Off Topic

The Secret Club That Runs the World

The Secret Club that Runs the WorldWow, the editor really got carried away with that title. We picked up a copy of Kate Kelly’s (great name) book ‘The Secret Club That Runs the World – Inside the Fraternity of Commodity Traders’ the other day, and after finishing it off – think the title probably should have been something more like:  A few traders who took enormously large risks, made fortunes, lost fortunes, and then faded into relative obscurity. But that might not have sold so well.

Beyond the critique of the title, however; this was quite an entertaining read for anyone involved in the commodity futures markets – and especially the energy markets.  The book touches a lot of different areas, including profiles on former regulators Bart Chilton and Gary Gensler; the dangers of indexing commodities after a huge run up, and how commodities were the red headed step child at Morgan Stanley.

But those parts are mostly just filler between the more entertaining sections discussing the incredible ups and downs of Pierre Andurand and his Energy Trading Hedge Fund Blue Gold Capital Management (since closed down), the behind the scenes drama as physical commodity giants Glencore and Xstrata tiptoed around a merger, and the bizarre tale of huge proprietary trading masked as hedging at Delta Airlines.

The Andurand/Blue Crest story is worth the price of admission alone.  Andurand is like a characterization of a hedge fund mogul for a movie. There’s his 11 million pound house in London, Goldman Sachs ties, ownership in a kickboxing league, a custom Bugati sports car, Elton John playing at parties, and – of course – the proverbial Russian model for a wife.  And then there’s the incredible performance:  +209% in 2008, +55% in 2009, and +13% in 2010 as assets under management surpassed $2 Billion; followed by a terrible day in 2011 when the firm lost close to half a billion dollars (in a day!).  About 16 months later, the fund shut down and sent home all the money to clients. Past Performance is Not Necessarily Indicative of Future Results.

This quote summed up Andurand (and our amazement on how they could have raised over $2 Billion).

“Everyone knew of Andurand’s appetite for emormous bets – and his reputation for relaxed risk management.”

Andurand has gone on to launch a new firm, Andurand Capital, which reportedly was one of the best performing funds in 2013, but we can’t help but imagine what one of our favorite authors, Nassim Taleb, might say about him.  Mr. Taleb might view the performance as little more than the personification of the role luck plays in investment outcomes. He may view Andurand as a human winning lottery ticket – the one trader out of tens of thousands trying to do the same thing who got the sequence of many best just right (although there were some that were notably wrong).  All we know is that we’ll keep rooting for the guy, so there’s more stories of mansions, private planes and model wives.

The rest of the story, excepting the regulator parts, is nearly as interesting – especially the stories around Delta Airlines mostly botched attempts at hedging their fuel costs, making for a good quick read that will have you at the very least, feeling a little emasculated over the size of your bets in the energy sector.

Invest like a Billionaire?

When someone first starts investing, there is the sort of high that comes with it; a high that convinces you that you just might be the next Warren Buffet. Sure. You watched a couple investing tips videos on Youtube, and you think you found some ETFs (with extremely low or no fees) that no one else knows about.

The thing is, that feeling never really goes away. The overly active investors are confident that with a little hard work they too will eventually become Warren Buffet. We all know the likelihood of that, so instead the people at Direxion decided to take that idea and turn it into an ETF. What are we talking about? The newly launched ETF Direxion iBillionaire (IBLN). Now you can feel like you’re trading with the greats, without actually doing it. Here is the description:

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Who needs the USDA when you can Live Tweet Crop Conditions

What gets Ag folks excited on a Monday morning on Twitter? Live Tweeting crop conditions. All day, the people of the “2014 Pro Farmer Midwest Crop Tour,” have been tweeting their hearts out with the hashtag #PFtour14 to show the conditions of corn and soybeans across the Midwestern states.

Crop Tour Logo

The goal of this four day tour is to provide accurate information of the condition of corn and soybeans as harvest season approaches. We can’t think of a better way to do such a thing then traveling state to state live tweeting the conditions in the field in real time.

Now you might be wondering, doesn’t the USDA already collect data from around the country to provide the conditions of various crops? Yes, but this crop tour is unique in that they don’t want to focus on  yield numbers specifically, but the big picture.

“Don’t focus on yield calculations from individual fields,” says Brian Grete, Pro Farmer senior market analyst and leader of the tour’s eastern leg. “That isn’t what we are trying to do, and we actually discourage scouts from tweeting individual yield results. Instead, we look at the entire area we cover as one big corn field. Twitter is most useful for getting a general idea of what scouts are finding. And the pictures are valuable.”

Essentially, give people the opportunity to tweet about the condition of their corn with pictures, and you got yourself one heck of a trend (pun intended). Take a look at some of the pictures from the first day of the tour, via the Ohio County Journal.

Corn 1 [Read more...]

Bloomberg Vomits Alternatives

We couldn’t resist this Bloomberg headline the other day:  “Classic Cars, Lean Hogs and Duchamp Art Lead Alternative Investment Ranking”  Cars, Hogs, and art… and an alternative investment ranking – this was going to be interesting.

Except the ranking is little more than the trailing 36 month returns – without mention of the volatility, drawdowns, or any other risk to the investments.  And the so called “Alternatives” in the article seems to be an odd mish mash of returns for whole investment categories like Private Equity with its 100s of Billions of Dollars invested alongside the returns for single stamps from 1867 which gos for around $400.

Throw in a few Ferraris, REIT indices, some Bordeaux wine, Soybean Meal futures, and Hedge Funds; and it’s like Bloomberg vomited alternatives all over the page.



Exotic_1(Disclaimer: Past performance is not necessarily indicative of future results)
Tables Courtesy: Bloomberg

Now we get it, looking at exotic property or ideas is a lot more fun to read about then say risk adjusted ratios (what real alternatives folk geek out over), but to compare investing in wine and fast cars to Private Equity and Hedge Funds seems a bit off the mark to us. For one, there is perhaps $1 Billion worth of capacity in some of the ‘exotic’ investments put up on the page, while some of the hedge funds listed manage many billions.  It’s not quite fair to compare the return on a $400 stamp or $1,000 bottle of wine with the Trillions invested in the hedge fund and private equity space. One is attainable to a handful of people in the world, the other to millions. It’s sort of like comparing the Yankees win/loss record for the year with Phil “The Power” Taylor’s darts record.

Oh well… the tables are pretty and it’s fun to see how much some of those ‘exotics’ returned. Who knew?  Self storage REITs were the place to be. We’ll take the ‘under’ on that happening over the next three years.

As for their line about alternative investment (now they’re talking the whole world of them…) underperforming the S&P – that is another case of apples and oranges, although not for the reasons outlined above, with both return streams available to the masses.  Alternatives are oranges to stocks apples because “Hedge Funds Don’t Care if They’re Underperforming the S&P.”

Can You Time the Market Without Crying?

We’ve all seen pictures like this one from Putnam showing how bad of an idea it is to miss the 10 best days in the stock market

Missing the Best DaysChart Courtesy: Putnam

But we read an interesting post on trying to time trading systems (that’s like timing market timing) that seemed to approach this in a bit more logical way. You see – it doesn’t make much sense to talk about missing the 10, or 20, or 40 best single days in the stock market. Most market timers aren’t trying to avoid a single bad day,  and get back in the next day. Most are looking at things like Price to Earnings ratios and the rest are trying to avoid bad periods… not just bad days. Plus, nobody is that unlucky trying to time the market that they miss just the 10 best days over a few decades. On the flip-side, nobody is that lucky that they would magically miss the worst market days over 10 to 20 years, only to get right back in the next day.

It makes much more sense to us to talk about what missing the best streaks of days looks like. The best 10 and 30 days periods, for instance. That would be a lot more interesting; to see how bad/good you would have been if you picked the exact wrong/right time.

Here’s what we found:

(Note: These figures do not represent actual trading, and were not taken from real experiences)

Missing the Best Trading Days

Missing the Worst Trading Days(Disclaimer: Past performance is not necessarily indicative of future results)
(Note: The figures and charts above are an example and do not represent actual trading)

In our opinion, the better argument for not trying to time would go something like this:

Trying to time the market?

  • If you’re incredibly smart, or lucky, or both – missing the worst 10 day streak would save you 549%
  • If you’re incredibly dumb, unlucky, or both – missing the best 10 day streak would cost you 212%
  • If you’re somewhere in between smart and dumb and have average luck – you’ll likely not miss anything… with missing the average 10 day streak resulting in 4%

We’re not sure if this supports timing or not – but it sure seems a better way to talk about it, rather than the more prevalent narrative about the big danger of missing the best 10 days in the stock market – like they come one right after the other or you’re the unluckiest person on the planet.  The whole thing is kind of silly anyway – as it is backwards looking, and would need to be completely thrown out the window if the next 30 years were the negative image of the past 30 years, with stocks returning –70% over the span. If that happens, then timing would do no good, again – it would be better to not be involved at all…



Rise of the Robo Advisors?

The Economist CoverForgive us for stealing from the cover of the Economist, but given the topic it seems fitting. Ever since the major technological advancements of the 20th century, there’s been a growing fear that soon enough robots will control the world (cue the Terminator franchise). Fast forward to today, and this fear has creeped into the financial advisor space of all places, with articles using  words and phrases like “afraid” & “risk irrelevancy” to display the attitudes and dangers all advisors face if they don’t adapt to the shifting mentality when it comes to investing. What are we talking about? And what is a robo-advisor anyway?  Why are people supposedly fearing it?

Who are the Robo-Advisors?

Just like Amazon ($AMZN) ruined Borders and the local bookstores, Netflix ($NFLX) killed Blockbuster, Facebook ($FB)  killed talking to your friends, and Tesla ($TSLA) is trying to disrupt the big auto-makers; the whole idea behind Robo-Advisors is to disrupt the financial advisor space with new technology and lower costs:  mainly algorithms instead of advisors; websites instead of branch offices, and automated text messages instead of hour long meetings. A few leaders have emerged so far in the space, with names like Betterment, Wealthfront, and FutureAdvisor, and a quick view of their websites will show essentially the same message:  ditch your father’s golfing buddy and invest like it’s the 21st century, with easy, intuitive tools to set things up and automated processes after that so you don’t have to worry about it. 

Why is Everyone Talking about them Now?

It’s the financial equivalent of booking an Uber on your phone versus standing in the cab line at the hotel. And it’s gone beyond the idea stage to real money. Wealthfront launched in December of 2011 and in those 30 months, they have since grown to $1 Billion in AUM, which is roughly an average growth of 33.3m a month. Betterment is doing well too, with $502 mm in assets under management. As for FutureAdvisor, they now have over $118mm AUM, with only 18 employees.  And the Venture Capital folks are falling all over each other to get in on the game wondering if this is the next Twitter or Facebook or whatever, pumping over a quarter of a billion into the space, and $95 million in just a few weeks earlier this year.

Bo Lu, the CEO of Future Advisor had this to say about the size of the opportunity

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About that Volatility = Complacency Claim…

Here’s how the usual reporting on low volatility goes…

There’s Low Volatility because the VIX is low, and the VIX being low reflects investors paying less for future downside protection, and paying less for downside protection means investors are less concerned (or aware) of the possibility of downside… so low volatility means these investors are becoming more “complacent”.  What exactly does complacent mean, we looked it up, via

“pleased, especially with oneself or one’s merits, advantages, situation, etc., often without
awareness of some potential danger or defect; self-satisfied.”

It’s kind of like a person foregoing hurricane insurance because there hasn’t been one in a while. Their recent good fortune of no hurricanes blowing their house down has made them complacent about the possibility of future hurricanes.

The structure of the VIX leads to this low volatility = complacency argument. The Chicago Board Options Exchange’s Market Volatility Index, or the VIX, measures the implied volatility of S&P 500 index, representing investors’ expectations of volatility in the benchmark equities index over the next 30 days.  Higher VIX values indicate anticipation of higher stock market volatility while lower VIX values indicate the expectation for lower stock market volatility. With stock markets tending to ‘take the stairs up, and the elevator down’ as the old saying goes, higher volatility is associated with lower prices most of the time. So, if investors think equities are going lower, they think it will be accompanied by increased volatility, and therefore will be willing to price the VIX higher.

So….we’ll concede that a Low Vix can represent a certain amount of complacency and lack of awareness of possible downside (or upside spikes for that matter) among investors in equities.

But does it follow that low volatility in say, Bonds, means that bond investors are becoming more complacent. While this is mostly semantics and likely only of interest to the most nerdy among you, does it follow that low volatility in Bonds as measured by tight ranges means there is complacency in that market?  We sort of think no. You see, volatility in nearly everywhere but the VIX is measured not by the prices of options to extrapolate the expected volatility over the next 30 days – but instead by the observed volatility over the most recent period, be it 30 days or 100 or the past year.

And that’s the rub… when we say that there’s low volatility in a market like bonds or the Euro Currency because the ranges have contracted, and that means there’s complacency (like we did in our “Complacency Everywhere” piece last week), we’re missing that the tighter ranges are what happened, versus the VIX reading being a measure of what investors believe will happen.  Now, of course, investors being humans – they often project what just happened onto what they think will happen, so there is a high correlation between the observed volatility and expected volatility.

But you can see intuitively that these aren’t the same thing. The observed volatility being low simply means investors were not faced with any market moving information or outside forces over the observed period. It doesn’t necessarily mean those investors are becoming complacent, i.e. – pricing in low volatility expectations moving forward. Luckily, the CBOE came out with some VIX-index like products a while back which allow us to test out this observed versus implied phenomenon. You can see from the charts that while observed volatility is at multi-year lows, the expected volatility is actually at multi-month highs.


Observed volatility = the tightest 10 Yr Treasury Yield 3 month range in 35 years

Expected Volatity = CBOE/CBOT 10-year U.S. Treasury Note Volatility Index – VXTYN (below)

Bonds Vix(Disclaimer: Past performance is not necessarily indicative of future results)

Euro Currency:

Observed volatility = the tightest consecutive monthly ranges in the Euro since inception

Expected Volatility = CBOE EuroCurrency ETP Volatility Index – EVZ (below)

Eurocurrency Vix(Disclaimer: Past performance is not necessarily indicative of future results)

So next time someone (like us) tells you investors are complacent because there’s low volatility – double check their inputs. Are they saying low volatility using the expected volatility of that market looking forward, or the observed volatility looking backwards?  We couldn’t agree more that tighter ranges and a low VIX portend a more volatile climate coming up (not a lower one), but the slight problem in the low volatility = complacency argument didn’t sit so well with us over the weekend… we feel better now for having gotten it off our chest.