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Xi Li is the managing partner of XL Partners and a visiting research fellow with Boston College. He worked in Acadian Asset Management as a senior researcher and portfolio manager and taught MBAs at Boston University, the University of Miami, and Vanderbilt. He advocates the combination of... More
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  • 401k track record from 4/2001-9/2010: 109%
    I finally get the 401k statement for some other reason.  I requested that they provide year by year return number so that I can show that there is probably no year with negative returns.  However, it does not have a break down for each year (maybe I will ask them again, which will take a while).  But it does have a total return over the whole period.  The total return from 4/16/2001 to 10/1/2010 is 109% (so over about 10 (9.5) years).  And it is restricted to only a short list of mutual funds (generally the choice is less than 10).  So it is a very constrained investment opportunity set and I do not have full time to trade this that frequently (and it has restrictions against frequent trading).

    The annualized return, if you put into excel, is about 8.1% per year.  I hope this does not disappoint my readers given the simultaneous markets' performance.  If 8% annualized a year in the last decade sounds boring, how about no or almost no negative returns in any of the last 10 years ;=).  So the Sharpe ratio, or the ratio of return to volatility, is likely to be quite higher, because of the relatively little volatility in performance.  I also get every trade executed in and out of the mutual funds from this statement.  If you or you know any one who have a chunk of money and would be interested in this kind of performance (or better), I would happy to provide the service.  I have my own company to take care of the administrative stuff.  The investments will be in highly liquid securities (or pure mutual funds, like my 401k), and will have relatively low risk exposure and low correlation with market performance through my 'impressive' asset allocation.

    The reason for little volatility or negative performance in my performance is because I had everything in cash in 2002 and 2008, the two big market down year.  There is no long-term T-bond fund in the 401k account so there is no way to capture the upside in those down years.  But zero return is still way... better than 30-50% downside, right?

    Another thought, I wonder how many are educated enough to recognize, this kind of long-term performance would be quite attractive in any environment (either at the start of 2000, when bull markets are raging, or at the depth of the bear markets in 2008).  These are equity like returns with bond like risks.  That is close to heavenly investing.  I hope I can repeat this performance for the years to come.  The paranoid survives. 
    Oct 18 12:05 AM | Link | Comment!
  • Defining Global Macro Quant Equity
    In strictest terms, quantifiable information is that which investors can back test and assign a statistical significance level and then systematically implement.  A broader definition would include that which is quantifiable but cannot necessarily be assigned statistical significance or systematically implemented.  The broader definition is where I believe a new opportunity for global macro quant equity lies. 

    Most of self-ascribed quant equity investors today use only the first set of quantifiable information, and mostly from the bottom up perspective.  My friend, Rodney Sullivan, and I have a new paper suggesting that quant investors should seriously consider applying a global macro approach that use the broader set of quantifiable information.  This paper can be found at the SSRN.  Both he and I have been keen to this approach for several years now.  I summarize this paper by way of an analogy. 

    Before 2008, the quant ocean liners were faster the other ocean liners.  In particular, the pure quant ocean liners have the most systematic implementation and strictly rely on the quantifiable information that can be back tested with statistical significance.  They are the fastest of all.  These pure quant ocean liners are our focus. 

    As a result of their success, the captains of the pure quant ocean liners hired many superb engineers and kept all of them under the deck tooling the ocean liners.  These captains made the rule that no one should waste any time above the deck.  This worked as long as the luck is on their side, i.e., the weather is great so that there are no icebergs, and all the undercurrents are flowing in the same direction as these ocean liners. 

    From 2008, the weather starts to change.  Icebergs start to appear in the ocean and undercurrents start to turn against these ocean liners.  If these captains or his crews have been above the deck, they would have noticed this.  However, the under-the-deck rule prevents them from seeing that.  These ocean liners almost all hit the first iceberg, suffering significant damage. 

    However, the captains of these ocean liners thought that this is just an anomaly and no iceberg will appear again.  So he insisted that his men mostly continue doing what they did, with the under-the-deck rule still strictly enforced.  What he and his crews did not know is that icebergs are popping up all around them this time, quite different from any difficult periods that they had before.  And the undercurrents are totally against them.  Soon enough, these ocean liners all hit icebergs again in 2009 and were severely damaged this time.  Undercurrents were initially against them strongly, pushing them backwards substantially in 2009, but then showed no direction in 2010.  With the engine sputtering and no clear direction of undercurrents, these ocean liners start to float with currents with no clear direction in 2010. 

    Should the pure quant ocean liners do something drastic about it?  Just think about Euro.  It is a flawed system that may survive for a while, but its death is certain under large standard deviation events unless backed by a united fiscal authority and active efforts to bring down the culture and language barrier (so that labor and capital could flow freely within the Euro Zone).  The pure quant ocean liners are in the same situation. 

    The captains of some of these ocean liners did start to order his crews to do something different, under the pressure of their passengers.  They gathered information about the history of the last two large iceberg accidents and maybe some smaller iceberg incidents in the past.  They want to use the information to predict the positions of any future icebergs.  This is a great improvement, and is part of what we advocate. 

    However, trying to predict future icebergs purely with the limited information faces insurmountable challenges.  It is important to eliminate the under-the-deck rule so that the weather and current conditions can be taken into consideration in future navigation to avoid future icebergs even though those conditions cannot be back tested with an assigned significance level or systematically implemented.  After all, even the best dedicated surveyors of these conditions such as George Soros could not necessarily produce a statistically significant track record of forecasting (To understand why this is the case, please see my earlier post on global macro investing:; We also suggest that these captains should use all useful information instead of throwing some important information out. 

    Further, these captains never had any idea about the issue of undercurrents. These captains do not fully understand that even if their ocean liners seems to be tightly constructed with everything based on statistical significance and systematically implemented, these ocean liners frequently have serious unintentional biases.  Some of these biases are persistent, e.g., small size, value, and momentum.  Other biases are incidental and last for a period and then disappear. 

    When these unintentional biases are in the same direction as the undercurrents, like in the few years before 2008, they bring significant tail wind to the pure quant ocean liners.  When these unintentional biases are in the opposite direction as the undercurrents, the pure quant ocean liners face substantial head wind. 

    The power of these unintentional biases is so large that many times most of the mileages covered by the pure quant ocean liners are due to this power.  Understand and be mindful of these unintentional biases is important to both alpha generation and risk management.  It is dangerous not to fully understand the unintentional bias while navigating the rough seas. 

    For one example of unintentional biases, I would refer to one discussion by Jeremy Grantham in his most recent quarterly report (see the last two paragraphs on p5)

    I have only read less than five reports of his ever due to the lack of time and their lack of short-term timing ability.  However, I find that all the reports are extremely insightful, especially for funds serving long-term institutional investors. 

    A similar simple example is about small cap and value in different time periods.  As mentioned above, the pure quant ocean liners persistently have these biases.  In 2000, these segments are undervalued, which gives the pure quant ocean liners substantial tail wind in the last market down turn from 2000.  In 2008, the same segments are quite overvalued, which gives the pure quant ocean liners substantial head wind. 

    So by global macro investing, we argue that the captains of these ocean liners need to add the top down quant models to systematically incorporate any global macro information that they can incorporate this way.  These captains also need to use quantifiable fundamental global macro information even if they cannot systematically implement it.  These reinvented ocean liners will be global macro quant equity ocean liners. 

    Most of the issues discussed above are in three papers that I wrote in the past.  The first two papers are free for circulation if I am invited for presentation.  Feel free to contact me at if you are interested in these papers.  The last paper is only available for a handsome sum.  If you are interested in the last paper, you can learn about the first paper before you decide about the third paper. 

    Li, Xi, 2007, Unintentional bets of pure quant investing, Working Paper, XL Partners, Inc.

    Li, Xi, 2009, No religion in quant investing, Working Paper, XL Partners, Inc.

    Li, Xi, 2008, Why does pure quant investing have unintentional bets, Working Paper, XL Partners, Inc.

    Disclosure: no position
    Oct 06 10:53 AM | Link | Comment!
  • Pyramid Builders
    It is a little surreal that stocks were poised for substantial further gains after September.  All the risk factors are there, and the warning signs getting louder.  However, thanks to people like John Paulson, who are "naïve optimist" as phrased by Wall Street Journal (not me, see Paulson and the bulls bounce back at, and David Tepper, who is opportunistic in taking Bernanke put (, the market got back to life in September.

    What these hedge fund managers, and many other institutional managers, are doing is simply building pyramids.  The liquidity is very low (, with most investors sitting on the sidelines.  So the strategy of Paulson & Co. is to push stock prices up to get a good return number for their own fund.  More importantly, by pushing up tock prices, they create the fear in the weaker mind of some investors about missing any potential rally.  If they could push hard enough, they may be able to build a pyramid scheme, and then get out before every one else, making some handsome sum for themselves.

    If we do not have enough weaker minds, then these pyramid builders may have trouble holding the bag on the top of the pyramids by themselves. I sincerely hope they do not succeed in luring the weaker minds, because that is likely to make those weaker minds suffer another serious blow in their personal wealth when these weaker minds find themselves holding the bag at the top of the pyramids. 

    How stretched is the market? We could look at every major economic number and they are still trending down. I would post the US PMI data along with stock data here, and the European number is the same.  PMI usually have strong predictive power for stock returns during the recessions.  This relation may break up during recovery, because stock prices would bounce back much more quickly.  However, what we see is that the US PMI is trending downward again after a good recovery later last year and early this year.  The stock price and PMI have the largest diversion (stock prices sharply up and PMI down at intermediate level) since a long time.  This only smells trouble for stock prices for months ahead, especially the likely trend for PMI is further down.

    What's different from the last Bernanke put early last year and the current situation is the one-legged nature of stimulus.  Last year, the monetary stimulus, aka the last Bernanke put, jumped start the rally.  The rally probably would have fizzled out quickly without the substantial fiscal stimulus.  The fiscal stimulus also helps sustain and amplify the inventory restocking cycle.  That is probably the main reason that we could have such a long rally up to today.

    However, this time around, we have no fiscal stimulus to sustain the rally.  The current fiscal stimulus can only provide drags on the economic growth (I talked about this in earlier posts).  There will be some small fiscal package here and there, but there will be no 800 billion package any more.  Although some would still have some delusion about Republican sweep in the House, and potentially Senate, the only consequence of that outcome will be a divided Congress that does not function at all.  With Republican's eye set for White House in 2012, do not expect any stimulus, unless the economy has already fallen into abyss again, similar to late 2008.  They would not appreciate any real recovery, which can only benefit Obama, and derail the Republican political goal in 2012. 
    nd derail the Republican political goal in 2012. 

    Disclosure: no position
    Oct 06 10:46 AM | Link | Comment!
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