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Why We are not Shorting the Euro

Posted by intelledgement on Wed, 01 May 13

The slow-motion conflagration raging in the Euro zone is much more likely to speed up than it is to abate anytime soon. With unemployment pushing 30% in Greece and Spain and spiking to all-time highs in France, the potential for social unrest remains at potentially dangerous levels. In fact, the situation is even more volatile than it appears in that the worst unemployment rates are among young workers—who in an environment where new job growth is outstripped by layoffs, find it very hard to secure a first hire. Large numbers of frustrated young males with nothing productive to occupy their time is not a condition conducive to social stability.

So far, The Powers That Be have limited violent unrest much to Greece, and even there, things have quieted down of late. But as the Eurocrats stumble from tactical crisis to crisis in their efforts to keep their TBTF banks alive in the fond hope a miracle will occur, it is inevitable that sparks—such as the recent scheme to confiscate depositor funds from accounts held in Cypriot banks—will fly…and the tinder scattered about is ever more profuse and dry.

Debts that cannot be paid will not be paid. Some banks will eventually collapse, but evidently not before expropriating as many funds from taxpayers, shareholders, bondholders, and customers as possible—with the active connivance of the Eurocrats—in lame attempts to cover their bad debts…or at least extend and pretend.

Whither the Euro?

So, given all this, one might ask, why does Intelledgement not recommend being short the Euro—that is, taking a position that will profit if the value of the Euro currency declines? If the Euro zone is inevitably headed for the dustbin of history, won’t their associated fiat currency end up there, too?

Basically, there are two reasons for our reluctance to go down this road. The first one is the number of variables that influence the value of the Euro. Perhaps the most explicitly political construct of any fiat currency in the history of humanity, the fate of the Euro is much a function of political decisions. For example, what if The Powers That Be decided to disband the Eurozone—or at least suspend the memberships of the weak sisters Italy, Spain, and France et. al.; but for Germany and the relatively stronger northern state economies to maintain the Euro as their currency? Conceivably, the Euro might actually strengthen in such a scenario. In effect, the macro call about the non-viability of the Euro zone could prove out but shorting the Euro would still be a losing proposition.

But if you really, really want to short the Euro…

AAnd then there is the second reason: there is no safe and reliable ETF vehicle available to that can take one down this road. The following table lists all seven ETFs which currently track the Euro—four long and three short:

ETF Symbol Inception NetAss ADV CAGR EURO CAGR PR
CurrencyShares Euro Trust FXE 12-Dec-05  0.3  0.8 1.85% 1.51%  34
iPath EUR/USD Exch Rate ETN ERO 27-Dec-07  0.0  0.0 -3.47% -1.92%  –155
ProShares Short Euro EUFX 16-Jul-12  0.0  0.0 -9.36% 9.37%  1
MarketVectors 2x Long Euro ETN URR 22-May-08  0.0  0.0 -8.46% -3.51%  –145
Ultra Euro ProShares ULE 25-Nov-08  0.0  0.0 -1.15% 0.22%  –160
MarketVectors 2x Short Euro ETN DRR 22-May-08  0.1  0.0 2.03% -3.51%  –499
UltraShort Euro ProShares EUO 25-Nov-08  0.5  1.1 -5.89% 0.22%  –544

ETF = name of the exchange-traded fund
Symbol = ticker of the exchange-traded fund
Inception = first date the exchange-traded fund was traded
NetAss = net assets under management for the exchange-traded fund (in billions)
ADV = average daily volume of the exchange-traded fund (in millions of shares)
CAGR = compounded annual growth rate of the ETF from inception to 30 Apr 13
EURO CAGR = compounded annual growth rate of the EURO from inception of the ETF to 30 Apr 13
PR = Performance Rating, viz., the difference between the CAGRs of the EURO and each ETF since its inception (the higher the PR, the better for the ETF)

Note: the leveraged ETFs are rendered in darker green (for 2x long) or darker red (for 2x short); non-leveraged ETFs are in lighter green (for long) and lighter red (for short).

As a general rule, we do not recommend investing in ETFs with less than $1B of assets and fewer than one million shares traded on average each day. This is because thinly traded/owned equities—and ETFs are no exception—are particularly vulnerable to market volatility. For example, if some overnight news development changed the situation sufficiently to warrant liquidating your position, a thinly-traded ETF is likely to be harder to sell at a fair price on a down day than one that is widely traded, and you could suffer a materially exaggerated loss just in that one day.

There is no pick of this litter

Well, of the seven ETFs that track the Euro, not a single one of them meet our criteria. The double inverse ProShares Ultrashort ETF (EUO) is by far the most popular, with $520 million under management and an average daily volume in excess of one million shares traded. It is also the worst performer of the seven, having lost 6%-per-year in value since 2008 when one should have expected—with the value of the Euro up an annualized 0.22%—a loss of less than half-a-percent. This is typical of “ultra” ETFs; the other 2x short fund— Market Vectors Double Short Euro ETN (DRR) —is underperforming expectations by 5% per year (which is terrible) and both ultra long funds are underperforming by 1.5% per year (which is very bad). It is almost never a good idea to own any leveraged ETF; their design parameters virtually guarantee they will underperform expectations.

In theory, you could short the long funds instead of buying a short fund. The granddaddy CurrencyShares Euro Trust Fund (FXE) would not be a good choice for that strategy: it is one-third a percent ahead of where you would expect it to be on an annualized basis after eight years in operation. (A worthy option should you want to go long the Euro, though.) The other long fund— iPath EUR/USD Exchange Rate ETN (ERO) —as well as both 2x long funds are all underperforming by 1.5%/year, which sounds good if you’re betting against the Euro…but all three of them are very thinly traded, which practically speaking means it would be hard to find margined shares to sell short…and, of course, if you did establish a short position, your risk of losing big should the market move against you before you can unwind is materially greater with a thinly-traded equity.

The new unleveraged ProShares Short Euro fund (EUFX) —not even in operation a year, yet—is off to an excellent start, tracking the Euro perfectly: the Euro is up an annualized 9% since the funds inception, and the fund shares are down 9%. If your impulse to short the Euro is irresistible but you are not ready to speculate in the FX markets directly, this ETF bears watching, although so far the fund has attracted only $4 million in net assets and volume is a bad joke.

All things considered, you’ll probably be better served just buying more pre-1965 circulated dimes and quarters, or another tranche of PHYS, than shorting the Euro.

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Nothing to see here: 2Q12 volatility doubles, but only to average levels

Posted by intelledgement on Thu, 12 Jul 12

Bouncing off the lowest quarterly reading in six years, volatility in the second quarter of 2012 (2Q12) was up 115% quarter-over-quarter…but that only brought it to slightly-above-normal levels. For 2Q12, the average daily change in the value of the S&P 500 index was ±0.76%, compared with ±0.35% in 1Q11.

We track market volatility because it is a reasonably reliable gauge of risk levels. 74% of the time from 1950 to 2012, when volatility in the S&P 500 goes up—that is, the average annual daily change in the price of the index (up or down) is greater than it was in the prior year—market performance declines. And when volatility declines year-over-year, market performance improves 57% of the time. And so far, 2012 is no exception: the S&P 500 index volatility of ±0.56% for the first six months is down 44% from the ±1.00 volatility we experienced in 2011…and market performance has materially improved from flat in 2011 to +8% so far in 2012.

Normally, the market is remarkably stable. On average, the S&P 500 index rises or declines 0.62% each day the market is open. Actually, 52% of the time, the change in the value of the index rounds to 0% (that is, the change is less than one-half of one percent). Another 38% of the time, the change rounds to 1%.

Thus, the ±0.56% level of volatility we have seen so far in 2012 is below average. If this level were to hold for the entire year, 2012 would then feature the least annual volatility since 2006 (±0.45%), which is to say, since before the 2008 crash. Here is a chart that shows annual volatility levels for the past 60 years:

After the 2008 crash, many analysts wondered if we were in for a replay of the 1930’s depression. In terms of volatility, 1929 was every bit as extreme for the DJIA as 2008 was for the S&P 500 (which itself was not created until after WWII, which is why we rely on the Dow for the 1929 data). Following the 1929 crash, volatility immediately declined sharply from the crash peak to a near-normal level in 1Q30, but then began a jig-jaggy climb that lasted through 1930 and 1931 and into 1932, peaking in 3Q32 at a level (±3.00% on average, every day the market was open!) even higher than 4Q29 had reached.

But the post-2008 pattern has been starkly—and hearteningly—different. Here is chart that compares market volatility for the two crashes:

While the extreme volatility of 4Q08 (±3.27% up or down every day the market was open!) topped anything from the Depression, in three-plus years since then, we have not come close to replicating those heights. And more importantly, the post-crash market performance has been like day (this time) compared to night (post-1929):

1929 -16% 2008 -38%
1930 -34% 2009 23%
1931 -53% 2010 13%
1932 -23% 2011 0%
1933 64% 2012 8%

Of course, the +8% for 2012 is just for the first half of the year; a lot could change. Just last year, the S&P 500 index was up 5% at the half-way point but declined in the last six months of the year to close flat overall for 2011. Indeed, volatility is not predictive. That is, frenetic trading does not generate a black swan event; it’s the other way round. Clearly the combination of increased longer-term risk in the USA-highlighted by continuing budget and deficit issues and seeming political deadlock exacerbated by 2012 being an election year-and potential danger of sovereign debt default in Europe with the concomitant systemic risk of large bank failures, and the potential for a hard landing in China, plus macropolitical tensions (e.g., Iran, North Korea) all continue to be challenges.

The relatively quiescent first half of 2012 may yet prove merely to be the calm before the storm. But so far, inasmuch as the market reflects the combined wisdom of us investors, clearly our consensus is that we have dodged the Depression bullet, and despite the lurking dangers and risks, we are still expecting rabbits to be pulled out of hats and the cavalry to arrive in the nick of time to save the day. Stay tuned for further updates.

Previous volatility-related articles:

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Guest Post: There’s A Larger, Scarier Fiscal Cliff That No One Is Talking About

Posted by intelledgement on Wed, 11 Jul 12

by Peter Schiff, Euro Pacific Capital

The media is now fixated on an apparently new feature dominating the economic landscape: a “fiscal cliff” from which the United States will fall in January 2013. They see the danger arising from the simultaneous implementation of the $2 trillion in automatic spending cuts (spread over 10 years) agreed to in last year’s debt ceiling vote and the expiration of the Bush era tax cuts. The economists to whom most reporters listen warn that the combined impact of reduced government spending and higher taxes will slow the “recovery” and perhaps send the economy back into recession. While there is indeed much to worry about in our economy, this particular cliff is not high on the list.

Much of the fear stems from the false premise that government spending generates economic growth (for stories of countries experiencing real growth, see the remainder of our latest newsletter). People tend to forget that the government can only get money from taxing, borrowing, or printing. Nothing the government spends comes for free. Money taxed or borrowed is taken out of the private sector, where it could have been used more productively. Printed money merely creates inflation. So the automatic spending cuts, to the extent they are actually allowed to go into effect, will promote economic growth not prevent it. Even most Republicans fall for the canard that spending can help the economy in general. But even those who don’t will surely do everything to avoid the political backlash from citizens on the losing end of any specific cuts.

The only reason the automatic spending cuts exist at all is that Congress lacked the integrity to identify specifics. Rest assured that Congress will likely engineer yet another escape hatch when it finds itself backed into a corner again. Repealing the cuts before they are even implemented will render laughable any subsequent deficit reduction plans. But politicians would always rather face frustration for inaction than outright anger for actual decisions. In truth though, only an extremely small portion of the cuts are scheduled to occur in 2013 anyway. If it comes to pass that Congress cannot even keep its spending cut promises for one year, how can they be expected to do so for ten?

The impact of the expiring Bush era tax cuts is much harder to assess. The adverse effects of the tax hikes could be offset by the benefits of reduced government borrowing (provided that the taxes actually result in increased revenue). But given the negative incentives created by higher marginal tax rates, particularly as they impact savings and capital investment, increased rates may actually result in less revenue, thereby widening the budget deficit.

In reality, the economy will encounter extremely dangerous terrain whether or not Congress figures out a way to wriggle out of the 2013 budgetary straightjacket. The debt burden that the United Stated will face when interest rates rise presents a much larger “fiscal cliff.” Unfortunately, no one is talking about that one.

The current national debt is about $16 trillion (this is just the funded portion…the unfunded liabilities of the Treasury are much, much larger). The only reason the United States is able to service this staggering level of debt is that the currently low interest rate on government debt (now below 2 per cent) keeps debt service payments to a relatively manageable $300 billion per year.

On the current trajectory the national debt will likely hit $20 trillion in a few years. If by that time interest rates were to return to some semblance of historic normalcy, say 5 per cent, interest payments on the debt would then run $1 trillion per year. This sum could represent almost 40 per cent of total federal revenues in 2012!

In addition to making the debt service unmanageable, higher rates would depress economic activity, thereby slowing tax collection and requiring increased government spending. This would increase the budget deficits further, putting even more upward pressure on interest rates. Higher mortgage rates and increased unemployment will put renewed downward pressure on home prices, perhaps leading to another large wave of foreclosures. My guess is that losses on government insured mortgages alone could add several hundred billion more to annual budget deficits. When all of these factors are taken into account, I believe that annual budget deficits could quickly approach, and exceed, $3 trillion. All this could be in the cards if interest rates were to approach a modest five per cent.

If the sheer enormity of the red ink were to finally worry our creditors, five per cent interest rates could quickly rise to ten. At those rates, the annual cost to pay the interest on the national debt could equal all federal tax revenues combined. If that occurs we will have to either slash federal spending across the board (including cuts to politically sensitive entitlements), raise taxes significantly on the poor and middle class (as well as the rich), default on the debt, or hit everyone with the sustained impact of high inflation. Now that’s a real fiscal cliff!

By foolishly borrowing so heavily when interest rates are low, our government is driving us toward this cliff with its eyes firmly glued to the rear view mirror (much as the new French regime appears to be doing). For years I have warned that a financial crisis would be triggered by the popping of the real estate bubble. My warnings were routinely ignored based on the near universal assumption that real estate prices would never fall. My warnings about the real fiscal cliff are also being ignored because of a similarly false premise that interest rates can never rise. However, if history can be a guide, we should view the current period of ultra-low rates as the exception rather than the rule.


This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. Please feel free to repost with proper attribution and all links included.

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2012 Volatility Plunges as Market Surges

Posted by intelledgement on Wed, 25 Apr 12

Market volatility in the first quarter was the lowest since 2006—before the crash—and the market was up 12%…which is already +12% better than last year. So…“Is it safe?” For the full story, check out “Calm Before The Storm? Volatility Plunges To Utter Quiescence In 1Q12,” published at Seeking Alpha.

Previous volatility-related articles:

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Hedge-Fund-Strategy ETFs Reconsidered

Posted by intelledgement on Thu, 19 Apr 12

Given the success of historical success of hedge funds—according to Greenwich Alternative Investments, who have been tracking hedge fund performance since 1988, the average hedge fund has a compounded annual growth rate of 13% over the past 23 years, as compared to 7% for the S&P 500—it is no wonder that the purveyors of exchange-traded funds (“ETFs”) have contrived to design offerings pegged to various hedge fund strategies. Last month, we published an analysis of eleven ETFs utilizing hedge fund strategies. While the night is young, metaphorically speaking—none of these funds is more than three years old and a couple have been operating less than a year—the early returns were not very impressive: ten out of these eleven funds were trailing the S&P 500 as of the end of 2011. On average, the S&P 500 had performed +5.7% on an annualized basis while the hedge fund ETFs were -1.3%.

Well now it’s a month later, and the skies have darkened considerably. The S&P 500 had a great first quarter; the ETF hedgie wannabes…not so much:

ETF—30 Mar 12 Symbol Inception CAGR SPY CAGR PR
Credit Suisse Long/Short Liquid Index CSLS 22-Feb-10 5.71% 15.56% -10
IQ ARB Merger Arbitrage ETF MNA 17-Nov-09 1.42% 14.00% -13
IQ CPI Inflation Hedged ETF CPI 27-Oct-09 1.82% 16.42% -15
IQ Hedge Macro Tracker ETF MCRO 09-Jun-09 3.94% 18.89% -15
New iShares Diversified Alternatives Trust ALT 16-Nov-09 -1.52% 14.25% -16
Exchange Traded Notes due March 13, 2031 Linked on a Leveraged Basis to the Credit Suisse Merger Arbitrage Liquid Index CSMB 16-Mar-11 -0.97% 15.88% -17
IQ Hedge Multi-Strategy Tracker QAI 25-Mar-09 4.48% 24.05% -20
Credit Suisse Merger Arbitrage Liquid Index CSMA 04-Oct-10 1.21% 20.90% -20
ProShares Hedge Replication ETF HDG 14-Jul-11 -1.71% 18.23% -20
WisdomTree Global Real Return Fund RRF 14-Jul-11 -6.22% 18.23% -25
WisdomTree Managed Futures Strategy Fund WDTI 05-Jan-11 -10.90% 14.02% -25
  • Sources = ETFdb for list of pertinent ETFs, Yahoo! for historical price data
  • CAGR = compounded annual growth rate…annualized ROI for this ETF since inception including dividends
  • SPY CAGR = annualized ROI of the SPDR S&P 500 ETF including dividends since inception of the pertinent ETF
  • PR = Performance Rating, viz., the difference between the CAGRs of the SPDR S&P 500 ETF and each hedge-fund ETF since its inception (the higher, the better for the hedge-fund ETF)

Now all eleven ETFs are losing to the market, and losing big: by an average PR of 17. This is because the market is on average +17% annualized while the hedge-fund-strategy ETFs are flat. These numbers look bad…really bad.

However, one reader—BlackDragonFund—posted a pertinent comment on our earlier article:


Well…it is the case that hedge funds overall have generally been—uncharacteristically—underperforming the market for the past year or two. So we went back and checked to see how each ETF was doing relative to its appropriate hedge fund forbears. We again used the Greenwich Alternative Investments data, which include historical performance for hedge funds following several disparate strategies.

ETF—30 Mar 12 Symbol Inception CAGR Pertinent GAI Category GAI CAGR PR
Credit Suisse Long/Short Liquid Index CSLS 22-Feb-10 5.71% Greenwich Global Long/Short Equity Group Index 4.75% 1
IQ Hedge Macro Tracker ETF MCRO 09-Jun-09 3.94% Greenwich Global Macro Index 4.37% -0
IQ CPI Inflation Hedged ETF CPI 27-Oct-09 1.82% USA Inflation Rate 2.48% -1
New iShares Diversified Alternatives Trust ALT 16-Nov-09 -1.52% Greenwich Global Equity Market Neutral Index 0.89% -2
IQ Hedge Multi-Strategy Tracker QAI 25-Mar-09 4.48% Greenwich Global Multi-Strategy Index 7.47% -3
Credit Suisse Merger Arbitrage Liquid Index CSMA 04-Oct-10 1.21% Greenwich Global Merger Arbitrage Index 5.88% -5
IQ ARB Merger Arbitrage ETF MNA 17-Nov-09 1.42% Greenwich Global Merger Arbitrage Index 6.78% -5
Exchange Traded Notes due March 13, 2031 Linked on a Leveraged Basis to the Credit Suisse Merger Arbitrage Liquid Index CSMB 16-Mar-11 -0.97% Greenwich Global Merger Arbitrage Index 4.51% -6
ProShares Hedge Replication ETF HDG 14-Jul-11 -1.71% Greenwich Global Long-Short Credit Index 4.96% -7
WisdomTree Managed Futures Strategy Fund WDTI 05-Jan-11 -10.90% Greenwich Global Futures Index -2.56% -8
WisdomTree Global Real Return Fund RRF 14-Jul-11 -6.22% USA Inflation Rate 2.23% -8
  • Sources = ETFdb for list of pertinent ETFs, Yahoo! for historical price data, GAI for hedge fund index performance data
  • CAGR = compounded annual growth rate…annualized ROI for this ETF since inception including dividends
  • Pertinent GAI Category = the Greenwich Alternative Investments hedge fund index most closely related to that ETF
  • GAI CAGR = annualized ROI of that GAI hedge fund index since inception of the pertinent ETF
  • PR = Performance Rating, viz., the difference between the CAGRs of the pertinent GAI hedge fund index and each hedge-fund ETF since its inception (the higher, the better for the ETF)

OK then. These results are still not good, but they are no where near unmitigated-disaster territory. On average, the real hedge funds are up about 4% on an annualized basis compared to the flat performance, on average, of the hedge-fund-strategy ETFs. One of the eleven ETFs is actually beating the real hedge funds and two more are just narrowly behind: less than a percentage point.

It is still very early in the game. Even the 24 years of hedge fund performance data we have is not a lot (although it is more than enough to be confident that the 13%-to-7% performance advantage hedge funds have over the market is statistically significant); the oldest of these ETFs has been around barely three years. So while these preliminary data are not very encouraging, it’s definitely too soon to write off the hedge-fund-strategy ETFs as a definitive failure.

Indeed—though it is rank speculation at this early juncture—if the ETFs continue to trail the real hedge funds by an average of 4% on an annualized basis, and the real funds rebound to their historical average outperformance versus the market of around +6%, that implies that the ETFs, even though they are egregiously lagging the market so far, would have a reasonable chance to outperform by +2% or so in the fullness of time.

As we observed last month, investors have pretty much been indifferent to the advent of these new hedge-fund-strategy-based ETFs. None of them have attracted anywhere near $1 billion of investment dollars or serious trading volume. But in the long run, if they can stick so close to their rich uncles, while they are not likely to attract attention from the 1%—or make you rich—they could eventually constitute a decent enough alternative to be worthy of legitimate consideration by long-term investors.

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Is Gold Overpriced?: A Macro View

Posted by intelledgement on Fri, 30 Mar 12

…[T]he price of gold is up sharply of late: roughly 5% so far this year, 10% in 2011, 30% in 2010, and 24% in 2009. Gold has clearly been appreciating in value faster than the dollar has been declining for the past few years. So, even taking into account the risks of a default in Europe, a war with Iran, a recession in the U.S., a growth slowdown or worse in China and India and so on…is gold overvalued here?

Published earlier today by The Motley Fool, this article graphs the price of gold versus the decline in the value of the dollar to determine how much of the former is explained by the latter. (Spoiler: probably less than you think.)

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Hedge Fund ETFs—Hedge Funds for the Rest of Us?

Posted by intelledgement on Fri, 09 Mar 12

In the last couple of years…the same folks who brought us the exchange-traded fund revolution have attempted to cash in on hedge fund mania by offering ETFs that aim to generate hedge-fund-like returns—or, at least, to follow one or more of the strategies that have generated such returns. So far, the reception for these “hedge funds for the rest of us” has been decidedly underwhelming.… But let’s take a closer look to see if there are any diamonds in the rough among them.

Historically, the average hedge fund beats the market handily. This article published by The Motley Fool earlier today evaluates the performance of hedge fund ETFs in comparison to the S&P 500 to see how well the success of their progenitors is carrying over to the new generation…or not.

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Macro Strategy Hedge Funds Dominate 2011 Top List

Posted by intelledgement on Mon, 30 Jan 12

Business Insider ran profiles of the top-25-performing hedge funds of 2011 (through October) earlier this month. The most numerous of the top dogs were Macro Strategy funds; seven of them made the list. The second most common category among the top 25 was Long/Short Equities, with five funds employing that strategy making the list. Quantitative, Fixed Income, and Multi strategies were each used by three funds on the list. And one fund made the list using each of the following strategies: Managed Futures, Mortgage-backed Arbitrage, Commodities, and Tail Risk.

Here is the complete list:

Fund Strategy AUM     ROI
Tiger Global Long/Short $6.0 45.0%
Renaissance Institutional Equities Quantitative $7.0 33.1%
Pure Alpha II Macro $53.0 23.5%
Discus Managed Futures Program Managed Futures $2.5 20.9%
Providence MBS Mortgage-backed arbitrage $1.3 20.5%
Oculus Multistrategy $7.0 19.0%
All Weather 12% Macro $4.4 17.8%
Dymon Asia Macro Macro $1.6 17.8%
Citadel Multistrategy $11.0 17.7%
Coatue Capital Management Long/Short $4.7 16.9%
Stratus Multi-Strategy Program Multistrategy $3.7 16.6%
OxAM Quant Fund Quantitative $2.0 16.4%
SPM Core Fixed Income $1.0 15.7%
Pure Alpha I Macro $11.0 14.9%
Autonomy Global Macro Macro $2.1 13.9%
BlackRock Fixed Income Global Alpha Fixed Income $1.6 13.5%
SPM Structured Servicing Holdings Fixed Income $1.6 13.5%
GSA Capital International Quantitative $1.0 13.0%
JAT Capital Long/Short $2.5 12.7%
Brevan Howard Master Macro $26.4 10.8%
MKP Opportunity Offshore Macro $1.2 10.7%
Paulson Gold Commodities $1.2 9.8%
Cerberus International Distressed $1.2 8.9%
Capula Tail Risk Tailrisk $2.3 8.6%
Macquarie Asian Alpha A Long/Short $1.6 8.6%
Tiger Asia Long/Short $1.3 8.6%

AUM = Assets under management in billions of US dollars.

ROI = Return-on-investment for the first ten months of 2011

Source = Business Insider

Notably absent from the list were Merger Arbitrage strategy funds—hardly surprising given the lack of action in that arena in 2011—and their close cousins, Event-Driven strategy funds.

The performance of those funds that did make the list is particularly noteworthy in view of the fact that overall, 2011 was a tough year for hedge funds. According to preliminary (full-year) data from Greenwich Alternative Investments, the average hedge fund was down 4% in 2011, significantly underperforming the market, which was flat.

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4Q11 Volatility Declines but to a Still-High Level

Posted by intelledgement on Mon, 23 Jan 12

The combined wisdom of all market traders and investors appears to be that risk declined last quarter, after a scary 3Q11…at least, the market was up and volatility was down…but we are not out of the woods yet. For the full story, check out “Nerve Racking: Q4 2011 Volatility Declines, But Only To Still-Elevated Levels,” published at Seeking Alpha.

Previous volatility-related articles:

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Ron Paul’s Portfolio: Unusual, Yes…but “Weird”?

Posted by intelledgement on Fri, 06 Jan 12

Twice in the last three weeks, Wall Street Journal personal finance blogger Jason Zweig has taken aim at GOP Presidential candidate Ron Paul…not for anything Dr. Paul has said, or for any of his policy proposals, but rather to criticise his investment portfolio. In his 21 December 2011 post, Mr. Zweig wrote:

…[W]e’ve never seen a more unorthodox portfolio than Ron Paul’s.… It’s shockingly different.…[A]bout 21% of Rep. Paul’s holdings are in real estate and roughly 14% in cash. But he owns no bonds or bond funds and has only 0.1% in stock funds…. The remainder of Rep. Paul’s portfolio—fully 64% of his assets—is entirely in gold and silver mining stocks….

So, how has this “shockingly different” portfolio performed? Well, in his 21 December post, Mr. Zweig did not address this question. And the answer is not straightforward. Since the disclosure forms that representatives fill out only provide a range of values for each asset—and do not disclose the date of acquisition—it is impossible to calculate a precise return on investment for the portfolio. Dr. Paul’s most recent form dates from May 2010, but judging from earlier disclosure form submissions, it appears that he has held most of his mining stock investments since at least 2002. Using historical data from Yahoo!, here is a summary of how the stocks Dr. Paul owns have fared so far this Century (that is, since 29 December 2000):

Stock Symbol  Max Value ROI  CAGR
GoldCorp GG  1,000,000 1533% 29%
Barrick Gold ABX  500,000 210% 11%
Newmont Mining NEM  500,000 286% 13%
Agnico Eagle Mines AEM  250,000 527% 18%
AngloGold Ashanti AU  250,000 253% 12%
IAM Gold IAG  250,000 261% 16%
Eldorado Gold EGO  100,000 802% 28%
Mag Silver MVG  100,000 -11% -2%
Pan American Silver PAAS  100,000 736% 21%
Silver Wheaton SLW  100,000 834% 41%
Alumina AWC  50,000 -60% -8%
Claude Resources CGR  50,000 -14% -2%
Golden Star Resources GSS  50,000 83% 6%
Kinross KGC  50,000 676% 20%
Virginia Mines VGMNF.PK  50,000 59% 10%
Allied Nevada Gold ANV  15,000 451% 43%
Brigus Gold BRD  15,000 -86% -21%
Coeur D’Alene Mines CDE  15,000 157% 9%
Dundee Corp DDEJF.PK  15,000 473% 84%
Federated Prudent Bear A BEARX  15,000 41% 3%
Great Basin Gold GBG  15,000 30% 2%
Hecla HL  15,000 946% 24%
Lexam LEXVF.PK  15,000 625% 172%
Metalline Mining MMG  15,000 -59% -8%
RYDEX SERIES FDS, INVERSE S&P 500 RYURX  15,000 -28% -3%
Wesdome Gold Mines WDOFF.PK  15,000 45% 14%
Petrol Oil & Gas  POIG.PK  1,000 -100% -47%
Vista Gold VGC  1,000 207% 11%
Viterra VTRAF.PK  1,000 -24% -7%
  • Max Value = the maximum value of the asset as listed in Dr. Paul’s disclosure form
  • ROI = the overall return on investment for that position
  • CAGR = compounded annual growth rate (annualized ROI) for that position from 29 Dec 00 to 30 Dec 11 (dates for some positions vary as appropriate…e.g., MMG was bought out by HL in 2011 so the enddate for calculating MMG performance is 29 Apr 11)

For the entire 11-year period, the CAGR for Dr. Paul’s stock portfolio is 19%. That is, +19%, on average, every year for 11 years! During those same 11 years, the S&P 500 declined overall by 5%, which amounts to a CAGR of 0%…but that does not count dividends; add them in and the CAGR is a tad under +3%. What about bonds? The 11-year CAGR of PIMCO’s massive Total Return Fund is about +1%.

I am not the only one handy with spreadsheets. There were over 300 comments appended to Mr. Zweig’s post, many of which pointed out that Dr. Paul’s investment strategy was running rings around the market. But, while in his followup post Mr. Zweig graciously conceded the point—his guesstimate of how well the portfolio may have performed is +23% on a CAGR basis, more generous than my calculations—he was still not impressed. In yesterday’s “How Weird is Ron Paul’s Portfolio?” post, he opined:

…[P]erformance alone can’t tell you whether an investment approach is sensible or not. After all, over the 10 years ended Dec. 31, 1999, Internet stocks far outperformed most other investments. That didn’t ensure that they would continue to do so in the years to come, and it certainly didn’t mean that it was prudent to put all or most of your money into stocks like or eToys Inc. …[I]nvesting isn’t just about maximizing your upside if you turn out to be right. It’s also about minimizing your downside if you turn out to be wrong. Putting two-thirds of all your assets into one concentrated bet is a great idea if the future plays out just as you imagine it will—but a rotten idea if the future turns out to be full of surprises. …[I]f the future happens to unfold in ways [Dr. Paul] doesn’t expect, then his hot investment portfolio is likely to go cold in a hurry.

Well, of course it is true by definition that banking on a particular outcome is more risky than hedging your bets. But that does not ipso facto render such a strategy to be nonsense!

Dr. Paul’s portfolio employs a macro-strategy approach that by its nature seeks to derive concentrated bets from political-economic-social analysis. Within the framework of this strategy, betting against the anticipated outcome is what constitutes nonsense. Risk management here is accomplished via constant vigilant attention to the macros, not by betting against yourself. If The Powers That Be stop prosecuting illegal and wasteful wars, stop printing money to bail out criminal banksters, and stop promising the future income of our children for present-day indulgences that are beyond our means, it will be evident things are going that way well before the value of Dr. Paul’s gold holdings are much affected and he or his financial advisors will have ample opportunity to redeploy his investment dollars.

In his initial blast against Dr. Paul, Mr. Zweig gratuitously pats himself on the back for having “revealed problematic trading in Congress more than a year and a half before the ‘60 Minutes’ episode that recently raised a ruckus over the same topic.” Given that it is manifestly obvious that Dr. Paul is not employing insider tips to enrich himself, it’s not clear why this topic would be mentioned.

But in this light, perhaps the word “weird” is not so far off after all. Here we have a Congressman whose investments [a] are congruent with his diagnosis of what ails the Republic, [b] are decidedly not informed by the sort of illicit inside information that Congress has corruptly made technically legal for their members to use (which if you or I used, should likely land us in jail), and [c] are highly profitable. I suppose in the statistical sense of being unusual, that is a weird combination…and too bad for that; we’d all be better off if it were more common.

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