Most if not all advertising by financial services businesses is aspirational rather than functional. That is, the quality of the product is secondary to what it can do for your image and lifestyle.

Usually the spots that pass with numbing regularity on Bloomberg news are no more than metaphorical honey traps for the retail market. But today there exists one spot that takes it a stage further.

Interactive Brokers has a suite of products and services offering excellent functionality. Yet they have settled on this way to sell them:


To summarize:
  • Boys - if possible, fit school in around your trading. Get rich with trading. Get the girl. 
  • Girls - find Skippy.
Hey. IB. Leave those kids alone. 

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Which hedge fund strategy?

Monday, March 14, 2016 | 0 comments »

An earlier entry pointed out how many sub-strategies there are under the title ‘long/short’. Take one step back and consider this table from the 2016 Preqin Global Hedge Fund Report (click for larger version):

The table continues for an entire second page but this half makes the point: that’s a lot of strategies before any examination of sub-strategies.

For those who like steady returns with as few shocks as possible ranking this list by the 5 year net return/volatility columns produces is a clear winner in the equity class: RV Equity Market Neutral (our yellow highlight). It is not the best on that ratio overall: two credit based approaches formerly best known for Jenga cameos in The Big Short pipped it.

The top 10 strategies on the return/volatility ratio look like this (click for larger version): 

If drawdown is your nemisis the list may be useful reference point when selecting approach.

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Long/short – what could go wrong? Hedged positions, protection etc etc etc. And yet there are headlines like this one:

Here’s Why Long / Short Hedge Funds Are Getting Hammered

One of the problematic aspects of such an approach is that “long/short” is a hard category to define – and there is no consensus around the term. Which leaves plenty of room for whatever headline one wishes to shock and amaze with.

The IAM took a stab at the definition in cooperation with the LSE's Financial markets Group a few years ago. They produced the following classification table of hedge fund strategies:

A cursory examination will show that Long/Short is a broad church. And complicating matters are those of its disciples who regularly trek over to the neighbouring tabernacle of Relative Value to worship.

Thus probably it is worth defining precisely what class of strategy is being analyzed before daubing all L/S with the same brush.

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It frequently is to those in the hole. Or as Professor Thaler  of The Big Short fame says:

“Just buying cheap stocks doesn’t do you any good unless they get less cheap soon”
So consider value as an investment category. Words to the effect that “the market always recognises the economic fundamentals of sound enterprises in due course” are part of the strap lines of value managers: intrinsic value against market prices; 60 cents for a dollar; and so on.

In overvalued and irrationally exuberant markets this approach frequently provides poor returns relative to benchmarks as market participants suspend good sense. Still, after the fallout of such episodes the value manager’s reputation as a paragon of sober logic is burnished.

And thus the proposition that the oft mad market will come round and fully price the fundamentals of a value enterprise remains seductive. So much so that the possibility of the fundamentals coming round to align with prices is frequently overlooked.

Yes, time does not heal all mispricings. Much can (and does) go wrong as it elapses - and as the architecture of financial markets evolves.

Last week, for example, Francis Chou was reported by Bloomberg as returning his 2015 advisory fee in an act of solidarity with his investors who lost 22% in his Opportunity Fund. Mr. Chou had a poor 2015 but, historically, is a strong value manager - as he points out in the article by referring to his great long-term record. Nonetheless, 22% is quite a drawdown to ascend in reasonable time without taking excessive risks.

An outlier? Some readers may be thinking “Warren Buffet” just about now.  Below is a chart of Berkshire Hathaway’s performance versus the S&P 500 on a rolling 5 year basis.

Source: Berkshire Hathaway annual letter, 2015

Even the King of Value has found the job tougher and tougher since the turn of the century.

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