The (Bursting) of the Bond Manager Bubble

US market history seems to be characterized by some form of hero worship at each point of the cycle. You know, the investment managers that the journalists, investment professionals, and (sometimes) general public drool over:

  • 1980s – The “Corporate Raider”
  • early/mid 1990s = the macro speculator / bond vigilantes
  • mid/late 1990s = The Star Mutual Fund Manager and Venture Capitalists
  • Early 2000s = Equity Short Sellers
  • Mid 2000s = Real Estate and Private Equity “Moguls” … and “value investing”
  • Late 2000s = Housing/Credit Short sellers
  • Early 2010s = The Bond Fund Managers

If history is any guide, R.I.P. Star Bond Fund Managers (not just “high yield”). It was good while it lasted. It’s your turn to come back down to earth…for good.

As @barbariancap eloquently stated: “when talking heads argue which one of the two is more deserving of the bond god/bond king title, you know the end is near”


  1. What does the bursting of a bond bubble look like?
  2. Who will be worshipped from Mid 2010s – end 2010?

The Turkey of Nevada and the Turkey of Canada #TurkeyOfCanada

Last week, we learned:

  • There are turkeys in Nevada
  • Nevada is a haven for yachts
  • People who are not “regulated” can do whatever they want.
  • A bear raid is when bulls sell on historic trading volume
  • The Turkey Of Canada thinks he can “move” Canadian bank stocks 10%
  • Free speech is equivalent to “undermining the integrity of capital markets”

On a serious note, here is the turkey himself:

Black Wednesday – October 21st, 2015 – The Last Time a $50+ Billion Stock Declined 40% Intra-day


Today will be a day to remember for many market participants. It is a day I will never forget. Today bore a faint resemblance to the October 1987 crash, but for stockpickers.

Valeant Pharmaceutical’s (VRX) stock fell intra-day (at its lowest point) -40% . -40%!!! That’s right, a $50+ billion market value company declined 40% in value within the day. That rarely happens.

I may write a more coherent post later, but here are a few things I’d like to write so that I can look back to this day in remembrance:

  • Congratulations to the public shorts and skeptics — Roddy Boyd, John Hempton, that AZ_Value guy, Jim Grant/Chanos, Andrew Left, and others.
  • Deep condolences to the longs. The magnitude of the market reaction made as much sense to you as it did to me (especially given that the “incremental” finding in today’s “report” was already in the public sphere).The so called “smoking gun” was available in plain sight. PLAIN SIGHT!! NOT HIDING, but widely available!
  • I can relate to both sides – I’ve been on both sides of similar type situations, where the security price went against me 50-80% within a day, or went in my favor in similar magnitude. Having been both the beneficiary and unlucky loser, I truly can and do understand both sides here.
  • The amount of schadenfreude amongst both the longs and (more recently) shorts has been quite high.
  • Yesterday’s Village Idiot, and Today’s Evil Genius – Earlier this year and last year, short sellers were considered the village idiots. Today they are considered (evil) geniuses… neither are correct.
  • DO YOUR OWN WORK – A certain trend-following guy wrote today: note to self: “Short future Citron picks” … except he and/or similar types traded against Citron picks (gainfully) from 2012-2014. Those chasing Citron here are wise as those chasing Ackman long VRX in the 200s. DO YOUR OWN WORK.
  • Intrinsic Value and Nonlinear Dynamics – What is VRX’s intrinsic value? Now is the time to be kicking the tire regarding free cash flow generation. That being said, I find the business school approach to valuation insufficient for purpose of evaluating roll=ups/platform companies. How can one arrive at a stable intrinsic value estimate, when the value is non-linearly dependent on its stock price? (even though it may have not used its stock as currency, it creates chaotic/nonlinear outcomes for purpose of estimating intrinsic value)
  • Too Difficult Bucket – Placed it in “too difficult” bucket in Q4 2014/Q1 2015 … no regrets. It remains in the “too difficult” bucket for me today. Arguably, it’s Hillary Clinton who created the recent short opportunity.
  • Shorting is hard – you probably made more money long VRX today vs most shorts did shorting it. ever.
  • Valueact won the war – Coulda/woulda/shoulda sold more (granted, that’s without knowing the future trajectory fo the stock), but they already won the war, pretty much no matter what happens from hereonforth.
  • Ackman-Freude <–> VIX – Fade it when it spikes up, and buy it when it comes crashing back down and stays down
  • Fool Of Randomness? – Today was one of the rare “drop everything you’re doing and laser focus on one thing and one thing alone!” days. Simply by NOT being the fool of randomness today, I was in a position to take advantage of opportunity. I was fortunate (not smart) to have been able to navigate gainfully today. I coulda/woulda/shoulda handled today better, but no regrets. Being self-critical is highly important, but also have to note that today allowed my longer-term learning/growth to shine through… I have more room to grow.
  • Statistical/historical significance – largest trading volume in history – by factor of 4x! Largest intraday percentage swing in history – yet it is not even in the top 5 among one-day percentage decline.. there have been 35 instances of over -10% one-day percentage declines. So yesterday was not so special in that regard… the -40% intra-day decline was VERY special.

“Strong minds discuss ideas, average minds discuss events, weak minds discuss people”

The (Real) Case Against Short-Selling – Why You Should Avoid Short-Selling Single Stocks

I’m eating lunch right now, and writing this post primarily as a self-reminder (so I can read it to remind myself DAILY). If you’re not like me (possessing the short-selling “genetic defect”), or even if you’re like me, you should avoid short-selling single stocks. Here are some reasons (ignore what others say, written by academics/non-practicioners):

  1. Your risk of blowing up, and/or experiencing crippling marked to market losses is very high, if not guaranteed. Most people (rightfully) cannot handle such volatility. Some people go insane, as a result. Insanity and poverty = bad.
  2. There is no free lunch. Credit default swaps and puts have their own risks that mitigate the blow-up risk, but present a whole new set of risk factors.
  3. Even if you’re one of those “I have 100-10,000 shorts” to reduce/eliminate risk of blowing up – you run the risk that you will spend 25%-50% of your time/efforts on a position that is 10 bps… okay maybe even 100 bps large. That seems like a waste of time. Or at least, your ROI on time seems inefficient.
  4. It is very difficult, if not impossible (assume impossible) to compound your capital with shorts the way you can with longs. It’s definitely more painful to attempt to do so with the former. How many billionaire short-sellers do you know vs billionaire long-term investors?
  5. It’s more tax efficient to be a long-term investor. This applies to most market participants, big and small, most of the time. You eat after-tax returns.
  6. Even if you possess the uncanny ability to find zeroes – in practice difficult/impossible to borrow, or very expensive to do so. So your effective expected return is far worse.
  7. Time-adjusted return matters as much as absolute return. So even if you have the uncanny ability of finding “terminal shorts”, zeroes, etc… say it takes 7-10 years…
  8. Short-selling is difficult/impossible to scale. Your opportunity set from $1 mm in capital vs $10 mm, $100 mm, $1,000 mm, $10,000 mm, $100,000 mm…. your opportunity set shrinks (not necessarily in a smooth fashion, but still it’s important consideration).
  9. Even in the instances your profit-seeking result in public good – e.g. outing a fraud – Some government officials will hate you (even when you’re working in their interest and have done nothing wrong!). To be fair, some will love you too, but the former make it all but not worth fighting the good fight. These introduce actual costs (legal expenses – lawyers are expensive) and opportunity cost.
  10. If you’re public about your shorts, you will receive hate mail, even death threats. And those sending you hate mail / death threats… they won’t apologize when you’re proven right. (okay, rare instance 1/1,000 will apologize).
  11. In practice, the criminals win… they may get caught/sentenced/fined etc years later, but they will have manipulated the stock, squeezed you out (illegally), leaving you with losses, even though you’re “right”. Job was a (relatively) righteous man, yet he suffered. His suffering was not a result of any of his actions. Lesson: Life is complex. Good things happen to bad people, bad things happen to good people, good things happen to good people, bad things happen to bad people. There may be a method to the madness, but it doesn’t mean you or I have it all figured it.

Addendum I to the so-called “Magna Carta” of short-selling

  1. Buy-ins (even if illegal behavior, market manipulation cause them, no recourse)
  2. foreign equities present additional complications, beyond listed above.

Addendum II to the so-called “Magna Carta” of short-selling

  1. See the career paths of those who possess the “genetic defect” – very few of them can boast of stable career lives (granted, the turnover in hedge fund and financial services industry is already high). Often dissatisfied with compensation, etc.
  2. The only business model whereby one can achieve some semblance of stability AND non-linear upside economics (for the manager) = the Kynikos funds’ business model. The problem is how do you sell it to investors? Granted, there must be a market for that “inverse alpha blah blah blah” model, as evidenced by Kynikos’ current and peak AUM.
  3. The above do not necessarily apply to “shorting” fx/indices/commodities/bonds/etc – though a whole host of other factors do.
  4. There seems to be a mismatch in the skills and daily disciplines required in the (I) research vs the (II) trading of securities. On one hand, one needs to be an analyst/researcher on par – if not vastly superior – to a long-only guy who possesses a concentrated position. On the other hand, one requires the trading discipline on par with a global macro trader. Contrast this against a long-term, long-only investor, whose research and “trading” duration are more aligned. (the above applies to position sizing as well).

Addendum III – Buyouts, etc.

  1. Companies you would never expect to be serious acquisition candidates, not only become so, but get acquired! And then written off 80-100% by the acquirer within 12-24 months’ time! (Sometimes a bit later)
    • Updated December 2015: See GMCR as additional example
  2. The rules of the game can, and have, changed midway – e.g. disclosure rules, outright bans, etc
  3. You’re at the mercy of your broker – in more ways than one.

Addendum IV – moral victories and/or pyrrhic victories, get used to them

Addendum V – the Joys of Short selling

  1. the Joys of Short selling – microcaps – applicable to retail traders

re: KBIO


“Try it sometime .40 cents to $45 to halted at $23 to zero 90 days”


Don’t forget: at one time, it cost -200% negative rebate to borrow KBIO

2. the Joys of Short selling – Institutional version

See case of the Hanergy fraud

“Falcon Edge held Hanergy short despite 7x return – told investors company ‘outright fraud’ earlier this year”




Mister “Process Process Process” in Hedge Fund Land and “macro strikes me as bullshit”

A certain long/short guy that many respect claimed:

“Macro strikes me as bullshit unless you can show me a repeatable, disciplined process that has delivered consistent returns over time.”

The fact of the matter is, many single stock-focused people consider macro “bullshit”, so his comment is unsurprising. While I disagree, what really got my attention was this line: “repeatable, disciplined process with consistent returns over time is a strategy.”

So a few (disparate) comments regarding the above:

  • Soros/Druck Qualify as Bullshit According to His Logic – Nearly all the great macro/trades and fortunes in history would qualify as “bullshit” under that guy’s definition (it’s also unsurprising he continued by insulting Druckenmiller – at least he’s consistent) – the Soros funds were characterized by more than a few drawdowns that would make the above-mentioned long/short guy pee his pants. The “Big Short” experienced a 20-35% drawdown right before working extraordinarily well. It’s not as if these fortunes were made with some previously implemented “repeatable process” . If you want to “repeatable, consistent returns” see Bernie Madoff, or stick with bonds.
  • Process –> Algorithm – “repeatable, disciplined process with consistent returns” ultimately , in my opinion, converges into an algorithm… algorithms render the very long/short guy who made the above claims , largely obsolete. Oh the irony. This suggests to me that if discretionary investors want to outperform the algo/quant ones, we need to go beyond process…
  • Mister Process Process Process – Someone I used to know – he had the right investment banking/consulting background – went to the right Business School. He was well-versed in Buffettology. He believed the Kool-aid, and spread the Gospel of Kool-Aid. He was that boring/safe guy who you’d want your daughter to marry… he was also highly process oriented. He was so accomplished at building processes, he was the guy you’d want to train all analysts at your fund. He’d groom them well. Guess what? He was and is an average/bad investor. He was great at going long value traps (and being the perfect counterparty/contra-indicator). He had no short selling skills. He also had no concept of position sizing conviction. He missed some of the best trades in history, even though they were staring at him right in the face.

Julian Robertson on … Germany

From More Money Than God:

In early November 1989, when Griffin was on leave at business school at Stanford, the fax machine that he had installed in his room sputtered out a message from the chief: “Big guy, the Berlin Wall is coming down soon. This is gonna be a VERY big deal.” A few days later, the wall duly fell, and two days after that Tiger began to load up on German securities. Robertson knew next to nothing about Germany; but Griffin had studied the German market during a summer stint in London, and Robertson was not going to let an absence of experience get in the way of a historic opportunity. Tiger bought Deutsche Bank, which stood to profit from a unification boom. It bought Veba, a large utility that owned power plants along the West German–East German border and could be expected to capture the emerging eastern market. It bought Felten & Guilleaume, the firm that made the power cables that would carry the electricity into the new territories. Sure enough, Germany’s stock market went on a euphoric tear, and Tiger’s stake in Felten & Guilleaume soon doubled.
The following summer, Robertson and Griffin rode into Germany. They went to East Berlin, where they discovered that nobody had heard of hedge funds or Julian Robertson. They also discovered that Germany was not quite what Robertson had thought. Sitting in the waiting room on his first company visit, Robertson touched the table and held up a dust-blackened finger. “These people have a long way to go,” he said a bit suspiciously. The meetings continued, with Robertson asking Wall Street questions and the Germans doing their best to be genial, and all the while Robertson was grappling with the gap between what he could see in the numbers and what came out of the mouths of these people. By American standards, and relative to the factories and other assets that they owned, German stocks were ludicrously cheap. If the Germans could manage these assets as American managers would, they would generate huge returns for shareholders; and if the incumbent managers were too sluggish to do that, surely a wave of Wall Street–style takeovers would quickly solve the problem?

But the more Robertson toured Germany, the less enthusiastic he became. He would sit in a manager’s office and ask about his company’s return on equity, but the managers cared more about their sales than their profits; they were running the company for the sake of the employees rather than for the shareholders. At the chemical company Bayer for example, Robertson was treated to a lavish lunch by the company’s top management.“It must be great to be the chief executive if you can eat like this,” Robertson said, not mentioning that he would have preferred that the company save money. “Oh no,” his hosts replied. “We serve this meal to all employees.”

“My! The planes here fly so close,” Robertson said, looking out the window. “Yes, that is the company flying club,” came back the answer. “Anyone who wants can train for their pilot’s license.” After the lunch ended, Robertson delivered his verdict to Griffin: “These people just don’t get it.” German managers could not care less about return on equity. By 1994, Robertson had come full circle on his view of the Germans. The nation’s industry was nothing more, he wrote, than a “giant flab bag of inefficiency.”

Then this happened ‘Model’ Germany that has recently rendered Greece a colony/vassal state

VW’s Emissions Cheating Found by Curious Clean-Air Group


So began a series of events that resulted in Volkswagen AG admitting that it built “defeat device” software into a half-million of its diesel cars from 2009 to 2015 that automatically cheated on U.S. air-pollution tests.


Where to Find Alpha: Anti “Risk Parity” Strategies (2015-2017+)

THESIS: Anti “Risk Parity” Strategies will be a major source of alpha generation from Q4 2015 – 2017 (if not beyond). I recommend that investors with allocation to Risk parity strategies pull out ASAP. I am not , and I have no interest in rigorously justifying my thesis. Rather, I will tease you with some hints/considerations/questions:

  • Why is Ray Dalio making more media appearances than even Warren Buffett? Arguably, Cliff Asness too, though his/AQR’s appearances seem a bit more measured. Both seem highly defensive of risk parity. Why? If you’re in a position of strength, why be defensive? Does not pass the “sniff test”.
  • Why does Bridgewater “backtest” returns without factoring in the impact that their and other RP funds’ presence would’ve had on markets in those past periods?
  • Why is it that some obscure outfit called Renaissance Technologies seems to obsess over modeling expected profit potential of a strategy as a function of its size?
  • If Bridgewater and other RP funds’ AUM went to zero, would the world care? Would the world be any worse off?
  • Assume I am wrong. Examine the claims of the RP proponents.
  • Compare/verify/test the proponents’ claims with evidence.
  • How much AUM is dedicated to RP strategies? How much EXPOSURE do these funds have (i.e., how much leverage)?
  • The Leon Cooperman / Omega Advisor quotes regarding Risk Parity are a distraction…the reality and truth are perversely ironic. Time will reveal all.
  • Why should the immediate and more distant future resemble the past, when the immediate past and present wildly differ from most of history?
  • The best “risk-adjusted” way of implementing “Anti Risk Parity” will likely be quite…boring. Though immensely profitable.


  • There at least several different ways of implementing Anti “Risky Parity” … they are not complicated. At all.
  • For the large institutions with allocations to “risk parity hedge funds” (e.g. pensions, endowments, etc), implementation of anti risk parity will help you both (I) save a significant amount of money and (II) handily outperform risk parity. The benefit of anti risk parity and/or reducing risk parity exposure is not only experienced via alpha generation, but via reduced costs (i.e. you need not pay a 1-2% management fee, nor a 20% incentive fee).
  • The crowded-ness of risk parity strategies AND unpredictable behavior of the “left hand side” of the balance sheets’ of risk parity operators opens up the path to non-linear outcomes, all detrimental to risk parity investors.. the prudent course of action would seem to reduce exposure to “risk parity” strategies by 50-100% before year’s end (2015). Those with bolder ambitions may not only seek to reduce risk parity exposure to zero, but substitute that exposure with anti risk parity.
  • This AQR “research” piece regarding risk parity is of dubious quality: it cites verifiably poor sources of hedge fund information in order to justify/estimate industry/strategy net and gross exposures. Furthermore, single stock short sellers regularly release far more thorough research on simple stocks… one would expect that a company of AQR’s calibre (and resources) can do better than this.
  • Anti risk parity is NOT a “bullish” or “bearish” stance… it’s more complicated than that (although its implementations can be elegantly simple). The only thing I’m “bearish” is the performance of “risk parity” strategies (at minimum, on a relative basis…you add in the fees, and it becomes a no-brainer to be “short” risk parity).
  • Based on other market participants’ public commentary / positioning, there are clearly others who are de facto positioned and/or positioning themselves in an anti risk parity fashion… though they may not be seeing it that way (or maybe they do).
  • I may agree with some of the Risk Parity proponents’ reasoning in disputing the Leon Cooperman assertions… yet I may disagree with their overall portrayal of risk parity (perhaps errors of omission).

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