This week’s
selection of markets- and trading-oriented articles. Next post the Off-topics
Previously
on MoreLiver’s:
REGULATION
New Circuit Breakers Would Have Halted ‘Flash
Crash’ – MarketBeat
/ WSJ
New SEC rules kicking in next year would
have slowed down the 2010 “flash crash” and halted stocks’ losses on the most
tumultuous days of the 2008 financial crisis.
Jamie Dimon and the Fall of Nations – Economix
/ NYT
Simon
Johnson: We had strong institutions for a
long time in this country — including effective checks on the power of bankers.
Many people remember that history and still hold its image in their mind’s eye
as they look at modern Wall Street. It’s time to wake up.
Dim Prospects for Financial Crisis Prosecutions
– DealBook
/ NYT
So it is the same refrain: the likelihood of a
prominent criminal case against a corporate or Wall Street executive in the
near future looks to be nearly zero at this point.
391 Auctions – The Aleph Blog
Jason Zweig of the Wall Street Journal has an
interesting piece up called Could Computers Protect the Market From Computers?...
I’m skeptical that we can stop unusual things from happening resulting from
computers trading rapidly by having other computers monitor it.
Modest Proposals for Financial Reform:
Regulation as Grade-Grubbing – The
Atlantic
The holy grail of regulation, in my opinion, is
to harness the power of private sector competition to provide, and constantly
improve on, the regulation's goals.
HEDGE FUNDS
Global Macro hedge funds hit with investor
withdrawals – Sober
Look
Throughout the second half of 2011, Europe became the bane of macro funds'
existence, as managers got constantly whipsawed by the whims of Eurozone
politicians and bureaucrats. Investing based on relative value became
irrelevant. Market trends (in currencies, commodities, rates, equities, etc.)
kept reversing direction (sometimes several times a month), often rendering
fundamental economic analysis completely useless.
Greenlight Capital's Q1 Letter – market
folly
David Einhorn Defends Apple, Still Short St. Joe (full
doc)
The holdings hedge funds do not want you to
know about – Abnormal
Returns
The bottom line is that you have to be a
careful consumer of information surrounding hedge fund disclosures. There are
number of ways in which hedge fund positions are not captured in 13Fs. You are
often not seeing a hedge fund’s entire picture, nor their best ideas.
The Secrets of The World’s Greatest Traders – All
About Alpha
I spoke with Jack Schwager who is perhaps best
known for his “Market Wizards” book series in which he has interviewed a cross
section of the most successful traders and investors in the world.
Funds of hedge funds: Going, going, gone? – The Economist
An overdue wave of consolidation is hitting the
funds-of-funds industry
"Heads I win, tails you lose." – London
Banker
(15 years ago)
he said that hedge funds were less a new
method for investment, than a new method for higher remuneration. The appeal of
hedge funds was in the outsize fees rewarding the fund managers rather than any
superior returns for investors.
SHADOW BANKING
The US shadow banking appears to have halved
since the start of the 2008, at least according to one new estimate — which
also reminded us that we still have to come up with a better way to define this
very broad sector.
What is shadow banking? – Atlanta
FED
What definition of shadow banking you prefer
probably depends on the questions you are trying to answer. Since the interest
in shadow banking today is clearly motivated by the financial crisis and its
regulatory aftermath, a definition that focuses on systemically risky
institutions has a lot of appeal.
NUMBERS
True Out-of-Sample Test of “Best” Technical
Trading Rules – CXO
In summary, evidence from true out-of-sample
tests on the best technical trading rules from 1897-1986 indicates that testing
biases are the source of their past outperformance.
Basic Equity Return Statistics – CXO
…evidence from simple statistics suggests that
investors should not count on the long-run stability of the equity investing
environment or on continuity of short-term relationships between past and
future returns.
Value at Risk – the
construct
International and European banking supervisors
are allowing banks to rely on their own internal Value-at-Risk (VaR) models to
calculate their capital requirements. However, many observers who do not belong
to the inner circle of financial analysts and commentators are puzzled by the
concept.
Jackknifing portfolio decision returns – Portfolio
Probe
Suppose we make some change to our
portfolio. At a later date we can see if
that change was good or bad for the portfolio return. Say, for instance, that it helped by 16 basis
points. How do we properly account for
variability in that 16 basis points?
PSYCHOLOGY
Dirty Money: There IS Accounting For Taste – Psy-Fi
Blog
The link between emotions and decision making,
particularly financial decision making, has been recognized for years. This is a tricky area because the connection
between emotions and rationality is difficult to unpick, which is why making
investment decisions while in an emotional state is usually not recommended.
Big, Fat Cognitive Illusion (and all of us are
more Greek than we think) – behavioral
macro
But what I have learned in my experience with
sovereign crises over the years is that whatever informational advantage they
have is usually more than offset by (1) their difficulty in distinguishing
between things that matter and things that don’t; (2) the psychological baggage
with respect to their own past, and (3) the often emotionally-charged nature of
their perspective.
Book Review: The Billion Dollar Mistake – The
Aleph Blog
We learn more from failures than
successes. With failures, it is easy to
observe the cause in hindsight and realize that we neglected a key principle in
investing. With successes, the reasons
vary, and it is much harder to generalize.
people who use index trackers either don’t
understand that they’re simple commodities or simply trade them like any other
instrument available to private investors: frequently, ineptly and in a manner
calculated to abrogate their inbuilt advantages. Nothing new there, then.
PLAYERS
Forgotten facts about the great brokerage
titans – Investment
News
Ex-mid/back-office support worker: 'I'm a
casualty of market conditions' – The
Guardian
An unemployed operations worker tells Joris
Luyendijk about redundancy and feeling intimidated by traders
Can Wall Street strategists be trusted? – Macronomics
History clearly suggests that they bring
negative value in terms of asset allocation forecasting. Even a casual look at
the graphs shows that strategists are massively wrong at extremes
Managing Wall Street's 'Winner Effect' – Businessweek
But that doesn’t explain why the firm’s traders
and executives doubled down on a position that, in hindsight, looked clearly
doomed. What were they thinking? That question, in essence, is what John Coates
has devoted his life to answering.