Travel: New Orleans, Bermuda, Georgia, Alabama, and France

I will be in New Orleans Friday if anyone wants to meetup for lunch or a coffee.

Also on the calendar are:

Bermuda speaking at Global Hedge Fund Summit, April 15th-17th,

and Georgia, Alabama, and France dates TBD in next two months.

(If that is not the oddest travel schedule I don’t know what is.)

13F & Listed Hedge Funds ETFs On The Way

Way back in the fall of 2008 we had two funds that were to going to launch as ETFs.  One was an endowment style global tactical ETF (ticker symbol IVY) and the other was a global listed hedge fund ETN.  We were partnering with Claymore (now Guggenheim) as the sub-advisor, as well as one of the world’s most famous financial brands that was moving into the ETF space.

Fast forward to the fall of ’08 and both filings got pulled due to the market gyrations.  This of course was both good and bad for my firm.  It was good since we would have recieved a pretty tiny index fee for designing the methodology, but it was bad since our strategies would have held up nicely since 2008.  (The story is actually much longer and interesting but not really something I want to publish on the blog.  So if you grab me over a beer sometime I’ll tell you the details.)

The global listed hedge fund ETN was going to invest in the listed hedge funds in Europe, and really the only structure that can do that without screwing the end investor due to PFIC taxes is the ETN.  The listed hedge funds trade like closed-end funds do here with discounts and premiums to NAV and we had a strategy to bias the index to the funds trading at the biggest discounts. I haven’t seen any content on listed hedge funds in the US (other than a chapter on them in our book), but the ETN structure should have died alongside Lehman, although oddly it is still around today.  I think investing in the foreign listed funds was really interesting five or so years ago, but with more and more active ETFs and alternative funds listing publicly, and the huge tax benefit to running active strategies in an ETF structure, they slowly became less and less interesting.

Anyways, it looks like Global X, which has been pretty creative and aggressive in launching funds, is going to do a global listed hedge fund ETF.  I doubt they can get around the PFIC rules but will update this post if I chat with the folks there anytime soon and they provide more clarity.  I’m pretty sure this is what killed the foreign listed private equity ETF a few years ago after I wrote about it a bunch on the blog.

As far as the three 13F based ETFs, they are interesting ideas with a major caveat – if they are done correctly.  I am often doubtful many people know how to analyze 13Fs (for example many people think the top holdings are the best to follow, which they are not).   I assume they are launching the first fund as a 13F tracker on the entire hedge fund space as a fund for the institutions to short (which I think is a great idea), as tracking the entire hedge space doesn’t make any sense otherwise.  But as with anything I reserve my judgement until I get to see the methodology of the underlying strategies.   (Note:  AlphaClone also has an ETF in registration, and as a disclosure I have a small passive equity stake in the company.)

As a follow up, every single one of my ETF ideas from my post a few years ago is now in registration or launched.  Perhaps it is time for a new list?

What would you like to see?

Love This Idea

The Visual Guide to Investing Series.  Literally had a book proposal for “The Visual Guide to Investing”.  Brilliant:

Bloomberg Visual Guide to Financial Markets


Why Tax Policy Matters: Dividends

Risk Parity vs. Endowment Model vs. Permanent Portfolio

It has been over 5 years and 1,000 posts since I started writing, so I thought I would dig through  the archives and touch on a few of my favorite posts, and maybe some of the dumber/better ideas over the years…but to start, below is the very first post to the blog. For the 2 of you that have been around since the first post Nov 1, 2006 here it is:

Three white papers by Bridgewater and PanAgora to introduce the blog and the topics of post modern portfolio theory and risk-parity…

Engineering Targeted Returns and Risks – Bridgewater

“The Biggest Mistake In Investing” – Bridgewater

“Risk Parity Portfolios” - PanAgora

Risk Parity is certainly in vogue this year – as is any strategy when it is having a great year.  In honor of my first post, below is a video that touches on the topic of risk parity, endowment, and permanent portfolio allocations.  I split this into two videos (Part I is 30 mins, Part II 10 mins).  It then puts a spin on them with a dynamic trend overlay.  At the end of the post is some added info for those looking for more background on risk parity.

I’ll have a few more videos in the coming months on the topics of equity income and currency investing.  If you want to view a larger version you can go to the Screencast website here.

Dynamic Risk Parity Part I

Dynamic Risk Parity Part II

Below is a short history of risk parity from Mr. Wiki:

History

“The seeds for the risk parity approach were sown when economist and Nobel Prize winner, Harry Markowitz introduced the concept of the efficient frontier into modern portfolio theory in 1952. Then in 1958, Nobel laureate James “Bill” Tobin concluded that the efficient frontier model could be improved by adding risk-free investments and he advocated leveraging a diversified portfolio to improve its risk/return ratio. The theoretical analysis of combining leverage and minimizing risk amongst multiple assets in a portfolio was also examined by Jack Treynor in 1961, William Sharpe in 1964, John Lintner in 1965 and Jan Mossin in 1966. However, the concept was not put into practice due to the difficulties of implementing leverage in the portfolio of a large institution.

According to Joe Flaherty, senior vice president at MFS Investment Management, “the idea of risk parity goes back to the 1990s”. In 1996, Bridgewater Associates launched a risk parity fund called the All Weather asset allocation strategy which attempted to “achieve consistent performance” and equalize risk by correlating diversification (such as global inflation-linked bonds and global fixed income assets) with exposure to different economic drivers, such as inflation and economic growth.  The initial impetus for the All Weather fund was to establish a family trust for the founder of Bridgewater Associates.  Although Bridgewater Associates was the first to bring a risk parity product to market, they did not coin the term. Instead the term, risk parity was first used by Edward Qian, of PanAgora Asset Management, when he authored a white paper in 2005. The term was later co-opted by the asset management industry and evolved into a portfolio investment category.  In time, other firms such as AQR Capital, Aquila Capital (2004), Northwater, Wellington, Invesco, First Quadrant, Putnam Investments, ATP (2006), PanAgora Asset Management (2006), AllianceBernstein (2010) and the Clifton Group (2011) began establishing risk parity funds.”

There is now a risk parity index from the good folks at Salient.

Some risk parity mutual funds (that tend to be expensive, average expense ratio of ):

Managers AMG FQ Global Essentials Fund (MMAVX), 1.71%

AQR Risk Parity (AQRNX), 1.20%

Diversified Risk Parity (DRPAX), 2.40%

Putnam Dynamic Risk Allocation (PDREX), 1.90%

Invesco Balanced-Risk Allocation Fund (ABRZX), 1.33%

Interesting news that Global X is launching a risk parity fund.  (Filing here via Index Universe.)

Huge listing of risk parity related literature below (most are PDFs).  If I missed any great ones send me a link and I’ll add:

ai CIO website has a treasure trove of risk parity articles.  Sample from their great magazine here.

Diversification and Risk Management – First Quadrant

At Par with Risk Parity? – Kunz, Policemen’s Fund of Chicago

Balancing Betas – FQ

Counter-Point to Risk Parity Critiques – FQ

I Want to Break Free – GMO

RISK PARITY: IN THE SPOTLIGHT AFTER 50 YEARS – NEPC

Leverage Aversion and Risk Parity – Asness

The Biggest Mistake In Investing – Bridgewater Associates

The Hidden Risks of Risk Parity Portfolios – Inker GMO

Engineering Targeted Returns and Risks – Bridgewater Associates

Global Asset Allocation & Risk Parity – Richmond Retirement

Risk Parity White Paper – Meketa Investment Group

On the Properties of Equally-Weighted Risk Contributions Portfolios - Maillard et al

Demystifying Equity Risk-Based Strategies: A Simple Alpha Plus Beta Description  – Carvalho et al

Chasing Your Own Tail (Risk) – AQR

Risk Parity Portfolios™: The Next Generation – PanAgora

PanAgora risk parity & Risk Parity Portfolios

The Risk Parity Approach to Asset Allocation – Callan

Risk Parity for the Masses – Steiner

Buffett vs. Protege (or, Shilling’s Revenge)

This story made news when Buffett and Protege made a 10-year bet over which investment would outperform:  US stocks (S&P500, made by Buffett) or a select group of hedge fund of funds (not disclosed for some odd reason).

“All of which leaves tortoise and hare gasping alongside each other at the end of four years — and having absolutely nothing to cheer about. Protégé is still a bit ahead. But its funds of funds, on the average, are in the minus column for the period by 5.89%. Admiral shares are down 6.27%.”

The ironic part is that the bet required the funds be placed in escrow, and the Long Now Foundation bought zero coupon bonds  which are now up over 40%.

A Survey of the Online Money Management Space

Investors shouldn’t pay much for buy and hold portfolios.  Honestly they shouldn’t pay anything on top of the 0.30% in fees one would pay for a portfolio of indexed ETFs or mutual funds (we detailed a few of these in our book The Ivy Portfolio).  Now, if you have a killer advisor that is doing tax harvesting and/or adding alpha that is different but not the topic of this post.  (Although if I was one of these software sites I would perfect the tax harvesting algorithm that would be huge differentiator.)

Anything more than 0.5% or so on top of fund fees is either paid a) out of ignorance, which is not always the investor’s fault or b) as a tax for being irresponsible.  For the latter I mean a fee to keep you out of your own way of chasing returns and doing something stupid, much in the same way someone pays Weight Watchers or any other diet advice program when you know what you should be doing (eat less, exercise more).  Some broad generalizations here but trying to get to the data below.  That fee is worth a lot if you cannot keep out of the way of your own emotions, and the evidence is massive in favor of that being the case.  We have a great research piece coming up on the topic here soon.

There is an enormous amount of VC money chasing financial startups, and there has long been a disconnect here for some reason.  Anyways, below is a summary of the buy and hold advice world.  I left out the really high fee advisors where the fee is variable by advisor since it is hard to make generalizations there other than that it is a dying model and you’re a predator if you’re charging 2% commissions and or 2%+ fees for doing nothing.  I pulled most data from the SEC.

I made the dividing line 0.5% for a $100,000 account.  Anything more is labeled in red (ie charge as much as you can get away with model), anything below in green (charge as little as possible model).  I can’t understand why the custodians charge anything at all considering they likely just load the accounts with their own funds (double dipping on fees).  I actually applaud some of the lower fee entrants and their fees (Betterment, Wealthfront), though I will say I think this is a very difficult model to differentiate yourself compared to simply buying a few ETFs and rebalancing that once a year.

If there is any errors or other sites I have missed let me know.

Click to enlarge:

 

 

13Fs: Does the 45-Day Delay Matter?

I’ve written dozens of posts here on the blog since ’06 on the topic of 13F research (older post here for example).  An analyst and I used to cobble together the 13Fs and backtests by hand, a long an arduous process.  However, over the years that process has allowed a number of insights to flow through that are hard to realize any other way than just getting your hands dirty.  Findings such as what funds to track, what holdings to track, what strategies to track, etc have been discussed here and in our book The Ivy Portfolio – often insights that have not been presented elsewhere.  So, below I wanted to tackle a topic that I hear almost every single time 13Fs come up – namely, does the 45 day delay matter in tracking these top hedge fund manager stock picks?

Below we do a quick test, and note it is not comprehensive.  There are inherent biases no matter how you chop up the data (how many funds to include, long/short only or entire universe, include dead funds, regress the returns based on turnover and AUM? etc etc)  but we look at 20 funds we have been following for years on the blog.  We compare reblancing on the 13F filing date to rebalancing a portfolio at the quarter end (ie look ahead bias investors do not have).  It shows how a portfolio constructed without the 45-day delay compares to a portfolio with publicly available information.  Tests go back to 2000, total return data with no transaction costs.

Q:  So, does the 45-day delay matter?

A:  A little.

While there is wide variation across the funds (to be expected), the delay ranged anywhere from a 3%+ penalty for a few funds (Greenlight, Icahn), to a 1%+ CAGR benefit (Tiger Global, Libra).  Overall the friction in the delay averages about 1.5% per annum (similar for both manager weighted returns as well as equal weighted returns).  Another aside is that it doesn’t matter a whole lot when you rebalance after the disclosure (ie there isn’t much of a bounce from the filings becoming public plus or minus five days).

We are running this study with a larger dataset, and  findings we may or may publish in a longer form white paper when we get around to it.

Next up on the blog are some videos on dynamic risk parity, equity income strategies, and currency strategies.

Funds included in the study:

APPALOOSA MANAGEMENT LP
BAUPOST GROUP LLC
BERKSHIRE HATHAWAY INC
GREENLIGHT CAPITAL INC
JAG HOLDINGS LLC
MAVERICK CAPITAL LTD
PRIVATE CAPITAL MANAGEMENT INC
RELATIONAL INVESTORS LLC
COBALT CAPITAL MANAGEMENT INC
HIGHFIELDS CAPITAL MANAGEMENT LP
CHESAPEAKE PARTNERS MANAGEMENT CO
THIRD POINT MANAGEMENT CO LLC
EMINENCE CAPITAL LLC
ICAHN CARL C ET AL
VIKING GLOBAL INVESTORS LP
ATLANTIC INVESTMENT MANAGEMENT INC
SECOND CURVE CAPITAL LLC
AKRE CAPITAL MANAGEMENT LLC
BRIDGER MANAGEMENT LLC
GLENVIEW CAPITAL MANAGEMENT LLC
LIBRA ADVISORS INC
TIGER TECHNOLOGY MANAGEMENT

Source:  Bloomberg

New Reads on the Way

In addition to the Hedge Fund Market Wizards book pre-ordered, I thought I would pass along a few more reads in the mail or pre-ordered, including a few that may be decent contrary indicators….

 

Schwager’s New Hedge Market Wizards Book w/ Dalio, Thorp, Woodriff

Looks like Schwager is putting out a new version of his famous Market Wizards series.  Personally I’d like to see a “where are they now” from the past few books. (His other books here.)

Hedge Fund Market Wizards

Table of Contents

Introduction

Part I: Macro Men

Chapter 1 Colm O’Shea: Knowing When It’s Raining

Chapter 2 Ray Dalio: The Man Who Loves Mistakes

Chapter 3 Scott Ramsey: Low-Risk Futures Trader

Chapter 4 Jamie Mai: Seeking Asymmetry

Chapter 5 Jaffray Woodriff: The Third Way

Part II: Multi

Chapter 6 Edward Thorp: The Innovator

Chapter 7 Larry Benedict: Beyond Three Strikes

Chapter 8 Michael Platt: The Art and Science of Risk Control

Part III: Equity

Chapter 9 Steve Clark: Do more of What Works and Less of What Doesn’t

Chapter 10 Martin Taylor: The Tsar Has No Clothes

Chapter 11 Tom Claugus: A Change of Plans

Chapter 12 Joe Vidich: Harvesting Losses

Chapter 13 Kevin Daly: Who Is Warren Buffett?

Chapter 14 Jimmy Balodimas: Stepping in Front of Freight Trains

Chapter 15 Joel Greenblatt: The Magic Formula

Conclusion 40 Market Wizard Lessons

Appendix 1 The Gain to Pain Ratio

Appendix 2 TITLE TK

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