PEACELIBRARY.ORG SET UP A HEDGE FUND RESOURCE

FCC shoots down LightSquared network plan

scgadmin — Thu, 16 Feb 2012 16:43:14 +0000

BOSTON (MarketWatch) — The Federal Communications Commission has shot down a plan by LightSquared Inc. to build a new wireless network out concern that it would interfere with GPS devices, The Wall Street Journal reported Wednesday. The rejection is a serious setback for the start-up venture and its principal backer, hedge-fund manager Philip Falcone, who has reportedly invested billions in the company. The FCC granted conditional approval for the project last year. While the FCC’s decision can be appealed to the its commissioners, the Journal said it was unlikely to be overturned.

Outside the Box: No jobs? Just learn to code

scgadmin — Thu, 16 Feb 2012 16:43:13 +0000

In Silicon Valley, many people are realizing that future employment may rely on knowing how to code, writes Ruti Polachek.

Revolution Investing: First third of 2012’s first quarter in the bag

scgadmin — Wed, 01 Feb 2012 04:10:14 +0000

We’re right in the middle of earnings season, and it’s the right moment to catch our breath and take stock of some of the less talked about, but no less important, positions in the Revolution Portfolio.

Outside the Box: China’s stock bubble was made in the U.S.A.

scgadmin — Fri, 20 Jan 2012 22:35:07 +0000

When a hot investment theme feeds on investor greed, ignorance and laziness — and is further inflated by unscrupulous, opportunistic investment banks — ugly things tend to happen, as U.S. investors in Chinese stocks are learning, writes Junheng Li.

Outside the Box: Private equity, carried interest and Mitt Romney

scgadmin — Wed, 18 Jan 2012 21:49:57 +0000

How can Mitt Romney and other fund managers lower their tax rate significantly? Tax lawyer Jack Nutter explains.

How to make a work-at-home business succeed

scgadmin — Wed, 11 Jan 2012 17:24:35 +0000

For those struggling to find work, or who are underemployed, working from home may be a good solution, as new home-based or virtual jobs and business can succeed with the advantages of technology.

Ten trends for hedge fund flows in 2012

scgadmin — Wed, 04 Jan 2012 14:47:32 +0000

Last year was the second-worst for hedge fund performance on record, according to data from Eurekahedge. But Agecroft Partners, a third-party marketing group based in the U.S., thinks things will be better in 2012 and has outlined its reasons for predicting $100 billion of net inflows.

Singapore investment unit to focus on North Asia

scgadmin — Tue, 03 Jan 2012 14:31:55 +0000

(Recasts the first paragraph; adds background on Temasek in the third-fifth paragraphs. more comments form Temasek spokeswoman in the sixth paragraph, comments from analysts in the seventh paragraph and background on another Temasek unit in the eighth and ninth paragraphs.)

Bear market?

scgadmin — Wed, 30 Nov 2011 18:20:38 +0000

Bear markets for beta are bull markets for alpha. It’s always an OPPORTUNITY MARKET for absolute return. Recently short selling has been performing well and stock indices have erased ALL last year’s gains. Investors have not received the alleged equity risk premium for so long but then stocks don’t read economics textbooks. Not many people can afford to risk their retirement savings hoping for REALITY to catch up with dubious THEORY. The “panic of 2007″ will worsen in 2008.

Though currently above 13,000, I would be amazed if the Dow and Nikkei are still above 10,000 by the time this MAJOR crisis and recession are played out. Few investors can waste time waiting long enough for beta bets to pay off and why should they when they can allocate to PERFORMANCE driven managers with the RARE skill to generate absolute returns and preserve capital no matter what the economic conditions? Even more damaging is the double impact of lower interest rates at the same time as the stock market collapses. Buy puts.

The S&P 500 is now at 1,400 as it was 12 months ago AND 96 months ago(!) back in January 2000 but it could be worse; in January 1988 the Japanese Nikkei was at 24,000 and TWENTY years on the index has “grown” to 14,000. When will traditional investors belatedly realise there is NO inherent return from “the stock market”. Just sell-side stupidity and historical hype based on false hypotheses. With equity benchmarks mostly flat for the decade investors can be grateful for alternative sources of return that have helped diversify portfolios and preserve capital. A stock and bond portfolio is TOO risky for conservative investors like me. Some stocks go up but most go down. Long/short is obviously SAFER than long only.

Strategies make money out of asset classes. In implementing a strategy the fund manager must either have a protective moat of a talent-based barrier to entry or keep it secret. Many things in the public domain do NOT work anymore but is that surprising? “Sell in May” timed the market brilliantly last year while “3rd year of Presidential cycle” didn’t but then both are just statistical flukes. The Dogs of Dow, the January effect, the “Magic formula” are too well known to work anymore. Those anomalies, among others, are gone. I hope for the sake of the long only crowd that the “First 5 days in January” is not predictive but suspect it will be this year. Buy stock index puts.

Investing and trading have important roles in portfolio management but it is NO place for gambling on the supposed “upward drift” of equity benchmarks. Prudent investing surely requires acknowledging the possibility of an extended bear market and constructing a portfolio that can grow, if necessary, no matter what happens. Inflation bites, bills come due and liabilities grow regardless of what stock and credit markets do. But “risk free” yields are far below required actuarial return targets.

What is the difference between investing, trading and gambling? With the first two it is the holding period; seconds to months is trading and years is investing. Investing and gambling are quite similar at first look; putting money at risk in the hope of making more money. Decision making under uncertainty. But most investors would balk at the idea of being called a gambler even if the markets often resemble a casino.

Surely the difference is that investing is deploying capital when you DO have the edge while gambling is when you DON’T have the edge. To make consistent absolute returns it is necessary either to have an advantage or identify someone else with one. That does not eliminate the possibility of small, manageable losses but it does mean persistent and predictable performance. By definition there is no edge in beta and it is not very reliable over most relevant time frames.

There are reasons to be bullish but then there usually are. The mythical “private equity put” and “Greenspan put” evaporated to be replaced by the sell-side delusion called “global decoupling”. Many economists are predicting a recession which, given their track record, means there is a chance there won’t be one. Several large US banks will report earnings this week and with new CEOs and new stock options the temptation to write down doubtful CDOs, SIVs, CMBSs and real estate loans to very conservative levels and adopt a kitchen sink approach to disclosing bad news must be high. LAST quarter can be blamed on former management but not the NEXT quarter. Ben Bernanke promising rate cuts was clearly preparing the market for bad news.

Monetary policy isn’t quite the economic rudder many would like to rely on. Some central banks think raising interest rates will curb inflation and lowering interest rates will avoid recession. Maybe but not necessarily anymore as global capital flows and new, non-obvious relationships between assets and geographies may have changed the rules of the game. High rates in Iceland or New Zealand or low rates in Japan or Taiwan haven’t had quite the effect that central bankers anticipated.

Situations change; western investors helped out Asian banks and now Asian investors help out Western banks. Asset classes shouldn’t be looked at in isolation as they all have varying effects on each other. Commodities move stocks, currencies impact bonds and vice versa. Last year showed how long-biased credit strategies could hurt everything from private equity LBO funding to some of the more crowded “market neutral” equity strategies.

One of the hedge funds that profited from the subprime CDO meltdown, Magnetar Capital, did NOT contribute to “astronomical” losses for the street; some counterparty banks simply didn’t know how to price or hedge structured credit tranches properly. As with caveat emptor, caveat venditor or seller beware – if a sell-side firm can’t manage the risk in a product, don’t sell it to clients in the first place. You can dress the credit crisis up with the exotica of Klio and Norma CDOs but basically it was poor quality financial engineering and fictitious capital rearing its monstrous Cetus-like head.

Casinos are now using something called NORA or Non-Obvious Relationship Awareness in their surveillance work. Successful investing is now very dependent on monitoring non-obvious relationships between securities. It was the key to doing well in 2007 and will be more so in 2008. This is where many err; looking at a single stock, pair of securities or one asset class when it is the ENTIRE interrelated macro puzzle that needs analyzing as well. Sometimes a stock, bond, commodity, currency or any other security goes up and other times it goes down. Predicting those moves is difficult but some can do it. Their changing relationships opens up anomalies and inefficiencies that can be exploited if you work hard enough to identify them.

For New Year I spent a few days in that bastion of statistical arbitrage, Las Vegas, the only city in the world named after a volatility metric. The usual opinion on casinos is you can’t beat the house just like conventional “wisdom” in finance is that you can’t beat the market. In general that is true since the sweat equity, concentration and aptitude required to perform such a difficult task on a consistent basis is rare. Difficult yes, impossible no. Like others I’ve taken the time to try to find an edge in picking managers and picking securities. And some people have an edge in Vegas.

As in financial markets there are slight advantages that can be developed in a few casino games to change the negative expectation of gambling to the positive expectation of investing. But it requires dedication, insight and research. Many people are aware Blackjack can be beaten but disclosure of the techniques and changes in the rules have reduced that edge. The first time I visited Vegas I had mastered basic strategy and the probabilities almost as well as Ed Thorp and could memorize cards as well as Dustin Hoffman and I did reasonably well; nowadays I am content to break even. But others have greater skill and do better than that.

Despite the increased sophistication and monitoring at casinos there are still professional blackjack players making money from innovating their strategy and developing their talent. Just like a proper hedge fund keeps refining and adapting its edges and finding new ones. Perhaps even roulette and dice games can be “beaten” if beaten is defined as having a small probabilistic bias that reduces the house’s advantage; it just takes high ability AND years of practice to do it. Skeptics can read the book Eudaemonic Pie or Google “dice control” for some basic tips though what works NOW is not going to be written about or easy to implement for obvious reasons.

Poker is a game of luck over one hand but skill over many hands. And when I looked up at the casino’s sports book I saw potential mispricings and arbitrages on the board just like on a futures exchange or page of stock quotes; but it does take hard work, an informational advantage and domain knowledge of the teams, players and horses to identify them. I’ve written before that a sports gambling hedge fund would make sense although there are larger edges available in financial markets than in casinos.

Slot machines are interesting from a risk/reward perspective. The house has the edge but that does NOT imply they should never be played. The POSSIBILITY of an enormous payout for a very low capital outlay is a different value proposition. “Experts” say that the odds of hitting a +$10 million jackpot are so remote (1 in 100 million or so) as to make them a loser’s game. But as with a national or state lottery, the probability that the jackpot will be won is 1.00, i.e. a certainty. Someone WILL win it. If you don’t play you have ZERO chance of winning but if you DO play you have an unlikely but NON-ZERO chance. Since any number divided by zero is infinity the act of risking a few bucks RAISES the probability of winning by an infinite multiple! The optimal algorithm with a lottery or a Megabucks slot machine IS to play but with small cash. Similar to buying far out of money options; even if most expire worthless, you only need one to pay out.

By complete fluke I happened to put $20 into a machine one evening and won $1,000. Deducting “fees” of 5% and 50% that is a “return” of 2,400%. So now you know what the “best” performing “hedge fund” was last year – the Nevada Slots Opportunities Fund. A stupid statement of course but sadly such unrepeatable luck has been used to market many a real fund. Naturally that return was “pure alpha” as I had the “skill” to pick the right machine in the right casino at the right time. NOT. But I have seen even sillier contentions in some fund marketing materials. There will be plenty of mean reversion in certain stock markets this year.

Suppose I had then lent the $1,000 to someone who promised to pay back $2,000 if they won speculating on local real estate. What if I assigned an overly optimistic default probability to this “trade” and launched the Nevada Credit Opportunities Fund on the back of this “amazing” mark-to-model yield? Sounds ridiculous but that is what Merrill Lynch, Citigroup, Bear Stearns, Northern Rock, Sowood and Dillon Read among several others were effectively doing in their credit businesses. Subprime borrowers weren’t “obeying” the Moody’s KMV model any more than stock markets have been rewarding investors for their “risk”.

The cold winter of the real world has not been kind to the warm summer of academic conjecture. Zero passive equity index growth century-to-date! I’ll take different strategies applied to assets rather than the “reliability” of the asset classes themselves every time. That very long term security called Gold may be around $900 today but remains far below its inflation-adjusted high set nearly 600 years ago. Gold traders and gold miner pick and shovel makers – yes, long only gold – definitely not. Take the long view? On what?

What if in 2020 or 2030 major equity indices are LOWER than today? Lost year, lost decade, lost…? High yield only makes sense if it is higher than the risk. Volatility and extended drawdowns do NOT always compensate with performance. Whenever I hear the case for long term passive investing I wonder what temporal era is meant – geological or cosmological time. Over holding periods of importance to humans I’d rather invest in alpha than gamble on beta. It just snowed today in Baghdad and Maui; “unlikely” events can and do happen.

by Veryan Allen. Copyright

Hedge fund technology?

scgadmin — Wed, 30 Nov 2011 18:20:38 +0000

Time is not money. Technology is money. The best way to predict the future is to invest in it. The only certainty is change. Technology is affecting how we invest and innovation impacts everything. Good hedge funds are inventing better ways to make money and disrupting the traditional world that has failed people so dismally. Successful investing requires flexibility so it makes sense to keep up with trends. NEW ideas have changed OLD investment strategies.

Creative destruction doesn’t only apply to business innovation it also applies to investment innovation. There has been plenty of Darwinian natural selection in fund performance and survival of the fittest recently. Past returns are not predictive for future returns and market evolution means reliance on history is NOT applicable going forward. Investment technology benefits people just like other technologies so why ignore NEW things and hope to rely on the OLD ways?

The World Economic Forum in Davos seemed rather subdued but then the REAL action was elsewhere. Hedge fund managers were at their desks with no time to head for the Alps when there were mountainous trading opportunities and valleys of risks to negotiate. Sometimes the forum provides an end-of-party short sale signal like private equity in 2007 or dotcom stocks in 2000 but little irrational exuberance this time. I was hoping there would be another “obvious, no-brainer, definitely going up, can’t lose” meme so I could short sell it.

Monetary policy should also take account of how globalization and capital flows have CHANGED the game. Economics is about maximizing the use of scarce resources and that includes how best to put money to work. The optimal utilization and protection investors’ of capital are key to maintaining economic well-being. People respond to economic incentives. Performance fees INCENTIVIZE good fund managers to do a good job, work to MINIMIZE losses and control risks.

High compensation attracts the best people to set up and join the best investment firms. Responsible investing requires having the most skilled portfolio managers and traders taking care of your money. The 2 and 20 versus 0.20 fee debate is an example of how incentives lead to better products that more closely match INVESTOR needs. Index funds and “cheap” long only funds cost investors TOO much in bear markets. Pay minimum wage to fund managers and receive back minimum performance.

More information, lower trading costs, more liquidity, more computer power, new geographies, asset classes and financial products have enabled proper diversification. One reason buy and hold looked good in the PAST, although quite poor on a risk-adjusted basis, is that in earlier decades the costs of trading and information gathering were high. There wasn’t much else to invest in other than long only but the range of opportunities TODAY is much broader. Long term performance is MUCH more important than long term holding periods. Some stock indices WENT up but WILL they now that financial markets are so different?

Formerly, many informational edges could not exceed the trading costs involved in executing the strategy but NOW they can. Commissions are lower, higher trading volumes mean less slippage and competition from national and global market deregulation have benefited ALL investors. Data gathering using machines with superior information processing capabilities have helped their human masters make and execute investment decisions. Financial innovation in the form of derivatives, structured products and hybrid securities allows risks to be sliced, diced and hedged as required. New strategies and assets have let investors FORTUNATE to be permitted to use them to get more diversified.

These benefits come with complexity which creates the need for “expensive” expertise in trading and managing these risks. Derivatives are useful trading and hedging vehicles OR weapons of financial destruction DEPENDING on the competence of those using them. Osaka rice futures and Chicago soybean futures have allowed farmers to transfer risk for generations AND built many traders’ fortunes but have also wiped out many more unskilled speculators. Equity, interest rate and credit derivatives have been hugely beneficial to end users and competent investors but do damage if used wrongly. Fire has been very important to human economic development but fire in the wrong hands can be disastrous. We still need fire though.

Societe Generale’s derivatives trader Jérôme Kerviel played with fire and lost $7 billion. I wonder if it would have been revealed if his rogue dealings had brought in $7 billion PROFIT? Curious how heavily regulated banks seem more prone to rogue traders than “unregulated” hedge funds. When it is your OWN money and own firm’s reputation at risk you are more likely to catch unauthorized trading by the troops or question numbers that are out of line with margin limits. There have been a few hedge fund frauds although the premier meltdowns like LTCM, Amaranth, Bear Stearns were due to inexperience and lack of skill NOT rogue traders. You can’t eliminate the possibility of losses but with proper due diligence and monitoring you CAN eliminate the risk of fraud AND incompetence in hedge funds.

I’ve written several posts about LBOs and CDOs but the products themselves are not to blame for losses anymore than credit derivatives. LBOs, pioneered by KKR, were a brilliant financial innovation but are too crowded now. The arbitrage has long gone. The issues that bothered me in recent years was their dependence on cooperative credit buyers, the strategy being too well-known and too much money in the “taking public firms private” trade. Similarly CDOs are potentially a great invention but it was executive arrogance, junk math, dubious pricing, mad modeling and ridiculous risk management that were the problems NOT the idea behind the products themselves.

The credit crisis is one factor that has led to the present economic situation. It looks like we are going to get some kind of stimulus package though whether it will be the catalyst for the necessary change in sentiment is anyone’s guess. Rate cuts help banks with steeper positive carry, assuming credit worthy clients still exist and want to borrow, but the primary idea is that low rates spur spending and investors to move into riskier assets.

The possible flaw with this economic antidote is that when real estate and credit markets are performing even worse than stock markets then risk aversion can INCREASE. If your 401(k) statement shows a much lower number than the previous one and that house nearby just heavily reduced its asking price, a money market yield of 2% can START to look attractive compared with heading to the shopping mall or buying into the “stocks are cheap” sales pitch. Stocks can get MUCH cheaper but more importantly so can real estate.

Recession or not, stock markets ANTICIPATE problems and portfolio drawdowns change the economic outlook. Bear markets are “defined” as a drop of 20% but does it matter? A 20% fall is a huge loss already and needs a 25% rally just to get back to breakeven. So whatever economic scenario transpires, a fall of that magnitude for long only equity portfolios is not only unacceptable but also unnecessary. The appropriate use of hedging instruments and new investment strategies ought to have made such portfolio volatility obsolete by now.

Whether we are in a bear market or a recession is just semantic debate. Traditional equity, credit and real estate investors HAVE lost money and that WILL change behavior. The Fed has been criticised for “panicking” last week with a 75bp cut after heavy selloffs in Asia and Europe after the Societe Generale debacle but they probably had no choice given the circumstances. If Ben Bernanke had NOT cut, the US stock market would likely have lost 7-8% that day or 1,000 points on the Dow. Such a drop in a single day would have had a very negative impact on investor psychology. Central banks try to protect the economy and stock market fluctuations have a direct and immediate effect on economic well-being.

Doubly damaging is that not only have traditional strategies failed to preserve investors’ capital but inflation is raising the cost of living. Reduced savings and less spending power are not a recipe for growth. Many analysts like to focus on a misleading metric called “core inflation” which EXCLUDES food and energy prices. So according to economists, as long as you don’t eat, don’t use any form of transportation and don’t heat your home in the winter, insidious inflation is indeed “moderate”! For those of us outside the ivory tower in the harsh cold of the real world, let’s hope stagflation is avoided. Six months ago some said credit contagion was “contained” and we know how that absurd assertion turned out.

Even if someone avoids new assets, structured products and hedge funds themselves I don’t think anyone can dispute that such disruptive technologies have impacted market dynamics. You may dislike dark pools, derivatives, decimal point price increments, deregulated commissions and day traders as well but they have changed how securities fluctuate. A buy and hold investor is affected by new strategies and trading technologies whether they want to be or not. New ways of preserving wealth are like new ways of preserving health. But just as there are quacks and charlatans in medicine, there are plenty of good doctors in HEALTHCARE and talented fund managers in WEALTHCARE.

Financial and medical technology have other parallels. There was once a time when innovative surgeons were ridiculed for their “radical” ideas of washing hands and using anaesthesia before operating. Technological innovation in HEALTH management has benefited everyone. Why then in WEALTH management do many financial advisors remain in the stone age world of ~~prehistoric~~ “modern” portfolio theory? Hedge funds and derivatives are not fads and can assist in REDUCING market exposure BEFORE bad things happen. Portfolio immunization prevents economic diseases like recessions and inflation sickening investors.

“Hedge fund” is a loaded term these days so rebranding them simply as “diversifying skill-based strategies” would help. New investment technologies that seek, but do not guarantee, to produce absolute returns even if underlying asset classes fall apart. Some will deliver and many others won’t but ALL investors need strategy diversification in their portfolios. As for “derivatives”, they enable risk transfer from those that DON’T want an exposure to those that DO. Derivatives may be dangerous in the wrong hands but they are very useful and EVERY investor needs them.

Data-driven prediction and market anomaly detection are necessary for consistent returns. Systematic trading strategies like quant funds are in the news again because some weak models weren’t properly tested for bearish conditions. Maybe it would be better to rebrand quantitative investing as carbon-based organisms outsourcing the more tedious aspects of security analysis, data gathering and trade execution to silicon-based organisms. Failing to make use of robust quantitative strategies and modeling techniques is a bit like refusing to use electricity or email. And why get one of those “unecessary” computers when sliderules have been so useful for so long? Society moves on.

Artificial intelligence complements human intelligence. Alan Turing didn’t have financial markets in mind when he did his work but computerized traders can mimic and often “think” better than many human traders, thereby satisfying the Turing Test as far as trading is concerned. It may be a while before computers can pass for a human in natural language processing or other endeavors but in finance the Singularity isn’t near, it’s already here.