World Beta Blog

I largely agree with Jim Rogers in the video from Bloomberg, and this article from John Hussman.

In other news, my roommate is Canadian, and he will be buying happy hour today. Canadian Dollar hits parity:

I have written a great deal in the past about foreign listed hedge funds. As far as private equity vehicles go, there are only a few. I don’t like PSP, and IPRV.L (fact sheet here) is traded in London (IPRV is the ETF Barclays launched based on the S&P Private Equity Index).

It is interesting to note that a mutual fund has launched a fund that invests in listed private equity funds. Here is the homepage for Vista Research and Management. Here is an information sheet for the fund, and here is the fund brochure. I would like to see the top holdings before investing in the fund, but from the literature it looks like they will be targeting the foreign listed private equity funds instead of just the management companies.

Both PowerShares and Barclays have filed to list two new ETFs that will invest in the foreign listed funds as well.

Home of the “Figure-4 Process”?

This website is simply amazing.

From the website:

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Brad Zigler has a great article over on SeekingAlpha on the S&P Case/Shiller housing futures – “Does Hedging Make You A Chicken?“.

(For more info on housing futures, check out the MacroMarkets site and the S&P Case/Shiller site.)

The most interesting chart from the Merc website is the correlation table below which basically shows that housing is negatively correlated to the major asset classes, and has zero correlation with REITs. (I ran a quick calc and found a .3 correlation with the GSCI).

Instead of hedging, I would think someone running a big enough beta allocation program would want exposure to housing as an asset class – possibly by dividing the real estate exposure into housing and REITs.

I see no reason why the timing model would not work for the housing futures as well. Out of curiosity I plugged in each of the markets into a simple 10-month moving average model and here are the results. It would make more sense to me to hedge when the markets were on a “sell” signal. (June 2007 values.) Atlanta, Charlotte, Portland, Dallas, and Seattle are at all time highs. Detroit is the furthest from its high at -13.76%.

Phoenix – Sell
LA – Sell
SD – Sell
SF – Sell
Denver – Buy
Washington DC – Sell
Miami – Sell
Tampa – Sell
Atlanta – Buy
Chicago – Sell
Boston – Buy
Detroit – Sell
Minneapolis – Sell
Charlotte – Buy
Las Vegas – Sell
NY – Sell
Cleveland – Sell
Portland – Buy
Dallas – Buy
Seattle – Buy
Composite – Sell
Composite 20 – Sell

Here is an equity curve if you were trading the 10-composite housing futures since 1987. Slightly better returns with less risk. The timing model would have exited in October 2006.

A couple other interesting notes from the historical data (and a big caveat, 20 years of data is a small sample to draw conclusions from):

The composite had a best year of 18.69% in 2004.
The composite had a worst year of -4.57% in 1990.
LA experienced 6 negative years in a row from 1990-1996.
Chicago has not had a down year since inception.
The worst single year for a city (10 composite) was -10.71% for Boston in 1990.
The best single year for a city (10 composite) was 31.16% for SF in 2000.

Momentum seems to persist. For years that were positive the year prior, the average return for the composite was 8.75%. For negative years the average return the following year was -0.04%. For individual cities, the returns are and 8.4% and -1.51%. Bad news for SD, SF, Denver, D.C., Boston, and NYC.

PS When are we going to see some MACROshares ETFs for the housing market?

Sounds like a Harry Potter title doesn’t it?

ORB actually stands for “Opening Range Breakout”, and is part of the title for an out of print book by Tony Crabel – “Day Trading With Short Term Price Patterns and Opening Range Breakout”. This book can be had for the bargain price of $500 on Amazon.com. Here is a description:

“Explains the importance of detailed studies on price patterns. Attempts to find forecastable events based on the relation between opening, closing, high and low prices. Includes computer-tested answers to many common short term trading questions. Consists of 5 sections: 1) opening range breakouts, 2) short-term price patterns, 3) patterns of expansion and contraction, 4) combination of price patterns with expansion and contraction patterns, and 5) openings and closings that occur in various segments of a price bar; includes the results of computer analysis for each topic. “

A list of some of the patters mentioned in the book is at the bottom of the post (many software vendors have the patterns coded/bundled into their software). Personally, I would just shell out the $30 and buy the bundle of eight articles he wrote for the magazine “Technical Analysis of Stocks and Commodities”. I read these articles years ago when I was working on stat arb systems. There are also free file sharing sites abound that have digital versions of virtually any book. (A more recent treatment of short term trading strategies can be found in the voluminous work of Larry Connors.)

How has Crabel actually performed? (He worked with Vic Niederhoffer at one point.) He has four programs listed on IASG with AUM over $3 billion. Below is an equity curve for his longest running program, diversified futures:

Average returns of 8.7% with vol of around 6%. Pretty decent low vol performance.

It is interesting to note that Brett Steenbarger over at TraderFeed even goes on to mention that “less well appreciated is that Crabel’s book is explicitly founded on the base of Ayn Rand’s epistemology.”

Other expensive titles include:

“Margin of Safety” – $1,000
“Mosaic” – $400
“Being Right or Making Money” – $800

—-
CRABEL ORB Setups:
NR; Narrow Range – Today’s trading range was narrower than the previous days range.
NR7; Narrow Range 7 – Similar to the NR. The range was the narrowest compared to the last 7 trading days.
WS; Wide Spread - Exact opposite of the NR. Today’s trading range was wider than the previous days range.
WS7; Wide Spread 7 – Similar to the WS. The range was the widest compared to the last 7 trading days.

Inside Day – Price bar in which the high is lower than the previous days high AND the low is higher than the previous days low.
Outside Day - Price bar in which the high is higher than the previous days high AND the low is lower than the previous days low.
IDnr4 - An inside day with the narrowest trading range in the last 4 trading sessions.

Bear Hook – NR with Open < Previous Low and Close > Previous Close.
Bull Hook - NR with Open > Previous High and Close < Previous Close.
Stretch – The 10 period SMA of the absolute difference between the open and either the high or low, whichever difference is smaller.

Homebuilders are down almost 70% from their highs. Time to buy, or would you be simply catching a falling knife?

Below is a chart of the Dow Jones Home Construction Index, currently the worst performing industry YTD at -50%. It is down roughly 67% from the high. If it continues along the lines of the NASAQ decline (roughly -78%), then the index could bottom around 240 from the current 370. That translates to approximately $14 for the ITB ETF that tracks the index (XHB is SPDR S&P Homebuilders version).

{Nod to Bespoke for the original post.) Chart of the Dow Jones Home Construction Index is below – from BigCharts.com.

Is it time for the Old Guard to disappear into the sunset?

I blogged in July about the news Rentech was planning on moving into the managed futures space in a big way. Talk about good timing – since that time many of the largest futures funds have been hemorrhaging money.

Two of the oldest and most famous managed futures managers, Dunn and Henry, are getting pummeled this year. Dunn is in a 40%+ drawdown the past two months, and is down 4 of the past 5 years(5 negative years in the combined futures programs) with AUM shrinking to near zero. Charts courtesy IASG.com.

Campbell is in its largest drawdown in 13 years (albeit only ~17%).

Chesapeake is down over -20%, Superfund over -25%, Mulvaney -35%, and Henry hasn’t had a positive year in some of his programs since 2002! Spending too much time watching the Red Sox?

Ok, who is having a good year? The Rydex Managed Futures (RYMFX) fund is up slightly since it launched about 6 months ago (and Greg Newton examines the fund in his article “Correlated With Nothing At All“). Quantitative Investment Management (run by some fellow Virginia alums) is up 17% with no down years since inception:

Eckhardt is up ~6% and hasn’t had a down year since 1999 (And Covel’s new book should be shipping in the next month – a 2nd perspective on the famous Turtle experiment):

If this new academic paper is true, I should be managing billions and shooting the lights out! (Although if wheat continues its trajectory towards the moon, I may just have to move this operation to our farm in Kansas.)

ABSTRACT

Using a large sample of hedge fund manager characteristics, we provide one of the first comprehensive studies on the impact of manager characteristics, such as education and career concern, on hedge fund performances. We document differential ability among hedge fund managers in generating risk-adjusted returns and flow-chasing-return behaviors among hedge fund investors. In particular, we find that managers from higher-SAT undergraduate institutes tend to have higher raw and risk-adjusted returns, more inflows, and take less risks. We also find that younger managers tend to have higher returns, more inflows, and take more risks. Our results provide supporting evidence to some of the assumptions and implications of the rational theory of active portfolio management of Berk and Green (2004). However, in contrast to the results for mutual funds, we find a rather symmetric relation between hedge fund flows and past performance, and that hedge fund flows do not have a significant negative impact on future performance.

Besides having one of the best moustaches around, Mohamed El-Erian is one of the elite investment managers in American today. (I tried a moustache for a week and looked like a really creepy pedophile.) Which is why it is shocking that he has decided to abandon his post as the manager of Harvard University’s $35bn endowment to return to his former employer PIMCO after less than two years on the job. (Here is some more info on the “Endowment Style” of investing.)

The FT reports that the move positions El-Erian as the heir apparent to CIO Bill Gross. El-Erian’s new title is co-CEO, and he has stated that he was “returning to southern California to be closer to family.” That is the investment version of the excuse for most marriages ending – “irreconcilable differences”.

I think the real reason is that Bill Gross shaved his moustache and PIMCO needs a new moustache-wielding poster boy for the company. A friend of mine said they will be passing out these hats upon his return.

Some of the biggest PIMCO funds are:
PTTAX Total Return
PASAX All Asset
PRTNX Real Return
PCRAX Commodity Real Return

Fun fact of the day: Bill Gross paid his way through college by counting cards in blackjack on the shores of Lake Tahoe. I tried the same thing 40 years later, and let’s just say it has gotten a bit tougher. Besides getting regularly evicted from the casino, my winnings totaled about one ski pass (although if you have ever skied Squaw, that’s not too bad). Here is an article on the topic, and from an article on theStreet.com:

TSCM:It’s rumored that your career in finance began as a blackjack counter in Las Vegas. How is managing fixed income like counting cards?

GROSS: It’s more than a rumor; it’s a fact. Basically, gambling and money management are pretty much the same. In each, the goal is to spread the risk and avoid becoming emotional while staying focused on the odds.

Vegas taught me that I could beat the system with a combination of hard work, coming up with ideas that no one has yet thought of, and the ability to tolerate a constant routine others would definitely find tedious.

It never occurred to me to publish any of my research (or write a blog). My paper that I published earlier this year, “A Quant Approach to TAA“, was originally an afternoon spent trying to verify the results of some backtests at Merriman’s FundAdvice website. In fact, I only completed the paper to finish the CMT designation (and avoid taking the Level 3 test). Most of my research either ends up in the wastebasket or unpublished.

I thought it would be interesting to see if anyone is reading the paper, and SSRN keeps a tally of all the downloads and abstract views. Currently, the paper has been downloaded 5213 times. That places the paper 6th overall in total downloads for the previous 12 months. The top five papers are (and yes, that really is the title for #2):

‘I’ve Got Nothing to Hide’ and Other Misunderstandings of Privacy – DANIEL J. SOLOVE

Fuck - CHRISTOPHER M. FAIRMAN

Market Efficiency, Long-Term Returns, and Behavioral Finance - EUGENE FAMA

Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure – MICHAEL C. JENSEN & WILLIAM H. MECKLING

The Worldwide Equity Premium: A Smaller Puzzle – DIMSON & MARSH & STAUNTON

and rounding out the top 10 at #10 is:

Porn Up, Rape Down – ANTHONY D’AMATO

As far as total downloads all time (there are roughly 130,000 full-text papers and 80,000+ authors), it is getting ready to break into the top 100.

It is currently behind “The Sarbanes-Oxley Act and the Making of Quack Corporate Governance” and ahead of “The Development Of Corporate Performance Measures: Benchmarks Before EVA“.