Maverick Bian's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/57042/comments http://seekingalpha.com/article/34798-130-30-funds-more-asset-gathering-than-alpha-generation?source=feed#comment-85722 85722
Admittedly, 130/30 attract tons of cash inflow from big allocators like pension funds. Several reasons may explain why they like this strategy.

1. On most allocators' book, they have so long an equity book and a bond book. 130/30 is the easiest way to hedge their current portfolio, or they have to hedge if they want to turn their beta-based return into alpha-based absolute return.

2. Some allocators have a mandate in place that they are not allowed to use any leverage. Yet in 130/30 structure, they can use the proceeds from short selling securities to fund additional 30% on their long book. By hedging this way, they might not lose their advantage of beating benchmark.

Put it simply, supposing 130% on S&P 500 long with 30% on short and S&P over the past 30 year has delivered a return at 12%, then this strategy will still deliver the same return (130%*12%-30%*12%=12%)... excluding mismatches in the hedging process and short borrowing costs as well as transaction costs. However, if you only use gross at 100%, say 70%*12%-30%*12%=4.8%, this return is too small to beat the S&P 500 during the past 30 years. In fact, in this situation, you only invested 40% of your total capital and delivered a return at 4.8%.

The above case is very ideal, and in reality, the case may change a lot. Here I want to make a point, by using 130/30 strategy, your portfolio beta has been changed, perhaps dramatically, depending your trading strategy. For example, in the past a buy-and-hold mutual fund manager has a beta, say weighted average beta at portfolio level =1 like buying S&P 500 index, yet after changing it to 130/30 structure, its beta may be cut in half to 0.5. In general, due to short disadvantages like short squeeze and negative carry issue, short book by nature is for much shorter run, typically no more than a quarter. And because of the changed mindset that in the past they only focused on the fundamental/value or growth driven, now they find they can trade in and out on one position and even on great value driven stock, this improved trading frequency, coupled with shorts' negative beta, most likely the portfolio beta exposure will be lowered down from 100% to, say 50%, depending on manager's portfolio management expertise. Sure, if you still buy-and-hold for many years on your long book for small caps yet only sell short large caps because of liquidity constraint, you may increase your beta in the 130/30 case.

3. For those fof or large allocators like Calpers that almost have a fof book, 130/30 strategy can definitely make you long live. The same logic will apply to the reduction in beta, which means if you want to manage a beta natural portfolio by investing 130% in a basket of long-biased funds with a weighted beta at 0.3(because of diversification effect) and 30% in dedicated shorts with a negative beta at -0.3, this kind of risk management will generate a lot of alpha while improving your Sharpe ratio dramatically. In this situation, 30% hedge will not cut your performance too much while significantly lowering the portfolio aggregate risk, in other words, cutting max DD by half or even 2/3 during huge distresses because you’re a true neutral product(all alpha fund).

Just my 2 cents.

Maverick500]]> Tue, 08 May 2007 11:32:35 -0400
Admittedly, 130/30 attract tons of cash inflow from big allocators like pension funds. Several reasons may explain why they like this strategy.

1. On most allocators' book, they have so long an equity book and a bond book. 130/30 is the easiest way to hedge their current portfolio, or they have to hedge if they want to turn their beta-based return into alpha-based absolute return.

2. Some allocators have a mandate in place that they are not allowed to use any leverage. Yet in 130/30 structure, they can use the proceeds from short selling securities to fund additional 30% on their long book. By hedging this way, they might not lose their advantage of beating benchmark.

Put it simply, supposing 130% on S&P 500 long with 30% on short and S&P over the past 30 year has delivered a return at 12%, then this strategy will still deliver the same return (130%*12%-30%*12%=12%)... excluding mismatches in the hedging process and short borrowing costs as well as transaction costs. However, if you only use gross at 100%, say 70%*12%-30%*12%=4.8%, this return is too small to beat the S&P 500 during the past 30 years. In fact, in this situation, you only invested 40% of your total capital and delivered a return at 4.8%.

The above case is very ideal, and in reality, the case may change a lot. Here I want to make a point, by using 130/30 strategy, your portfolio beta has been changed, perhaps dramatically, depending your trading strategy. For example, in the past a buy-and-hold mutual fund manager has a beta, say weighted average beta at portfolio level =1 like buying S&P 500 index, yet after changing it to 130/30 structure, its beta may be cut in half to 0.5. In general, due to short disadvantages like short squeeze and negative carry issue, short book by nature is for much shorter run, typically no more than a quarter. And because of the changed mindset that in the past they only focused on the fundamental/value or growth driven, now they find they can trade in and out on one position and even on great value driven stock, this improved trading frequency, coupled with shorts' negative beta, most likely the portfolio beta exposure will be lowered down from 100% to, say 50%, depending on manager's portfolio management expertise. Sure, if you still buy-and-hold for many years on your long book for small caps yet only sell short large caps because of liquidity constraint, you may increase your beta in the 130/30 case.

3. For those fof or large allocators like Calpers that almost have a fof book, 130/30 strategy can definitely make you long live. The same logic will apply to the reduction in beta, which means if you want to manage a beta natural portfolio by investing 130% in a basket of long-biased funds with a weighted beta at 0.3(because of diversification effect) and 30% in dedicated shorts with a negative beta at -0.3, this kind of risk management will generate a lot of alpha while improving your Sharpe ratio dramatically. In this situation, 30% hedge will not cut your performance too much while significantly lowering the portfolio aggregate risk, in other words, cutting max DD by half or even 2/3 during huge distresses because you’re a true neutral product(all alpha fund).

Just my 2 cents.

Maverick500]]> http://seekingalpha.com/article/28364-buy-and-hold-as-good-as-hedge-funds?source=feed#comment-81931 81931
I looked into almost all timing funds including high-frequency, programming trading, volatility arbitrage, CTA, and the like, and I found most of PMs are former traders or programmers, options traders, futures, stock traders, currency traders, or trading oriented. They like to trade, in their words, “Since most of time orgasm only lasts for a couple of days, why should I hold it for months, and even years?” And most of time, they're running a very highly concentrated portfolio if they target an unbeatable return, except for program-trading and market-neutral funds. I have a friend who is totally a new horn on US stock markets: last year jumped in and have earned more than 1000% so far, compared to overall market return at 16% around. But the risk he has undertook is huge. Personally he may be a good trader, but he's far, far away from a good portfolio manager.

Typically for timing funds because they need to capture enough themes/catalysts to grow their portfolio fast, so capacity becomes a big issue for most funds in this category. And statistically more than 90% of traders cannot live longer than 5 years unless they can evolve themselves into a well-disciplined risk manager-esque. If Brian Hunter can disciple himself, Amaranth remains a shining star, I guess. If markets are so shallow and you put in so many orders/contracts, you're actually take on a huge risk of be manipulated by others as well as by counterparties. And if JPM could have released its billion-dollar collateral on Friday, and Amaranth would still have been alive; it’s huge sales pressure on Monday that declared the demise of Amaranth, due to the street “rumors”.

Is buy-and-hold a good strategy? I'm not sure, but if you're running a book with billions of dollars of buying power, you may have no choice but wait for big events like earning surprises or something, because every move you make will have a great effect on the underlying price. Based on my thorough research in the entire hedge fund world, I found most fantastic returns are most likely associated with funds during its every early start-up stage with AUM much less than $50mm. So, if you're not a large investor, a small boutique may give you a surprise from time to time. And if you were to move your comparison window starting from 1990 to 2001, you’ll get the totally different views on the hedge fund industry, I’m sure.

Still, statistical rules will not apply to a few individual case, so I would suggest you not care too much about the whole industry, only focus on how to improve your own portfolios, because based on some preliminary outcomes from Maverick 500 Hedge Funds Project, there still is enough room to grow your portfolios if you can pick those talented managers. Yet, if you're a pension fund manager like Calpers, I would suggest you go for an FoHFs since you have a specific mandate and need to feed myriads of retirees on a monthly basis while not dipping into the fund’s principal. Only pursing a high return on a few single-manager names is not a good way to go.

Just my 2 cents!

Maverick500]]> Thu, 01 Mar 2007 09:31:42 -0500
I looked into almost all timing funds including high-frequency, programming trading, volatility arbitrage, CTA, and the like, and I found most of PMs are former traders or programmers, options traders, futures, stock traders, currency traders, or trading oriented. They like to trade, in their words, “Since most of time orgasm only lasts for a couple of days, why should I hold it for months, and even years?” And most of time, they're running a very highly concentrated portfolio if they target an unbeatable return, except for program-trading and market-neutral funds. I have a friend who is totally a new horn on US stock markets: last year jumped in and have earned more than 1000% so far, compared to overall market return at 16% around. But the risk he has undertook is huge. Personally he may be a good trader, but he's far, far away from a good portfolio manager.

Typically for timing funds because they need to capture enough themes/catalysts to grow their portfolio fast, so capacity becomes a big issue for most funds in this category. And statistically more than 90% of traders cannot live longer than 5 years unless they can evolve themselves into a well-disciplined risk manager-esque. If Brian Hunter can disciple himself, Amaranth remains a shining star, I guess. If markets are so shallow and you put in so many orders/contracts, you're actually take on a huge risk of be manipulated by others as well as by counterparties. And if JPM could have released its billion-dollar collateral on Friday, and Amaranth would still have been alive; it’s huge sales pressure on Monday that declared the demise of Amaranth, due to the street “rumors”.

Is buy-and-hold a good strategy? I'm not sure, but if you're running a book with billions of dollars of buying power, you may have no choice but wait for big events like earning surprises or something, because every move you make will have a great effect on the underlying price. Based on my thorough research in the entire hedge fund world, I found most fantastic returns are most likely associated with funds during its every early start-up stage with AUM much less than $50mm. So, if you're not a large investor, a small boutique may give you a surprise from time to time. And if you were to move your comparison window starting from 1990 to 2001, you’ll get the totally different views on the hedge fund industry, I’m sure.

Still, statistical rules will not apply to a few individual case, so I would suggest you not care too much about the whole industry, only focus on how to improve your own portfolios, because based on some preliminary outcomes from Maverick 500 Hedge Funds Project, there still is enough room to grow your portfolios if you can pick those talented managers. Yet, if you're a pension fund manager like Calpers, I would suggest you go for an FoHFs since you have a specific mandate and need to feed myriads of retirees on a monthly basis while not dipping into the fund’s principal. Only pursing a high return on a few single-manager names is not a good way to go.

Just my 2 cents!

Maverick500]]> http://seekingalpha.com/article/27618-hedge-fund-replication-thoughts-from-the-engine-room?source=feed#comment-81659 81659
1. We can not kill an industry only based on the statistical average. For example, the retailing industry has been facing huge competition for a while from mega chain stores like Wal*Mart, kicking millions of pop-and-mom stores out of business over the past two decades, however, we still have top performers like Wal*Mart in the marketplace: My point is far less than 1% high school students are qualified to get in Harvard doesn't mean we should not try. Every industry has stars, dogs and cows. I raised this question during IAFE HF meeting in NYC, because I got confused by the fact that on the one hand there're tons of negative publicity while on the other hand we have seen huge cash inflows into this industry: Do those large institutional investors look like so stupid? And the general public even got their chance of investing in HFs because of the new listings by Fortress et al.

2. Everywhere you'll see left middle and right, and the same rule will apply to the hedge fund world as well. Complaint doesn't solve anything. The best way for (large institutional) investors is “to work out a practical solution on how to pick up the most talented applicants in the world as an admissions office: if you can attract those most talented students around the globe, then your school will no doubt become a Harvard. Per my deep research which will be published as academic papers soon, there remains enough room to support hundreds of billions of dollars delivering an impressive return with well-controlled risks. Here's a good example why large institutional investors allocate more assets into Hedge Funds or PEs: Yale's endowment fund has earned a compounded return of more than 30% since it began to invest in PEs starting from 1970's as well as more than 10% in return over the last 10 years since it began to include HFs. Although HFs' return on average can not compete with PEs’ to some degree but the HF liquidity is much better and lockup period far shorter, hinting much less risks from operations perspective.

3. Almost every academic researchers thinks simply if HFs as an industry wish an excess return, then there must be someone who will provide such inefficiencies. I read many articles on this front. In the first place, I think it's a good industry wide competition analysis, however, its assumption that every HF will get the same average return is problematic: in my mind it seems that any industry's profit/return pattern should follow a distribution, and do not apply one mean for all. Can we say like this, "Because most people have no capability of getting in Harvard, so the whole society is poor!?"

4. My solution is “how to turn my firm into a Harvard” in the hedge fund industry while a lot others are complaining, even though it’s a tough job. LOL!

Just my 2 cents

If you wanted to know whick fund falls into Maverick 500 Portfolios, I might be the one to whom you should resort.

Maverick500]]> Wed, 21 Feb 2007 09:23:44 -0500
1. We can not kill an industry only based on the statistical average. For example, the retailing industry has been facing huge competition for a while from mega chain stores like Wal*Mart, kicking millions of pop-and-mom stores out of business over the past two decades, however, we still have top performers like Wal*Mart in the marketplace: My point is far less than 1% high school students are qualified to get in Harvard doesn't mean we should not try. Every industry has stars, dogs and cows. I raised this question during IAFE HF meeting in NYC, because I got confused by the fact that on the one hand there're tons of negative publicity while on the other hand we have seen huge cash inflows into this industry: Do those large institutional investors look like so stupid? And the general public even got their chance of investing in HFs because of the new listings by Fortress et al.

2. Everywhere you'll see left middle and right, and the same rule will apply to the hedge fund world as well. Complaint doesn't solve anything. The best way for (large institutional) investors is “to work out a practical solution on how to pick up the most talented applicants in the world as an admissions office: if you can attract those most talented students around the globe, then your school will no doubt become a Harvard. Per my deep research which will be published as academic papers soon, there remains enough room to support hundreds of billions of dollars delivering an impressive return with well-controlled risks. Here's a good example why large institutional investors allocate more assets into Hedge Funds or PEs: Yale's endowment fund has earned a compounded return of more than 30% since it began to invest in PEs starting from 1970's as well as more than 10% in return over the last 10 years since it began to include HFs. Although HFs' return on average can not compete with PEs’ to some degree but the HF liquidity is much better and lockup period far shorter, hinting much less risks from operations perspective.

3. Almost every academic researchers thinks simply if HFs as an industry wish an excess return, then there must be someone who will provide such inefficiencies. I read many articles on this front. In the first place, I think it's a good industry wide competition analysis, however, its assumption that every HF will get the same average return is problematic: in my mind it seems that any industry's profit/return pattern should follow a distribution, and do not apply one mean for all. Can we say like this, "Because most people have no capability of getting in Harvard, so the whole society is poor!?"

4. My solution is “how to turn my firm into a Harvard” in the hedge fund industry while a lot others are complaining, even though it’s a tough job. LOL!

Just my 2 cents

If you wanted to know whick fund falls into Maverick 500 Portfolios, I might be the one to whom you should resort.

Maverick500]]>