World Beta Blog

If you read the paper we linked to a few weeks ago you know that institutions are just as bad at timing as you are.

Now there is an article in the WSJ that goes to show pensions are shifting their allocations away from equities into bonds that yield next to nothing.  The difficult part of this equation is that most of these funds still expect a 6-8% return on their portfolio.  Not sure where that is going to come from out of the magic alpha ether.

Will their timing be fortuitous?  History is not on their side.

Sortable pension table here.

Economist link to public pension funds here.

I think this is a brilliant website.

Five Books

Some of my favorite compilations so far and books that I ordered today (dammit):

Risk Management – Graciela Chichilnisky

Catastrophe: Risk and Response

Frozen Desire: Meaning of Money

Investment - Marc Faber

The Economics Of Inflation – A Study Of Currency Depreciation In Post War German

Collected Works of Jules Verne

Crises - Gary Gorton

A Brief Popular Account of All the Financial Panics and Commercial Revulsions in the United States, from 1690 to 1857

History Of Crises Under The National Banking System (1910)

Crashes – Charles Morris

Saving the World – Nicholas Kristof

Science – Lewis Wolpert

Risk

Other:

Frozen Desire: Meaning of Money

An Analytic Assessment of US Drug Policy

From the NYT:

“The decline has been painful for the Japanese, with companies and individuals like Masato having lost the equivalent of trillions of dollars in the stock market, which is now just a quarter of its value in 1989, and in real estate, where the average price of a home is the same as it was in 1983. And the future looks even bleaker, as Japan faces the world’s largest government debt — around 200 percent of gross domestic product — a shrinking population and rising rates of poverty and suicide.”

AAPL, MO, and MCD all hitting new all-time highs…

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I just attended another great Value Investing Congress in NYC, and here is a roundup of some links:

From Abnormal Returns:

Key takeaways from the Value Investing Congress.  (ValuePlays and MarketFolly)

The short case for St. Joe (JOE) from David Einhorn.  (Money Game, Dealbreaker, Market Folly)

An extended profile of activist hedge fund manager Bill Ackman.  (Reuters)

and from the article Facebook for Finance:

“In practice, though, sharing has long been one of the most important ways that fund managers discover new investment ideas. Private “idea” dinners and gatherings like the twice-annual Value Investing Congress, launched by Whitney Tilson and John Schwartz, have long been a staple of the business. In a 1988 academic paper, written back when social networking meant working the cocktail party circuit rather than friending somebody on Facebook, Yale University economist Robert Shiller and then–Harvard economist John Pound found that roughly 53 percent of the institutional investors they surveyed attributed their initial interest in a stock to another investment professional. When the inquiry was limited to a small sample of stocks that had experienced rapid price increases, 75 percent of the investors traced the origins of their ideas to fellow fund managers.”

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Seven Deadly Innocent Frauds of Economic Policy

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The originator of the “razor blade” model of selling didn’t follow it. (HT: AF)

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I’ve used a simple betting strategy to win our office NFL pool most weeks.   It simply fades the consensus picks.  Online books and betting websites have been publishing this data since the early ’00s, and now it looks like there is some empirical evidence that backs up this supposition from the website Sports Insight.  Now, these %ages will not help you in Vegas (you need to win roughly 55% of the time to overcome the vig) but they may help give you an edge in your office pool.  Note that since your competitors are likely following the consensus, any win will likely distance you from the rest of the field as well creating an outlier that should help to separate points from the pack.

The website lets you download the data (for a $) so you can run your own quant analysis.  Report back with any interesting findings!

Nice interview with TCU and Investure folks on CNBC.

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French Fama on moving averages: “An ancient tale with no empirical support.”

This really surprised me.  I have read dozens of academic papers in support of trendfollowing (including my own) as well as a ton of unpublished literature.  It is a strange quote from Fama, who finds that momentum is the most predictive of his four factors and is on paper saying that he is open to analysis “if it is in the data”.

MarketSci has been doing a ton of great work here in the past few weeks.

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A great post by Holt over on AllAboutAlpha regarding hedge fund transparency. Hedge fund paranoia over disclosure is unfounded.

The Impact of Mandatory Hedge Fund Disclosure

Abstract:
In this paper, we examine the use of hedge funds’ 13(f) filings by market participants. While many argue disclosure could harm investment funds, we find hedge funds largely benefit from disclosure while providing little private information to the marketplace. We detect abnormal trading volume around disclosure dates and also find significant, positive abnormal returns immediately after disclosure, suggesting the presence of copy-cat traders. We also find some hedge fund companies have significant volume changes on their positions prior to their disclosures. A long-short portfolio of these companies’ expanded-contracted positions purchased prior to the disclosure date earns positive, significant abnormal returns through the disclosure period. Finally, we find no evidence disclosed holdings offer long-term investors access to profitable information.

A lot of goofy quotes in here but I like this one:

“No strategy is so good that it can’t have a bad year or more,” Asness says. “You’ve got to guess at worst cases: No model will tell you that. My rule of thumb is double the worst that you have ever seen.”

Paper from last year that I am just seeing:

Absence of Value – Stewart et al

I will be in NYC next week – drop me a line if you want to meetup!

AQR, who has been pretty innovative in launching a number of what I would call alternative beta funds, just launched a risk parity fund – AQRNX, AQRIX.  (HT:AP)  We’ve been writing about the topic of risk parity on the blog since 2006 and I’ll include some background links below.  I asked the q a long time ago why someone didn’t launch an all weather type of globally diversified fund (although they should only charge about 20-50 bps tops vs 1.25% which seems high for a buy and hold strategy).

Fact Sheet here

Homepage here

A couple other views on risk parity below:

I Want to Break Free – James Montier

The Hidden Risks of Risk Parity Portfolios – Ben Inker GMO

Engineering Targeted Returns and Risks – Bwater

The Biggest Mistake In Investing – Bwater

Risk Parity Portfolios - PanAgora

Risk Parity PPT– PanAgora

The King of Quants
GTAA Q2
Risk Parity Q3
Risk Parity Q2

And an article from Quantext, “Getting the Most Return for Your Risk“.

I wholeheartedly agree with the author that a good buy and hold asset allocation can get you to about a 1:1 ratio for return to volatility. With a few tweaks (like risk parity) you can do slightly better, but not a lot better without resorting to active management.