World Beta Blog

Did you know French and Fama hold a Q&A on their blog (though they call it a forum) ?  Text from a recent entry here:

EFF/KRF: A stock’s price is just the present value of its expected future dividends, with the expected dividends discounted with the expected stock return (roughly speaking). A higher expected return implies a lower price. We always emphasize that different price ratios are just different ways to scale a stock’s price with a fundamental, to extract the information in the cross-section of stock prices about expected returns. One fundamental (book value, earnings, or cashflow) is pretty much as good as another for this job, and the average return spreads produced by different ratios are similar to and, in statistical terms, indistinguishable from one another. We like BtM because the book value in the numerator is more stable over time than earnings or cashflow, which is important for keeping turnover down in a value portfolio.

Nevertheless, there are problems in all accounting variables and book value is no exception, so supplementing BtM with other ratios can in principal improve the information about expected returns. We periodically test this proposition, so far without much success.

I will be in NYC the week of November 7th, and as always, let me know if you want to meetup.

I will also be speaking at this one day quant global macro conference.  There are going to be some interesting speakers chatting about about some timely topics including tail risk, risk parity, currencies, and TBD (mine!)  :

Summary of the program:
8:00am Check-in/Registration with Continental Breakfast

8:30am Dr. Wai Lee, Neuberger Berman, “Risk On – Risk Off”

9:20am Alessio de Longis, Oppenheimer Funds, “Yield Differentials as Currency Driver: The Role of FX Hedge Ratios”

10:30am Lars Nielsen, AQR Capital, “Chasing Your Own Tail (Risk)”

11:20am Mebane Faber, Cambria Investment Management, topic TBA

1:00pm Professor Francis Diebold, University of Pennsylvania, “Measuring Financial and Macroeconomic Connectedness”

Lunch is included in the registration fee.  Exact order and timing of presentations is subject to change without notice.  Full details on each speaker and presentation are available through the links to the right.  SQA Members $300; IAFE Members $375; Nonmembers $400; full time Students $100 (must present student ID at check-in).  Early registration ends 11/6/11 so register now before prices increase!

I am still shocked no one has stepped up and offered a number of solutions for managed futures packaged as ETFs.  I get that CTAs are loathe to give up their 2 and 20 fees, but CTAs (like many hedge strategies) can be distilled into a few rules based systems.  While Sperandeo’s indexes (now S&P’s in forms like LSC and WDTI, but also mutual funds and sep accounts, although they have their own problems) have garnered a few billion, I fully expect lower fee entrants to come into the space – I’m just amazed it hasn’t happened yet.   Where are the Dunn’s and Henry’s of the world here?  Mt. Lucas?  Conquest?

I understand why some have not done it (ie don’t need to over $10B like Winton, Transtrend, BlueCrest etc), but if I was a CTA I would launch a “lite” version on the NYSE.  I know some don’t want to deal with the SEC but a few simple alternative beta funds (1x-3x) launched at 50bps would raise > $1B in the first year.

Would love to hear from my friends in the CTA world as to why they haven’t hopped on board…

Great read from Rob at Research Affiliates in the recent issue of Fundamentals:

“If we finish 2011 with 3% core inflation, 4–5% total inflation, and 3% three-year total inflation, the Fed’s ammunition will be tapped out. If the Fed runs the printing presses in the face of 6–10% true inflation, we are flirting with hyperinflation.”

Read a couple fun reads on the plane, both focusing on investing anomalies (one quant equity, one all trading).

Both fun reads!

The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies

and

Beyond the Random Walk: A Guide to Stock Market Anomalies and Low-Risk Investing 

I was going to construct all three of these for say G-7 and maybe G-20 (with both combos and individually by country), but before I do is there a resource that updates them already?

I know Hussman and Fisher talk about them a bit, and maybe they are on Bloomy but I have yet to be able to find them yet…

Interesting interview with Raj out of Newsweek today.  Back when I was really starting to look into 13F data mining I always would poll hedgie friends where they would most like to have their money and Galleon would always come up.  Oddly, it was always one of the very worst to clone (to which I just attributed, incorrectly,  that they were trading too much).

I just recently learned of (another) friend/acquaintance getting arrested lately.  Shockingly to me, I have known an unfortunate amount of people that have been in jail for various reasons. When I was interviewing with hedge funds coming out of college I got fairly far along with a biotech hedge fund that was seeded by Soros.  Long story short, I didn’t get the job – which turned out to be a godsend when the PM and CFO “inadvertantly” bought up about 70% of two biotech stocks without ever disclosing the stakes.  Needless to say they both paid some fines and spent some time in jail (may still be there, I’m not sure).

From Clay Christensen’s address to the 2010 HBS class (a very highly recommended read “How Will You Measure Your Life?“):

“On the last day of class, I ask my students to turn those theoretical lenses on themselves, to find cogent answers to three questions: First, how can I be sure that I’ll be happy in my career? Second, how can I be sure that my relationships with my spouse and my family become an enduring source of happiness? Third, how can I be sure I’ll stay out of jail? Though the last question sounds lighthearted, it’s not. Two of the 32 people in my Rhodes scholar class spent time in jail. Jeff Skilling of Enron fame was a classmate of mine at HBS. These were good guys—but something in their lives sent them off in the wrong direction.”

Nice chat on the machines and the d-process with Charlie Rose, and lots more links and reading on Hedge Fund Letters:

(One of the benefits of being in freezing Berlin for the week is that I am getting a lot of writing done.  Just finished a paper on investing in stocks and hopefully it will be out soon.  What a beautiful city this is (as was Paris), and looking forward to some great food, beer, and meetings this week.)

I like reading Joel Greenblatt’s books, and there is a nice summary from the recent VIC where Greenblatt presented here (referring to Tilson’s Value Investing Congress, different than Greenblatt’s Value Investing Club (recent post here) which is confusing since Greenblatt is speaking at Tilson’s).  I often see references to Greenblatt’s Gotham Capital returns over 20 years – 40% a year.  If true, those are some of the best returns in the history of markets.  Indeed, an investor in his fund would have seen returns of almost two orders of magnitude above his initial investment.  ie assuming the fund was started at a reasonable $10mln, after 20 years it would be worth $8.4 BILLION.  That is without any withdrawls or additions of course.  Although my best guess is that the fun was small, existed largely during the go-go ’80s and ’90s, maybe used a little leverage, and paid out regular distributions.  Regardless, those are awesome numbers.

To see just how difficult that is check out the great blog post by my buddy Wes at Turnkey Analyst:  Mission Impossible:  Beating the Market Over Long Periods of Time.  (Also lots in the blog archives on the difficulty of sustaining alpha returns…)

From the Turnkey Analyst Blog:

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 halfof the ENTIRE stock market.
• 33%+ returns imply that an investor will end up owning the ENTIRE STOCK MARKET!
• A 40% return will have you owning the entire stock market in ~60 years–not a bad retirement plan!
• A “doable” 21.5% a year implies an investor will own .62241% of the market at the end of 2010. With a $16.4 trillion total market value as of December 31, 2010, this would imply a personal stock portfolio worth $102 billion!!!
• 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!

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?