“Things that have never happened before happen all the
time.” Scott Sagan
Reader: "what the deal with the links?"
RH: "just some stuff I've been reading; thought you might be interested."
Just for fun here below is one window into seven years of me managing my systematic alt risk strategy. The strategy evolves over time so it's hard to characterize it consistently over time but for the sake of argument let's say it looks like this at some point at least:
collateral yield - cash
collateral yield - lower risk
collateral yield - moderate risk
permanent positions - alternative risk in misc categories
permanent positions - energy focus
trading strategy* - trend following in various fixed income categories very broadly defined
trading strategy - short options on futures, some equity options
trading strategy - discretionary (e.g., currency, other macro) and opportunistic (rare)
* main thrust of program
The chart is the percentage point-gap between the strategy and a custom reference benchmark that is designed to roughly smell like a 35/35/30 portfolio or what might possibly be my own passive baseline. I seriously doubt I could successfully defend the benchmark in public but I'm comfortable that I get a sense of whether my trading adds any value. I've been trying to fire myself for a couple years but my retirement steering committee (me, three daughters, two cats) says I can't leave yet. For fun, note that there was a big strategy shift in mid-2013 when I added and then focused heavily on the trend following systematic strategy. Late 2016 was a period of max leverage of around 1.7 or 1.8 (not much but still had me paying attention). Right now it's probably .70 or less but that's working for me, too right now.
RETIREMENT FINANCE AND PLANNING
As we transition to a generation of retirees that will be
primary dependent on DC plans, how do workers plan to convert savings to
income? In 2018, for the first time, DC plan participants were asked about
their plans for the money accrued in their plan when they retired. Only half of
workers are confident that they know how much income they will need each month
in retirement or how to withdraw income from their savings and investments,
with only 1 in 8 very confident. In short, future retirees’ potential greater
reliance on unpredictable sources of income combined with their lack of
confidence in withdrawing income from their savings and investments is
noteworthy—especially in light of its juxtaposition with their increased
confidence in living comfortably throughout retirement.
call me a skeptic and I like to bust some of the myths
surrounding the flexibility mantra people
who adhere to this flexibility mantra might suggest that one could have
weathered the last 18 years pretty easily by tightening the belt during the two
recessions (one lasted only 8 months, the second lasted 18 months). But that’s
bogus! You would have tightened the belt, measured as the inflation-adjusted
withdrawals for the entire 18 years! …
it’s numerically impossible to come up with a new flexibility rule that would
look better … at every horizon
MARKETS AND INVESTING
Nobody Planned This, Nobody Expected It, Morgan Housel
Risk does not like prophets. It’s not even fond of
historians. You can plan for every risk except the things that are too crazy to
cross your mind. And those crazy things do the most harm, because they happen
more often than you think and you have no plan for how to deal with them.
Good times for dividends, FRED blog
Net corporate dividends have grown from $5.8 billion in 1929
to $990 billion in 2017. Of course, this growth is largely driven by the
general increase in prices—i.e., inflation—and by the increase in overall real
economic activity… Apart from a few years during and after the most recent
recession, this value has exceeded 5 percent for the past 11 years. Before
this, you’d have to go back to World War II for this value to exceed 5 percent.
So, yes: Good times for dividends.
ALTERNATIVE RISK
Is investment management a science - Use the"narrativeness" test. Mark Rzepczynski
investment management. Is it science? For some, the quants,
it is. For others who are discretionary managers, rules and laws cannot be
applied to what they do, it is a narrative. Some investors demand or want only
a science. Some managers cannot explain what they do without narrative. Where
it gets interesting is when quants use storytelling to explain their models or
when storytellers try to suggest their opinions are a model or a theory. Just
telling a complex story or using a "model" to explain the current
economic environment may not be science.
High-Frequency Derangement Syndrome, Cliff Asness
They casually assume that because today’s system isn’t
perfect, and it isn’t, that yesterday’s was better. It just wasn’t. Yesterday's
system was much more expensive on average, crashes still occurred, and human
market-makers still didn’t throw their bodies and wallets in front of those
crashes to stop them by buying at higher than market prices.
we use account-level data from LendingClub and Y-14M data
reported by bank holding companies with total assets of $50 billion or more. We
find a high correlation with interest rate spreads, LendingClub rating grades,
and loan performance. Interestingly, the correlations between the rating grades
and FICO scores have declined from about 80 percent (for loans that were
originated in 2007) to only about 35 percent for recent vintages (originated in
2014–2015), indicating that nontraditional alternative data have been
increasingly used by fintech lenders. Furthermore, we find that the rating
grades (assigned based on alternative data) perform well in predicting loan
performance over the two years after origination. The use of alternative data
has allowed some borrowers who would have been classified as subprime by
traditional criteria to be slotted into “better” loan grades, which allowed
them to get lower-priced credit. In addition, for the same risk of default,
consumers pay smaller spreads on loans from LendingClub than from credit card
borrowing.
Don’t be Afraid of Commodity Futures: Understand Them.
AlphaArchitect
The futures market is an exciting corner of the financial
markets, that often times investors who focus on equities consider, but we
don’t fully understand. The goal of this
writing was to give everyone a good foundation of knowledge to start digging
deeper into the futures market. There is
an ocean of information out there and we’ve gone about a foot deep We should now understand the characteristics
of the futures market, how the price of the futures contract against the spot
price can impact the cash flows to the margin account, and how moving from one
futures contract to another can impact your returns. [Don't forget options on
futures. While I realize that options in
general, futures in general and derivatives on derivatives in particular can be
intimidating, the options market on futures is less stomach churning than
futures proper imho]
Leverage and Trend Following, Corey Hoffstein While we
believe that trend following is most appropriate for investors concerned about
sequence risk, levered trend following may have use for investors pursuing
growth. In a simple back-test, a naïve levered trend following considerably
increases annualized returns and reduces negative skew and kurtosis (“fat
tails”). The introduced leverage, however, significantly increases annualized
volatility, meaning that the strategy still exhibits significant and large
drawdown profiles.
Factors In Fixed Income, Swedroe
While factor-based, style investing in equities has become
popular, its adoption has been much slower in other asset classes, including
fixed income. Brooks, Palhares and Richardson demonstrate that style investing
in bonds can also be applied. Thanks to the documented low or negative
correlations between style premiums and market premiums, and low sensitivity to
macroeconomic and financial market environments, fixed-income style investing
can provide diversification benefits—as well as potentially enhance returns—for
traditional, long-only stock and bond portfolios. [This is a big part of my
strategy because I can't afford the AQR income factor funds minimums otherwise
I might outsource]
I have been watching the development of bitcoins, but I
don't partake in bitcoin trading. If pushed into a corner for an opinion, I
would say that bitcoin trading is excessive and overly speculative. Bitcoins as
a concept may have exceeded its reality.
It also may be too early to have trading of a derivative on this cash
market with many outstanding questions on how to best run this market.
SOCIETY AND CAPITAL
Inequality in US Life Expectancy, Tim Taylor
if gains in life expectancy have considerable value, it also
follows that inequality of life expectancy matters, too.
Some Economic Effects of US Import Restraints, Tim Taylor
With all the controversies over the US
imposing tariffs on steel and aluminum …it's perhaps useful to consider an
overview of what import restraints the US
economy already has in place, and what effects they have had.
our economi[c] worries…don't arise because money is our
master and jobs are enslavement. Instead, it's all just tradeoffs, just
reality, just various aspects of the human condition. We should all know enough
history to have an idea of what "masters" and "enslavement"
really mean, and working at US
job in 2018 doesn't qualify. For those
of us living in the United States
200 years after Marx was born, it's worth keeping the perspective that the
economic stresses in our lives are first-world problems.
Update on the great public debt issue, sr-sv.com
The latest IMF fiscal monitor is a stark reminder of the
public finance risks in the world. Public debt ratios have remained stuck near
record highs of 105% of GDP for the developed world and a 3-decade high of 50%
for EM countries. If one includes contingent liabilities public debt would
average over 200% of GDP in advanced economies and 112% in emerging economies.
Deficits remain sizeable in the developed and emerging world, notwithstanding
the mature stage of the business cycle. Overall the financial position of
governments today is a lot more precarious than during past recoveries, leaving
them ill prepared for future adverse shocks. The U.S.
is even easing fiscal policy, expanding its deficit and an already high debt
ratio. Also, China ’s
public debt stock is expected to rise rapidly in future years.
Why Winners Keep Winning, Mick Maggiulli
The purpose of this simulation is to demonstrate how
important starting conditions are when determining long term outcomes. Instead
of marbles though it could be wealth, or popularity, or book sales. And most of
these outcomes are greatly influenced by chance events. We like to think in America
that most things come down to hard work, but a few lucky (or unlucky) breaks
early on can have lasting effects over decades.
Wisconsin's Pension System Works for Everyone, Justin Fox, Bloomberg
What enables Wisconsin to deliver pretty good pensions at
quite low cost is a retirement plan that occupies a middle ground between the
defined-benefit (DB) pension plans that were once predominant in the U.S. and
the defined-contribution (DC) 401(k)s that have supplanted them in the private
sector. I wrote a column last week about the rise of a middle-way pension
approach variously dubbed collective defined contribution, target benefit and
defined ambition, and credited the Dutch with originating it in the past decade
or so. A reader then pointed out that this was pretty much how Wisconsin
had been running its pensions since the late 1970s.
Infographic: A World of Languages, visualcapitalist
Today’s infographic from Alberto Lucas Lopez condenses the
7,102 known living languages today into a stunning visualization, with
individual colors representing each world region. Only 23 languages are spoken
by at least 50 million people. What’s more, over half the planet speaks at
least one of these 23 languages as their mother tongue.
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