PopMuse: Hedge Funds http://popmu.se Musings of stuff en-us Copyright 2007-2019 http://creativecommons.org/licenses/by-nc-sa/3.0/ Billionaires fear Warren and Sanders – but they should fear us all | Robert Reich https://www.theguardian.com/commentisfree/2019/nov/10/billionaires-warren-sanders-wealth-tax-bezos-dimon-cohen https://www.theguardian.com/commentisfree/2019/nov/10/billionaires-warren-sanders-wealth-tax-bezos-dimon-cohen Sun, 10 Nov 2019 06:00:29 UTC Robert Reich at Hedge funds | The Guardian Wealth tax plans make sense but proper regulation could also cut Bezos, Dimon, Cohen and Neumann down to sizeBillionaires are wailing that wealth tax proposals by Elizabeth Warren and Bernie Sanders are attacks on free-market capitalism. Related: Michael Bloomberg: billionaire eyes centre lane in Democratic presidential race If unearned income were treated the same as earned income, America’s non-working rich wouldn’t be billionaires Related: Why did Amazon spend $1.5m in Seattle's local elections? | Hamilton Nolan Robert Reich, a former US secretary of labor, is professor of public policy at the University of California at Berkeley and the author of Saving Capitalism: For the Many, Not the Few and The Common Good. He is also a columnist for Guardian US Continue reading... http://creativecommons.org/licenses/by-nc-sa/3.0/ Nichola Pease to join firm husband's hedge fund is betting against https://www.theguardian.com/business/2019/nov/06/nichola-pease-to-join-jupiter-husband-hedge-fund-odey-asset-management https://www.theguardian.com/business/2019/nov/06/nichola-pease-to-join-jupiter-husband-hedge-fund-odey-asset-management Wed, 06 Nov 2019 13:32:41 UTC Julia Kollewe at Hedge funds | The Guardian Odey Asset Management holds short position on Jupiter, which has appointed Pease as chairNichola Pease, a high-profile investment manager, has been appointed chair of a fund management company her husband’s hedge fund is betting against.Jupiter Fund Management said Pease would replace Liz Airey from 2 March. According to the latest Sunday Times rich list, Pease and her husband, Crispin Odey, have a combined fortune of �775m. Continue reading... http://creativecommons.org/licenses/by-nc-sa/3.0/ Best hedge fund? http://feedproxy.google.com/~r/HedgeFund/~3/yFxwH6myXws/best-hedge-fund.html http://feedproxy.google.com/~r/HedgeFund/~3/yFxwH6myXws/best-hedge-fund.html Tue, 08 Oct 2019 18:08:00 UTC Hedge Fund at Hedge fund Best hedge fund? World's top performing hedge fund? When do past returns predict future performance? Defining "best" as highest risk adjusted alpha after deducting all style premia and beta factors, the greatest ever hedge fund manager is obvious.Skill is predictive, luck is not. It's better to select jockeys, rather than horses, as I wish to avoid the vexatious volatility and devastating drawdowns of smart/dumb betas. Invest with great managers before they are famous. Hedge fund managers like George Soros, Warren Buffett and Jim Simons were avoided for decades despite outstanding performance. They are STILL avoided by most!Time in drawdowns is never recovered.�Your money is too important to be risked on "averages". I prefer strategies that deliver independently of market direction. Though rare, skill can be detected with competent analysis. Bet on horses and lose years of gains in bear markets. No market "average" for me. Passive always fails, eventually.Below is the chart of a famous fund. The fund is open and you can, if interested, invest in it. Experts say it's great but I think it's terrible. Passive pimps say retirees, widows and orphans should gamble on unanalyzed stocks no matter how bad or overpriced!Seems good. +20% CAGR after fees for ten consecutive positive years. The returns have been independently audited many times. Transparent, heavily regulated and available to all investors. No leverage, lockups, gates or valuation issues. The manager keeps it simple by investing long only in liquid equities on the largest market value stock exchange. It must be good, right?After analysis I concluded the fund was too risky despite being recommended by rearview mirror loving "Nobel" geniuses. I decided to figure out who was the best manager ever. The criteria for a good fund are complex but necessary to find the best. Defining a top fund as that which achieved the highest risk-adjusted alpha over several decades, the wealth accumulated by the manager from his investment acumen, the consistency and repeatability of performance from protectable edges, then the best ever investor is obvious.The “god of the markets”, 本間宗久 Munehisa Honma long/short hedge fund performed outstandingly for over 50 years. His main work, "Fountain of Gold", is the best finance book ever written. His trading ability enabled his family office to become the largest land owner in Japan. They later diversified into the Honma golf business which makes sense if you own vast tracts of flat land in a mountainous region.A set of Honma clubs has "high" fees but like hedge funds versus index funds, you get what you pay for. Destroy your golf score with "cheap" clubs? Wreck your portfolio with 0.02 for passive or grow and preserve wealth by paying 2 and 20 for skill?Munehisa Honma's net worth was over US$100 billion in today's money. Some years he "took home" more than the equivalent of US$10 billion so it's curious why pundits are excited on "news" John Paulson received "record" pay of just $3.7 billion. Fair "salary" for the over $12 billion he generated for clients that they would not OTHERWISE have.Like Honma, Paulson hedged client portfolios. REAL hedge fund managers focus on achieving returns to monetize talent and build wealth. Shorting subprime was NOT the�greatest trade ever. Good but not greatest. "Ever" means since 2002? Recency bias yet again. Honma's short sale of rice futures in 1789 was far more profitable than Paulson's "big" credit short.There's a fountain in the main garden of Honma's house as a reminder of the source of wealth. As befits many successful hedge fund managers, Honma was an avid art collector. He also advised the world's first sovereign wealth fund. Though rice was heavily traded and analyzed in those days, such liquidity did NOT produce an efficient market. He figured if he worked hard to develop competitive informational and analytical advantages he could extract alpha out of other traders, regardless of whether futures brokers themselves were bullish or bearish or prices were rising or falling. That's a TRUE hedge fund. Any firm needing a bull market to make money is NOT a hedge fund.Note for the long only luddites: the GREATEST trades tend to be shorts. Hedge fund "pioneer" Alfred Winslow Jones did not "invent" hedge funds. He invented the term but not the philosophy. Munehisa Honma was investing for absolute returns two centuries earlier. By 1755 Honma already knew that psychology and the IRRATIONAL actions of participants NOT economic logic drove markets. Behavioral finance isn't new, it's 253 years old. He didn't buy and hold rice and wait to be compensated for its higher risk. He did not "expect" a risk premium or "assume" that rice prices would rise over time. Index fans regard those as axiomatic for "stocks". Neither equities nor credit carry a risk premium. Trade them but NEVER hold them. Munehisa Honma paved the way for the hedge fund managers of today. Translated adages from his main book - "Market action is more important than news". "Prices do not reflect actual value". "Buys and sells are decided on emotion not logic". He discovered the truth all that time ago and without the computers, analytics and communication systems we have. He also knew the dangers of transparency: "Never tell others your positions or strategies". His performance speaks for itself. They should retrospectively award him one of those "Nobel" prizes that economists still hold onto as they continue their futile search for a rational market.Honma wrote of the returns to be made buying when most are selling and shorting when everyone else is buying. Consult the market about the market! Even today many spend valuable time on Fed watching when they could INSTEAD be seeing what the MARKET is saying. The Market told us we were entering a recession several months ago and the credit crisis was NOT "contained". The Market is not efficient but it forecasts better than any economist. As befits the samurai trader he was, the time between making a decision and implementing that decision must be minimized. Delayed execution and transparency are the enemies of performance.Though primarily a statistical trader, Honma also spent time on fundamental analysis, talking to farmers and consumers about what moved rice prices, who was buying or selling and why. He had detailed historical weather data and analyzed it to predict a key factor driving rice yields. His strategies required low latency trading so, despite the pre-electronic era, he established a signaling system all the way from Sakata to the Dojima Exchange in Osaka to get orders done and price data as quickly as possible. He developed many quantitative techniques to maintain his competitive advantage; some simple ones, like candlestick analysis, have entered the public domain but other more sophisticated methods he rightly kept to himself.Honma invented black box algorithmic trading. As his impact on the markets grew he evolved from market-taker to market-maker. He leveraged his informational advantages and adapted to the situation as needed. Those quants who download a decade of security prices and then overoptimize and curve-fit to the patterns of recent history might remind themselves that Honma analyzed 1,500 years of rice data BEFORE doing a trade. He focused on finding robust and persistent phenomena NOT spurious patterns containing zero PREDICTIVE information.Feedback fuels future fluctuations. Honma would have scorned those economists that assert that markets have no memory. Securities are traded by humans and computers programmed by humans, both of whom DO have memory. If the input has memory then the output has memory. If no memory is assumed, prices might indeed follow a random walk. "Nobel" Prize "winner"�Paul Samuelson supposedly "proved" that "Properly anticipated prices fluctuate randomly" which might have been relevant except for the INCONVENIENT TRUTH that prices are NEVER properly anticipated.Stock, bond, currency, real estate and commodities prices are determined by participants with memory, so prices themselves also have memory. Honma accumulated more wealth exploiting security price memory than all the economists TOGETHER who have ever believed in memoryless markets. Not only is there NO efficiently priced security; it is impossible for an efficient market to exist. Amnesiac assets? Absurd. Rational agents? Really. The future state has no dependence on the present or past states? Preposterous.Many trading techniques can be traced back to Honma. It is interesting how often Western investors get caught out trying to trade Japan.�Some fixed-income arbitrage hedge funds got hurt by cash Japanese bonds recently. The yen carry trade has damaged many that didn't realise that a low interest rate does NOT imply a weak currency. As Honma wrote, the cheap can get MUCH cheaper.Some might be skeptical of technical analysis and know nothing about Japanese-style technical analysis. Fair enough. There are plenty of fundamental ways to make money. But if a bigger investor with a few trillion yen to put to work believes in such things as candlesticks, Kagi, Renko, Heikin Ashi and Ichimoku then that may impact the markets and lose money for those who do not master such methods. If you don't know your edge then you don't have an edge but that edge must be enough to overcome other traders' edges. I haven't come across ANYONE able to consistently make money trading yen, JGBs or Japan equities without a thorough understanding of Japanese analytics.I didn't trade any security in Japan until I knew ALL the above methods cold. Incredibly many rookies still try (and fail dismally) to trade Japan profitably. As Honma knew and John Maynard Keynes implied, the key is working out what others will do and how they value securities NOT one's own estimate. The market may NEVER value an asset "correctly" as some activist and value investors in Japan have recently found out to their cost.Honma was the first successful quantitative trader. Isaac Newton's earlier trading forays weren't successful but then gravitational modeling is easier than financial modeling. The sun WILL rise tomorrow but the motion of the markets is less predictable. It is interesting how today more scientific method and new math are being applied to the markets. But OLD math and dubious economic "theory" have not coped well with modeling REALITY. Assets classes affect each other but the ways they interact change over time. Since no traded security moves randomly, the math of randomness is not useful in finance. Today many still use it because stochastic calculus is easy, unlike the quant methods that work.ALL assets are connected. Honma monitored many things even if they had no apparent connection to rice prices. Everything is related and NOTHING is independent. Beware of ANY financial "model" that assumes independent, identically distributed prices. We have seen the dire results though it does allow alpha to be transported from those that use them to those who employ better methods to win the zero-sum game. The Central Limit Theorem has no applicability to the REAL statistical distribution of prices.Japanese electronics, washing machines and subway systems make use of fuzzy logic. Fuzzy logic is disdained by those who think we live in an orderly, bivalent world of true/false, right/wrong, yes/no and 0/1. I once developed a fuzzy model to calibrate the bullishness or bearishness of the Japanese market. It provided nice projections for the daily ranges for the JGB, Nikkei and yen. Given the inappropriate Ito stochastic integral for pricing derivatives, I also adapted the Sugeno fuzzy integral to derive a more accurate option replication and hedging model. Isn't the world itself FUZZY so fuzzy logic could be of use? The market is vague even at the best of times. The market is NEVER in a 1 or 0, bull or bear state; it is always somewhere between 0 and 1.Japan therefore had the world's best ever hedge fund - Honma's long/short rice fund managed from the 1740s to the 1790s. The chart above is a Japan "passive" index fund performance from 1980-1989 but below is the ENTIRE performance chart since 1980. Past perfomance was not indicative for future performance in any country. The risk and volatility since 1990 have failed to compensate investors with high returns but that would not have surprised Honma. Performance comes from hard work and talent NOT buy and hope. A good heuristic for assessing investment strategies - if it is simple then it won't work. Easy "solutions" cause difficult problems, as we have seen.Returns have not been good for the TOPIX since the high water mark set so long ago. The 1980s were NOT even the best decade; the 1950s compounded at a 25% CAGR and returned 10X investors' money. Even now, so many years into a bear market, the TOPIX remains the top returning stock index in the post war period. Would I therefore invest in it? Absolutely not. I want funds that WILL perform in the future not rely on a magnificent past. But for those who like "cheap" long only equity funds and historical data dredging, it is interesting they don't overweight Japan. As for me I am staying long yen, long JGBs and short the Nikkei for now.I prefer the manager risk of TODAY's superstar traders and investors NOT the risk of long only funds. Honma-sensei thrived in volatile market conditions. Recession will make the absolute returns generated by top hedge fund managers important and they have the best ever, Munehisa Honma, also known as Sokyu Homma (本間宗久) and born Kosaku Kato, for inspiration.Since Honma's era there have been many obituaries written for the hedge fund industry. We are on another iteration right now because a few beta dependent speculators masquerading as hedge funds recently blew up. That SOME hedge fund strategies are short volatility and can be modeled as effectively short sellers of put options and hoping a black swan won't show up to reveal their fund as a data snooping lemon is very OLD news. Ten years ago Long-Term Capital Management short sold options and bet the house on convergence and got taken out by the "never happened before" Russia default. Fortunately there are many quality hedge funds run by managers who are fully aware of the dangers of being short gamma and convexity, potential "rare" event fat-tail risks, carefully hedge for those exposures or maintain a long volatility profile. Sure plenty of "hedge funds" are no good but there are many skilled hedge funds that do manage risk. by Allen Veryan. Copyright http://creativecommons.org/licenses/by-nc-sa/3.0/ Short-selling: can hedge funds make a fortune from no-deal Brexit? https://www.theguardian.com/business/2019/sep/30/short-selling-hedge-funds-fortune-no-deal-brexit-boris-johnson https://www.theguardian.com/business/2019/sep/30/short-selling-hedge-funds-fortune-no-deal-brexit-boris-johnson Mon, 30 Sep 2019 14:51:57 UTC Patrick Collinson at Hedge funds | The Guardian Philip Hammond says Boris Johnson’s rich backers are line to make a killingCrispin Odey: I am not backing no-deal Brexit as shorting opportunityHedge fund millionaires backing Boris Johnson will make a killing from a no-deal Brexit, according to the former chancellor Philip Hammond. The claim is these “short sellers” are betting on big falls in share prices and the value of sterling in what critics say is a classic example of “disaster capitalism”. But how do they do it, who are they and are they all merchants of doom? Continue reading... http://creativecommons.org/licenses/by-nc-sa/3.0/ Crispin Odey: I am not backing no-deal Brexit as shorting opportunity https://www.theguardian.com/business/2019/sep/30/crispin-odey-denies-backing-no-deal-brexit-shorting-opportunity https://www.theguardian.com/business/2019/sep/30/crispin-odey-denies-backing-no-deal-brexit-shorting-opportunity Mon, 30 Sep 2019 12:51:40 UTC Nils Pratley at Hedge funds | The Guardian Hedge fund manager says he is optimistic about UK and claims as to motivations are ‘rubbish’Short-selling: can hedge funds make a fortune from no-deal Brexit?Crispin Odey, the hedge fund manager who is a leading backer of a no-deal Brexit and Boris Johnson, has dismissed claims his support is motivated by an opportunity to make millions from short-selling UK companies and the pound as “absolute rubbish”.Odey told the Guardian he was optimistic about the prospects for the UK after Brexit, denied influencing strategy at No 10 and said his fund had an overall “neutral” position on UK stocks. Continue reading... http://creativecommons.org/licenses/by-nc-sa/3.0/ Ex-top civil servant: Hammond was right to query no-deal backers https://www.theguardian.com/politics/2019/sep/29/ex-top-civil-servant-hammond-was-right-to-query-no-deal-backers https://www.theguardian.com/politics/2019/sep/29/ex-top-civil-servant-hammond-was-right-to-query-no-deal-backers Sun, 29 Sep 2019 19:19:54 UTC Graeme Wearden at Hedge funds | The Guardian ‘They are shorting the pound and the country’ warns Nick Macpherson of Boris Johnson’s hedge fund supportersFormer chancellor Philip Hammond’s attack on Boris Johnson’s hedge-fund backers has been supported by a former top Treasury civil servant, as financial experts raise concerns over the PM’s links to the City.Nick Macpherson, former permanent secretary to the Treasury, said Hammond was right to question the political connections of some of the hedge funds with a financial interest in no deal.Mr Hammond is right to question the political connections of some of the hedge funds with a financial interest in no deal. They are shorting the � and the country, with the British people the main loser. #soundmoney https://t.co/Ncn5IR48hKNadhim, calm yourself: I made no reference to “interference”. I observed 3 things:1) Boris has backing from hedge fund managers;2) Some of those will have bet on No Deal;3) Those that have will be happpy to see scant progress towards a deal.Which of these 3 is incorrect? Continue reading... http://creativecommons.org/licenses/by-nc-sa/3.0/ Calls for inquiry into claims Johnson backers benefit from no-deal Brexit https://www.theguardian.com/politics/2019/sep/28/boris-johnson-backers-benefit-from-no-deal-brexit-inquiry https://www.theguardian.com/politics/2019/sep/28/boris-johnson-backers-benefit-from-no-deal-brexit-inquiry Sat, 28 Sep 2019 16:06:27 UTC Michael Savage Policy editor at Hedge funds | The Guardian Cabinet secretary urged to look into conflict of interest fears raised by Philip Hammond and Rachel JohnsonThe UK’s most senior civil servant is under pressure to investigate Boris Johnson’s financial backers following cross-party claims that unnamed individuals stand to benefit from the prime minister’s willingness to pursue a no-deal Brexit.John McDonnell, the shadow chancellor, has written to the cabinet secretary, Sir Mark Sedwill, asking if there may be a conflict of interest in Johnson’s acceptance of support from hedge funds that could gain from an economic shock. Continue reading... http://creativecommons.org/licenses/by-nc-sa/3.0/ Neil Woodford buying up FTSE 100 shares after fund suspension https://www.theguardian.com/business/2019/sep/23/neil-woodford-buying-up-ftse-100-shares-after-fund-suspension https://www.theguardian.com/business/2019/sep/23/neil-woodford-buying-up-ftse-100-shares-after-fund-suspension Mon, 23 Sep 2019 18:21:37 UTC Kalyeena Makortoff Banking correspondent at Hedge funds | The Guardian Woodford Investment Management reveals investments in blue chip stocksNeil Woodford has piled cash into FTSE 100 stocks after seeing the value of his flagship fund tumble 13% following its shock suspension in June.The beleaguered fund manager apologised to investors still trapped in the Woodford Equity Income Fund, and confirmed that their cash would likely stay gated until early December. Continue reading... http://creativecommons.org/licenses/by-nc-sa/3.0/ Asset allocation http://feedproxy.google.com/~r/HedgeFund/~3/jsFMJiX5nMs/alpha-or-beta.html http://feedproxy.google.com/~r/HedgeFund/~3/jsFMJiX5nMs/alpha-or-beta.html Sat, 17 Aug 2019 03:08:00 UTC Hedge Fund at Hedge fund Asset allocation doesn't work. The "experts" are WRONG but such wrongness keeps pension "consultants" and financial "advisers" in business. Just take a look at the disastrous state of public pensions and retirement savings. It does not drive portfolio returns or volatility. Easy mathematically or empirically to prove for all client goals, market scenarios and risk tolerances, investors big and small should NEVER asset allocate.Asset allocation? If investors were required to put their entire portfolio in one stock of their choice, "experts" would conclude ONLY stock picking drives returns. If you flip a coin each month to be "100% stocks" or "100% cash" then market timing becomes the SOLE factor. Asset allocation is based on bad science. Good data science proves: 100% in skill strategies, 0% in asset classes.BAD SCIENCE: decide on conclusion you want - �then find a data set you know in advance will "confirm" your delusion. Brinson, Ibbotson etc ONLY studied investors that were ALREADY doing "asset allocation". If they�had confined themselves to market timers they would "discover" that market timing drove performance! Asset allocation had no influence. Is it valuable to "conclude" that asset allocators' returns and variances were driven by "asset allocation"? No.I've read the academic papers, heard all the gurus speak, met with the geniuses. Safe in mediocrity and groupthink but empirical garbage and dangerously mistaken. Sadly most investors destroy their wealth and retirements obeying conventional "wisdom". As a data scientist I let facts and evidence speak. SKILL is the ONLY prudent long term investment.Naive asset percentages in various betas is a breach of the fiduciary standard. Truly "prudent" men do NOT invest like that. Some urge low fee, high cost, high risk dumb beta index funds but such speculative products have vicious volatility and devastating drawdowns. The prudent way to achieve goals for ALL long term scenarios is strategy selection NOT asset allocation.Was nothing learnt from 2008? The ludicrous losses of traditional portfolios in major drawdowns show "bet on betas" asset allocation fails.�Portfolio returns are actually decided by level of manager talent, security selection and competent (or not) factor hedging. �Asset allocation dominated conventional "wisdom" and wrecked too many portfolios. Meanwhile the skilled thrived in those wonderful market conditions. Trillions are mis-invested due to asset allocation. Enough!60/40? Does x% in fixed income when bonds yielded 10% make sense even if they now yield 2% or less? Still x%? Of course not. Since client long term goals require the SAME absolute return no matter what, fixed income attractiveness varies as a function of interest rates. As for "high" yield, many junk bonds were yielding +15 to 20% when Michael Milken made his name. Today a measly 5%? "High" is absolute, not relative. Need a lot more coupons to absorb the defaults. Ignore arbitrary "asset class" beta labels.Check out "risk free" govt bonds during inflation. The "lower for longer" fools urge loading up on duration at these rates! Risk reward? Equity markets are usually either too cheap or overpriced. Asset class silos have no place in this dynamic, volatile, high frequency world. 100% in SKILL is what you need. Diversification is no free lunch and adds value only if it REALLY diversifies. Mostly it diworsifies.Focus on talent. Investors don't have the time or risk appetite to gamble on indices. Time slows for no-one so don't grow old riding out drawdowns and gambling on the idiotic ideas of the asset allocation crowd. Markets may rise - eventually - but that time CANNOT be recovered.�100% needs to be invested in skill so�I invest with the world's best managers. Why put a cent with anyone not good enough to run a hedge fund?Asset allocation has cost millions their retirement. It has also destroyed the spending budgets of university endowments and foundations. Liquid long only is bad but leveraged illiquid long only is crazy. Pension consultants call it "private equity". David Swensen is still being allowed to gamble away alumnae money at casino Yale, for now. Many pensions keep doing what they have always done and get what they always get: lower funded status. Why waste millions on consultants to do an asset/liability study when asset allocation is useless?Skill is necessary if you want consistent capital growth. Short positions are required; longs are optional. Those landmark�studies reached BIASED conclusions because asset allocation is what the CHOSEN investors already focused on. In contrast smart investors pay no attention to asset class labels and focus on security selection and tactical timing. Good fund managers analyze securities using skill. I have no interest in unskilled asset classes. Beta does not compensate for risk even in strong bull markets. Don't breach fiduciary duty to yourself or others you represent.A stock and bond asset mix determines variation of returns only if you focus on beta. It's easy to debunk the asset allocation "axiom". If you encounter any "consultant" claiming that asset allocation accounts for over 90% of returns, don't walk away, run. Risk averse people invest in alpha. The true determinant of superior risk-adjusted returns is investment SKILL not percentages in UNSKILLED asset classes. It's the manager mix NOT the asset allocation. Check out the dire funded status of DB and DC pensions that gambled on betas due to incompetent advisors and conventional "wisdom".It was a GREAT decade for the S&P. No beta for "passive" index funds but every day offered an opportunity set of fluctuating securities to capture alpha. It was an even better quarter century for the Nikkei. No beta since 1984 but vast alpha was generated from security selection and market timing by those with talent. Some "experts" say investors ought to have more in risky assets due to higher "expected" returns. Instead people would be wise to focus on 100% in skill. For those with liabilities to fund, intolerance of volatility or dislike of deep drawdowns, alpha is the prudent investment. Can't beat beta? Forget about beta.In aggregate, stocks can underperform bonds for decades. 60/40 sounds prudent until rephrased as 90/10 risk. Why have a high risk appetite when unhedged equity indices NEVER compensate with sufficiently high reward even in bull markets. Last century's 8% return on 16% volatility was an insult but a last decade's negative total return with even more risk is absurd. Most bonds also don't reward enough for their risk. Do not go near index fund garbage. It is for speculators NOT fiduciaries.Choose specific securities or hire�other people�with rare skill to do it for you. If your portfolio�lost money in 2008 or you spend less than 100 hours a week�dedicated to�manager due diligence, portfolio construction and security selection you need to re-evaluate WHO is making investment decisions for you and HOW to upgrade. The Greeks got it right: alpha�is before beta. If a manager is unable to make money or preserve capital in DOWN markets they aren't suitable for ANY portfolio.Alpha beta separation is trendy but beta tends to swamp alpha as we saw in the downs and ups of 2008/2009. That led to the mistake inherent in the crazy concept called portable alpha. It was a beta-centric way of getting some investors into hedge funds but failed because it kept asset allocation front and center. It diluted the absolute return attribute and changed it into just another relative return index based product. The alpha beta separation idea still has too much risk budget in beta. But why bother with beta at all? "Cheap" beta is expensive considering its risk. Cost and risk conscious investors favor alpha. It's a cheaper source of return.The more vituperative commentary on hedge funds, the more one should invest in alpha vendors. Why tie up precious capital in riskier beta when lower risk alpha is available? Better to identify mispricings and arbitrages than invest in "the market" itself. It is safer to minimize market exposure and analyze specific securities to buy and short sell that just gambling on benchmarks. Most portfolios are very beta biased while some investors implement a beta plus alpha model. The natural progression is to alpha only which has a much better efficient frontier. I do not understand why investors must surrender their wealth to the hazards of beta when superior alternatives exist. Selecting the RIGHT betas at the RIGHT time is a form of alpha anyway. Choosing the WHICH and WHEN of asset classes takes as much talent and expertise as at the security level. I have no idea where "the markets" are going in the long term but will not take the chance of finding out. Asset and security selection, timing and hedging skill, though rare, are the only properties a conservative investor can rely on if they need adequate and consistent absolute returns. Beta is passive but do we really live in a world that rewards passivity in any activity? I don't think so which is why they are called ACTIVITIES. Alpha comes from acumen driven ACTION.Successful investing is about leveraging informational, structural and analytical advantages or hiring those that have them. Let's look at portfolios that did well over long periods but didn't asset allocate, instead focusing on security selection or timing. A low frequency trading firm like Warren Buffett's Berkshire Hathaway identifies specific multiyear opportunities in currencies, commodities, stock and bond markets, derivatives and event driven special situations. In contrast the high frequency trading of Jim Simons' Medallion Fund times thousands of liquid securities over shorter holding periods down to microseconds. Producing alpha depends on your knowledge and technology edge applied to appropriate time horizons. Beta bets drive many portfolios because that is what most investors do. It is like those who assume carbon is necessary for life because the science they know and only lifeforms they have analyzed are carbon-based. The anthropic principle applied to finance. It is false logic similar to the "all swans are white because every swan I've seen is white" phenomenon. Asset allocation fit nicely into the established body of theory which is why it remains popular despite its woeful weaknesses. Efficient, unbeatable markets imply the non-existence of skill! Choose beta because alpha is just "random" luck in a zero sum game? The much cited Brinson Hood Beebower paper has cost too many investors too much money. Beta people advocate index funds since they want you to invest in "the market". But the optimal way to achieve absolute returns at the total portfolio level is to be alpha-centric.Beta vendors don't manage risk, don't market time and outsource ACTIVE security selection to benchmark construction firms. They even stay fully invested long only in bear markets! A beta-centric portfolio is where investors decide policy asset allocation and then hire managers to basically deliver the return from asset classes and hopefully a bit of alpha on top from tracking error constrained active mandates. Most long only funds have an R-squared with their benchmark over 70% - ie beta explains most of their returns. Alpha strategies and manager selection shouldn't be secondary but that is the result when beta bets dominate the allocation of investment capital.Alpha vendors see a market of securities offering long/short opportunities in many time horizons within and between asset classes. An alpha-centric portfolio is where investors hire managers to analyze, trade and hedge for absolute returns. Of course you have to be good and work extremely hard to find alpha. Any manager that depends on beta is NOT running a hedge fund. A truly efficient portfolio does not pollute itself with beta. Dismissing all hedge funds is like avoiding all stocks because Enron, General Motors and Nortel fell to zero. Don't invest in bonds because some default and there is no such thing as a risk free rate? Nortel stock lost -100% while a Nortel bond is up +700% but most missed it.Pure alpha sources do not fit well into the beta allocation process that some find so compelling. Since they are not assets, treating hedge funds as an asset class is wrong. The dispersion of returns across the industry is very high. So variable that AVERAGE performance has little meaning. 10,000 hedge funds, 10,000 strategies. People like to know if "hedge funds" were up or down each month. But what does that mean? Some made money and some lost money. Likewise I am often asked where I think "the market" is going. That is a beta question. Some stocks go up and others go down. Seek alpha.Do I want "hedge funds" that outperform? No. I look for hedge funds that make money which is a very different target. I know that good hedge funds will have high risk-adjusted returns and bad ones will not. Alternative beta is just another beta and is therefore to be avoided. Most betas are becoming more correlated whether by geography or the equity, credit and real estate correlation to the economy. I am not concerned whether a hedge fund is "market neutral" or not. But it must be able to deliver absolute returns that are "economy neutral".Alpha is the REAL diversifier because there are so MANY different ways of generating it. Focus on alpha if you want good returns regardless of the economy. Why pay attention to asset classes when investing in SKILL-BASED STRATEGIES makes more sense? Others are welcome to unhedged beta bets but for conservative investors like me beta with a bit of alpha is inferior to an ALPHA ONLY portfolio. Making money is simple: do the opposite of "Nobel" Prize economists. by Allen Veryan. Copyright http://creativecommons.org/licenses/by-nc-sa/3.0/ Burford Capital replaces finance chief to appease investors https://www.theguardian.com/business/2019/aug/15/burford-capital-replaces-finance-chief-to-appease-investors https://www.theguardian.com/business/2019/aug/15/burford-capital-replaces-finance-chief-to-appease-investors Thu, 15 Aug 2019 17:40:12 UTC Kalyeena Makortoff Banking correspondent at Hedge funds | The Guardian UK-listed litigation financier bows to pressure and demotes CFO after hedge fund criticismBurford Capital is replacing its chairman and finance chief in an effort to appease shareholders after a US hedge fund made allegations of poor governance and murky accounting practices.Burford, which specialises in funding lawsuits in exchange for a cut of the settlements, has faced criticism over the fact that its chief financial officer, Elizabeth O’Connell, is married to the chief executive, Christopher Bogart. 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