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  • Part VII: Non-Correlated Hedged Convexity Capture Bulldozes Through Market Chop [View article]
    @Algyros – Sure thing. First though, I’m not familiar with Harry’s proprietary implementation, so I don’t want to predict that it’s bound to implode (actually, I expect it's robust). However, I am familiar with the underlying mathematical principles – both their benefits and risks – including his simple illustration in this article. For any system, I would want to see historical draw-down and leverage (both equally important factors).

    Harry’s Convexity operates on the principle of Compounding. It’s been said that “Compounding is the most powerful force in finance.” That force can work for you, or against you. With Convexity, it’s working both for and against you, depending on market direction and if you’re short or long convexity.

    If you’re short convexity (short LETFs), a market going against you “accelerates” (compounds) as it keeps going against you. In an interest rate shock environment (1970’s), where both treasuries and equity prices are dropping, your hedge works against you just as fast as your equity portion. A simple Excel model shows that 50/50 short TMV and SPXS/TZA/FAZ/etc. both dropping 3% a day, 5 days in a row (14% market drop), gives a draw-down of 67% and leverage at 500%. Eeek! 3 more days and you've totally blown up! (Market down just 22%).

    However, the up-down-up movement is powerfully in your favor. If you guess the right index you do quite well through 2008 (TZA or FAZ). But the down-down-down movement is VERY dangerous. Guess wrong (S&P, Nasdaq, Midcaps, etc) and you blow up.

    That’s your back-of-the-envelope risk.

    You can be smarter about it… and that’s what differentiates Convexity Traders from each other. There are 100 ways to skin a cat, and there are 100 ways to trade Convexity, each with its own risk profile. If you’re going to trade convexity, it’s best to do it right. Instead of a half-analyzed idea with exciting returns, you'll be better off going with a thoroughly developed (and probably proprietary) system.

    The fact that Harry’s proprietary system is long-only, suggests to me that he’s probably far enough along in system development that he has something robust. That’s worth looking into. This publicly disclosed example here though… there’s a reason he’s happy to publicly disclose it - it's unstable, but it's exciting, so it starts a conversation.
    Apr 21, 2014. 04:02 PM | 3 Likes Like |Link to Comment
  • Part VII: Non-Correlated Hedged Convexity Capture Bulldozes Through Market Chop [View article]
    That said... I would run, and run fast, from an allocation generating 50% returns on an ongoing basis. The math says it'll eventually blow up.

    I give Harry the benefit of the doubt in assuming that he has simulated back through previous decades (replicating ETF performance), and his non-public system is far smarter in allocation levels, diversifying, hedging against interest rate shocks, and the many other things that any smart quant will account for. I assume (hope?) that Harry is using the "impressive returns" to get attention, but in practice is much more conservative.
    Apr 18, 2014. 02:18 PM | 2 Likes Like |Link to Comment
  • Part VII: Non-Correlated Hedged Convexity Capture Bulldozes Through Market Chop [View article]
    I'll personally confirm that Harry's system is smarter than the quick criticism posted gives him credit for. This is the first of any of his articles I've read, but I'm familiar with the math and fundamental theory.

    To the critics... revisit the math, get a bit more creative, then go back to your computer and run some simulations.

    To curious readers interested in a third party opinion on (what I'm pretty sure is) Harry's fundamental approach, I'd be happy to talk.
    Apr 18, 2014. 01:38 PM | 1 Like Like |Link to Comment
  • Fiscal Cliff: Let's Call Their Bluff [View article]
    diadochi -
    The internet is great at delivery of information to people who are able and interested in understanding it. However, from Wikipedia on Illiteracy in America:

    "Roughly 40% were at either basic or below basic levels of proficiency..."

    Even if that number half the reported level... The economy is complex, and humans decisions are emotionally influenced... especially when humans are "incapable" of making informed judgments. Whether voters are "incapable" by illiteracy, intellect, or time, or care, the result is the same - they are persuaded by emotion or incomplete understanding.

    I personally would love to live in a world filled with citizens of sound intellect and moral judgment... but even with that foundation, TIME is required to explore and understand the economic and social impact of political actions. Even with smart and moral citizens, we still need to delegate representatives who we trust to put in the time appropriate to consider the impact of political decisions.

    I agree with your idealism. You seem like a reasonable thinker. But consider where your idealism breaks down. A republic isn't perfect either (representatives are not perfect, nor is our judgment of those representatives for whom we vote). But consider that a republic may be less dangerous than the increasingly democratic system you're promoting.
    Dec 20, 2012. 12:06 PM | 2 Likes Like |Link to Comment
  • Fiscal Cliff: Let's Call Their Bluff [View article]
    I'm glad that SA publishes articles from both sides of the aisle. Math and moral responsibility lead me to lean libertarian, but I appreciate opportunities to read what others are thinking - even if their thinking is incomplete. We all benefit by reading what other people are thinking - that's how we correct others, and get corrected ourselves.

    So I say to Ellen: Thanks for organizing these radical proposals into one article, and providing a few numbers that you believe support them.

    And I say to SA Readers: Please put together the numbers and equations, and help Ellen to see where her proposals fail (or miraculously succeed).

    To Ellen: Please revisit the simple equation of Equity = Assets + Liabilities. Sure, you can "tear up" Liabilities (or pretend to eliminate interest on them), but Equity is diminished in balance. Here's a decent, balanced SA article illustrating this principle regarding US coinage:
    Dec 20, 2012. 11:07 AM | 1 Like Like |Link to Comment