John Hussman: We May Be Seeing a Phase Transition 28 comments
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Excerpt from fund manager John Hussman's weekly essay on the U.S. market:
Market breadth has clearly deteriorated. This was already evident in the failure of most broad-based advance-decline statistics to confirm the recent highs in the major indices. That early weakness has now been followed by a preponderance of declines over advances.
As Jim Stack of Investech Research noted near the recent highs, "The DJIA has closed higher in 5 of the past 8 trading days, but declining stocks outnumbered advancing stocks in 7 of 8 of those sessions. That type of negative breadth divergence has occurred only 15 times in 75 years -- the majority of which were in bear markets." He also noted "On Monday of last week, the DJIA hit a record high while declining stocks overwhelmed advancing stocks by a 2:1 margin." That divergence has never before occurred in market history, though again, lesser divergences have typically been characteristic of weakening markets.
Leadership has also reversed decisively. I've noted over the years that substantial market declines are often preceded by a combination of internal dispersion, where the market simultaneously registers a relatively large number of new highs and new lows among individual stocks, and a leadership reversal, where the statistics shift from a majority of new highs to a majority of new lows within a small number of trading sessions.
This is much like what happens when a substance goes through a "phase transition," for example, from a gas to a liquid or vice versa. Portions of the material begin to act distinctly, as if the particles are choosing between the two phases, and as the transition approaches its "critical point," you start to observe larger clusters as one phase takes precedence and the particles that have "made a choice" affect their neighbors. You also observe fast oscillations between order and disorder in the remaining particles. So a phase transition features internal dispersion followed by leadership reversal. My impression is that this analogy also extends to the market's tendency to experience increasing volatility at 5-10 minute intervals prior to major declines.
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Not sure why I am responding. There is a biblical proverb about not arguing with fools. I guess it is just annoying to see you keep repeating the same erroneous assertion.
I'm not sure if you are just too lazy or too stupid to verify what you are saying above (on the stock-picking). In the annual reports for the fund, Hussman breaks out separately the performance of just the individual stock-picks from overall fund performance. The individual stock-picks have *OUTPERFORMED* the market every single year since inception except 2006. The underperformance of the fund is entirely due to being fully-hedged pretty much 100% of the time over the past 3 years. Therefore, the return of the fund is going to be the difference between the stock-picks and the overall market plus the interest earned on the hedges.
You certainly are an interesting fellow. You seem to be on some sort of mission with your plethora of replies to numerous bloggers. You do seem to be a self-proclaimed expert on the market, with the correct stance on "market action" being obvious to you. So help me out, how would you be positioned here. Are you bullish, neutral, bearish? What is your forecast for the next 12 months? Would you be 100% unhedged here, or fully hedged? I suspect you will not give clear answers to these questions, as you have know idea yourself. I think you know how to throw stones, but have no idea how to build the house yourself.
Mr. Hussman's prospectus claims he is only "hedged" if val uation and market action are unfavorable. If it is true that he has been "hedged" for the past 3 years, it is a fair conclusion that Mr. Hussman's system of determining "market action" favorability is a failure. As I've said before, I don't think he uses a system as implied by his prospectus but rather is like any old Joe using hunches. I presume he does better with the valuation variable which lends itself better to quantifying analyis.
Mr. Hussman's fund claims to be an equity growth fund which would typically be fully invested in equities selected by Hussman Econometrics. A three year period (a bull market no less) of being fully hedged (whatever that means) seems rather inconsistent with this statement.
If Mr. Hussman were fully-hedged as you say, a reasonable interpretation would be that he earns the risk-free rate. Since he did earn returns slightly higher than the risk-free rate, it would appear that he is not fully hedged as you say, but again fully hedged may mean something different.
If Mr. Hussman had rather been market neutral (another interpretation of fully hedged) we would see whether his stock picking abilities produced good returns, and they have not.
This is not a childish argument (as in "what do you think the stock market is going to do" ?) but rather an analysis of whether Mr. Hussman succeed in following his mandate as described in his prospectus.
My interpretation is this and you can take it for what it is worth:
1. Mr. Hussman's claim in his prospectus of being able to differentiate the favorability/unfavorab... of "market action" is highly dubious. This is generally a dubious claim and his performance over the past 5 years should be adequate evidence that this claim is bogus.
2. Had Mr. Hussman correctly identified the past 4 years as "favorable" market action (correct in retrospect, difficult to know in advance though his prospectus claimed he had a way) Mr. Hussman would have been in a "positive" or "aggressive" market posture and would be expected to generate returns better than or equal to general equity returns. In reality the returns were atrocious for a "strategic growth" fund in a bull market.
It is not unfair to throw stones at underperforming money managers that make dubious claims, underperform, and walk away with millions. I have made no such claims and generally believe most people should stay away from expensive and dubious active money managers. Most of these are marketing operations more than they are money management operations.
Regards and take my harsh analysis for whatever you think its worth.
john.
take a look at the 5-year chart of the market, and ponder how Mr. Hussman's "system" for determining whether "market action" is favorable or unfavorable.
Just remember, he's running an equity growth fund which he claims would be typically fully invested in equities.
And even in the worst conditions when both "market action" and "valuation" are unfavorable would he be "hedged". Not "fully hedged", "hedged".
For chrissake, if he's going to generate t-bill returns for 3 years there's no reason to pay his active management fee......better to just return investors money.
I suppose that should be the end result anyway for investors that understand the underperformance.
john.
Up until this point I have filtered through your posts and tried, though all good sense tells me I am wasting my time, to find some semblance of rationality. Call it common decency if you like. I now have a question for you: can you agree you have had a fair opportunity to voice your opinion?
No-one is arguing that strategic Growth’s pefrormance has been poor over the lastfew years. What you are failing to grasp is that the fund’s shareholders are well aware of this fact and have come to terms with Hussman’s ‘fully hedged’ stance as it was commuicated to them on a WEEKLY BASIS! They also realize that Hussman’s gauge of ‘favorable market action’ did not work for the last few years of the protracted bull market. Nothing you write is news!
Who are your ramblings directed at? – on the one hand, you have the choir – and on the other are those who now suspect lunacy and just rolltheir mouse wheels dwn a few times when they see your name (although even that has become tiresome). Sir, I am sorry to say, that as of today I am one of the latter.
Please, I implore you,for the sake of civility and everyone’s time, move on. Why not focus your wealth of time and effort somewher else; like helping people with teaser-rate mortgages resetting in mid-2008 figure out how they are going to refinance? Anything but this!
I doubt most of Hussman's fund "investors" have any clue about what fully-hedged means. If it truly means he is hedged such that no risk is being taken and the risk-free rate is the benchmark, then Hussman has one of the greatest scams going:
Pay me x % of your money so I can put you in a risk-free position.
Now, that's a brilliant scam.
If Hussman is such a genius and a transparent genius apparently according to others.....folks should get the hell out of his fund when he is "fully hedged" - you don't pay a manager of an equity growth fund to deliver the risk-free rate, bonehead.
If I thought you were speaking for all the people you claim to be speaking for I'd take you more seriously......but rather I think you just don't like what I am writing - a pretty good resemblance of the truth, if not the naked truth, my man !
Make that the unfiltered, naked truth.
Tiresomely Yours,
John
Until then, goodbye John
Forgive me if I am skeptical of "he's added material value" and he has a stellar sharpe ratio.
Frankly I think you are completely full of it.
The only way he can have a stellar Sharpe Ratio is if all underperforming growth fund managers have stellar sharpe ratio's. I doubt it but if you can produce the actual figures rather than your fantasies I am willing to look at it.
And please do not get the sharpe ratios from Hussman.....do the calculation on a monthly basis.
But even if your unlikely fantasies are backed up with numbers, the main point is that Mr. Hussman has a mandate described in his prospectus.
It is quite clear in the mandate that this is an equity growth fund which, though periodically will be hedged, is typically fully invested.
If I had asked you in advance to understand his mandate and asked how it would perform in a gently rising equity growth market over 4 years, what would you expect in the returns ?
Answer: At or above the equity market rate would be the answer (go read the prospectus and do this exercise).
If your answer is something else, then you are not looking for an equity growth fund. If your answer is that Hussman's returns the last 5 years are acceptable, then you are delusional. The returns stink to high heaven and are inconsistent with the mandate.
Hey, listen, if the guy screws up with a hedge for a year or so......fine, a professional made a mistake.
But 3, 4, 5 years of dramatic underperformance - that's not a mistake, it's borderline fraud. Again, read the prospectus and figure out whether Hussman succeeded. Don't take my word, read the prospectus.
I will be waiting for your Sharpe ratios........and should the Sharpe ratio compare favorably to proper comparisons (equity growth managers) over the last 4 years, Sharpe will be turning over in his grave (is that guy dead ?) and the measure will no longer be useful.
So Paul, when we gonna get the Sharpe ratios ?
John.
Looks like the returns are this:
2.84 % 1yr
4.55 % 3 yr
6.46 % 5 yr
To me that looks like 3 years at or below the risk-free-rate. the 5 yr is above a couple of percent and I will agree this is material, though unacceptable performance for a Strategic Growth fund which claims to be typically fully invested, and further has a system to differentiate "market action" favorability.
My figures remove an expense ratio of 1% though I think it's higher than that, and I am just assuming that the returns Hussman presents at his website (3.84, 5.55, 7.46) are before taking out expenses, though there is no clear information to that effect. Usually it's best to distrust money managers on this kind of thing, as it is often used to deceive investors into believing their returns aren't as bad as they really are.
If the presented returns are actually net returns to investors after the expense ratio, I will be impressed.
If they are not, it is just one more reason to distrust Mr. Hussman's Strategic Growth fund.
With respect to the Sharpe ratio, it is quite obvious that the past 1, 3, and 5 year figure would not be stellar, though the 5 year might just be bad rather than atrocious. Also, the Sortino ratio would probably be a better measure anyway so as not to penalize equity growth managers for upward volatility.
If you go back to inception, it looks substantially better, but you have to keep in mind that the early years were a very abnormal market deflating from the bubble.
But in the end, in order to evaluate this fund properly you have to find a reasonable benchmark for an equity growth fund which occasionally hedges when the manager believes valuation and market action are both unfavorable.
The S&P is a reasonable benchmark (I can't think of any better) though you could make an argument that the benchmark should be even higher than the S&P.
On that fair measure, Hussman's fund has failed on a 1 year, 3 year, and 5 year basis - really it's as simple as that.
The idea that it's unfair to judge the guy on 5 years is pretty silly, given the very dramatic underperformance. Keep in mind we are not talking about near benchmark performance, we are talking about 20% to 120% (roughly) over the past 5 years.
Put 100K into a diversified index fund for 5 years - receive 220K back
Put 100K into Hussman's Strategic Growth fund - receive 120K back
Now most active managers do not outperform index fund over serious periods of time, but this underperformance is so bad as to be nearly criminal.
Is it possible that Hussman's approach will be vindicated ?
Extremely unlikely. I think it would take a very, very dramatic decline in a very, very short period of time to vindicate him. And even then it would not be full vindication as measured against his prospectus mandate:
There will never be any way to realistically dispute that Hussman's claim in his prospectus to be able to identify positive "market action" is simply bogus or he failed to implement his claimed system.
Remember that the only time he is supposed to be hedged is when "market action" and "valuation" are unfavorable. So the only way to explain his "fully hedged" approach is if he wrongly determined that the "market action" over the past 4 years was unfavorable. Otherwise he did not follow his prospectus which is a legal mandate.
So, feel free to trust him based on your instinct or friendship or whatever it is, but it is clear to me that a substantial failure occurred which cannot be explained away if you are willing to hold him responsible to the prospectus mandate and an equity growth benchmark.
regards,
john.
I'm not really sure why you're so concerned with the details of his prospectus mandate. I think you are overly concerned with the box, which is a helpful visual aid but only generally true. It's not a simple binary sum, but an analysis. He has stated continually that he feels the current overvaluation outweighs the mildly to decently favorable market action over the last few years.
I guess my question is, why do you feel so strongly that 4 or 5 years is a better frame of reference than 6 years? Even if you include just that one extra year, 2002, and give him no credit for 2000 or 2001 performance, HSGFX destroys the S&P. Do you really think that having one year out of six be a bear year is so unusual and abnormal?
Hussman Strategic Growth’s Sharpe ratio since inception is either 1.15 (arithmetic) or 1.12 (geometric) depending on which method you prefer. This is taking the longest period where monthly returns (as you stipulated) are available, namely 8/1/2000 (roughly one week after inception) to 7/31/2007.
I’ll be honest; I was sort-of winging it earlier with the word “stellar”. I knew the number was good simply because I knew the fund’s return over the same period was good (11.91%; which, I might add represents roughly 900 basis points of annual excess return over the S&P500). I also knew the annualized monthly standard deviation over the same period (7.6%) would help put his returns in perspective. However, thanks to your brazen ignorance, I can now be more specific. Now read carefully, I don’t want you to miss anything!
I looked at every single domestic Large Cap open-end mutual fund I could get my hands on (I came up with roughly 1,500) and compared the 7-Year Sharpe ratios on all of them. Guess who had the highest Sharpe ratio? If you guessed Hussman Strategic Growth, you would be correct! If I add every single domestic Mid Cap open-end fund I can find (roughly 650), as Strategic Growth also holds some mid caps, I only get 2 that have a higher Sharpe ratio: Fairholme (FAIRX) and JPMorgan Mid Cap Value Inst (FLMVX).
Allow me to repeat the key point above:
Out of an unscreened universe of 2,165 domestic Large and Mid cap mutual funds, 1,331 of which have a 7-year track record, Hussman Strategic Growth has the 3rd highest 7-year (monthly since inception) Sharpe ratio.
I’m sure that’s not the response you were hoping for; it’s a little more specific than my previous comment; however, given that I didn’t have the numbers at my finger tips, the word “stellar” was pretty apt.
Now I will be the first to say that comparing Hussman Strategic Growth to these long-only funds is not appropriate. But, I am not here to write a research report. I merely wanted to back up the word “Stellar”.
If you question the above; which no doubt you will, I encourage you to find me a domestic large or mid cap open-end fund with a better 7-year Sharpe ratio. I can help you with the calculations if you struggle.
You probably feel like you just walked into a freight train, don’t you Mr. Lewing? Well, I have some more news that might make you think twice before being unnecessarily rude in the future and hopefully temper your ignorance – wait for it – today alone, Hussman added 322 basis points of alpha.
As far as my concerns go, it is certainly not limited to the 4 sectored investment posture box, which may be simplified for presentation purposes.
The concerns succinctly are this:
1. It is marketed as a growth equity fund which will occasionally be hedged, but will typically be fully invested in equities chosen by Hussman Econometrics.
2. Occasional hedging should not result in the dramatic underperformance that has been seen in the past 5 years. It appears, rather, that Mr. Hussman was not really running a growth equity fund but rather some kind of instrument seeking a dramatically different risk exposure. Whatever that risk exposure was, it would not appear to me to be consistent with an equity growth fund which is occasionally hedged.
Short or medium periods of dramatic hedging might be appropriate but locking investors into a near risk-free rate of return for a multi year period in an equity growth fund does not appear to be reasonable or consistent with the mandate in my opinion. There are many ways to get low risk investments for multi year periods, and paying Mr. Hussman an active management fee over this duration seems to be an unwise financial decision.
3. The prospectus implies that Mr. Hussman uses indicators to determine whether "market action" is favorable or unfavorable and further implies that he understands from history that these indicators are valid. To me, this is just bogus marketing crap. I have no problem believing that Mr. Hussman has intelligent and time-tested ways of assessing "valuation", but this crap about "market action" is just that - CRAP.
In fact, I would love to have Mr. Hussman to explain the following:
- what was your system of determining the "market action" variable you claim to use in your investment decision making process ?
- did it work as expected the past 5 years ?
- if not, can you help me understand what went wrong ?
These are the kinds of things Mr. Hussman should be explaining to investors, though I do admit it is very entertaining to hear that the market is going from a liquid state to a gaseous state (or vice-versa) before our very eyes.
As to your last question, Mr. Hussman has underperformed any reasonable benchmark for and equity growth fund for 5 years or so. This is not a case of 1 year of bad performance. And while he may or may not deserve credit for the trouncing in his first year or so, I would just say that the great weight of evidence including the last 5 years highly suggest that he does not add value and may not have actually been running the equity growth fund with occasional hedging that his prospectus describes.
From a statistical perspective it is also fair to give lower weight to dramatic market events like the internet bubble, and his early year seemed to have benefitted greatly from the dramatic unwinding of internet stocks (all while many value stocks did decently). It is much more likely that this period is the period you want to ignore or weight lower than any of the recent 5 years though there is clearly room for debate on that.
If you want to be charitable you might conclude simply that Hussman foolishly believed he had some way of assessing "market action" and ended up being very, very wrong and investors paid for his wrongness. I think it's much worse than that, though, and would say that Mr. Hussman arrogantly believed he had such skills to determine "market action" and even in the face of nicely rising equity growth stocks he refused to believe the "market action" was good........and his investors paid dearly.
You can get into all sorts of nitpicking about the intersection between "valuation" and "market action" and the weight of the evidence, but in the end his investors paid dearly for his approach to investment analysis, and if he had simply bought from the universe of stocks which were reasonably valued, his investors would have cleaned up and would have more than doubled their wealth the past 5 years.
And this is really the lesson in simplicity: buy stocks that are reasonably or attractively valued......go ahead and study chemistry, physics, and learn to play the guitar while they rise over time, but spare us the analogies........becau... it is all well covered in the time value of money, accounting, behavioural finance, economics, statistics, and mathematics.
Even if it does, I don't think there's a chance that he can make up the ground already lost by not following the simple mandate of running a growth equity fund.
John.
[<em>Edited for offensive content</em>]
At best, this is a boring thread. At worst, it is a slow motion written brawl.
Please take it somewhere else.
John
[<em>Edited for offensive content</em>]
You need an anger management course, and probably a series of visits to a psychiatrist.
My unstable mental health really should not be the issue
Regards, John.
[<em>Edited for offensive content</em>]
What is it? Why you stink up the place? Be nice. Talk a walk. Eat some food. Drink some wine.
You sure love to hear yourself talk. And apparently all the rest of the world is populated by fools, except you of course.
This is not your only hostile posting. You have graced other writers with your condescending and insulting comments.
So if we are all so stupid, why are you wasting your obviously superior self communicating with us.
I guess you will just keep enjoying yourself while you lower the level of the dialog on this site with every comment you post.
My only reason for spending time on you was the now lost hope that you might stand back and see how damaging rather than helpful your approach has been.
You don't want dialog. You just want to make yourself feel better by making others feel bad. Maybe you'll just burn yourself out and go away. So good-bye and I hope you get well.
Please don't be offended by my opinion that Hussman's Strategic Growth fund may have failed to follow it's mandate, and certainly failed to come close to any reasonable benchmark which might be chosen.
It's rather funny that so many people have opinions about personalities and people they will never meet, yet seem to have no opinion on the topics at hand:
For example, Is the stock market like a gas going to a liquid ?
I do not believe I have lowered the dialog. In fact, I think folks that are trying to suppress opinions or personalities but who have nothing to say about the investment related topics are bringing down the dialog........the funny thing is how testy people get when they hear things they don't like.
Furthermore, on the internet it's best to take anybody's opinion with a grain of salt, as I am sure plenty of Hussman cronies might argue his case not from principle but from cronyism.
If Hussman were truly a transparent manager and looking out for the interests of his suffering investors, he would answer the following simple questions:
- what was your system of determining the "market action" variable you claim to use in your investment decision making process ?
- did it work as expected the past 5 years ?
- if not, can you help me understand what went wrong ?
These are valid and important questions for investors to determine whether he adds value, and I am of the opinion that his essays are self-serving.
But hey, if his suffering investors would rather know that the market is like a gas changing states to a liquid instead of why he has underperformed his benchmarks, that's up to them (you ?).
It is quite possible that my straight-forward opinion may not be conducive to snapping Hussman out of his Physics essays.......
Would you mind asking him the important questions and reporting back ?
John.
[<em>Edited for offensive content</em>]
I watch and listen, mas not so good at questions
The market she is confused, Mr. Hussman I don't know him
he can talk and you can buy something else
Mas, buy some stocks now, little more latter, you make money
don't be afraid
buy cheap
Out of the entire Morningstar domestic large cap (that’s value, growth, and blend) mutual fund universe - roughly 1,500 funds - Hussman Strategic Growth has the HIGHEST 7-year (monthly since inception) Sharpe ratio. Throwing all of the domestic mid cap funds – roughly 650 – into the analysis, there are only 2 funds that have a higher Sharpe. So out of an impressive 2,165 mutual funds, 1,331 of which have a 7-year track record, Hussman Strategic Growth has the 3rd highest Sharpe ratio. Mr. Lewing, please go back and read that again very slowly – I don’t mind if it takes you a while to comprehend. You see, unlike you, I am patient.
That’s reason enough for me (and I suspect a few other people out there) to hang on to this fund. And, all it took was one, brief, concise, paragraph.
Throw in the potential the fund has to add over 320 basis points of alpha in a single day (over the S&P 500) - when you need it most – like on Friday (which is exactly what it did) and I would say it is time for Mr. Lewing to sell his dribble somewhere else.