The 20% Club

In a year where are lot of hedge funds are struggling, what hedge funds are getting it right?  Below are a few funds whose clone portfolios (top ten holdings, rebal 50 days after q end) are up over 20% YTD (and you know how difficult that is).  In parenthesis are some of their notable holdings (source: AlphaClone):

JAT Capital, John Thaler (BIDU, SINA, RVBD)

Hayman Advisors, Kyle Bass, (SIX, APA, IMMR)

Sandell Management, Tom Sandell, (Q, SUG, ID)

Tiger Global, Chase Coleman, (AAPL, MELI, AMZN)

Bogle Investment Mgmt, John Bogle, (PLAB, CATM, CELL)

ValueAct, Jeffrey Ubben, (VRX, SLE, MSI)

Icahn Capital, Carl, (MSI, CLX, MMI)

20%+ Returns? Forgetaboutit

I love this article from my friend Wes at Empirical Finance: Mission Impossible: beating the market over long periods of time.

Summary Findings

Before I even begin, here are some findings (I use the CRSP return database which starts January 1, 1926 and runs through December 31, 2010):

  • Earning 20%+ returns over very long horizons is for all intent and purposes virtually IMPOSSIBLE (assuming the market experience of the past ~90 years is representative of the future).
  • 31.5%+ returns over the 1926 to 2010 period imply that an investor will end up owning over half of the ENTIRE stock market.
  • 33%+ returns imply that an investor will end up owning the ENTIRE STOCK MARKET!
  • Warren Buffett–and perhaps a very select handful of others–have been able to achieve 20%+ returns over very long time periods. These individuals represent some of the richest people on the planet because of this very phenomenon.
  • An investor might have an epic run of 20% returns for 5, 10, maybe even 15, or 20 years, but as an investor’s capital base grows exponentially, the capital base slowly becomes ALL capital, and all capital cannot outperform itself!

This follows nicely with my post on hedge funds and CTAs:  Where Have all the Sharpe Ratios Over 1 Gone? (and more here).




Yield Curves

Off recent highs, but still pretty steep:

Great Advice on Book Writing

“What do you wish you’d known about the process of writing a book that you didn’t know before you did it?”

Fun article for my writer friends that looks at advice from 23 published authors on the process of writing a book. And to see just how much the world has changed, a little clip on book making.  Some cool advice:

Be ready to organize vast amounts of data. Use a wall, or software like Scrivener.  - Carl Zimmer

Make it great, no matter how long it takes. There’s no such thing as too many drafts. There’s no such thing as too much time spent. As you well know, a great book can last forever. A great book can change a person’s life. A mediocre book is just commerce…..Let some of you come through. You’re obviously not writing a memoir here, but this book is still partly about you — the world you see, the way you think, the experiences you have with people. And trust me, readers are interested in who you are. So don’t be afraid to let bits and pieces of your personality and even life details seep into the text. It will breathe a lot of life into the book. -David Shenk

Write when the book sucks and it isn’t going anywhere. Just keep writing. It doesn’t suck. Your conscious is having a panic attack because it doesn’t believe your subconscious knows what it’s doing. - Cory Doctorow

And run all quirky one-liners that you hope to include in your author’s bio (do you “always enjoy a good latté”?) past a close friend; they don’t age well. -Geoff Manaugh

Don’t forget to write the book that you want to read.Mark Frauenfelder

When my self-disgust reaches critical mass I seem to be ready to go. -August Kleinzahler

Develop a very serious plan for dealing with internet distractions. I use an app called Self-Control on my Mac. -Ben Casnocha

How inept publishers are at selling books, even books that, as in my case, they have a significant financial stake in and that they profess to love. Once they get rejected by Today and Terry Gross and once the SundayTimes passes (or, as in my case, assigns a  review and then never runs it), they’ve exhausted their playbook. Solution: what you’re already doing, which is to build your brand among your intended audience. - Anon

The most striking thing about my book processes was that no one at the publisher did any editing at all.  No fact checking, no line editing. - David Gans

Apply to MacDowell, Yaddo, Blue Mountain Center, Headlands — a few other good residencies, including one in Cali I can’t remember now. Four to eight weeks of you, quiet, among other artists, with people feeding you on schedule can do wonders. -Josh Shenk

Hat tip Kottke.



Lucky History

From Myhrvold at Bloomy:

None of these catastrophes came entirely out of the blue. To the contrary, geologic history tells us that we’ve actually gotten off lucky. In 1783, the Laki volcano in Iceland erupted so violently that it killed perhaps a quarter of the country’s population. That volcano put enough ash into the sky to change the weather in the entire Northern Hemisphere, causing crop failures and famines across Europe, India, Japan, Egypt and North America that pushed the total death toll to 6 million. It took almost a decade for the weather to recover.

Laki isn’t even the worst Icelandic volcano on record — far larger was the six-year eruption of Eldgja that began in 934.

One could recount many such examples, but people’s eyes tend to glaze over when you talk about something that last occurred in 1783, much less 934. Surely things are different now, they say. The unfortunate truth is quite the opposite — a millennium ago was yesterday as far as the Earth is concerned, and the relevant phenomena operate as vigorously as ever. Proud as we are of the many technological achievements of modern society, we are actually more vulnerable than ever because we live more densely, within a complex and sometimes fragile web of buildings, roads, bridges and the like.


Ackman Considering Launching a Closed-End Fund

There is news out recently that Bill Ackman wants to launch a public fund.  We’ve been writing about Ackman for years including a 2007 piece entitled “Will Someone Please List a Hedge Fund in the US?” when we used to talk about the foreign listed hedge funds.

It is too bad he is considering launching a closed-end fund however as it is a terrible structure for the shareholder (but great for the manager as it locks up $).  All of the initial investors get hosed on the IPO fee (essentially a front end sales load – there is no reason to ever buy a CEF through an IPO), then the tax efficiency is much worse than an ETF.  Not to mention the fund can swing wildly around the NAV (which of course can be a plus or minus).


Euromoney Acquires Ned Davis for $112mln

Congrats to everyone at my favorite institutional research shop on the recent news to be acquired by Euromoney.  Lets hope nothing changes and the fantastic research continues!


Taleb & Spitznagel Launching Black Swan ETF

From Forbes magazine:

“In July Universa intends to tap the financial adviser market by offering its own black swan ETF. The fund will mimic some of the strategies employed by its institutional-only hedge fund and will have an expense ratio of 1.5%.”

We considered launching a basket of puts as a tradeable ETF.  I think investors would welcome the ability to buy (short) a basket of,  say, 10-20% out of the money puts that rebalanced monthly without the headache of having to trade and monitor lots of options.  Too many other good ideas ahead of it though.

It will be interesting to see how they structure it regarding choice of markets as well as rebalancing decisions.  I assume they mean filing in July as I don’t see it listed at the SEC but I do know that they will not be using the ticker SWAN…

It mostly unrelated news it is good to see David Chappelle is launching a new product as well…

New White Paper on Pension Funds

I’m finally ready to start cranking out these papers and my goal is to get out six more by year end.  I am also experimenting with longer form analysis on the blog and will post this article here once I can clean it up.  Let me know what you think!

You can download the whole white paper below on SSRN by clicking the title here:

What if 8% is Really 0%?  Pension Funds Investing with Fingers-Crossed and Eyes-Closed

June 2011, Working Paper


It is well known that pension funds in the United States are underfunded even if they achieve their projected 8% rate of return.  The scope of pension underfunding increases to an astonishing level when more probable future rates are employed.  A reduction in the future rate of return from 8% to the more reasonable risk-free rate of approximately 4% causes the liabilities to explode by trillions of dollars.  As bond yields declined over the past twenty years, pension funds moved toward more aggressive equity-based portfolios in an attempt to reach for this 8% return.  By investing in a portfolio with uncertain outcomes, pension funds could experience increasingly volatile and even negative returns.  Paradoxically, in an effort to chase the universal 8% rate, pension funds may be laying the groundwork for returns even lower than the risk free rate.   In an effort to offer an empirical basis for this possibility, we conclude the paper with a relevant comparison – the return of a hypothetical Japanese pension for the past two decades.  We believe that pension funds need to at least prepare for the unfathomable:  0% returns for 20 years.  Most pension funds, regrettably, have not adequately stress tested their portfolios for these scenarios.

IndexUniverse Webinar Tomorrow

I’m doing an IndexUniverse webinar tomorrow, swing by and come ask some questions!

6/14/2011 2PM Eastern

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