The Limitations (?) of Non-Discretionary Trading

Active fund management continues its decline (both in popularity/adoption, as well as in realized performance), even as passive investing moves in the opposite direction. One needs to look no further than [aggregate] hedge fund performance in 2016. Like 2015, yes, you had some notably good performers…only to be offset by notably poor performers.

Concurrently, “quantitative investment management” (which I prefer calling “non-discretionary trading”) remains in vogue. Look no further than the assets under management of AQR and the likes, of the world… or the political influence of Renaissance Technologies (though, in fairness, Rentech has been anything but an ‘asset gatherer’).

Question: What effect – if any – do the simultaneous popularity/success of ‘passive investing’ AND ‘quantitative investment management” today have on their future returns/losses (and the smoothness/volatility of those returns/losses) ?

Let’s oversimplify and say that the ‘alpha’ of the non discretionary participants arise 100% out of the discretionary active participants. If the actives are being pushed out because of both the passive AND quantitative trends… does that not diminish the alpha opportunity set for the non discretionarys? What if I were tell you that some of these non discretionarys use 10x-20x leverage…on their equities books?

Some of you may recall the “great quant meltdown of [August] 2007”, that occurred just under 10 years ago.Seemingly invincible quant funds experienced sudden and meaningful declines (e.g. -5 to -30%).

The likes of Soros, Druckenmiller, Paulson, etc… all great wealth compounders for themselves AND outside investors – eventually experienced real/meaningful drawdowns/losses.

Given that the capital flows towards passive and quant have largely occurred at the expense of active management… i.e., as passive and/or quant become more ‘crowded’ … are they truly immune to what the likes of Soros/Druckenmiller/Paulson all eventually experienced?

I think not.

ADDENDUM on 1/9/2017

Perhaps quant alpha now and in the future, just might (also) be derived from the negative alpha of other quants. For example:
BlackRock Quants Sustain Record Losses in Setback to Fink Plan

BlackRock’s main quantitative hedge-fund strategies — which use computer models to sort through vast amounts of data to pick out patterns — were on track for losses in 2016, according to a monthly client update sent out in late December. Of the five included, four were set for their worst returns on record, data through November showed.

I don’t what the sources of the losses were..but it is a possibility worth entertaining.



Things that make you go ? as we enter 2017

The year is more or less over. As we head into 2017, here are a few things that make you go ?:

  1. “Hey brother @realDonaldTrump give me control of the Fed and we will make the economy great again. Dow at 40k in 4 Years. #Yeswecanseco” – December 11th
  2. “GET READY FOR DOW 20,000” – Barron’s front page, December 12th
  3. “The US dollar is on fire” – December 15h
  4. “Outlook 2017: This Bull Market Has Legs” (10/10 strategists say market will be up) – Barron’s front page, December 17th
  5. “An economist who predicted a 17,000-point stock-market crash just 10 days ago is suddenly bullish” – December 19th
  6. “After peaking at $554 million in February, assets in bearish Rydex funds have dropped 75%, nearly the lowest in 20 years.” December 20th 12/20
  7. Plenty of chatter, in recent days, about funds up 30%-40%+ YTD.
  8. “Gartman says stocks going higher” – today
  9. Gartman on the $: “the dollar is headed higher, dramatically so” – today
  10. “Jim Cramer’s flashing signal that the massive rally is here to stay” -today
  11. etc

Interpret at will.

Theranos (i.e. Therafraud) Full Complaint



Finishing 2016…and a Sneak Preview of 2017

It’s been just over 10 days since the US Presidential election, and I sense that many Americans – and market participants – are still in a state of “denial or anger”. That said, some people have moved on towards ‘acceptance’ (e.g. Dalio, Buffett, President Obama, etc). From my perch, it’s too early to say.

Based on public reaction, there are reasons both to be hopeful, and to be concerned (whether these hopes and concerns are meritorious or not, remains to be seen):

Reasons to be hopeful – the appointment of the likes of Jamie Dimon, Nikki Haley, Mitt Romney, etc mentioned as potential Trump Cabinet members – have given hope even to the likes of the Vox founder, a known Hillary Clinton propagandist

(most of) Donald Trump’s own words – e.g. 60 minutes interview – emphasize unity, repudiation of violence, economic expansion (e.g. infrastructure spending), etc.

President Obama and Donald Trump’s public behavior towards one another has uplifted public/market confidence as well.

Reasons to be concerned – the appointment of the likes of Steve Bannon, Jeff Sessions, and Michael Flynn have caused fear in many Americans. By some measures, reported acts of violence have creeped up.

The rhetoric regarding “bringing jobs back to America” is encouraging, but it’s just that: rhetoric. What happens if rates rise in a meaningful fashion, leading to runaway inflation? Rising unemployment and inflation would be a very difficult situation – whether the Trump administration is at fault or not.

My View: Too early to say.

As it pertains to financial markets, I have observed:

  • Eye-popping exuberance in US Financials – some would say record breaking exuberance, as gauged by highest recorded RSI in the XLF ETF history. Question: have financials’ equities historically benefited during rate rise cycles? Which sectors have tended to benefit? Suffer? Why?
  • Statistically significant price movement in Government Bond Prices – “USTs yield haven’t moved this much since [20+ years ago]”
  • USD strength, EUR weakness, MXN (record weakness) – To my surprise, I heard that a large institution actually put on a long MXN USD trade, pre election, as the “long Hillary” trade. Well, we can imagine who/how has been ‘unwinding’ that position since November 8th. Also, imagine how countries with significant $-denominated debt are feeling right now? Not only has there been upward pressure on all government bond yields, world wide, but the $ strength as well. This trend cannot last indefinitely without some severe consequences.
  • Russell 2000 Longest Winning Streak for over 13 years – Some refer to this as a  “Make America Great Again” trade. What exactly is included in this Russell 2000? What are its member constituents?
  • Rumors that an “Axe Capital” peer is experiencing historic short term losses
  • Historic [by some measures] Equity Price Dispersion – Given the extreme dispersion in equity prices – historic or not – I find it ironic seeing some people say “it WILL be great for stock pickers, going forward” – how about it IS and HAS BEEN ?
  • My friend jokes that a Trump 1st term, 2nd term, and legacy now are all priced in.
  • the below is interesting, especially if you recall what happened in January/February of this year (not to say history will repeat exactly)


My prior posts have been helpful and remain relevant:

The 2nd Half of 2016: Nationalism & Political (In)stability – July 16, 2016

The sum result on financial markets is not immediately clear, especially as it relates to US financial markets. What is clear(er) to me is the growing importance of global macro, or at least understanding how global macro impacts one’s investment strategy. Specifically, I will be surprised if the following are NOT true, going forward:

  • (Continued) Record-breaking bi-directional macro volatility
  • Confusing, inconsistent, and sometimes outright non-sensical correlations between headline political instability/violence versus financial markets price activity

I expect the 2nd half of 2016 to continue with record breaking market activity.


Regime Change(s) in Financial Markets and Politics – MARCH 3, 2016



  • Rise of Nationalism. Pretty much everywhere.
  • Trump is winning. Bernie Sanders Super Tuesday results disappointing. The loudest Trump critics appear to misunderstand him and his fans. No matter, both point to regime change. Note that “regime change” in Asia and Europe before the modern era, were often accompanied by executions.
  • Supreme Court, replacement for Antonin Scalia.
  • Regulatory enforcement is rising (after decade-low levels of white collar fraud enforcements through 2013/2014″ e.g. Valeant Pharmaceuticals. Regime change.
  •  Europe – Brexit, Spain (Visca Catalunya), threats to Schengen, etc.
  • China – Xi regime gives off the impression of a more nationalistic tone.


The above lead me to believe that we are transitioning from one state to another… methinks the ‘regime change’ may resemble the transition from the dot com bubble/bust to housing bubble/bust. We’re somewhere in between two different regimes.


What I like entering 2017:

The short answer is, TBD; I’m not sure. That said, if I had to place all my capital into one trade for the next 12 months, there is one that comes to mind, with unlevered expected return of over 20%: it’s a quasi-arbitrage situation. It is a meaningfully sized position.

It involves going short the underlying security and long the one related to underlying one. I say quasi, because if the equity markets were to correct (or if the underlying security were to continue declining), I believe there would be a meaningful risk that the current gap (which shouldn’t exist, or at least, be this wide) widens further. But that would excite me only more.

Critiquing John Hempton’s “Comments on investment philosophy”

“There are plenty of people out there who call themselves Buffett acolytes – and as far as I can see they are all phoneys. Every last one of them.” – John Hempton circa Anno Domini 2016

I read John Hempton’s Comments on investment philosophy – part one of hopefully a few… and felt inspired to write a few disparate (potentially related) thoughts:

  • Investment Beliefs are Useless – Zen Master Linji: “If you meet the Buddha, kill the Buddha.” The Bible: “You shall have no other gods before Me.” Let the professional bullshitters worship false investment gods. I say: Investment beliefs are useless, if not worse than useless, unless you’re in the business of sounding smart, selling books, newsletters, etc. If you want to BE smart: Innovate or perish.
  • “If you know the enemy and know yourself, you need not fear the result of a hundred battles” – Like John Hempton, I read Warren Buffett’s letters when I was starting out in the investment business. Over time, I came to realize I learned far more by becoming self aware of my own tendencies, biases, mistakes, victories, good luck, bad luck, etc. rather than reading “how to invest” books. Self examination, over time, has been, and remains, a critical part of what I do… as well as observing others. Learning who I am – a short seller – changed everything. Study self, study others.
  • Poker & Transparency – I believe that the word “transparency” is frequently (i.e. more so than not) misused and abused, when used in a business and/or financial markets context. When you play poker, do you reveal your cards? Do you (intentionally) seek to reveal your emotions? No and no. In fact, it is morally and ethically correct, within the context of Poker, NOT to reveal one’s cards, nor one’s emotions. I’m a strong believer and proponent of truth and honesty.  Some people mistake the word ‘transparency’ for truth and honesty. They are not the same thing, as the poker analogy demonstrates.
  • Applied Epistemology – Deep down, I am a very lazy human being. I like to do as little work as possible while achieving superb results.  And so I am constantly asking myself: “Am I wasting my time? Given investment opportunity x, should I be spending my time on x? If yes, how much more time? Am I wasting my time?”
  • Pair Trade: Short Credentials, Long Skills/Character/Attitude 
  • Am I or Am I not Behaving like a Capital Compounding Machine? – I try to think about this daily/weekly. Is my capital and/or time dedicated to capital compounding activities or not? If not, better off just having a good time…resting/leisure time are necessary.
  • The Asset Gatherer versus the Capital Compounder – I see the Asset Gatherers as my natural enemies, my natural prey…in fact, I see it as my goal to slaughter and devour them into extinction (aside from the passive Vanguards of the world, who are NOT my enemy) . I began this business – semi-traditionally, and semi-unconventionally – as a pure capital compounder. That remains the case. When I see investment managers whose primary instinct is to be an asset gatherer, and would not be investors if it weren’t for external capital, I see tasty prey…my meat.


Specific Commentary (Hempton’s quotes are in bold, while my commentary is not in bold):

  • “Phoney Buffett-style value-investing is dangerous” – Not only do I believe that this is a true statement, it has been one of the main mandates of my twitter account – to ridicule and expose the Buffett idol worshippers who effectively practice this phoney buffett-style value-pretending.
  • “There are plenty of people out there who call themselves Buffett acolytes – and as far as I can see they are all phoneys.” – This is an inconvenient truth…probably offensive to some, but nevertheless true. Buffett acolytes represent a religious/cultural phenomena. In fact, let me take this one step further: today’s Buffett acolytes are probably the de facto counterparties of a young Warren Buffett.
  • “There are psychological feedback mechanisms that stop you meeting the twenty punch-card test. Firstly it is really hard to be that patient.” – I tend not to struggle with patience… I do struggle with boredom (yes, there is a difference!). How do you bide your time, while waiting for the fat pitch? Fortunately, I think I have found a few solutions.
  • “Somewhere along the line I realised that did not have the temperament to be a true 20 punch-card investor.” – This is of cardinal importance, i.e., to know thyself.
  • “And when you are wrong like that it is scarring. It makes you less willing to pull the trigger in quantity when something does meet the twenty punch-card test.” – I don’t believe this is an objectively true claim; it seems subjectively true. I personally know people who have and/or can bounce back from 20%-40% declines, without an impaired ability to ‘pull the trigger’ in quantity.
  • “So in the midst of under-performance a client might ask me what I did last year and I would say something like”
    • a) I read 57 books
      b) I read about 200 sets of financial accounts
      c) I talked to about 70 management teams and
      d) I visited Italy, the UK, Germany, France, Japan, the USA and Canada”
    • two friends of mine – (they do not know each other) strongly advise I should spend a good % of my time away from “computer screens” – go to the beach, go on vacation, etc. They advise doing this, independent of investment performance. Given my naturally lazy tendencies, I will probably heed their advice.
  • “Real twenty-punch-card investing is impossible to sell to clients” – unless the clients themselves have experience enduring/overcoming drawdowns
  • “Some of them have tricks I do not understand (I put David Tepper in this camp – I simply don’t get how he does it and hence can’t emulate it*)” – I like to study and/or interact with people like these, even if their activities do not resemble my own. I am a firm believer in “cross-pollination”
  • “Portfolio managers I admire” – I’ve tended to learn more about active portfolio/risk management from macro managers than L/S ones. I’ve tended to learn more about investment research from L/S managers.

The 2nd Half of 2016: Nationalism & Political (In)stability

It’s a beautiful, blue skied Saturday morning where I am. Yet I can’t shake off a general sense of unease I’m feeling… It’s not the Turkey coup situation or the French mass murders (on Thursday) alone… for me, it’s a (growing) pattern of incidents I loosely see as symptomatic of the rise of nationalism and political instability.

The fruit of my labor is not a result of merely my own labor

It almost feels wrong to be enjoying life, and living in a land that is so abundant (relatively) in peace and prosperity, while my fellow human being suffers so much. I did not choose where I was born; I did not choose WHEN in history I was born; I did not choose my parents, the household  conditions…and so on, and so forth. No one has. It seems quite unfair that all these characteristics – that I had no control over – account for most of who and where I am today. Yes, I have worked hard (sometimes). Yes, I have been smart/skillful (less than sometimes). But who am I kidding? My success is not merely my own – it is the sum result of many factors, most of which I had no control over.

And so I find it difficult to be enjoying myself when so many other human beings – fellow brothers and sisters of the human race – are suffering for reasons beyond their own decisions.

I have actually felt this sense of unease for the last 5-6 years…I would occasionally tell friends that I fear that a good portion of our remaining adult lives may be filled with far more human tragedy. That we face high risk of war, that the peace/tranquility we Americans have been blessed with for the last 30 years is not the norm, at least from the vantagepoint of human history.  A certain financial/political researcher I follow correctly anticipated the rise of political instability / war risk, specifically pointing to 2015 Q3 as the beginning of a cycle.

Being right does not bring comfort. I hope I am wrong.

Growing Unease, Nationalism, Political Instability and Financial Markets

I feel almost wrong thinking about how this growing unease impacts financial markets. Should I not mourn for those in suffering? Perhaps. But in times like these, I also feel a responsibility to live life abundantly – to live life with a sense of gratitude, purpose and meaning.

it seems the best way to honor the deceased and the suffering.

The sum result on financial markets is not immediately clear, especially as it relates to US financial markets. What is clear(er) to me is the growing importance of global macro, or at least understanding how global macro impacts one’s investment strategy. Specifically, I will be surprised if the following are NOT true, going forward:

  • (Continued) Record-breaking bi-directional macro volatility
  • Confusing, inconsistent, and sometimes outright non-sensical correlations between headline political instability/violence versus financial markets price activity

The 9/11 Risk

A friend of mine who has been a global macro speculator since the mid 1990s considered 9/11 far scarier than 2008. 2008, at least from a global macro perspective (in his view), was predictable. 9/11, as it pertains to financial markets implications, was not.

Another friend (an ancient whose career precedes the macro friend’s by more than a decade) described October 1987 in similar terms – he was not sure if his fund’s positions would clear that week. He feared that his brokers/banks would fail.

Perhaps Brexit was that for us in 2016 (except that it was a very well broadcasted event). Or perhaps Brexit is a sneak preview.

Either way, here are the implications I see:

  • 9/11 and October 1987 are not predictable. Outright positioning for one seems a waste of time and capital. Mental preparation for one seems a good use of time.
  • Their impacts on medium/long term fundamentals and financial market trajectory afterwards is similarly unpredictable.
  • Namely, 9/11 eventually was followed by recession/equity bubble crash. 1987, on the other hand, was a blip in the continued US bull market. Bottom-line: the 9/11, 1987 risk is not long-term bullish or bearish for risk assets.


2016 so far has been quite the year of statistically significant price action:

  • All-time highs in the quantity of negative yielding bonds. All-time lows in interest rates, record-breaking YTD capital appreciation.
  • Greatest GBP one day decline in history.
  • The S&P500 and USTs tested record highs and lows (yields) respectively on the same day…for the first time in history.
  • multi strategy hedge fund performance – see January/February period.
  • Various records broken in rapid changes in volatility.
  • Top 1-3 peak to trough declines in oil (through late January).
  • Greatest one-day decline in Spanish equity market history

I expect the 2nd half of 2016 to continue with record breaking market activity.

Parsing Soros’ comments on Europe

Yesterday, George Soros published an op-ed titled: Brexit and the Future of Europe on Project Syndicate. As Soros’ public statements tend to be

  • Misquoted or taken out of context
  • Misunderstood
  • Even occasionally dismissed as the rabble rousing of an old man

I will document my interpretation – a parsing – of his latest comments. The purpose of this writing is for my own benefit – as a journal of sorts (so I can look back in the future to see if was right or wrong) … and to benefit anyone who has eyes and ears to learn.

And yet that was not enough to stop the United Kingdom’s electorate from voting to leave. Why? The answer could be seen in opinion polls in the months leading up to the “Brexit” referendum.

Translation: You morons completely misinterpreted or dismissed my Guardian Op-ed that I wrote days before the Brexit vote. The likelihood and risk of a Brexit were evident to those dispassionately paying attention to the ground level realities. In fact, I wrote: “My 60 years of experience tells me the pound will plummet, along with your living standards.” But you arrogant fools dismissed me as a “has-been” octagenarian. And those of you inattentive to detail ignored my explicit prognostication. You arrogant fools also ignored the fact that, like 2006-2008, this time I turned off the “auto-pilot” program running Soros Fund Management – and I switched back to manual.

Now the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible. Britain eventually may or may not be relatively better off than other countries by leaving the EU, but its economy and people stand to suffer significantly in the short to medium term. The pound plunged to its lowest level in more than three decades immediately after the vote, and financial markets worldwide are likely to remain in turmoil as the long, complicated process of political and economic divorce from the EU is negotiated. The consequences for the real economy will be comparable only to the financial crisis of 2007-2008.

Translation: The EU has been in a fragile state for several years – the 2010-2011 volatility in European sovereign debt markets were a very clear warning sign. But those EU-related concerns abated at the end of 2011 (though not fully disappearing)… in all likelihood, Brexit is the needle that will “break the camel’s back” (i.e. lead to disintegration of the EU). Contrary to the doom and gloom media headlines (and even some of my earlier rhetoric in the Guardian) claiming that this will destroy Britain’s economy, Britain’s economy may actually be relatively better off long-term by leaving the EU. The immediate consequences, however, appear negative for its economy and its people.

The odds that financial markets globally remain in turmoil exceed the odds they do not; however, like 2007-2008,  this may lead to counter-intuitive market price levels – and very violent, unpredictable paths – across all assets.

That process is sure to be fraught with further uncertainty and political risk, because what is at stake was never only some real or imaginary advantage for Britain, but the very survival of the European project. Brexit will open the floodgates for other anti-European forces within the Union. Indeed, no sooner was the referendum’s outcome announced than France’s National Front issued a call for “Frexit,” while Dutch populist Geert Wilders promoted “Nexit.”

Translation: My Guardian Op-ed may have been a bit deceiving (though not intentionally), in that my fears have always been about the risk of EU dissolution, not  fear of the UK’s future.

But the implications for Europe could be far worse. Tensions among member states have reached a breaking point, not only over refugees, but also as a result of exceptional strains between creditor and debtor countries within the eurozone. At the same time, weakened leaders in France and Germany are now squarely focused on domestic problems. In Italy, a 10% fall in the stock market following the Brexit vote clearly signals the country’s vulnerability to a full-blown banking crisis – which could well bring the populist Five Star Movement, which has just won the mayoralty in Rome, to power as early as next year.

Translation: Yes, I believe Brexit will hurt the UK’s economy in the near term. However, if Brussels has a punitive attitude/approach to Brexit (i.e. try to “make an example” of the UK for purpose of deterring other EU countries), that will actually backfire against Brussels. Case in point, Italy. Brussels, you better be careful not to treat the UK as you did Greece.

All of Europe, including Britain, would suffer from the loss of the common market and the loss of common values that the EU was designed to protect. Yet the EU truly has broken down and ceased to satisfy its citizens’ needs and aspirations. It is heading for a disorderly disintegration that will leave Europe worse off than where it would have been had the EU not been brought into existence.

Translation: Some of you conspiracists may see me as an elitist, “New order” puppetmaster, blind and callous to the plight of the masses. Actually, I am fully aware that the EU has and is not acting in the interest of most its members’ citizens. It does not make me happy at all…don’t forget I am a survivor of a far darker period in Europe’s history. I am concerned that the EU’s member nations and its citizens may end up worse off in coming years, versus the counterfactual scenario where the EU had never existed. Yes, to put it bluntly: the EU may end up a failure.

But we must not give up. Admittedly, the EU is a flawed construction. After Brexit, all of us who believe in the values and principles that the EU was designed to uphold must band together to save it by thoroughly reconstructing it. I am convinced that as the consequences of Brexit unfold in the weeks and months ahead, more and more people will join us.

Translation: Yes, the EU might prove to be a mistake. It is inherently a flawed construction. But it is still worth fighting for. I may not have specific policy prescriptions, but recall that I earlier implied that a punitive approach by Brussels will be counter-productive. That is the wrong approach. It would not be consistent with the values and principles the EU was designed to uphold.

I’m cautiously optimistic that if the aftershocks of Brexit don’t dissipate in coming weeks/months – rather, escalating(i.e., in financial markets, the real economy, and overall peace) – more people will seek to preserve/reconstruct the union, but with more conciliatory attitudes and approaches. A punitive approach by Brussels will lead to the dissolution of the EU. A conciliatory one may lead to a EU 2.0.

Additional Thoughts:

  • I found a certain Vic Niederhoffer’s public heckling over Soros (few weeks ago) rather amusing and…ironic.
  • Soros’ comments must be analyzed from global macro and game theoretic lenses.
  • This past week is a key inflection point in attitude of the casual Soros bashing market participant – their knee jerk reactions up to now might have been to ‘fade’ (i.e. bet against) any Soros related headline (without reading/listening to his actual words). The behavior may now switch, until there is some sort of market climax/resolution.