“The government would find it virtually impossible to legislate for socially responsible investing (SRI) by retirement funds, because it is difficult to define what SRI means, a retirement funds conference heard this week.”
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“Today, David Rosenberg also chimes in on this ridiculous divergence between the S&P and bonds, and in graphic form shows that should the gap ever close, it would lead the stock market to its fair value, which ironically, is just around the March 2009 lows of 666… As a reminder, historically bonds are right… about 100% of the time.”
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Someone else catches on to the gold/silver COMEX fraud: “… if this much gold and silver really is changing hands out there, then why are eligible COMEX inventories sitting at 20 year lows? If the Big Commercial traders are laying on these enormous short positions as part of a legitimate hedging strategy, then why wouldn’t the same strategy work with crude oil? Or Wheat? And, most notably — why wouldn’t this same hedging strategy work with copper? ”
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““As I’ve been saying all along, it’s extraordinarily rare for markets to set up this way. I can only think of a few occasions in my 35 years of trading when the precious metals have been poised to blast off and this is one of them.”
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Bill Murphy of GATA gives the 101 on central bank gold manipulation in this BNN interview.
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Gold hit a record high of $875 an ounce on Nymex in January 1980, about two months after the start of the Iran hostages crisis and less than a month after the Soviet Union invasion of Afghanistan. That’s equivalent to about $2,318.84 an ounce in today’s dollars.

Kind of hilarious that they use $1800/oz on the chart but then $2318/oz in the article. Of course, official statistics-debunker John Williams would say gold needs to best a dollar value more like $7000/oz to truly be in “record” territory.

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Correlation? More assets moving in synchrony? Correlation is a misleading statistic of little help in measuring or achieving diversification. Highly correlated funds CAN hedge a portfolio but some uncorrelated strategies are too dependent on underlying markets. Below is a hypothetical hedge fund with +1.00 correlation to the S&P500. Absolute returns every year and +17.65% CAGR but correlated PERFECTLY with a risky index fund which lost money! Clearly the product offered diversification despite that pesky correlation.

Diversification was said to be the only “free lunch” but that has been arbitraged away, at least in traditional risky asset classes. 2008 showed how important it is to diversify the right way not diworsify the old way. Sadly correlation is still used as a critical input for portfolio construction and risk management. During crashes, correlations tend to rise but now it occurs in “normal” market conditions as well, adding to risk NOT reducing it. Securities can move in sync due to herding, ETFs and algorithmic trading. The passive indexing mania means benchmark components go up or down regardless of value whether they are stocks, bonds or commodities. The best way to diversify a long is with a short NOT another long.

The omnipotent correlation matrix drives much portfolio “optimization”. A bunch of incorrect inputs from data dredging history whose forward-looking output is even more error prone. Garbage in, garbage squared out. Correlation is a bad measure of magnitude. On up market days most stocks may go up but they don’t rise by the same percentage. Relative value strategies take advantage of varying price moves even if in the same direction. I don’t mind if an investment has a correlation of +1, 0, -1 or anything in between. It’s irrelevant. I do care it has minimal dependence on anything else in the portfolio. Sadly for traditional investors MVO and CAPM have been shown to be simple, elegant and completely useless.

“Modern” portfolio theory requires three sets of wild guesses marketed as capital market assumptions: expected returns, expected volatilities and expected correlations. Scary how trillions are invested in this weird way and the poor “results” speak for themselves. Those variables aren’t robust, stable or likely to be accurate in constructing a long term portfolio. I’ve kept track of such facile forecasts and the tea leaf reading “experts” who made them. Pretty sad outcomes but those fortune teller numbers still keep being used. We are ALL affected by assets being (mis)allocated in this failed framework. Unlike the crystal ball gazers I don’t try to predict markets so I find mispriced securities INSTEAD and safer strategies whose returns outweigh risks.

It is not surprising conventional wisdom has performed so badly with “Nobel” prizes awarded for such “efficient”, mean variance “optimized”, CAPM nonsense. Past asset class returns are no indication of the future over any time horizon including centuries, standard deviation does not measure risk and correlation gives no insight on risk factor dependence. So why is this stuff still used? Everybody knows everything so the markets are random right? CMA causes almost as many problems as actuarial assumptions. If you keep doing what you have always done, you receive what you always get: growing liabilities and declining assets! Safer to go with skill-based strategies that offer absolute alpha not repackaged beta.

Beta is usually cited as a measure of volatility. But it’s really correlation adjusted for the relative volatilities of the fund and benchmark. You can have a low beta fund that is high risk and a high beta security LESS risky than the market. Idiosyncratic risk isn’t a risk; it’s the idiosyncratic alpha you want. Alpha and absolute returns are not the same. The textbook calculation of beta and alpha is based on correlation which, as the example above shows, isn’t helpful. The identification of true beta – dependence on underlying risk factors – and true alpha – value added through skill not luck – is more complicated. I prefer calculating co-relation and association metrics not coRRelations. High correlation shows the markets are even more inefficient.

Dispersion? Every month reports come out on how “hedge funds” have performed on average. Those numbers are meaningless with such a disparity of skills and zero-sum nature of alpha. Most of the mainstream strategies are too well-known now so it is not surprising AGGREGATE returns are tending to zero. Skill is rare. The average hides a wide range of numbers from managers performing very well to many that are not. 2008 saw huge dispersion. The average hedge fund lost 20% but 3,000 made money. True diversification costs 2 and 20 and the quantitative and qualitative resources to isolate manager skill from luck. The basic arithmetic of covariances and variances just don’t make the grade.

The best sources of low dependence are time and space diversification. High frequency trading continues to perform well. Amazing how the majority of portfolios still don’t allocate to such a reliable source of alpha. Last decade was great and returns have also been good this “difficult” year. If algos do constitute 65% of all trading in liquid securities, perhaps a model portfolio should have 65% allocated to HFT? Even after so many years of superior risk adjusted returns most investors avoid high frequency strategies. Perhaps buy and hold for a few milliseconds is the natural evolution from buy and hold for a few decades. Everything operates on short time horizons nowadays.

There is a big difference between good funds and bad ones. Emerging markets have also had high dispersion with frontier markets tending to outperform. Frontiers are less dependent on the world economy while the term “emerging markets” is often semantic arbitrage for countries that are actually developed. The old BRIC lost to the new BRIC but the SLIM has been the rockstar this year. Sri Lanka, Iran, Mongolia were missed by almost all international investment “strategists”. Could the geographic diversification strategy nowadays be to invest in places that do NOT have ETFs? It’s an Asian century but not in the most heavily hyped markets.

Unlike the unreliable, unskilled, unhedged trio of unknown FUTURE asset class statistics, I know that the best managers properly incentivized to work hard and apply rare skills to their money and yours will deliver in all possible scenarios over time. Changing markets and rising correlation are no excuse for not being able to make money. Of course no-one avoids losses sometimes which is why risk management and low similarity between strategies is important. Two funds might or might not be correlated but one can be vastly superior and safer than the other. Avoid managers dependent on the market and focus on skill-based absolute return strategies.

by Veryan Allen. Copyright

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Top Five Hedge Funds

Institutional Investor Ranks the Top Five Hedge Funds

Institutional Investor ranks the top 100 hedge funds in terms of total capital. In the following video, Institutional Investor’s executive editor, Michael Peltz, reveals the magazine’s ranking of the top five hedge funds.  If you are reading this via RSS or e-mail, click here to watch the video.

Top Five Hedge Funds:

BridgeWater Associates – $38.6 billion
JPMorgan Chase – $32.89 billion
Paulson & Co. – $29 billion
D.E. Shaw & Co. – $28.6 billion
Brevan Howard Asset Management – $26.8 billion

Watch the latest video at <a href=”http://video.foxbusiness.com”>video.foxbusiness.com</a>

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Tags: Top Five Hedge Funds, Top 5 Hedge Funds, five largest hedge funds, list of the top hedge funds, what are the biggest hedge funds?, top 5 hedge fund firms, hedge fund firms, top ten hedge funds

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David Tepper Interview

How David Tepper Made Billions in the Financial Crisis

David Tepper, the billionaire manager of Appaloosa Management, spoke in some detail about his strategy in 2008 and 2009 that made him billions of dollars. During the height of the financial crisis when most hedge funds were just trying to protect against losses, Tepper’s fund was buying up shares in failing banks, expecting a rebound that would pay off big. And that is exactly what happened in 2009, when the banks shares that he had bought for cheap started rising Appaloosa Management made $7.5 billion. Here is an interesting interview with David Tepper:

When Lehman Brothers filed for bankruptcy in September 2008, investors panicked on Wall Street, causing dangerous aftershocks across the markets. And while most of Appaloosa’s peers were desperately trying to mitigate losses and stave off redemption requests amidst the market’s free fall, Tepper decided it was the perfect time to leap right into the eye of the storm.

So the fund started aggressively buying up depressed bank debt of holding companies like Washington Mutual and common and preferred stock of Wachovia and others.

One has to wonder if the guy eats nails for breakfast.

“We lead he herd,” he chuckles. “The Street follows us, we don’t follow the Street.”

Tepper was sitting on a pile of cash, having sold out of most of his positions in the spring of 2008, and didn’t have any debt. So when the U.S. Treasury put out a white paper in February 2009 announcing its Financial Stability Plan, which included the Capital Assistance Program designed to shore up the capital of banks, he took his time and read the fine print. read more..

Related to: David Tepper Interview

• Hedge Fund Tracker Tool
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Tags: David Tepper Interview, David Tepper banking crisis, david tepper appaloosa management, appaloosa management hedge fund, David Tepper $7 billion, David Tepper Billionaire

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Or: “How To Use Tax Bailout Money To Lever-up into Government Guarantee Programs And Be Profitable Again”
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