Global Macro Trading Journal

Daal said:
Could this also happen in bonds? I guess so, but it SHOULD (according to finance theory) happen more often in stocks, because it is an riskier asset. In theory, one would expect the volatility of volatility to be higher in high return assets and lower in lower return assets
More...

I couldn't raise this theory without testing it
If I measure by 4 year intervals, the volatility of volatility (SD of SD of annual real returns 1928-2016)
S&P500 7%
US 10Y bonds 4%
US T-Bills 2%
And the surprise
Gold 10%

In 8 year intervals
S&P500 5%
10y bonds 3%
US T-Bills 2%
but..
Gold 11%

So even though gold has a lower volatility than stocks over the entire sample
SD Gold 18.86%
SD of S&P500 19.55%

Its volatility will change from low to high more widely than stocks, in fact, about twice as widely. Therefore, one could even say, its the most volatile of all these markets
But also, stocks (as theory would claim) have a higher vol of vol than bonds. So this is another reason why one cant get too close to the optimal historical allocations, at least if you expect to build the best return/volatility portfolio. You never know when the volatility will change on you. Also, 88 years might not be enough to find the 'true' historical volatility of stocks
 
Daal said:
I couldn't raise this theory without testing it
If I measure by 4 year intervals, the volatility of volatility (SD of SD of annual real returns 1928-2016)
S&P500 7%
US 10Y bonds 4%
US T-Bills 2%
And the surprise
Gold 10%

In 8 year intervals
S&P500 5%
10y bonds 3%
US T-Bills 2%
but..
Gold 11%

So even though gold has a lower volatility than stocks over the entire sample
SD Gold 18.86%
SD of S&P500 19.55%

Its volatility will change from low to high more widely than stocks, in fact, about twice as widely. Therefore, one could even say, its the most volatile of all these markets
But also, stocks (as theory would claim) have a higher vol of vol than bonds. So this is another reason why one cant get too close to the optimal historical allocations, at least if you expect to build the best return/volatility portfolio. You never know when the volatility will change on you. Also, 88 years might not be enough to find the 'true' historical volatility of stocks
More...
This might explain why Dalio likes 7.5% in Gold and 7.5% in a basket of commodities. Perhaps he is trying to further decrease the volatility of a portfolio by decreasing exposure to gold moodiness with that crazy vol (high SD) AND vol of vol (high SD of SD)
 
Daal said:
I couldn't raise this theory without testing it
If I measure by 4 year intervals, the volatility of volatility (SD of SD of annual real returns 1928-2016)
S&P500 7%
US 10Y bonds 4%
US T-Bills 2%
And the surprise
Gold 10%

In 8 year intervals
S&P500 5%
10y bonds 3%
US T-Bills 2%
but..
Gold 11%

So even though gold has a lower volatility than stocks over the entire sample
SD Gold 18.86%
SD of S&P500 19.55%

Its volatility will change from low to high more widely than stocks, in fact, about twice as widely. Therefore, one could even say, its the most volatile of all these markets
But also, stocks (as theory would claim) have a higher vol of vol than bonds. So this is another reason why one cant get too close to the optimal historical allocations, at least if you expect to build the best return/volatility portfolio. You never know when the volatility will change on you. Also, 88 years might not be enough to find the 'true' historical volatility of stocks
More...
Perhaps 8 year is too little?
16 year intervals
S&P500 5%
10y bonds 3%
T-Bills 2%
Gold 8%

So with stocks you are more sensitive to a big dispution that sends volatility higher for a long period of time, than with bonds. In the US, this could come about in the form of a fiscal crisis (and the threat of money printing to pay for it), nuclear war, or who knows what else
 
I keep finding more interesting stuff.
So gold looked really bad looking at vol of vol but, SD tends to punish UPSIDE volatility as well as downside. Its possible that gold is sensitive because its a form of insurance, and it benefits from disruptions. So I tested for SD of Negative returns (the thing that goes into the Sortino ratio)
There the insurance theory played out
8 year intervals
S&P500 5%
10y bonds 2%
T-Bills 2%
Gold 4%

16 year intervals
S&P500 3%
10y Bonds 2%
T-Bills 1%
Gold 3%

So, gold is volatile, but if you remove the upside volatility and only consider downside vol, its pretty much the same as stocks.

This all on yearly data, it would be pretty neaty to re-run all of this on monthly data
 
This high sensitivity to changes in volatility is interesting because if you look around the world, there are a lot more countries with higher stock market volatilites than the US. Brazil is an example but you have extremes like Venezuela, or just EMs in general. The EEM (EM ETF) right now has a around 18-20% implied vol compared with 12% in the US VIX. It appears that historically the US has had a lower volatility then EMs or other countries because of the strength of its institutions, stable rule of law, independent central bank, freedom in markets, plus luck etc. So that's the risk for a portfolio that is closer to the 'perfect' stock allocation that the computer recommends, that the US will have a breakdown in institutions, degradation in the rule of law, bad luck, etc and as a result, Vol will pop higher, in perhaps, a permanent basis
 
The reason I'm putting so much work in trying to find that 'optimal portfolio' is because I got to have something to back a recommendation of a specific allocation. I dont want to just throw numbers around without reasoning, plus it is really helping me understand more about markets, risk and investments
 
I'm a non-US investor and sometimes I got kicked with a withholding tax of 30% on dividend payments from certain ETFs, even when the ETFs were paying interest from the bonds underneath it. Apparently Obama passed an act that exempted a lot of that tax for non-US
Pimco has a number of funds that are partially/fully exempt from that withholding because of the act

The question now is, which other ETFs are exempt. It would be pretty cool to have US treasury bond ETFs, corp bond ETFs with the exemption. I would be able to juice my returns from bonds while keeping risks low (and increase diversification)

http://www.klgates.com/permanent-us...s--a-new-distribution-opportunity-01-12-2016/
 

Attachments

http://brontecapital.blogspot.com.br/2017/01/when-do-you-average-down.html

Hempton did a post on averaging down in stocks, I think its a good post. He is right on his criticism of Ackman in adding to the VRX situation. I mentioned on this journal back in late 2015 that having that much exposure in a 5-1 levered company was insane, that's why I put on a "VRX hedge". This was back when the stock was at $100. I also mentioned recently:

"When you find something cheap, buy, dont wait for it to get cheaper. Buy a chunk, and own some cash so you can add more if it goes lower (up to a certain portfolio risk management allocation limit, thats a very important limit if you are using fundamental analisys), but you got to buy some." And you got to respect that limit, or you will pull a Bill Miller

Stated in statistics terms, the lower the confidence interval around how much a stock is worth the less you should own (a smaller position size) and the less willing to add to a position you should be. I sorta learned this principle when Einhorn commented that he was avoiding HLF (a 0% position size) because "the range of outcomes is too wide" to get involved.

How do I justify that I added to VRX last year? Well, I'm so much bellow my max allocation limit (5% in case of VRX, which I mentioned in late 2015) that I can afford to add some when specific catalysts appear (whether be it technical or fundamental). It isn't about randomly adding to a position like Bill Miller does
 
Last edited:
But Hempton doesn't seem to apply his logic to the HLF situation. Or, more likely, he does but HE PRETENDS that he doesnt. He's got this fake bravado that he is right no matter what, yet if you look back on his HLF posts, he talks about how he had a 'small position in HLF'. He also claimed to have a 'large position on HLF' in the 60's. Now at $50 with the CEO out, I'm sure that if you ask him he will claim again 'im small now'.

He act (as an investor) as if uncertainty around HLF's worth is high (which it is) but as a commentator, he does the opposite. As if there is not much uncertainty about the company. I'm sure that if he turned over his trading records on HLF, it would become clear that he is far less confident on the future of the company than it appears (same thing with his VRX short now)

Also, what about his strategy of shorting small and mid caps? If you have tiny positions in them, then you need to come up with so many ideas that it is pretty much impossible to do it well (who can came up with 20 good shorts every year?). If you have bigger positions, then the range of outcomes/confidence interval around where the stock will trade on the future (because of fundamentals or short squeze dynamics) is so wide, you will almost certainly face a big loss at some point. Raising your portfolio volatility instead of decreasing. In addition, its such a difficult skill that not only the confidence interval around the stock price is low but the margin of error for having the skill of pulling it off consistently is tiny. It doesn't take much to turn it all an activity that destroys value rather than creates

Hempton might say "well, its the specifics of the situation that give me the confidence to go against these factors". Well, thats pretty much what Ackman did on VRX
 
Last edited:
Hempton does raise the good point that in levered business there is more uncertainty around how much the company is worth (or wider 'range of outcomes' like Einhorn would say). That is also true in other cases like in companies with litigation risk
The question is, why did he had a 'big position' in HLF before the FTC came out with a decision on the company? Had they called in a pyramid, the stock would be almost worthless overnight
The answer is, of course, he did not had a truly big position. He was probably just long more than he was in the past but still keeping a fair amount of distance from a big bet because he was afraid of the government (as he admitted to me in an email) but he wanted to keep the fake bravado going
 
You must log in or register to reply here.
Back
Top