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Managed futures returns exploded to the upside with index returns showing big gains relative to alternative asset classes. The positive skew for some managers was even more surprising. We saw some October returns as large as 14%. Every major index we track was close to 3% or higher. For example, the October return using the Morningstar managed futures category was positive 3.45 and the year to date return was up 1.85 percent.

Natural gas has always been a volatile market and subject to weather shocks; however, over the last few years the volatility and weather shocks have been dampened because of the high storage inventory levels. Monthly volatility has declined by at least 1/3 over the last three years as inventories remained high.

Talk of tax cuts floating through the halls of Congress coupled with stronger consumer confidence allowed risky assets to continue marching higher. Warnings of overvalued equities, concerns over leverage, and higher geopolitical risks, have not stopped stocks from stronger gains around the globe. For US companies in the third quarter, 76% have shown positive earnings surprises and 67% have had positive sales surprises. The earnings growth rate is 4.7% for the third quarter according to Factset. Positive economics, good company performance, and low volatility all contributed to this continued rally.

A simple explanation for looking at a portfolio as a bundle of diversifiable risks is presented nicely in the new book, Rational Investing; The subtleties of asset management by Hugues Langlois and Jacques Lussier, two excellent researchers and money managers.

The Bank of England research piece, Eight centuries of the risk-free rate: bond market reversals from the Venetians to the ‘VaR shock’ by Paul Schmelzing, is important reading for any investor. It places the current bond rally which has been going on for over three decades in the long term context of the last 700 years. This bond bull movement is exceptional but not yet extraordinary when look at through history. Unfortunately, all bond rallies will end, but the reasons for ending may vary.

So if there’s a big market sell-off and as a response the VaR overreacts and shoots up, then many investors are kind of forced to sell because they have to stay within their VaR limits and this selling will then be done in an already collapsing market…rigorous use of VaR measures undermines the stability of markets.

It’s the type of risk management practice that works well as long as it is not needed; just like Bernanke observed after the credit crisis about their standard models that proved to be “successful for non-crisis periods”. 

-Harold de Boer Transtrend
Opalesque Roundtable series ’17 Netherlands

The human brain is an inefficient device for noticing, selecting, categorizing, recording, retaining, and manipulating information for inferential purpose.- W.M. Grove and P.E. Meehl

If those are all the things that the human brain is inefficient with, what is left over? A lot, but there has to be focus on using the brain for the right problems and when to change the thinking process. 

What makes a good investment manager? One trait not often talked about is curiosity. You cannot find new or unique opportunities if you are not curious; however, the concept or meaning of curiosity for investment management may be hard to define.

The line between recent “exotic preferences” and “behavioral finance” is so blurred that it describes academic politics better than anything substantive.                                 – John Cochrane University of Chicago 

John Cochrane, as well as others in finance, has focused on the academic issue of defining preferences for investors at an abstract level, but the issue becomes a reality when trying to extract preferences from investors to help build a portfolios.