Pretty good numbers crunching valuations carried out here, with some event-conditional Yahoo/Softbank/Alibaba scenario-ing, and a useful table with a handy and quick YHOO/BABA price ratio heuristic: Imma Be a BABA Bull: Yahoo, the Morning After
yahoo_valuation_table
So. Go YHOO/BABA? (long YHOO/short BABA)
What’s the stock borrow fee like on BABA, and is it even available for short borrowing?
How many “relative value/event arbitrage” traders got killed putting on the long 3Com/short Palm value trade 15 years ago…
The Cult of Loss Aversion: A Call to Rethink Risk in Global Macro Investing
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In the wake of a traumatic loss, whether it is financial or personal, it is just human nature to overcompensate to make sure the experience is not repeated. But while that is understandable, it is rarely the best response. And so it has proved for many hedge fund investors over the past few years. While one could argue that each of the investor responses highlighted above has damaged investment performance, this article will focus on one specific issue: the cult of loss aversion in global macro investing.
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The result has been a concentration of assets under management (AUM) amongst a few very large funds, many of which fetishize loss avoidance over all other factors in trade selection and risk management. Of course, risk management is an important part of any robust investment process. However, in modern macro investing the cult of loss aversion is becoming counterproductive given the fundamental and market outlook.
These days, most macro managers can be more accurately described as ‘hedged’ than ‘absolutely discretionary return’ investors. When legendary traders such as George Soros or Stanley Druckenmiller were making a name for themselves in the British Pound or Equities (yes, he was long a lot of them) they did not have a “hedge” against those positions because they truly believed in them. Sadly, very few macro managers have this level of conviction these days. They are too worried about taking a loss rather than a making huge profit.
In a world of many independent opportunities and a widely-dispersed asset base, it is completely rational for firms to use tight trade- and portfolio-level stop losses, because with rare exceptions (such as during times of acute market volatility) each stop loss decision has little bearing on the behavior of the market as a whole. Unfortunately, this does not describe the current state of the market.
Thanks to the static monetary policies operating in many major economies, there are relatively few independent investment opportunities with sufficient market liquidity to absorb a thematic allocation from a large global macro fund. As a result, the few such trades that do exist very quickly become over-crowded, particularly by the few large funds that dominate the AUM base of the strategy. Unfortunately, this leads to paranoia and a fear of loss rather than a healthy balance between risk taking and risk management.
When the markets do move, portfolio managers are incentivized to take profits or reduce risk very quickly. Why? Because macro investing has become a game of musical chairs, where investors need to make sure they are not the one caught out when the music stops. Those on the right side of the market, aware that most of the past five years have been characterized by range trading in foreign exchange and fixed income, move to ensure that they do not drawdown their investment gains. Those with losing positions, on the other hand, do not feel able to view markets through a value prism, and instead worry about the possibility of hitting their modest loss thresholds, and thus closing out positions at disadvantageous levels. Consequently, the de facto “macro” time horizon has been compressed into a few hours to a few weeks, leaving relatively few able to capitalize on the thematic gains that have traditionally characterized the strategy.
Although generating a 10%-12% gross return should not be a particularly hard target in an environment where risk parity funds have produced 20%+ annualized gains over the last few years, the current focus on loss avoidance above all else has condemned the macro strategy to a performance that is mediocre at best. If a portfolio manager is unable to weather a 5% drawdown without having his risk allocation cut or eliminated, how is he to participate in the type of trades that generate double digit returns? The answer is he cannot. Unfortunately, what is individually rational (i.e. cutting risk quickly to avoid hitting drawdown limits) has proven to be collectively irrational as the industry careens from stop-loss to stop-loss.
This negative feedback loop has provided even more incentive for investors to allocate elsewhere, and very often to managers dedicated solely to one asset class, including funds that are far less focused on loss aversion or a metric like a Sharpe Ratio. Remember, investors can market returns. They cannot market a Sharpe Ratio.
It is ironic that the macro strategy has lost its way considering the opportunity for out-performance from some of the big themes of the last four years – long Equities (yes that is a macro investment), long Interest Rates, long Credit, and short Volatility – was very large. These were strategies that in previous cycles made big profits for the macro managers who got them right.
They can do so again. That is why the call right now should be to re-think how investors look at risk. What investors should demand from their managers is a return to old-school macro investing, where themes are given time to play out, portfolio turnover is significantly reduced, and more focus is placed on absolute returns at the expense of fetishizing drawdown limitation.
At the very least, investors should take a look at the macro managers that have evolved post the Global Financial Crisis. A new breed of portfolio managers are emerging who are “risk conscious” and use their expertise in derivative products to add both edge and control to concentrated investing. True, their absolute AUM pales in comparison, and certain strategies may have liquidity constraints in terms of scale, but it is becoming easy to identify this group of “risk conscious” managers from those simply focused on loss aversion.
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Ahh… The last highlighted and underlined point: my marketing edge in my pitch deck?
Ha!
Others turn up their noses and bad-mouth the currency: Japan is eating its own capital
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But the more important question is: Which has been, and will be, the better trade – the short Yen trade, or the long Nikkei trade?
The Mid-Autumn’s night of the fullest moon. A time of celebration, reunion, and love. But it’s been a chilly pensive day, and sky overcast and yellowed, moon wanly and balefully lit, night.
The heart is heavy and full.
Whenever the flowers are in bloom and the moon is full, sad thoughts enter our minds. After the flowers are no longer in bloom and the moon is no longer full, the people begin to disperse. The festive atmosphere departs for the distant cloudy skies, and we are cut off from the past as if from a hazy dream that we cannot recall. The vibrant spring colors of the grass and trees succumb to the chaotic red shadows of fall. As they begin to chirp, the chickens’ songs become melancholy. We wish we could make the long days of spring longer. When we will be able to look up and once again gaze at the full moon?
-Zhang Xian, Magnolia Flowers
(translation taken from the wiktionary page)
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One of Mum’s favourite songs from her favourite singer she was always humming and singing in the house.
周璇 – 月圓花好 Zhou Xuan – Full Moon Blooming FLowers (1940s):
月圓花好
浮雲散 明月照人來
團圓美滿今朝最
清淺池塘 鴛鴦戲水
紅裳翠蓋 並蒂蓮開
雙雙對對 恩恩愛愛
這軟風兒向著 好花吹
柔情蜜意滿人間
Full Moon Blooming Flowers
The drifting clouds disperse, the full moon shines upon the gathering people
The most complete and joyous reunion, is this day and night (mid-autumn’s)
On the clear and shallow pond, the Mandarin ducks (coupled lifelong mates) frolic and play
Adorned with red garments and jade-green parasols, the twin lotus flowers bloom as one
Two-by-two pair-by-pair, tenderness coupled with love
This languid breeze blows towards, the blooming flowers
Tender and sweet love fills the earth
…Icahn, Soros, Druckenmiller and Zell’s all on my side. And most importantly, a UBS Client Advisor enthused excitedly, while we were sharing a hot jacuzzi tonight, that there’s no froth or bubbles in this current boiling-hot equities rally.
Okay, the encounter is a lot less salacious than it sounds. I was just soaking in the blisteringly hot outdoor jacuzzi in the estate on this slightly-chilly rained-out evening (recently found out that soaking my stiff and sore post-op lower back in hot water before and after my swim+water therapy sessions in the pool, eases the soreness and pain greatly) when this gent lowered himself gingerly into the steaming waters, and we do what us guys do when we find ourselves in close proximity sharing a small space half-naked with our wet bodies: we grunted/acknowledged each other, avoided each others’ eyes, shifted our positions to be as far away as the small space will allow using a divide-and-conquer algorithm, and started to meditate intensely upon the whatever-it-may-be but suddenly interesting object in front of us – for him a leafy tree or bush; for me, an amazingly deep azure blue ceramic tile arrayed into an Alhambra-like interlocking mosaic pattern…
Alhambra_blue_mosaic_tile
But you can avoid filling in the awkward silence for only so long.
After we made our short introductions, what followed was actually a pretty interesting conversation. This Swiss gent with only the slightest of a Swiss-German accent in his English has been with UBS his entire career, starting with the famed Swiss direct apprenticeship at age 17 with their banks and financial firms, learning the ropes and working their way up through the ranks while obtaining their technical certification along the way. So, a true blue UBS man then. Very useful for me to pump him for some updates on the wealth and asset management scene in recent years, whether the trend towards IAMs (independent asset managers) is real and sustainable, his take and gauge on the popularity of discretionary portfolio mandates and/or managed account structures with clients, and his views of a certain once-gigantic-now-much-reduced-but-still-formidable US competitor. As expected, he took some swipes at Citi, for being silo-like across their functions, especially with client onboarding. (But I’ll reserve my judgement; after all, back in April I was seriously considering taking up an offer from an acquaintance in Citi for a portfolio position there. Thought it might be a good opportunity to see and experience a portfolio management role within the sell-side of the asset management industry, and potentially very useful for my eventual aims and ideas. But, am in a hurry to build my own thing…)
Anyway, as you would more or less expect from a client advisor/relationship manager, he’s a BOOYAH! bull.
Not sure whether he’s channeling Cramer, a previous Bianco, an expansionary Morgan Stanley, or his own cautiously hedged house view. But he was going on exuberantly about how we are still a long way off from the final euphoria stage of this current rally/bubble, and there’s ‘huge amounts of cash still sitting on the sidelines’.
Hmm, I still prefer the cool quantitative analysis of Hussman; though admittedly, what’s the point of being academically rigorous and iconoclastic, but with embarrassing negative returns over 1, 3, 5, and 10 year periods.
And here’s what the collective brain trust of the alternatives/hedge fund industry thinks of the current record S&P 2000 round number:
Icahn, Soros, Druckenmiller, And Now Zell: The Billionaires Are All Quietly Preparing For The Plunge
“The stock market is at an all-time, but economic activity is not at an all-time,” explains billionaire investor Sam Zell to CNBC this morning, adding that, “every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue; and when you got a demand issue it’s hard to imagine the stock market at an all-time high.” Zell said he is being very cautious adding to stocks and cutting some positions because “I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking.” Zell also discussed his view on Obama’s Fed encouraging disparity and on tax inversions, but concludes, rather ominously, “this is the first time I ever remember where having cash isn’t such a terrible thing.” Zell’s calls should not be shocking following George Soros. Stan Druckenmiller, and Carl Icahn’s warnings that there is trouble ahead.
Billionaire 1: Sam Zell
On Stocks and reality…
“People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.”
“I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking,” he said. “If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”
“It’s almost every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue,” he said. “When you got a demand issue it’s hard to imagine the stock market at an all-time high.”
He also lamented about how difficult it is to call a market top. “If you’re wrong on when, that’s a problem.” His answer: “You got to tiptoe … and find the right balance.”
“This is the first time I ever remember where having cash isn’t such a terrible thing, despite the fact that interest rates are as low as they are,” he added.
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. Billionaire 2: George Soros
Soros has once again increased his total SPY Put to a new record high of $2.2 billion, or nearly double the previous all time high, and a whopping 17% of his total AUM.
Late Monsoons... 