95% Cancer, 5% Alpha?

From the Financial Times:  “Assessing the performance of funds of hedge funds“, B. Dewaele, H.Pirotte, N. Tuchschmid and E. Wallerstein:

“Applying the FD procedure to the first model, we find that, after fees, the majority of FoHFs do not channel alpha from single-manager hedge funds. Applying the FD procedure to the second model, we find that only a very small fraction of FoHFs deliver after-fees alpha per se, i.e. on top of the alpha of the hedge fund indices. “

FOFs face a huge hurdle because of the high fees.  HF Indexes face a huge hurdle because of how they are structured.  If anyone ever tries to sell you something that is the “beta” of hedge funds, run away as fast as you can.  You don’t want exposure to hedge fund beta (it’s the alpha you want) nor do you want exposure to broad hedge fund indexes (although some replication can make sense, depending).  Lots and lots of articles in the archives and a nice post here from Bridgewater’s Daily Observations “Hedge Fund Returns Continue to be Dominated by Beta“.

Access to Hedge Funds


Another Type of Replicator 


Hedge Fund Indexes:  Who Needs ‘em? 

Demographics and Some Uncomfortable Truths

I read this article on the plane en route to London.  PIMCO has been hinting at their recent work in the demographics space and I hope we see more here…

Well That Was A Surprise…

I don’t pretend to have the same preferences as my audience, and that is why I often ask questions and poll the readership.  If you  remember back to 2008 I had a design contest for the book cover and let users pick the winner and eventual cover.  Much to my surprise, the cover I like received about 5% of the vote and the winner, well, is now the cover.

My last two polls asked a question about what content you want to see and where.  The vast majority of you want to read strategic and tactical investment content, and shocking to me, most of you want to read it online or as a PDF by a 2:1 margin.

Personally I can’t think of anything worse than trying to read a 200 or 300 page piece online or as a PDF but that is why I asked.  Then again, my iPad and Kindle are both mostly used as paperweights and only for long trips.  Kindle and hardcover were both represented with much lower votes.  I’ll post a chart after a few days when all of the votes are counted.

I could see the content possibly coming out in one of all of the formats but will have to marinate on it a bit more.

Link to survey here if you have not voted…

(Below is the cover I liked most!  Awful in retrospect….)








New Book

After viewing the responses to our last survey, we have decided to update a few of our white papers and expand upon them.  The biggest question I have is, “How do you want to read long form content?”.  Since this update will likely be somewhere between 50-300 pages, I would like to poll the readership as to your preferred viewing method.  Vote below, as it will have a material impact on how we deliver the content come January…

I will probably wait until year end to include 2011 data, but I envision:


-To A Quantitative Approach To Tactical Asset Allocation and Relative Strength Strategies for Investing.

-Include 2009-2011 data.

-Include more data on long/short portfolios.

-Include more data on combining the two portfolios (ie a momentum rotation with timing component).


All new material:

-Additionally include many more asset classes than the original five such as currencies, small cap stocks, emerging market stocks, foreign bonds, corporate bonds, gold, etc.

-Include alternative indexing strategies.

-Include various allocations, ie more and less aggressive (40-80% in bonds), risk parity etc.

-Include popular guru allocations such as permanent portfolio, endowment, Arnott, etc.

-Include alternative cash management strategies.

-Possibly include chapters on fundamental factors.


This is your chance to pipe up about what you would like to see included…so vote below and/or email me suggestions.  If you want to see the material available on more than one device/location vote for more than one choice…


Emerging Market Models

Bear Markets in the DJIA 1899-

I always look forward to reading the great work out of the folks at The Leuthold Group.  Here is a great chart from their monthly Green Book, a must read ($).


New Books

A few new books on the bookshelf:

Grand Pursuit - Sylvia Nasar

The Inner Voice of Trading- Michael Martin

Below is a great quote pulled from The Inner Voice:

“We analyze massive volumes of noisy data from the markets, trying to find patterns that we can “bet” on.  I would say we have considerable humility compared with most participants in the financial markets, who create elaborate stories.  We know that we know almost nothing, but the ‘almost nothing’ we know isn’t completely nothing, and we only bet on that.  It’s a bit like a scientific experiment, because quite often we fail.  But overall we make more money than we lose.” – David Harding of Winton

Sentiment Update

I thought I would post a few charts for perspective from AAII recent updates.  Click to enlarge:


And a nice PPT slide from the good folks at OSAM:

Sitting on the Valuation Mountaintop

Great new piece from the folks at RA – “King of the Mountain (PDF)“.  It takes a look at how PE Ratios respond to real interest rates and inflation.

Quick summary:  There is a sweet spot with moderate real yields (2-5%) and moderate inflation (2-3%).  When conditions move outside of these bands (ie, now), PE Ratios tend to be much lower.

With real negative yields likely negative now, PE ratios fall to 11 (nearly half of current levels).  Ditto for inflation over 4%.  (This depends on the timeframe and method used to compute inflation which could be anywhere from 1%-7%, depending.  One year CPI is around 4%, while trailing three year is around 1%, both of which are 3-4% understated relative to the ShadowStats/old method of measuring inflation.  )

There is a nice chart at the end that looks at the combination of both factors on a 3-D graph.

New Curated Investment Research Offerings

I think there is room for more curation on the academinc/professional research space in investments.  A few sites have been working on it to various degrees, and my current  favorites are CXO and Empirical Research (now Turnkey Analyst).  Some of the other linkfest/aggregation sites like Advisor Perspectives and Abnormal Returns are good too, but I’m talking about a more in depth “deep dive” into the papers and approaches.  I think there is a lot of room for translating much of this research into practical advice and trading strategies.

A big hedge fund just started with a beta site: Whitebox Selected Research.  Redleaf’s writings are wonderful reads (as is his book), and it looks like the site, while just getting underway, may archive the Whitebox letters.  Here is a recent one from August 15, 2011: “Bullish on America”.

PS What happened to AlphaLetters, defunct?

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