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Hedge Fund Performance Sank With Equity Beta Decline

Hedge funds as measured by the HFR indices suffered with the overall market decline with only RV strategies being able to take advantage of the higher volatility environment. In general, the equity hedge fund declines were consistent with their longer-term betas (approximately .3 to .6). The outliers for the month were the event driven, special situations, macro and systematic CTAs indices. The year-to-date returns show significant dispersion with equity hedge fund indices generally positive while special situations, systematic CTAs, and event driven indices falling between -2.50 and -3.75 percent.

Managed Futures

Managed Futures Managers Hurt By Volatility Shock

The managed futures hedge fund category generated poor performance in February as measured by the SocGen CTA index and the SocGen CTA mutual fund index. This behavior was also seen in the BTOP 50 index which declined 5.29 percent for the month. The SocGen short-term traders index was down 4.31 for the month but still up for the year by just over 1%. Nevertheless, the year to date return numbers for managed futures are better than long duration bond performance and the credit sector as measured by the TLT and LQD ETFs.

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February Performance – Ouch! So Let’s Put In Context

February was a bad month for investment performance. All of the major ETF indices we normally follow were negative. Diversification was an elusive concept and reinforced the key portfolio allocation risks of rising correlation. There is no positive spin with these numbers other than less risky assets like bonds fell less than more risky assets, although year to date numbers show that bonds have not been a safe haven. There are a few takeaways from the month:

Uncategorized

Investor Anxiety Is All a Matter of Timeframe

How would you feel about your investment portfolio if you went to sleep at the beginning of the year and woke-up on Friday? What if you stuck your portfolio in a drawer and pulled it out after three months or a year to look at performance?  My guess you would say you were happy and comfortable with your investment decisions, yet there has been a lot of investor anxiety this month.

Uncategorized

Financial Shocks Can Be Either Endogenous Or Exogenous – What Can We Expect?

There was a clear financial shock to the market with the spike in the VIX index earlier this month, but the market has reversed a significant portion of the earlier losses. From the SPY high in January, the market declined about 10.5%. There has been a reversal of 6% so the stock market is now positive for the year and only down 4.5% from the high and down 2% from month-end.

Volatility

The “3 by 5 Index Card” on What You Need to Know About the February VIX Spike

University of Chicago professor Harold Pollack in an interview a few years ago mentioned that the best money advice can fit on a three-by-five inch index card. He was then challenged to write the card. His financial advice went viral. We follow this tradition by focusing on a simple “three-by-five index card” on the VIX volatility spike earlier the month.

Volatility

What Is Your Focus? Schwerpunkt – The Center Of Gravity For Your Investment Efforts

Schwerpundt is a German word meaning main focus, center of gravity, or focal point. The term came from Von Clausewitz’s “On War” and refers to the strategic objective or goal of any military campaign or battle. It is the place of greatest importance against an adversary.

Uncategorized

Psychopaths Are Not Good Hedge Fund Managers, Neither Are Narcissists – Who Would Have Thought?

Wall Street is filled with characters and “personality”. I have met my share, but a key question is whether some of these personality extremes actually lead to better returns. I have written about this in my posting The Wisdom of Psychopaths and Trading. Some have suggested that the characteristics of psychopaths if directed toward good goals may lead to successful outcomes. The core idea is that a lack of empathy or emotion found in psychopaths is actually good for some jobs. Certainly, there is a strong strain of thinking that trading should be without emotion. Hence, personality characteristics such as less emotion or empathy may be good for return generation. You just may not want to have them as your boss.

Uncategorized

Generating Tilts Around Core Bonds – Changing The Correlation, Yield, And Risk Exposures To Bond Sectors Offers Opportunities For Portfolio Refinements

Some may say, “A bond is a bond, is a bond”. Investors may place risky assets in one category and then have bonds in a less risky category. This dichotomy does not focus on the important distinctions between bond groups and the roles that different bond categories may play nor does it present the possible trade-offs between return, risk, and correlation within a portfolio from different bonds.

Commodities

Time For Commodities, But What Is The Right Choice? Think In Terms Of Risk Premiums

Inflation is a growing concern with many investors. Additionally, there is the perception that financial assets are overvalued. There is a need for diversification across other asset classes given the potential for stock-bond correlation rising in an inflationary environment.

Commodities

Taking A Second Look At Gold During A Financial Crisis

What would have protected investors during the turmoil of last week? With all of the major asset classes falling, not much. Declines were a just a matter of degree. There were some selected instruments that did well, but the “correlation to one” effect, albeit not absolutely true, kicked-in for many assets that were supposed to provide strong diversification. However, there was a protection instrument that did provide safety, gold. Although slightly under bond returns for the Barclay Aggregate index through the first twelve days of the month, it has generated gains for the year and certainty beat long-term Treasury bonds.

Commodities Uncategorized

If Dollar Is Down, Investors Want To Look Toward Commodities

The dollar may be trending down, but investors should also look at the second order effects of what will happen to other markets. For example, a declining dollar is good for long commodity exposure. The long commodity argument is twofold, one, a decline in the dollar makes commodities denominated in dollars cheaper to foreign buyers which will increase demand; two, a decline in the dollar associated with global growth will increase global commodity demand. There are both substitution and income effects.

Uncategorized

“Bond Vigilantes” – They Were Corralled But Never Disbanded

We have not heard from the “bond vigilantes” in quite some time. The origin of the word vigilante is Spanish for watchman, alert, or guard, and like a watchman they have been out there waiting for the long combination of events. The definition of bond vigilantes is a broad term for bond market participants who impose discipline on the market through focusing on negative fundamentals. Their form of discipline is selling duration or not buying at current levels.

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