Aggressive comments like yours prompting authors to read some popular book to "understand" their subject and the unfair treatments I have received from SA regarding my articles are the reasons I stopped publishing here. Good luck to you too and I would like to recommend to you to be less aggressive with others in life. At the end it hurts not only you and them but the whole society and becomes a vicious circle of hate and revenge seeking, a circle I never belonged to and I will never be inside.
In my opinion the misconception applies to all markets. No matter what you trade if you get into a crowded trade for example, like for example long bonds at the moment, you may face the consequences. But markets can stay irrational for longer than expected. It is a high risk bet to go against the crowd, expecting the crowd to go against itself at some point. Soros did it and won but he might have been lucky and his performance might have been a result of survivorship bias.
"What is clear, however, is you are unable to discern what the misconception means. "
Elaborating on the misconception was not the objective of the paper. I think I made that clear. But since I mentioned it, it appears that at least I am aware of it. You would agree to that.
The dilemma is not a false one. It is a real one. Managed futures became popular because they offered a low correlation asset class to equity and fixed income funds. If managed futures focus on stocks and bonds entirely, their fundamental advantage as a distinct asset class will be lost. The dilemma is losing that advantage versus maintaining it and whatever these choices imply. I hope this is clear. You have the right to disagree but you have not offered any proof that the dilemma is false. I would be interested in such proof and I am ready to accept it if the premises are sound and the logic is valid.
Now, you mentioned hedge funds. I think this may be the source of our disagreement. I never talked about hedge funds in general but only about managed futures funds. This article was about traditional managed futures funds dealing primarily with futures contracts and most of them being mostly trend-followers.
I wasn't trying to resolve anything. I just stated some facts.
Fact 1: It is true that the standard deviation of log returns of most commodities is higher than that of stock, fixed income and currency futures.
Fact 2: Standard deviation is a lagging indicator based on past data.
"Whereas in contrast any logic based on a false premise will guarantee an unsound conclusion. "
This is a tautology. It conveys no useful information.
"You are saying managed hedge funds are retreating; but not saying what they should/could do differently to win."
I hope you do not expect me to do that in detail in an article even if I knew the answer. The problem is too complicated to have one all-encompassing answer. However, I briefly said that part of the answer is changing methodology.
"It is difficult to see the difference between a real dilemma, and a false dilemma, if (no matter what you do) both give the same result. "
I disagree. To someone who is familiar with managed futures the dilemma is clear. It is avoiding high volatility markets but also missing their strong trends and thus having a mediocre performance by not taking high risks in those markets versus trading commodities too, being subject to higher volatility of equity performance and the withdrawals that come when performance is negative.
The dilemma is clear in my opinion. The answers may also be clear to those who are familiar with the changes in the market dynamics in the past 5 years as reflected by changing correlations. This is an entirely different subject and not the aim of my article.
"Low-yield and long-maturity bonds have high duration, and essentially act like zero coupon bonds, hence giving an investor tremendous price appreciation if there is further flight to safety."
However, high duration bonds are also very sensitive to an increase in rates depending on their convexity.
I think the counter argument is that the bond trade is crowded. Since December 2007 about $ 1 trillion has been invested in bond funds and ETFs as compared to less than $33 billion in the equity markets. (Source: http://stks.co/kDOI) Thus, the risk of investing in bonds at this point is a lot higher. This is the type of risk that cannot be quantified easily but can inflict maximum damage in the case of a rare event occurrence that would cause an interest rate rise.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
Exactly but in the meantime PIMCO will make some good money from the reversal of the spread. What you wrote makes a lot of sense. But rates won't go straight up and in the beginning the force behind the rise will be an improving economy which will benefit muni bonds and their prices will rise for some time. This is one of the scenarios I mentioned at the end of the article. My opinion is that things will get worse, Treasury bond yields will fall further and muni bond yields will rise because of scattered defaults. I hope I am wrong.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
"Same with treasuries, who on earth can think buying AND holding a 10 or 30 year bond at these rates makes sense! "
Tom, what you say makes sense for individual investors but pension funds buy the bonds for liability matching. To make a long story short, they try to match future cash flow liabilities with revenue streams from coupons. They usually hold the bonds to maturity.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
I agree about the CPI comment. However we should always remember that currency values are affected by relative conditions. If the euro is doing bad because of financial turmoil in Europe, the dollar will be strong in relative terms.
PIMCO would like to see the dollar lower to eliminate currency risk and even profit from that. However, please note that currency moves are largely affected by political decisions (G-7, G-8, G-20) and forecasts based on economic fundamentals are wrong more often that they are right.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
For a US based investor with investments in USD denominated assets there is no foreign exchange risk as long as inflation remains under control. Given the state of the velocity of money, there is no prospect for inflationary pressures building up in the foreseeable future imo.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
No objection, I agree. Tax considerations may become a major force driving the current spread back to its historical average. The article in USA Today I quoted considers the tax aspects. My purpose here in the second part of this article was to mention the PIMCO muni bet, a small one in relation to their holdings but still significant, and present some of the reasons that may affect its profitability. If the muni default rate starts rising investors will pay less attention to tax benefits and will turn to Treasuries. If the economy improves, municipal bonds may be preferable based on tax considerations alone. In both cases, the fundamental factor that will affect the outcome of the bet is the state of the economy and not solely tax considerations, which I agree with you are in general important but must be viewed in proper context. For example, capital preservation is the primary objective of the majority of traditional fixed income investors and other monetary benefits, like tax savings, are important but come second, especially during times of turmoil.
The Managed Futures Dilemma [View article]
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
"I strongly believe building your own individual bond portfolio is far better than buying a bond fund."
What you say is interesting. Maybe in your article you will mention some key parameters to watch along these lines.
Michael Harris
Making A Case For U.S. Treasuries [View article]
But since 01/2008 TLT is up about 34% but SPY is down about -4%. (Figures are rough estimated and do not include dividends).
The Managed Futures Dilemma [View article]
Thanks for the conversation.
The Managed Futures Dilemma [View article]
Elaborating on the misconception was not the objective of the paper. I think I made that clear. But since I mentioned it, it appears that at least I am aware of it. You would agree to that.
The dilemma is not a false one. It is a real one. Managed futures became popular because they offered a low correlation asset class to equity and fixed income funds. If managed futures focus on stocks and bonds entirely, their fundamental advantage as a distinct asset class will be lost. The dilemma is losing that advantage versus maintaining it and whatever these choices imply. I hope this is clear. You have the right to disagree but you have not offered any proof that the dilemma is false. I would be interested in such proof and I am ready to accept it if the premises are sound and the logic is valid.
Now, you mentioned hedge funds. I think this may be the source of our disagreement. I never talked about hedge funds in general but only about managed futures funds. This article was about traditional managed futures funds dealing primarily with futures contracts and most of them being mostly trend-followers.
Thanks and regards.
The Managed Futures Dilemma [View article]
"To resolve what you are trying to resolve..."
I wasn't trying to resolve anything. I just stated some facts.
Fact 1: It is true that the standard deviation of log returns of most commodities is higher than that of stock, fixed income and currency futures.
Fact 2: Standard deviation is a lagging indicator based on past data.
"Whereas in contrast any logic based on a false premise will guarantee an unsound conclusion. "
This is a tautology. It conveys no useful information.
"You are saying managed hedge funds are retreating; but not saying what they should/could do differently to win."
I hope you do not expect me to do that in detail in an article even if I knew the answer. The problem is too complicated to have one all-encompassing answer. However, I briefly said that part of the answer is changing methodology.
"It is difficult to see the difference between a real dilemma, and a false dilemma, if (no matter what you do) both give the same result. "
I disagree. To someone who is familiar with managed futures the dilemma is clear. It is avoiding high volatility markets but also missing their strong trends and thus having a mediocre performance by not taking high risks in those markets versus trading commodities too, being subject to higher volatility of equity performance and the withdrawals that come when performance is negative.
The dilemma is clear in my opinion. The answers may also be clear to those who are familiar with the changes in the market dynamics in the past 5 years as reflected by changing correlations. This is an entirely different subject and not the aim of my article.
Thanks and regards
Making A Case For U.S. Treasuries [View article]
"Low-yield and long-maturity bonds have high duration, and essentially act like zero coupon bonds, hence giving an investor tremendous price appreciation if there is further flight to safety."
However, high duration bonds are also very sensitive to an increase in rates depending on their convexity.
I think the counter argument is that the bond trade is crowded. Since December 2007 about $ 1 trillion has been invested in bond funds and ETFs as compared to less than $33 billion in the equity markets. (Source: http://stks.co/kDOI) Thus, the risk of investing in bonds at this point is a lot higher. This is the type of risk that cannot be quantified easily but can inflict maximum damage in the case of a rare event occurrence that would cause an interest rate rise.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
http://bit.ly/S1g5Qe
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
Tom, what you say makes sense for individual investors but pension funds buy the bonds for liability matching. To make a long story short, they try to match future cash flow liabilities with revenue streams from coupons. They usually hold the bonds to maturity.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
PIMCO would like to see the dollar lower to eliminate currency risk and even profit from that. However, please note that currency moves are largely affected by political decisions (G-7, G-8, G-20) and forecasts based on economic fundamentals are wrong more often that they are right.
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]
PIMCO's Old And New Bets: Should You Replace Treasuries With Munis? [View article]