Tuesday, June 16, 2009

Is it time for a "White Swan" fund?

"Black Swans" and Nassim Taleb are all over the news these days. Tail risk hedging is all the rage after the fund group loosely associated with Taleb, Black Swan Protection Protocol, had fantastical returns in October (65% to 115% if you can't read the article). Black Swan's are so hot that even mutual funds are advertising their tail risk hedging programs as a main selling point. While there might not be anything wrong with Mohamed El-Erian's Fund, retail getting involved is often a sign of a crowded trade. Looking at Mutual Fund and ETF launches, from Tech, to Alternative Energy, to Global Water, timing of such things is rarely correct. While it could easily be argued that tail risk hedging is an essential part of risk management. To a great degree, although less than reported, risk and return are correlated. You may want to be taking on tail risk in your investments.

Providing downside insurance to investors has actually been more profitable than investing directly in the stock market over recent years. An example this is the performance of the CBOE Put Write index. The put write index has outperformed the S&P since 1986 with less volatility. This points to the fact that insuring risk is a large source of returns and one ought be wary of any program hedging such risks costing too much. Taleb's first fund, had significant issues with poor performance after the "black swan" appeared. It was eventually rolled up. Andrew Lo's (2001) hypothetical Captial Decimation Partners returned an impressive 46% annualized with 1/6th the down months from 1992-1999 as a levered tail risk insurance provider (the strategy is easily replicated by any investor and requires no borrowing). They were insuring a larger portion of the tail than many tail risk insurance programs, and obviously that amout of leverage can lead to catastrophic losses (hence Lo's title for his idea).

So what might a "White Swan" fund do? It would bet on expected outcomes, and insure against the most unlikely events that people seem so fearful of. The unlikely events it would sell hedges against? The stock averages falling dramatically and fast over extended periods, US Treasuries rising dramatically in value, deflation. It seems hyper-inflation and deflation are on the mind of Taleb. While both seem unlikely, deflation would be much more "unexpected." I am guessing Taleb may be graying up his swan a bit, and mostly betting on (non-hyper) inflation. And deflation, come on? Or maybe he is just looking to repeat his mistakes.

The question is, when everyone is lining up for insurance, should you get in the insurance business? Seems like an idea worth considering.

Friday, June 12, 2009

Kool and the Gang

Senate Passes FDA Tobacco Bill

Historic Measure Limits Ads, Packaging; Smokeless Products Affected


"The regulations also require makers to pull from the market products that were introduced after February 2007, which could hurt some dissolvable tobacco pellets and strips. Some snus products will likely be exempt because similar pouches were on sale before that date.

This bill "could significantly chill the introduction or commercialization of new tobacco products that have significantly lower risks than cigarettes," said Tommy Payne, a Reynolds spokesman.

The new ban on candy- and fruit-flavored cigarettes isn't expected to have a big financial impact. Menthol cigarettes are initially exempt from the ban because of demands from the Congressional Black Caucus. About 75% of African-American smokers buy menthol brands.

The FDA is required to set up an advisory panel that will report within a year on whether menthol should be banned."

This bill disappoints on quite a few levels. First and most obvious, regulations are all pernicious. Second, the prospect of banning fun dissolvable tobacco products like Camel Orbs, and Ariva and Stonewall is just unconscionable. From what I understand they are the future of tobacco. I actually traveled around to a few local gas stations looking for these products as they sounded like fun. When is the last time a tobacco product has inspired such excitement? The answer is never. Next they will be banning exciting and fun beverages like Twisted Tea and Sparks (Oh, wait).

However, I must commend the actions of the Black Caucus in standing up for the rights of Menthol smokers. Where is my Black Caucus?

Tuesday, June 9, 2009

Broken Windshield Fallacy

House Passes Cash for Clunkers Legislation


"Although politicians and pundits are sure to weigh-in on the merits of the bill, the specifics appear clear: if your car gets 18 mpg or less and you trade in for a new vehicle the achieves at least 22 mpg, you receive a $3,500 voucher, or $4,500 if the mileage of the new vehicle is 10 mpg higher than your previous heap. SUV, pickup truck and minivan buyers are eligible for a $3,500 voucher if their vehicle gets at least two mpg higher than their trade-in and $4,500 if the vehicle gets five mpg more than their older model."

Yes, clearly, destroying usable cars or straight subsidizing car purchases will help the economy. Clearly we can subsidize our way out of any problem.

Clusterfuck

The morons over at Clusterstock, post "Famous Bear Fund Has Lost All Its Gains From The Crisis." Apparently, the alleged business reporter Joe Weisenthal of apparent "Dealbreaker" fame, doesn't even know how mutual funds work.* Joe forgot the part about mutual funds being required to pay capital gains at the end of the year.

While Tice's predictions about broad market indexes have been far from accurate, he and current manager Doug Noland have amassed an impressive track record for a short bias manager. If Federated was smart enough to pair Noland with a strong long only manger they would have quite a product on their hands.

Trailing Total Returnsthrough 06-08-09



Total Return %+/- ML USD LIBOR 3 Mon CM+/- S&P 500 TR% Rank in Cat
1-Day0.000.000.0883
1-Week-0.32-0.330.0157
1-Month-0.94-1.07-2.3018
3-Month-19.90-20.32-58.2019
Year-to-date-5.53-6.21-10.8024
1-Year19.4616.8248.5610
3-Year Annualized10.045.6417.312
5-Year Annualized7.613.779.461
10-Yr Annualized*9.385.6211.091

*Data through 05-31-09




*I guess the quality of the blogging shouldn't be shocking as the CEO (really?) of the blog is none other than Henry Blodget former ML analyst of securities fraud fame (and now EMH supporter).

Wednesday, June 3, 2009

Chapter What?



If only these morons had figured this out 10 years ago when reasonable people would have.

Monday, June 1, 2009

Read the Journal free

Silicon Alley Insider

Basically, find an article you want to read. If it is subscription only, google the title, click the link. No subscription required. Magic.