Quantitative Ramblings

This post is an opportunity to play with a few ideas buzzing in my head this afternoon.

Here is some data on the hedge fund industry taking from the EDHEC dataset. See website for more details: http://www.edhec-risk.com/

Here is an overview of monthly performance from 1 Jan 1997 – 31 Dec 2014.



On a risk adjusted basis the Equity Market Neutral returns are the clear star performer.






Now let us have a look at how some of these returns look from the lens of a normal distribution.

Rplot16 Rplot15 Rplot14 Rplot13





There is a very strong argument that the markets are random. If this is the case then fund managers should not be able to demonstrate any consistent pattern of returns. One of the ways to determine if there is a persistence of performance is to test for auto-correlation. In essence auto-correlation is a process whereby you test the correlation of a time series by itself but create a series of lags. Naturally the 0 lag will have a perfect correlation of 1 (100%) what you are looking to see is if the lags produce a statistically significant correlation by piercing the horizontal dashed lines. If there is a  statistically significant auto-correlation after many lags, I think we can dismiss this as spurious we are looking for significance after few lags.

I wasn’t surprised to find that the only strategy to produce auto-correlation was the Equity Market Neutral strategy.  L/S Equity was also able to produce auto-correlation.


Rplot18 Rplot19 Rplot20


To conclude this post is just me rambling along while watching some news. I will do more in depth analysis some time in the future but I think from the data presented there is certainly a strong argument to be made for managers that try and take out market direction in their trading behaviour. I think this makes a lot of sense, if forecasting the markets is random as many suggest, then the best chance of producing alpha as a manager is if you see the investing world within the relative scope of a market neutral environment.


All Greased Up – Sefirot Freestyle Portfolio

Feeling anxious about my OIL trade. Lots of doubts and rationalisations entering my internal dialogue.

My brief is to outperform the S&P 500 on a risk adjusted basis. On this score I am seriously outperforming but we are early in the game so let’s not get ahead of ourselves. I should also add the goal is to outperform on a go forward basis, in other words I am not going to simply lock in the outperformance and buy the benchmark and then say I beat the index. To claim victory one needs to beat over a bunch of different starting times.

The question I am asking myself is, am I correct to be playing around in other asset classes instead of just timing the SPY? For the purposes of this mandate my answer has to be yes as I am trying to keep this portfolio similar to how I would manage other people’s money and in order for my style to work I need to look for uncorrelated and diverse multiple trading opportunities. Michael you should know trading as a one trick pony will hurt you.

Let’s get back to OIL, now that I am satisfied that it is appropriate be trading this instrument. The plain hard fact is that so far on this trade I have been wrong. I am trading the belief that the market has oversold this asset for a whole lot of reasons, primarily due to the fact that it carries so much geopolitical charge and is therefore so heavily discussed in the media and that its use affects every man in the street. This setup is absolutely typical of a herding feedback loop activated by a market complex. With all this said I am still wrong over the time frame observed. However my time frame for this trade is a lot longer than what has come to pass and the risk associated is well within my parameters so for now I need to let my EGO step aside and let it do its thing.

Message to self: try keep the ego related emotions of being correct in OIL out of the equation. Been correct means more dollars and improved performance in the trade, don’t allow that to make you think you are cleverer, wiser, more deserving or any other emotion than being blessed to have achieved your goal. In the same vein don’t allow the shadow to inflate on the negative aspects associated with been wrong. Being wrong doesn’t invalidate you as a competent skilled professional.

[if I was being truly transparent I would put on the table all the personal issues I am currently going through which might further explain my emotional reaction to the price action. For now I will hold back :).

Portfolio Activity

The Sefirot will add the following two trades to its tactical portfolio:

  1. buy 125 OIL @ the open
  2. buy 30 FXE @ the open (this is an ETF of the Euro / USD)

Both of these asset classes are heavily oversold. While I believe the EURO is destined to fail and disband I think it has moved too far in the build up to the ECB QE announcement. I am therefore simply trading this for a dead cat bounce. I am also trading oil from an oversold point of view but have no firm view on the supply and demand factors affecting price over the medium to long term.

oil27 euro27th



When to Crap your Pants

I apologise for the crude subject line but hey that is exactly the instruction my mother gave me as I was providing her advice on her investment portfolio. What I am about to describe is not unique to my family this is a problem the retired world is facing and some countries have it worse than others on a relative basis; the theme remains consistent.

My mother needs $=X each month to cover her living expenses, don’t worry mom I won’t say how much 🙂 . Something else to consider is my mother is incredibly risk averse, that is despite her roulette addiction so capital preservation is a major theme in her portfolio.

My brother in law and myself are her trusted advisors and we decided to have a small equity allocation based on her needs for income and capital protection so we went 40% equities, 60% fixed income and cash. Yes of course we could have done better had we more exposure to equities and yes with new highs in the Dow yes we left some on the table but you can also see that the Aussie market has not yet reached new highs so we did ok. Moving along……dowaord

So we have a heavy weighting in fixed income / bonds 58.5% with just 1.5% in cash. With all this QE talk in Europe it suddenly dawned on me perhaps my mothers portfolio is not as safe as we perhaps thought. Take a look at the Aussie 10yr bonds the yield is at an all time historic low, which means the price inversely (that’s how bonds work) is at all time highs.


We have just witnessed the impossible a major world currency moved 16% in one day actually a little more during the day that is pretty damn scary. The point I made to my mom is that perhaps its time to sacrifice a little on the monthly income and move more of her funds from fixed income into cash. Sometimes one just has to bite the bullet and be extra careful.

The crazy thing is in some countries keeping your money in cash means you are paying the bank to store your money. Many people like to say that bonds and equities are not correlated but that is simply not true. There are periods that they are like now and others that they aren’t.

So while trying to avoid what we thought/think may be an equity bubble we have climbed right onto what is probably the biggest bubble of them all the Bond Bubble. Heaven helps us when this bubble bursts as we are likely do more than crap our pants.

Portfolio Activity

The oil market feels heavy, I am going to sell 250 OIL (50%) of my holding @ the open with the hope of buying it back a little lower.

Feeling a little edgy about the portfolio, want to do more but have no true sense of where things are headed, other than my research telling me the markets are expensive. The core of this portfolio is designed to trade for the long term, with some light sprinkling of tactical trading around the (h)edges.


Swiss Timing

This is my 100th blog post in the short 3 months of going live, and is providing me with a vital outlet for my inner thought processes. I woke up late this Friday morning, as it seems my week has consisted of one late night after another. After turning on my phone, the beeping text alerts beat me to my trusted Bloomberg app to see what happened in the markets over night.

Friday I work from Bondi so before I discuss what I think about the Swiss “shock” take a look at my office for today.


For those who haven’t heard the Swiss “suddenly” removed the peg to the Euro they implemented in 2011 to halt its then increase in value. The reason then was as a safe haven during the global financial crisis people were pouring their money into this tiny country and in so doing killing the countries large export economy. Isn’t life amazing, here is that Kabbalistic Jungian idea of unity of opposites: Good = Bad.

With the recent drop of the EUR to the USD and the likely further demise of the EURO the Swiss bankers decided to not continue buying the EUR to maintain the peg and sit with an enormous pile of EURO “assets” on their balance sheet.

Take a look at how the market reacted. The Swiss currency rose almost 30% at its highest during the day to then correct roughly half that.


It dropped 3,500 pips at its worst.

The Swiss stock market also went into freefall dropping 15% before recovering to lose about 8% the worst since 1989.


The question I want to deal with on this my 100th post is whether any of this could be anticipated? I believe YES and NO. So much for getting off the fence.

The reason I say YES, is because in terms of the theme I am developing for my book The Market Complex there was a clear interference by the Swiss Central Bank with the ebb and flow of the natural way of things which most people left unconscious and soon began to treat as natural.

The psychological rule says that when an inner situation is not made conscious, it happens outside, as fate. That is to say, when the individual remains undivided and does not become conscious of his inner opposite, the world must perforce act out the conflict and be torn into opposing halves. Collected Works, A Symbol of the Self.

So yes when a complex is identified it is known that it will produce unpredictable eruptions (read: sudden market dislocations like today). However the answer to whether we could anticipate when this shock would take place the answer is NO. When the energy around a complex amplifies we do know that things are about to become increasingly unpredictable. The news out of Europe and the threat to the Euro’s long term existence is being well played out in the media and political circles. I think it is fair to say that an eruption in this market complex was well overdue and the best thing one could have done in anticipation was buy volatility protection or stand aside from this market.

In conclusion this picture sums it up, you cannot have good without bad, up without down.