Daniel Moser

Leveraged ETFs Might Be the Cause of Late Day Trading Moves

This late in the day momentum argument is structurally sound. The leveraged ETF's are mandated to maintain a 2:1 debt to equity ratio or in some cases even a 3:1. When the general market gets extremely volatile it throws their debt to equities ratio off drastically on a daily basis, thus they have to go out into the market place and buy or sell their underlying securities to rebalance their debt to equity. Remember they don't care where the market is going...there job is to be 2:1 Long or Short their underlying index.

Now, why would this occur at the end of the trading day? Easy...if your job was to maintain a 2:1 debt to equity position, you would never rebalance at 12:00 during the day. You would have no idea what your portfolio would look like at 3:00. Thus, they have to wait until the end of the day so that they actually accomplish their mandate.

Also the argument that they don't actually buy or sell underlying stock is fundamentally not true. You can easily see their top 10 holdings in many of them. Think about it...how do you maintain a 2:1 leveraged ratio on some set index? You issue a bunch of debt and buy all the underlying securities. When your debt to equity gets out of whack because of the change in stocks prices, it is by far easier to buy or sell equities than it is to alter your debt structure. If for some reason I am wrong about this argument, my next point would be that somewhere with in mere seconds a market maker is out there shorting or buying stocks so that they are hedged thus somebody is trading the underlying stocks.

I don't really believe the VIX has anything to do with this at all except to the extent it can predict volatility in the coming month. This is all about the mandates of the ETF's that force momemtum to beget more momentum. It takes violent market moves to force these ETF's to rebalance in big ways which just makes the market move even further. If the actual volatility dies down...their rebalancing won't be so disruptive.

Hedge Fund Tracking: Moore Capital Management (Louis Bacon), Q3 2008

Banning short selling is a very silly idea. Maybe during the next cycle you will read up on diversification and what expanding your selection by including short positions or short funds can do for your overall portfolio. And if the argument against me is that you can't short in IRA's, read up on the short ETF's out there. 401K and IRA investors need portfolios designed for all weather not bull markets exclusively. Heaven forbid, people actually have to pay a little bit of attention to their finances! Say it ain't so.

Fortress Raises Redemptions Drawbridge

I would love for someone to explain to me how anyone who can invest in the common stock of these hedge funds can ever expect to earn any money?

It seems to me, these securities are a terrible way to get access to the hedge fund scene. Unless I am mistaken, investors who buy FIG and other publicly traded hedge funds are shareholders in the management company of these funds. Thus, the only earnings theoretically applicable to shareholders are management fees and performance bonus. The big catch though is that the performance fee isn't applicable to the management company since it is accounted for as "carried interest" within the hedge fund entity itself. To someone more intelligent on the subject, please feel free to correct me, but it seems to me the best the shareholders of FIG could ever dream about earning in EPS is 2% of the AUM. This problem is just compounded when you figure that the 2% is really just revenue. Once you subtract out expenses of the employees there is not likely to be anything left for shareholders. Why then would you ever purchase these securities?

Short Selling Levels Down. Is This a Surprise?

Smarty_Pants,

I think you may have missed a tremendous point with respect to short selling. Short selling may not impact the operations of traditional businesses. However, banks and trading companies are hardly traditional businesses. Their lifelines are credit (for good or bad). If you will recall, when Enron went belly up, it wasn't because they kept losing excessive amounts of money via their business operations. They went bankrupt whenever their counterparties refused to trade with them. Sure, Enron in the later stages was making very poor capital investments and sure with the corrupt people at that top running the business they would have gone bankrupt at some point anyways. But this doesn't mitigate the point that IF an institution(s) were able to short the stock of a bank/trading company, buy puts, sell calls, and buy Credit Default Swaps...with enough scale to start a panic in the credit departments of all the target banks counterparties...they would be able to bankrupt the business. Once the credit lines dry up, the banks are finished. Without counterparties willing to trade...what good is a trading company? Now, it is only fair to admit that having a leverage ratio of 10/1 or greater makes little mistakes fatal from a profitability standpoint. Nonetheless, banks/trading companies are not the same thing as APPL or MSFT (incidentally two companies with practically 0 debt outstanding). Credit coupled with counterparties willing to trade is the lifeblood of banking and trading companies. If the share prices of these institutions sinks dramatically it has fatal implications (case in point, Lehman, Bear Sterns, and practically every other bank that has been failing).

Moment and Omega Rankings of Index ETFs

I have just recently discovered the concept of omega as a portfolio measure and I have a question for you...

How do you incorporate correlation measurements into portfolio construction using Omega as your maxmizing function during the construction process? I think I understand the objective behind seperating gains from losses for the purposes of capture various moments of the distribution but it seems like this process, on face, loses the ability to construct portfolios that utilize inverse correlations in the market place. Thanks for your help.

Hedge Funds Finding New Ways to Short

The synthetic short idea works if you have the timing down. The interesting thing about it is that puts should be incredibly overpriced right now because the market makers (short put positions) cannot be hedged currently. So, here is an idea take a couple million dollars and go buy a ton of puts towards the end of the short selling ban, watch what happens when all the market makers rush to hedge their delta/gamma positions. The government could potentially put a lot of market makers out of business because they won't allow them the ability to properly hedge their positions.

Disclaimer: I do not support market manipulation. However I just happen to see a hole in the system in which big players may have the ability to crush certain market participants with regard to options trading during a short seller ban.

The Short Sell Ban: Are Markets Now Less Efficient and More Risky?

That was completely awesome!!!

Should the SEC Force Hedge Funds to Disclose Short Positions?

I would like to take this time to comment that naked short selling should have never been allowed in the first place. It makes zero logical sense to me. Having said that I am quite frankly excited about the short selling disclosure requirement. There are several hedge funds that I admire that engage in short selling. I think this disclosure requirement will provide a great learning opportunity for students of finance to gain some insight and starting points for why some funds short. How could you turn down the opportunity to attempt to find out what Jim Chanos is thinking? This is a great thing if you are interested in investing.

Ike vs. Refining Capacity and Oil Price

I am afraid that you (whisper) are missing the point to some extent. While you are correct that crude and products (gasoline, distillate, etc) do move in tandem to an extent-albeit even a relatively large extent, refinery margins have been terrible in the U.S. because we have a gasoline driven economy. Unfortunately, for whatever reason, the U.S. made a huge bet decades ago to run the economy on gasoline vs. diesel thus we built the infastructure for gasoline.

If gasoline and crude oil followed a more historical path over the last year or so, gasoline would be closer to 4.5-5/gallon. Maybe even higher. Big oil companies are capital constrained like any other industry. Arguably even more so given the fact that they can operate on 10% of the total reserves in the world .

Exxon probably has terrible margins on their retail gas stations relative to E&P. Hence, a capital constrained company sells off their low margin businesses in an effort to invest more heavily in higher margin businesses like more exploration and production.

Within the last 3 years refinery margins were at their peak for both distillate and gasoline production. They put off a lot of maintance work at that time so that they could boost earnings as much as possible. Now they are paying the piper. That is a large reason that refinery utilizations are down so extensively. They are operating with really old facilities and put off maintaining them properly for a few years.

In my opinion, although no one asked, the recent volatility has practically nothing to do with the underlying fundamental picture. Quite frankly this is all about liquidations. I don't pretend to know where the equilibrium price of oil is but I am quite confident oil should not be moving $5 a day and natural gas moving 50 plus cents a day under normal, fundamentally driven circumstances. Don't be too hasty to draw conclusions about the direction of energy prices currently. There is a tremendous amount of noise in the system. This is what happens when you let banks get into the world of energy. This is little more than market contagion spread by the failure of most institutions that used credit to hold assets.

The case winner here is that we need more infastructure (pipelines, refineries, etc). Until that happens energy price volatility will remain tremendously high. Drilling is a moot point if it isn't refined and distributed. Enough Said.

Ospraie's Poor Portfolio Weighting: XTO Contributes Major Loss to Fund

An important factor to remember when evaluating fund blow-ups is style. Ospraie was by definition a global macro fund which brings with it a vastly different risk to reward ratio. Ospraie was not a portfolio engineering hedge fund like Jacobs and Levy, thus probably not concerned with the modern portfolio theory definition of risk (a.k.a. volatility of returns). Moreover, I speculate, based on the few pages I have read from Mr. Anderson, that Ospraie believed in definition of risk that is more oriented around the probability of losing money on an investment. However, one must recall the famous Keynes quote, "the market can stay irrational longer than you can stay solvent". This is where Ospraie got into trouble. They ran a global macro hedge fund that specialized in basic material industries (why because that was Mr. Anderson's background in school as well as at Tiger). They had to be concentrated because their style of investment management was such that you don't take risks unless you have a competitive advantage....they probably had a tremendous competitive advantage but in the end the market volatility, in the short term, took Ospraie down at the worse possible time.

While I must be sincere for a moment and acknowledge that everybody involved in Ospraie is not happy about the outcome currently, it is stories like these that make hedge fund investing so exciting. George Soros, Julian Robertson, Dwight Anderson, etc. are as heroic as dragon slayers or bull fighters. But every now and then the hero has to lose.

SEC's New Plan Could Revamp Oil and Gas Reporting Rules

From my understanding there is another issue surrounding the accuracy of proven reserves. Apparently there are two different numbers reported to the agencies...reserves and resources. As it turns out proven reserves reflect the economically feasible reserves. This is a huge kink in the peak oil theory as well as any other medium term shortage argument.

As the price of oil/nat gas rises suddenly reserve numbers grow simply because projects that were not feasible a year or two before become feasible. That is a wretched way to measure the quantity of oil and natural gas on the Earth.

It seems to me Wall Street, the media, and policy makers should be more concerned with resources than reserves in the first place. I can understand from a raw cash flow valuation perspective why proven reserves may be important for short term valuations of securities (i.e. less than 5 years). However from a long term perspective natural resource companies are much more of a call option (real or financial) and proven reserves just wouldn't allow the correct valuation in my opinion.

Case in point, Canadian tar sand energy companies are quite literally a call option on future oil shortages. Yet because of limited technology currently, the amount of reserves available for them to harvest is grossly underestimated because it assumes no improvement in technology, which in itself is a very poor assumption.

P.S. On a website in which knowledge can be gained, nothing productive comes from being rude.