Making Money With Math Has Been Too Easy For Too Long Part II

Sep. 02, 2014 6:00 AM ETTMF, XIV17 Comments
Harry Long profile picture
Harry Long


  • Each of our publicly-released strategies continue to smash the indices.
  • Even I am surprised by the massive degree of their outperformance.
  • I again implore readers to close out positions in these public strategies.
  • It's time to take the profits.
  • These public strategies have had an historic run--but nothing lasts forever.

"If you want to be an amazing systematic trader, it is essential to view yourself as an advanced life form from another planet who was sent to Earth to observe and to chronicle systematic human foibles. Quite literally, you have to view people as unfortunate beings who make constant logical and mathematical errors in judgment. Your job is to exploit their systematic mistakes in how they process information.

Lest you think this is too easy, remember that while it is very fashionable for humans to constantly comment upon how illogical, dumb, and predictable other humans are, that most people are unable to profit from the misjudgment, pettiness, and emotionalism they are constantly confronted with. Unfortunately, most humans only suffer from their fellow humans' stupidity, and with grave consequences, ranging from the seriousness of war and peace, to the horrors of genocide and starvation, to the banality of infidelity."

--You're Welcome Planet Earth: Structural Arbitrage (June 10, 2013)

When I wrote those words last year, I knew that I was revealing a massive market inefficiency between the volatility and fixed income markets. However, I had no idea how popular the strategy would become. Nor did I fully appreciate the endurance and the persistence of the structural mispricing between these markets.

Since publication, the story is well known. The performance of the strategy actually increased in 2014 compared to 2013. There has been no drop-off in the performance of the strategy whatsoever, despite the predictions of critics. Indeed, Structural Arbitrage has more than doubled the performance of the S&P 500 since publication, with only a 0.49 correlation.

YTD, the strategy is up almost 52%. To review, the rules are:

I. Buy XIV (XIV) with 40% of the dollar value of the portfolio.

II. Buy TMF (TMF) with 60% of the dollar value

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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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