Category: Alternative Investment Strategy

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Alternative Investment Strategy Uncategorized

Thinking about trade BAIT – Where is your advantage?

You are so smart. You have a great trade idea and you know it will be a winner, but there is only one small problem. For any trade you make, there has to be someone else on the other side of the trade. For every buyer, there has to be a seller. So for what you are doing right there has to be someone doing something wrong? That may not be exactly true, but any trader should work under the assumption that his smart money is taking advantage of less smart or “challenged” money. What is your advantage when you make a trade? We have looked at this before in “The three ways hedge funds make money”, but I find using the acronym BAIT, developed by Michael Mauboussin in “Who is on the other side?”, is a great way to describe this issue. The acronym BAIT stands for the possible advantages of a manager: Behavioral, Analytical, Informational, and Technical.

Alternative Investment Strategy Uncategorized

Risk premia versus hedge funds – Worth a look

As we better understand the return generation process, we are able to dissect any set of money manager or hedge fund returns into its component parts. At a high level, any money manager can be divided into a set of risk factors or premia and alpha or skill. As a general conclusion, researchers have found that as investors get better at identifying risk factors, the size of alpha declines. We are able to attribute more returns to specific risks so the amount that is leftover as skill declines.

Alternative Investment Strategy Uncategorized

Market Tilt or Timing – Is there a difference in forecasting?

At a recent conference, I heard a large money manager say the following, “We do not market time, but we do take market tilts.” Unfortunately, no one was able to ask the manager to clarify the difference between tilts and timing. Aren’t they both forecasts?

Alternative Investment Strategy Uncategorized

Bracketing Fed Funds rates through a known set of model – Getting good probabilistic estimates

An ensemble approach to modeling can be an effective way to get a good idea of the consensus and differences in forecasts on futures moves in the Fed funds. This is an effective alternative to looking at Fed funds futures and options as a market estimate.

Alternative Investment Strategy

Trend-following is not the same as following the herd of opinions

Investors may be viewed as trend-follower because they chase performance, only picks recent winners, and sort on performance. However, trend-following professionals often exploit this undisciplined, casual, and unsystematic approach to trends through the investment scaling of chasers. Investor behavior driven by tracking the opinion of peers is a form of trend following and may create price trends; however, it is not the same as a disciplined approach to finding trade opportunities through rules-based behavior. 

Alternative Investment Strategy Uncategorized

Investment Causality – Narrative, Price, Fundamentals or The Reverse

Any investor needs to know two things: what is the philosophy that drives his decisions; what is the philosophy that is driving the market as a whole. Are you price, fundamental, efficiency or narrative driven? Is the market currently price, fundamental, or narrative driven? Know your expectation mechanics.

Alternative Investment Strategy Uncategorized

That’s crisis not correction alpha, you fool! Trend-following value is in simplicity

I discovered from reading an informative piece on managed futures and CTA’s from HedgeNordic magazine that trend-followers will produce “crisis alpha” but not “correction alpha”. A crisis is defined as a significant and extended downturn while a correction is short-term drawdown. Unfortunately, one man’s correction is another man’s crisis. All crises start and end as corrections. 

Alternative Investment Strategy Uncategorized

FX intervention – Analysis says central bank activity works

Many have held the view that central bank FX intervention is ineffective. It can be disruptive and have some temporary impact, but central banks cannot make currency markets do what they don’t want to do. Research using public data, a limited sample and mainly focused on floating exchange rate regimes, shows, at best, mixed value […]

Alternative Investment Strategy Uncategorized

Alternative risk premia overreaction in 2018 – Don’t fall for recency bias

What happened to alternative risk premia returns in 2018? This was a major discussion topic at a UBS risk premia conference last week. It was a difficult year. In fact, it was the worst performance year since 2008, and the decline for many strategies was a multiple standard deviation event. Yet, there is a good opportunity for investors who focus on the longer-run. Since the performance for many risk premia seemed unrelated to macro factors, there is strong potential for mean reversion to longer-term strong positive performance. To extrapolate recent performance as representative of history would be to fall into a recency bias.

Alternative Investment Strategy Uncategorized

Risk premia performance generally positive for January

It is a new year and the underperformance of many alternative risk premia strategies in 2018 is now an old memory. Good performance heals past return wounds. While well-constructed alternative risk premia should not be highly correlated to market beta, they will be related to the investment regime. Risk premia are time varying.

Alternative Investment Strategy Uncategorized

A risk-on environment and the hedge fund world is good

Hedge fund styles as measured by the HFR indices showed strong positive January performance in tandem with the gains in the stock market. When in a risk-on environment many hedge fund styles are winners.

Alternative Investment Strategy

Risk-on- What happened to fears of 2018?

The equity reversal was tough on many trend-followers. This reversal spilled-over to US bonds during the month. Good buy trend signals now in both equities and bonds. Dollar strength reversed on Fed pause remarks. Metals and energy both moved higher during the month even with global growth threats. Commodities asset class is not a trend rich environment at this time.

Alternative Investment Strategy Uncategorized

Global stocks – All about avoiding global slowdowns and recessions

Is it that simple? Global equity investing is all about missing the big macro risks – recessions. There are headline risks every year, but it is always about economic growth when you step-back and look at annual performance. If global growth appreciably slows, global stocks are hurt. A simple long-only asset allocation strategy is to stick with long-term trends with the ability to walk-away when a recession or slowdown occurs. 

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