the alpha and omega : comments

Quality if relative, not absolute

j (anonymous) — 2008-05-09T13:47:46Z

Rich men in less-developed economies are not efficient at producing quality children because they tend not to have high human capital themselves.

What is this nonsense?

Steve Schwarzmans Take on the Subprime Mess

Mahalanobis — 2008-05-09T10:53:00Z

Trying to buy a mortgage bank in the midst of the subprime crisis was the equivalent of being a noodle salesman in Nagasaki when the atomic bomb went off. Not a lot of noodles left, or even a person, and thats what happened to us on this deal.

Story.

White Noise : George Soros

Mahalanobis — 2008-05-08T07:54:00Z

Three weeks ago (AMZN):

Currently (Bloomberg.com):

Random Facts

Mahalanobis — 2008-05-07T14:20:00Z

In 2006, an iPod that cost about $200 would have cost $1B in 1976 and would have been very large. [Source]

Extreme Events : Ladislaus von Bortkiewicz

Mahalanobis — 2008-05-04T20:29:00Z

Saddest thing I read today (Schumpeter):

"[Bortkiewicz] was not a good lecturer, and his lectures, which he elaborated with a minute and conscientious attention to details all his own, were said to be delivered to rather empty classrooms.

His critical acumen made people fear him, but it hardly contributed to making them love him."

.
FYI: In 1898 Bortkiewicz published a book about the Poisson distribution, titled The Law of Small Numbers. In this book he first noted that events with low frequency in a large population follow a Poisson distribution even when the probabilities of the events varied. It was that book that made the Prussian cavalry horse-kick data famous. The data give the number of soldiers killed by being kicked by a horse each year in each of 14 cavalry corps over a 20-year period. Bortkiewicz showed that those numbers follow a Poisson distribution. Some historians of mathematics have even argued that the Poisson distribution should have been named the "Bortkiewicz distribution."

It is in his work on Karl Marx - whom he simply saw as one descendant of Ricardo - that his claim to fame lies. Bortkiewicz's solution to the Marx's "Transformation Problem" (1907) is considered legendary, although it was ignored at the time. Bortkiewicz was also involved in other theoretical controversies - particularly against Böhm-Bawerk and the Austrian theory of interest and also against the Alfred Weber's theory of industrial location.

More here and here.

The Mystery of Monogamy

Mahalanobis — 2008-05-03T16:56:00Z

This paper* explains why modern societies are less polygynous than less-developed societies:

Men in less-developed economies prefer quantity over quality [=skill] in wives and children. The explanation is rather intuitive. Rich men in less-developed economies are not efficient at producing quality children because they tend not to have high human capital themselves. Therefore, they have a low demand for quality children and, consequently, a low demand for quality women who can help them produce quality children. As a result, women in less-developed societies are valued only for the quantity of children they can produce, and not the quality. This makes all women very close substitutes for one another, which keeps the price of all women low enough for richer men to acquire multiple wives.

In more advanced economies, richer men tend to have high human capital and, therefore, they are more efficient at producing human capital in children. This creates a high demand for quality in children and in women, because quality women are complements in the production of high-quality children. Thus, all women are not close substitutes in the marriage market in advanced societies. Higher-quality women are a scarce resource, which drives up their price in the market marriage market and makes polygyny less affordable for wealthy men.

The main implication of the model can be summarized as follows: male income inequality generates polygyny, but female inequality in the marriage market reduces it. As the return to human capital increases, women who can create high-quality children more efficiently are increasingly valued in comparison to low-quality women.

The main empirical prediction is that the composition of inequality, not just the level, is an important determinant of the degree of polygyny in society. Secifically, societies should be more polygynous in countries where variation in overall wealth inequality is determined more by differences in nonlaber income (capital and inherited wealth) versus income variation generated by differences in the levels and returns to human capital investments.

* Eric Gould et al., The Mystery of Monogamy, American Economic Review, American Economic Association, vol. 98(1), pages 333-57, March 2008.

Cudgel Over the Quants

Mahalanobis — 2008-05-02T12:59:00Z

Portfolio.com: Hedge funds are dragging defectors into ugly courtroom battles over trade secrets.

Eric Falkenstein isn't your typical 42-year-old hedge fund manager. Instead of trading stocks all day or courting new investors, he spends his time updating his blog, researching equity strategies, and talking to his lawyer. He's a hedge fund portfolio manager who is legally restrained from managing hedge fund portfolios. Click here to read the whole story.

Eric,

you had me in stitches. great analysis and I agree.
Nonius (anonymous) — 2008-04-26T09:18:44Z
Eric,

you had me in stitches. great analysis and I agree.

Nonius

Hedge Fund Claims "Mean-Variance Optimization" as IP

Mahalanobis — 2007-03-30T03:19:00Z

Telluride Asset Management, a fund run by Peter Hajas, is trying to enjoin one of its former portfolio managers from using "Markowitzian mean-variance optimization" in his future work because it constitutes a "trade secret" that is "owned in full" by Telluride, usage of which would generate "irreparable harm to Telluride". Defense asserts arguments do not pass the "giggle test".

A fairly readable set of briefs were filed on March 23 in Minneapolis.

Here's the Plaintiff: Tridecap (pdf, 884 KB)

Here's the Defense: defendant (pdf, 849 KB)

Update March 20, 2008: Millions of dollars later (see here), some legal docs (see here), no definition of the intellectual property with any particularity. Why Europeans should avoid America.

HedgeFundGuy,

You have always been one of my favorite bloggers....

Dan in EuroLand (anonymous) — 2008-03-16T23:38:28Z

HedgeFundGuy,

You have always been one of my favorite bloggers. I am glad you are back, and I hope everything works out.

Why give away all your trading secrets? Oh, because they are already public knowledge...

Paul N (anonymous) — 2008-03-15T16:44:21Z

Why give away all your trading secrets? Oh, because they are already public knowledge and not your ideas, I get it. I guess if everyone is doing it then the alpha will disappear...

I was actually reading some of the court documents, kind of interesting.

Good luck with everything!

Cuba: Aftermath: Legionella

Mahalanobis — 2008-03-14T21:57:00Z

My father has been hospitalized since shortly after our return from Cuba. He was in artificial deep sleep for more than a week but now he's already doing fine (Today: Tell mom I really need my laptop). The funny thing is that the hospital told us that everybody who was in Cuba should be tested for Legionella (they demanded the flight number as well) but the testing center said that it doesn't make any sense to test for Legionella in case nobody has any symptoms (fever, coughing, etc.). I wasn't too concerned about myself since the internet told me that the incubation period is 2-10 days.

Eric just send me a link to a story about a hotel located in the tourist corridor of Orlando that voluntarily closed its doors on Friday after two guests contracted Legionnaires' disease. Sample this:

"Legionnaires' disease causes death in up to 5 to 30 percent of cases".

That probably doesn't apply to developed countries, but still...

Nice, but deadly.

Cuba: A few Impressions

Mahalanobis — 2008-02-24T19:02:00Z

I've just returned from a 10-day trip to Cuba and I must say that the misery and decay I encountered in Havana (Habana Vieja) exceeded my expectations by a wide margin. From above the city looks like after an air raid...

{Lunch at our hotel, NH Parque Central}

...and from the ground, it doesn't look that much better:
Havana has two markets. One for Cubans, who pay with pesos, and one for tourists who pay with "pesos convertibles" (1 CUC = 1/0.9 USD = 1/1.3 EUR). The latter offers hotel rooms, gastronomy, good cigars, cabs, and souvenirs (interestingly, often made out of Coke-cans). Prices are the same as in developed countries and are actually even higher when adjusted for quality. When it comes to food, there aren't too many items I'd recommend. Salad is tasteless and beef is unchewable most of the time. So you'd better stick to fish. Cohibas are a bit cheaper than abroad, except if you live in tax crazy Canada.

The market for Cubans is a dispersed fleamarket. Even the "big" stores look like closed stores with a couple of items forgotten in the window. I highly recommend not visiting a local butcher: You wouldn't feed your dog with that stuff.
Résumé of La Habana: Being in a pool on the roof-top of a hotel with a view over Habana has some charm. But when going outside there is not much to do and you'll soon be annoyed by all those people offering cheap cigars and CDs with Cuban music. One can easily get the impression that the whole town is a tourist rip-off: Paying more for a cab ride or a Mojito as you would in your home country and being expected to give a tip worth more than a Cuban earns per day made me angry.

Unfortunately, Cubans don't have access to "world news" (no foreign newspapers, no internet, no satellite dishes), so the people I talked with were actually quite happy with their situation ("We don't earn much, but as opposed to other countries education and health care is for free!" (translation mine)) and couldn't see that people in developed countries who are considered as dirt poor have a way higher living standard (I didn't have the impression that they were afraid to speak openly).

The rest of the trip I stayed on the beach in Varadero, a tourist zone that is closed for Cubans (only those who work there can enter). The hotel was really nice (Iberostar Varadero) and the service was excellent. In case you like being on the beach and food and a fast and cheap internet connection isn't your highest priority, it's the place to be.

related items: Cuba: Aftermath: Legionella

Another Lesson in Econometrics

Mahalanobis — 2008-03-12T21:12:00Z

At the moment, I'm reading Hedge funds: Quantitative Insights by François-Serge Lhabitant (required reading for CAIA Level 1). Seems this guy read A First Lesson in Econometrics* by John Siegfried:

"The Gibbons, Ross and Shanken (1989) test compares the estimated maximum Sharpe ratio for the original universe (denoted Sharpe₁) with the estimated maximum Sharpe ratio for the augmented universe (denoted Sharpe₂). The authors show that the statisticfollows a Wishart distribution, which is a generalization of the Chi²-distribution. Under the null hypothesis that the Sharpe ratio of the extended universe is not different from the Sharpe ratio of the original universe, the statistic W should not be statistically different from zero [...]."

* Here is the non-gated version.

Back from the Dead

Eric Falkenstein — 2008-03-11T02:28:00Z

Well, I'm still involved in expensive litigation, which I'm told will end in finite time (that 'this too shall pass' is both true and totally unhelpful). In the meantime I have created a website where I post up information on corporate default probabilities, and also equity benchmarks.

DefProb generates default probabilities on over 9k nonfinancials worldwide. Updated weekly with the latest info, it's the most powerful model available, at the special introductory price of zero. The model is basically a function of the Merton model, net income/assets, and agency ratings (when available), but also some other spices. I use implied volatilities if available, and post the latest asset swap rates which I found for about 500 companies. Lots of fresh information is there, and I don't know anywhere else you get good public company default info for free.

My equity indices are geared towards institutions. My ex-employer initially claimed that my admission of using cashflow, accruals, volatility and mean-variance optimization, was, per se, a violation of their interpretation of our Confidentiality Agreement. The court ruled they could not own these in general. In researching for my case, while I found these factors commonly mentioned, there weren't any popular indices or ETFs based on them, and I think any popular factor deserves an index, so I created simple indices based on going long or short these basic factors.

So you can look them up, see how there are doing, download the data into excel and check out their daily correlations with other time series. I especially like my minimum variance portfolios. They take an index, say the S&P500, and then run a volatility minimization program, and go long that subset. Easy alpha! The last two fall issues of the Journal of Portfolio Management have had articles on practitioners examining this strategy, so I think it's becoming more popular (see Blitz and van Vliet, or Clarke, de Silva, and Thorley).

And of course, I'm starting to blog again, here.

Airbus A320 Nearly Crashed during Crosswind

Mahalanobis — 2008-03-03T21:16:00Z

We had some very windy weather in Europe over the weekend. In Germany, an Airbus A320 nearly crashed during crosswind approach at Hamburg Airport.
"Das ging beinahe in die Hose."

via The Presurfer

Berstein on the Evolution of Risk

mike anderson (anonymous) — 2008-03-03T21:10:49Z

Read it! Read it! For an economist, statistician, or finance wonk, it's an easy, entertaining, and informative read.

Bernstein on the Evolution of Risk

Mahalanobis — 2008-03-03T20:37:00Z

This past Wednesday on Bloomberg Radio Tom Keene spoke for an hour with Author Peter L. Bernstein about his book "Against the Gods: The Remarkable Story of Risk," the evolution of risk and the importance of consequence. Mr. Bernstein also discussed the role of behavioral economics in our current subprime crisis, Fed policy under Chairman Greenspan, and modern finance theories.

via Heidi Tan (email)

I didn't have the time to listen to the interview yet but I'm sure it's worth listening. I bought the book a while ago and... I'm sure I'll read it soon.

Hedge fund to sue SEC over advertising ban

Mahalanobis — 2008-03-03T08:01:00Z

FT: Phil Goldstein, the hedge fund manager who derailed the Securities and Exchange Commissions attempt to require hedge fund registration, will sue the regulator to lift its ban on hedge fund marketing and advertising.

The long-standing ban on funds soliciting money from the public has been interpreted to mean a hedge fund should release only very limited information about itself. This interpretation has come under pressure as hedge funds have grown rapidly and become widely covered in the media.

Mr Goldstein told the Financial Times: We want to be able to have a website like any other business. The only websites required to pre-qualify people are hedge funds and pornography . . . gun shops are allowed to advertise, the Massachusetts state lottery is allowed to have a website. We want to be treated like any other business.

Click here to read the whole story

Addendum

Mahalanobis — 2008-03-02T21:34:35Z

Don't they have any CFAs and CAIAs who have to obey to the Standards of Professional Conduct??

I(C). Professionalism: Misprepresentation
III(D): Duties to Clients: Performance Presentation

Their

Mahalanobis — 2008-03-02T21:26:25Z

gated technical manual (I quickly skimmed it at the office) doesn't provide any hint that any backtesting was involved but our commodities trader reassured me that Barcap wouldn't be so stupid to have their super-duper index sitting on the shelve for 7 years without telling anybody. So maybe they monitored 50 algorithms since 2000 and now chose the best performing one...

So how was the strategy built?

stxx (anonymous) — 2008-03-02T18:13:21Z

Actively managed: Was there a committee discussing "we would have seen that drop in prices and taken the position" a? Or was it a quantitative research project based on Excel's Solver and Goalseek functions?
Again, the chart looks to be too good to be true ...

...

BenGroeger — 2008-03-02T18:11:42Z

seems that Monoliners are in trouble deep and will stay there. No regret, no way out.

The latest victims in the subprime debacle are cities

stxx (anonymous) — 2008-03-02T17:59:11Z

February 28, 2008. San Francisco suburb that has been hit hard by the sagging housing market is on the verge of going broke. Officials in Vallejo, Calif., will decide whether to declare bankruptcy this week, as they face big increases for police and fire protection and sagging tax revenues.

http://www.npr.org/templates/story/story.php?storyId=87775224

HFs' Fire Sales Send Muni-Bond Yields to Historic High Levels

Mahalanobis — 2008-03-02T15:53:00Z

WSJ: Months of turmoil in the municipal-bond market, long a placid haven for individual investors, reached a boiling point Friday -- as hedge funds were forced to unwind complicated bets and in the process dump billions of dollars of the securities.As a result of that surprising forced selling, yields on debt from municipalities and other tax-exempt issuers jumped to their highest levels in history, when compared with safe debt issued by the U.S. government. The average AAA-rated, 30-year municipal bond yielded 5.14% Friday afternoon, compared with 4.42% on a U.S. Treasury 30-year bond.

In normal times, municipal-bond yields are much lower than Treasurys, because investors don't have to pay taxes on municipal bonds.

Click here to read the whole story.

Leverage Providers

Mahalanobis — 2008-02-29T08:41:00Z

Peloton Partners LLP, the London- based hedge fund manager being forced to liquidate a $1.8 billion asset-backed fund, said it's a victim of Wall Street's reduced lending.

``Credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has compounded our difficulties and made it impossible to meet margin calls,'' Peloton co-founders Ron Beller and Geoff Grant said in a letter yesterday to clients.

Beller and Grant, who founded their firm in 2005, are seeking buyers for mortgage securities held by the ABS fund. The fund provided clients with an 87 percent return last year after the managers bet on a surge in delinquencies on loans to homeowners in the riskiest subprime category. Beller said in a Jan. 25 telephone interview that the firm bought securities backed by mortgages that are safer than subprime [Alt-A].

Source:
Peloton Blames Wall Street Lending Crackdown for Fund Collapse, Bloomberg

Vulture Funds

Mahalanobis — 2008-02-28T16:52:00Z

Bloomerg: Vulture Fund Deals With Delinquent Homeowners Lost by Subprime

Barcap to tap into commodity appetite

Mahalanobis — 2008-02-27T12:16:00Z

The FT writes:

Barclays Capital is due to launch its first global commodity index on Tuesday to tap the rising appetite of investors for raw materials such as crude oil, wheat and copper.

The bank said its Commodities Outperformance Roll Adjusted Liquid
Strategy index (Corals) would make bets on rising and falling prices and
would adjust its allocations among 12 commodities monthly, taking into account its view about future prices.

Most benchmark commodities indices, such as the industry leader S&P GSCI, are passive, long-only indices that bet only on prices rising. These are known as beta strategies.

The Barclays Capital index takes an active approach and looks to generate market-beating returns an alpha strategy.

Love those backtests... :

¿Que tal?

Mahalanobis — 2008-02-26T16:24:22Z

Ha pasado mucho tiempo desde la última vez que me escribiste...

In wärmeren Ländern trifft man vielleicht auch deswegen leichter auf desolate Häuser, da dort eine gute Isolierung gegen Kälte und Wind nicht unbedingt erforderlich ist. Betreffend Kommunikationsmittel: Das Hotel hat 4 Euro für eine halbe Stunde megaslowen Internetzugang verlangt. Angeblich kostet das Telephonieren nach Europa 3 Euro/MINUTE. Die nächste Handyrechnung wird (traurige) Gewissheit bringen...

Solch verfallene Häuser gibt's übrigens auch hier in Südspanien. Zum Glück ist...

Zorra — 2008-02-26T13:01:54Z

Solch verfallene Häuser gibt's übrigens auch hier in Südspanien. Zum Glück ist die Auswahl grösser in den Supermärkten und was Kommunikationsmittel betrifft. ;-)