The Credit Crisis Financial Stocks Short Journal

[Daal]

Quote from Trend Following:

With all due respect at some point the "trend followers still around are all lucky survivors" argument is head in the sand. Are we to the point that some people literally explain away Harding, Man, AHL, Aspect, Hite, Millburn, Dunn, Henry, Eckhardt, Turtles, Sunrise, Parker, Rabar, Abraham, Mulvaney, Campbell, etc. etc. -- by simply walking away from their performance satisfied that an explanation of "luck" absolves them of further investigation as to why they make $? That's bizarre to me. But let's face it EVERY college classroom is built upon the foundation that trend followers can't exist. To accept trend following puts egg on the faces of many, many tenured minds around the world.

The VN statistical tests I mentioned are tests on market prices of all kinds, not on returns from TF funds. He found no evidence of trends that couldn't be explained by randomness, how come you dont explain the flaws of such tests?Maybe because you dont understand those tests?Could it be that you dont have a background in statistics?This explains why you keep coming back to 'look at these guys' argument, which is a bad one. Why dont you refute this?

"Dave: This all seems to make sense in theory. However, how do you explain the fantastic track records of the major trend followers reported in books on the subject or the economic argument that speculators on big moves are paid an economic return by hedgers and equilabrators?

Victor: Well, I would look as a criterion at the total profits that all trend followers have made over time for their public clients rather than the personal profits they have made for themselves. I would also compare the past high returns that the publicly cited great exponents have made to the total dollar amount that their clients have made or lost. In addition, I would look at the actual total dollar returns to the public of those who invested in some of the greatest trend following funds who admittedly have had much inferior results, lawsuits, and tragedies in their publicly reported and audited results versus the legendary stories of great past performance. Another thing I would like to point out is the publicly reported results of the famous trend followers in the last two years, when money at their disposal is at the maximum. I dare say that billions upon billions have been lost as a review of the rankings of CTA�s would show. But, of course, that�s guaranteed to happen. Looking at the April TASS Flash report, I�d estimate the average trend fund is down 20-40% over the last 2 years, and some are really getting killed. Please bear in mind that the big CTA�s typically offer 8 or 10 different �programs�, so that they can quietly close down the worst performers, or just stop reporting their result."

Like, really, if you are sure beyond that shadow of doubt that you are correct. Why not start a study of this kind, you could gain a lot of attention if you managed to do this. It would help you because you would be able to put a figure in TF profits instead of using the bad 'look at my big boys' argument

 

[Trend Following]

I posed a response back. You ran away from it and told me there a bunch of tests that I don't understand. Gotcha. 10 years from now will this be the same argument?

Quote from Daal:

The VN statistical tests I mentioned are tests on market prices of all kinds, not on returns from TF funds. He found no evidence of trends that couldn't be explained by randomness, how come you dont explain the flaws of such tests?Maybe because you dont understand those tests?Could it be that you dont have a background in statistics?This explains why you keep coming back to 'look at these guys' argument, which is a bad one. Why dont you refute this?

"Dave: This all seems to make sense in theory. However, how do you explain the fantastic track records of the major trend followers reported in books on the subject or the economic argument that speculators on big moves are paid an economic return by hedgers and equilabrators?

Victor: Well, I would look as a criterion at the total profits that all trend followers have made over time for their public clients rather than the personal profits they have made for themselves. I would also compare the past high returns that the publicly cited great exponents have made to the total dollar amount that their clients have made or lost. In addition, I would look at the actual total dollar returns to the public of those who invested in some of the greatest trend following funds who admittedly have had much inferior results, lawsuits, and tragedies in their publicly reported and audited results versus the legendary stories of great past performance. Another thing I would like to point out is the publicly reported results of the famous trend followers in the last two years, when money at their disposal is at the maximum. I dare say that billions upon billions have been lost as a review of the rankings of CTA�s would show. But, of course, that�s guaranteed to happen. Looking at the April TASS Flash report, I�d estimate the average trend fund is down 20-40% over the last 2 years, and some are really getting killed. Please bear in mind that the big CTA�s typically offer 8 or 10 different �programs�, so that they can quietly close down the worst performers, or just stop reporting their result."

Like, really, if you are sure beyond that shadow of doubt that you are correct. Why not start a study of this kind, you could gain a lot of attention if you managed to do this. It would help you because you would be able to put a figure in TF profits instead of using the bad 'look at my big boys' argument

 

[Daal]

Quote from Trend Following:

With all due respect at some point the "trend followers still around are all lucky survivors" argument is head in the sand. Are we to the point that some people literally explain away Harding, Man, AHL, Aspect, Hite, Millburn, Dunn, Henry, Eckhardt, Turtles, Sunrise, Parker, Rabar, Abraham, Mulvaney, Campbell, etc. etc. -- by simply walking away from their performance satisfied that an explanation of "luck" absolves them of further investigation as to why they make $?

What if I showed 20 names of fund managers who are bond 'patriots', they usually think long-term UST bonds are cheap, they buy it on leverage through futures, but sometimes they try to time their moves. They have had an oustanding record over the last 30 years, the original group was actually 100 but I picked the 20 best ones to enhance my charts of what $10K invested with them would be like 30y later. Does that mean that investing with them is a great idea now?

I couldn't find in your book, well reasoned arguments on why the momentum edge(as shown by studies) wont go away, there was a few comments on human nature but as I have shown it doesnt take human nature to fix itself to have edges go away(january effects, small cap outperformances and others all have gone away and came back)

I also couldn't find your defense against the VN position that the TF edge is already gone, its just that it only works for small money. With big money the TFs lose, it shouldn't be that hard for you to go after the data of the net $ produced by TFs for their clients. I'm not saying I agree with him but where is your defense with some data?

I dont have a strong position one way or the other dude, its possible that more TFs could actually increase trends and asset volatility instead, creating more profits for those who sell out earlier than others, I just dont know, which is why I'm wondering the TF guru has done such as poor job of answering key issues

 

[makloda]

Quote from Daal:

The VN statistical tests I mentioned are tests on market prices of all kinds, not on returns from TF funds. He found no evidence of trends that couldn't be explained by randomness, how come you dont explain the flaws of such tests?

He didn't test it on all kinds of market prices. He tested it on equity index prices only as far as I remember (from his book "Practical Speculation").

He then argues because it (autocorrelation as a means of trend detection) doesn't work on equities it can't work on anything else. AFAIK he never tested currencies/bonds/commodities etc.

I'm asking again: If VN had a valid point then he would (unknowingly) confirm the Efficient Market Hypothesis. If the EMH is correct, then why bother trading at all? There is no room for alpha in the EMH, we'd all just buy & hold asset classes forever for the beta exposure.

 

[makloda]

Quote from Daal:

I also couldn't find your defense against the VN position that the TF edge is already gone, its just that it only works for small money. With big money the TFs lose

Just look at the assets under management of the big trendfollowing funds that Covel listed above and you will see that VN's assumption (that more money was lost than made for trendfollowing clients) is ridiculous.

The biggest funds are trading many billions since years, and averaged 15-20% annually over the last 5 years. The profits (net of fees) must be in the tens of billions. That more than makes up for a couple of blowups/lawsuits/Madoffs in the TF CTA universe.

 

[Trend Following]

Quote from Daal:

I dont have a strong position one way or the other dude, its possible that more TFs could actually increase trends and asset volatility instead, creating more profits for those who sell out earlier than others, I just dont know, which is why I'm wondering the TF guru has done such as poor job of answering key issues.

Contrary, you do take a strong position (not right, but strong). We all see what we want to see.

 

[Daal]

Quote from makloda:

Just look at the assets under management of the big trendfollowing funds that Covel listed above and you will see that VN's assumption (that more money was lost than made for trendfollowing clients) is ridiculous.

The biggest funds are trading many billions since years, and averaged 15-20% annually over the last 5 years. The profits (net of fees) must be in the tens of billions. That more than makes up for a couple of blowups/lawsuits/Madoffs in the TF CTA universe.

I would like to see a study on this, frankly whats to lose by putting some light on this

 

[Daal]

Quote from makloda:


I'm asking again: If VN had a valid point then he would (unknowingly) confirm the Efficient Market Hypothesis. If the EMH is correct, then why bother trading at all?

I'm not too concerned if I find out that markets are significantly more efficient than I thought. Even if markets were quite efficient Tiger Woods still wins more titles and money than everyone else, so my response would be just 'work harder'

The reason I prefer global macro is because it enables me to use my understanding of how the world and markets work in trading. To the extend my understanding of reality is more accurate and flexible(in the cases where its not accurate) I will have an 'edge' over the next guy that an efficient market can't take away. There will always be top 5% that will take the money, the secret is to work hard and seek to be in that top 5%

And one of the keys for that is to have an flexible opinion. Which our friend Covel doesnt seem to have. Hard to blame him, when you build a sense of identity and fame over a particular claim then you have that claim challenged the initial instinct is try to shutdown your consciousness over that issue. Just like a bank CEO who receives large bonuses will fight that idea that his bank is insolvent

 

[jack hershey]

Quote from Daal:

I'm not too concerned if I find out that markets are significantly more efficient than I thought. Even if markets were quite efficient Tiger Woods still wins more titles and money than everyone else, so my response would be just 'work harder'

The reason I prefer global macro is because it enables me to use my understanding of how the world and markets work in trading. To the extend my understanding of reality is more accurate and flexible(in the cases where its not accurate) I will have an 'edge' over the next guy that an efficient market can't take away. There will always be top 5% that will take the money, the secret is to work hard and seek to be in that top 5%

And one of the keys for that is to have an flexible opinion. Which our friend Covel doesnt seem to have. Hard to blame him, when you build a sense of identity and fame over a particular claim then you have that claim challenged the initial instinct is try to shutdown your consciousness over that issue. Just like a bank CEO who receives large bonuses will fight that idea that his bank is insolvent

I think Tiger came up with a very good idea. He hits the balls less often since that is what is entered on the score card. He works much less harder than other players. For a while, I thought he had bigger balls that just went farther. From what I can see he plays in the middle, goes last when the grass is all packed down and directly toward the hole in the grass. Then when close, he puts the ball next to the hole to preclude having to roll it very far on an uneven surface. Using long portions of uneven surfaces in golf is a bad idea if you go by what he does. He uses a basketball approach often; the air ball approach. Sometimes the ball hit the smooth grass part and rolls back to the hole in the grass. He may be hitting the ball so hard and high from the middle spots that the balls is all mixed up and could even spin backwards. Some of those clubs are really tilted too. I guess he uses them to not be able to hit very far after his first shot goes way past half way. He never does two equal shots to divide the distance equally. Something is definitely up with his thinking.

I reviewed the Robin Williams Technical Analysis of the invention of golf on U tube. Once you know this history; it explains why Tiger just takes all the short cuts he does. Golf tools are ridiculous so just cut to the chase.

I also thought about the way Covel got involved in trend following. I know it was an eight year long hazardous journey for the beginning. Besides that, he went to 71 countries for some reason. I can't wait for the Robin Williams take on Covel's "trend following".

I can hear Robin now:

One year??? No, eight fucking years of hazardous journey. Hazards like holes filled with sand?? No, talking to people who only make 20% a year!!!!! How do you tee off on a stock???? Blackstar says I have to wait and enter on an close that is an all time high!!!!!! How do you finish the hole?? I stop out: there is no other way. I just putter around and hold until its a fixed % off the peak!!! You don't have many clubs in your bag do you???? Bag??? Blackstar doesn't trade short trends at all.

The Covel System a la Blackstar found that by looking at 22 years and 24,000 stocks that trend following had limited application. The investible universe peaked at less than 3,000 in about 16 years beginning with about 250 in 1983. 1982 was my 25th aniversary of trading. By 2003 it was back down to about 1,500. Obviously trend following as suggested by Covel, is not something for the financial industry to consider.

 

[makloda]

Quote from Daal:

I will have an 'edge' over the next guy that an efficient market can't take away. There will always be top 5% that will take the money, the secret is to work hard and seek to be in that top 5%

And what makes you think a trendfollowing fund constantly improving their edge and planning different scenarios can't outperform 95% of their peers?

If markets are not efficient then trend following (and any other trading approach for that matter) is in a position to generate superior risk adjusted returns compared to buying and holding the underlying markets.

Just because you feel more comfortable with global macro doesn't mean trendfollowing is not viable or the it will be "arbed away".

I believe all trading approaches are constantly going through cycles. Global macro was huge in the 70s when floating exchange rates were adopted. Gobal macro was bleeding in 1999/2000 during the tech bubble when shorting tech and long airlines killed Tiger and some of their peers. Trendfollowing funds had spectacular years (2002, 2008) as well as terrible years (2009 is shaping up as a negative year for many funds, 1994 is another example). Value/activist hedge funds were doing great in 2001/2002 and got their hand handed to them on a plate in 2008. Whenever a style has a bad year, the doomsday callers come out of the woodworks and claim "trendfollowing/value investing/etc. is dead". And 1-2 years later that supposedly dead style comes back with roaring returns, just when everybody thought it was "arbed away".

For some reason many seem to discredit trendfollowing funds because it just sounds too simple. There is no genius like George Soros or Julian Robertson sitting in a manhattan office and putting on a huge contrarian interest rate or currency bet that reaps them billions. This simplification underestimates the amount of trading acumen and discipline involved in trendfollowing.

This actually would be my one and only criticism of Covel. He makes it sound like ANYBODY can successfully create and follow a mechanical system and make money like clockwork. IMO most people are not cut out for it. Most people can't live with the idea of being in a constant drawdown for 50% of the calendar months. They will fail following their system and skip signals/miss entries and exits/exit the system at the trough of drawdowns etc. The amount of discipline required is zen-like.