-time high will only date back to when the ETF existed, so will understate some like Japan who is down more like 75% from the peak.  I will update with indexes at month end):

2 Out Of 3 Countries Are In A Bear Market

I took at look at the top 30 country ETFs we track, and thought it interesting that two out of three were in bear market territory (down 20% or more from 52 week highs).

The best performer?  The US stock market.

Spain, Italy, Russian, and Austrian ETFs are all down 40% or more.

Will update after lunch with a chart.


Momentum, Low Vol, Risk Parity, and Asset Allocation

Lots of people emailed this over today.  Nice article (although the Sharpe Ratios are overstated since they exclude the rfr for some reason.)

Adaptive Asset Allocation – Butler & Philbrick

Hedge Fund Interviews

Some fun interviews in here including Dalio, O’Shea, Woodriff, and Thorp.  For instance I had no idea Thorp ran a trendfollowing fund from 2007-2010…or that Woodriff formed 3 CTAs, worked as a prop trader, traded his own account all before founding QIM and raising over $5billion.  There are some amazing differing viewpoints from these macro managers (I’m only about halfway done)….such as:

O’Shea (COMAC):  “People get all excited about the price movements, but they completely misunderstand that there is a bigger picture in which those price movements happen. Price movements only have meaning in the context of the fundamental landscape. To use a sailing analogy, the wind matters, but the tide matters, too. If you don’t know what the tide is, and you plan everything just based on the wind, you are going to end up crashing into the rocks. That is how I see fundamentals and technicals. You need to pay attention to both to make sense of the picture.”

Dalio (Bridgewater):  “I believe that anyone who has made money in trading has had to experience horrendous pain at some point. Trading is like working with electricity; you can get an electric shock. With that pork belly trade and other trades, I felt the electric shock and the fear that comes with it. That led to my attitude: Let me show you what I think, and please knock the hell out of it. I learned about the math of investing.”

[Dalio walks over to the board and draws a diagram where the horizontal axis represents the number of investments and the vertical axis the standard deviation.] This is a chart that I teach people in the firm, which I call the Holy Grail of investing. [He then draws a curve that slopes down from left to right—that is, the greater the number of assets, the lower the standard deviation.] This chart shows how the volatility of the portfolio changes as you add assets. If you add assets that have a 0.60 correlation to the other assets, the risk will go down by about 15 percent as you add more assets, but that’s about it, even if you add a thousand assets. If you run a long-only equity portfolio, you can diversify to a thousand stocks and it will only reduce the risk by about 15 percent, since the average stock has about a 0.60 correlation to another stock. If, however, you’re combining assets that have an average of zero correlation, then by the time you diversify to only 15 assets, you can cut the volatility by 80 percent. Therefore, by holding uncorrelated assets, I can improve my return/risk ratio by a factor of five through diversification….I strive for approximately 100 different return streams that are roughly uncorrelated to each other. There are cross-correlations that enter into it, so the number works out to be less than 100, but it is well over 15.

…There are no technical inputs.”

Then on the other hand you have Woodriff, a fellow Wahoo, who only uses technical inputs:

Q:  All your secondary variables derived just from daily open, high, low, and close price data?

A:  Absolutely. That is all I am using.

Q:  You don’t throw in any other statistics, such as GNP or any other economic variables?

A:  If I could, I would. I actually tried that, but I couldn’t get it to work.

Well worth a read!

Hedge Fund Market Wizards – Schwager

Top 10 Financial Research Papers of the Year

Whitebox folks awarding $25k to the top paper (HT: Tradestream).  Papers below:

  • “Information Leakage Prior to Company Issued Guidance” – Financial Management; Anna Agapova and Jeff Madura
  • “Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities” – Journal of Econometrics; Tim Bollerslev, Michael S. Gibson and Hao Zhou
  • “The Implied Cost of Capital: A New Approach” – Journal of Accounting and Economics; Kewei Hou, Mathijs A. van Dijk and Yinglei Zhang
  • “A Survey of Alternative Equity Index Strategies” – Financial Analysts Journal; Jason Hsu, Tzee-man Chow, Vitali Kalesnik and Bryce Little
  • “The ABCs of Hedge Funds: Alphas, Betas and Costs” – Financial Analysts Journal; Roger G. Ibbotson, Peng Chen and Kevin X. Zhu
  • “Principal Components as a Measure of Systemic Risk” – Journal of Portfolio Management; Mark Kritzman, Yuanzhen Li, Sebastien Page and Roberto Rigobon
  • “Common Risk Factors in Currency Markets” – The Review of Financial Studies; Hanno N. Lustig, Nikolai L. Roussanov and Adrien Verdelhan
  • “Is Momentum Really Momentum” – Journal of Financial Economics; Robert Novy-Marx
  • “Are Stocks Really Less Volatile in the Long Run?” – Journal of Finance; Lubos Pastor and Robert Stambaugh
  • “Under-/Over-Valuation of the Stock Market and Cyclically-Adjusted Earnings” – International Finance; Marco Taboga

Self Publishing & Airplane Reading

I’m on the plane to NYC (and reminding myself how much better Virgin is vs. any other airline) and reading a few new research pieces.  Email me any other good ones and I’ll post:

The Devil in HML Details – Asness (HT: BL)

Hedge Fund Market Wizards – Schwager

Historical Dividend Analysis Makes Us Bullish on Japan – Schwartz

Over 24 interviews and counting with traders – Podcast with Covel.

I’m self publishing book #2 this summer.  Looking for good website/company/individual that is great converting Word docs for an ebook.  Any suggestions?  Will update the blog post with reader ideas.

So far:



“Every human being on the planet should short Treasuries”

That was a quote from a famous market pundit in Feb 2010, who also described the trade as a “no-brainer”.  Had you followed this guru’s advice your no-brainer portfolio would be down 50%.  Not that I need to remind our readers to blindly follow pundit advice, but always good to remember bold calls are great for selling books and speaking fees, not always so good for your wealth…

In a related note here is an update to the Tetlock forecasting tournament some of you participated in…(HT: AF)


Berkshire Summary

I often post links to Twitter that never make it to the blog, so I will repost this link as it is a great summary of the Berkshire meeting this past weekend.

Travel: NYC Trip

I’m headed to NYC this weekend through next Thursday.  If anyone has a suggestion for a good happy hour spot on Monday and Tuesday for a small group let me know (casual, but room for people to drop in anytime).

I’ll be heading to see my buddy Tug in Magic/Bird as well as attend the Ira Sohn conference.  Lots of great speakers this year including Einhorn, Gundlach, Mandel, Ackman, Robbins, and Witmer.  If anyone else is headed to Ira Sohn let me know.

As always drop me a line if you want to meetup as I will have some time on Monday and Tuesday!

Nail in the Mutual Fund Coffin (NAV Based ETF Trading)

I don’t see the reason so many people are clamoring to make ETFs less transparent (usually 99% of the people don’t need to mask their trades).  In general people don’t like transparency for two reasons – they are doing something they shouldn’t be, or, they are revealing they are not doing anything significant and charging a lot for it.

However, this article touches on a topic I would love for the regulators to approve, and that is NAV based trading for ETFs.  Would be the nail in the coffin for mutual funds.

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