What I mean by 'doesnt really support trend following' is that the blackstar paper would not be good 'evidence' that TF works, even though it would add value to a portfolio by reducing volatility. The reason is because so far it appears that they achieve excess returns due a market inefficiency that is unique to small stocks that are not being arbed for technical reasons
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The Credit Crisis Financial Stocks Short Journal
- Thread starter Daal
- Start date
What I mean by 'doesnt really support trend following' is that the blackstar paper would not be good 'evidence' that TF works, even though it would add value to a portfolio by reducing volatility. The reason is because so far it appears that they achieve excess returns due a market inefficiency that is unique to small stocks that are not being arbed for technical reasons
Quote from Daal:
You mentioned there was several reasons for the outperformance, the data you provided(which I found interesting) tells me that system beats the market simply because it appears that there is an inneficiency in stock markets where badly performing stocks tend to be overpriced therefore being long the stock market ex-bad performers(those who had significant declines) beats the market with lower volatility, regardless of trends
I look forward for your evidence on the other reasons why the breakout system works
Let's assume for a moment that you are right, that's all it is, the ability to avoid over-priced stocks that have high odds of blowing up in the future. What exactly is wrong with that?
Some other evidence:
Virtually all of the market's returns come from a small minority of stocks. This is true when looking at 1 year hold periods, 3 years, 5 years, 20 years, etc. What do you think all those stocks have in common?
http://www.blackstarfunds.com/files/TheCapitalismDistribution.pdf
Quote from Daal:
What I mean by 'doesnt really support trend following' is that the blackstar paper would not be good 'evidence' that TF works, even though it would add value to a portfolio by reducing volatility. The reason is because so far it appears that they achieve excess returns due a market inefficiency that is unique to small stocks that are not being arbed for technical reasons
How would you exploit the opportunity without a trend following system?
If you look at Mebane Faber's paper, the results of his approach are exactly the same: trend following offers similar nominal returns to buy & hold but drastically improved risk characteristics. As you may recall, he uses highly liquid asset classes only, hence IMO your "only works on illiquid stocks/assets" argument doesn't hold.Quote from Daal:
What I mean by 'doesnt really support trend following' is that the blackstar paper would not be good 'evidence' that TF works, even though it would add value to a portfolio by reducing volatility. The reason is because so far it appears that they achieve excess returns due a market inefficiency that is unique to small stocks that are not being arbed for technical reasons
Quote from ecritt:
Let's assume for a moment that you are right, that's all it is, the ability to avoid over-priced stocks that have high odds of blowing up in the future. What exactly is wrong with that?
Some other evidence:
Virtually all of the market's returns come from a small minority of stocks. This is true when looking at 1 year hold periods, 3 years, 5 years, 20 years, etc. What do you think all those stocks have in common?
http://www.blackstarfunds.com/files/TheCapitalismDistribution.pdf
VN said
"While these are serious objections, they are of the armchair variety. We have tested similar strategies on big groups of stocks like the S&P500 and found it produces random results."
Which you replied with
"When restricted to the S&P 500 we found an inverse relationship between the tendency to have substantial and prolonged % moves and market capitalization. Intuitively this made sense to us as index members have already experienced the market cap growth necessary to get into the index. Also, index members tend to offer transparency that is communicated in real time by an army of analysts and research reports. Furthermore, their business models tend to be overly diversified relative to small/medium companies. Additionally, there is typically millions of dollars bid and millions asked just cents away from the prevailing price at any given time. It seems only an accounting scandal, speculative mania, or major market shock can provide the fuel for outlier moves. That being said, we don't discriminate against them; we are just happy that there are so many more small and mid-cap companies to buy."
So it appears that this TF 'edge' only works in situations where there is less liquidity, coverage, information, borrowing difficulties/costs,etc
So yes, one can take advantage of that by using that system but I'm thinking about the implications of that. If that TF edge only works in instances where the market is having a tough time arbing it means that suggestion of VN that big TF funds are -$ in terms of returns seems more likely to be true given that they are trading highly liquid, widely followed markets
Quote from makloda:
If you look at Mebane Faber's paper, the results of his approach are exactly the same: trend following offers similar nominal returns to buy & hold but drastically improved risk characteristics. As you may recall, he uses highly liquid asset classes only, hence IMO your "only works on illiquid stocks/assets" argument doesn't hold.
There are systems that are able to capture trends or improve trading results in retrospect in highly liquid markets, I accept that. The question is, are they likely to continue working in the future?
Thats why I would like to see the net $ return figure of TFs and CTAs researched by an uninterested party before holding a strong view
What exactly are you looking for. Scientific proof that guarantees profitability into the infinite future?Quote from Daal:
The question is, are they likely to continue working in the future?
All these exercises prove is that markets were inefficient in history and one could have exploited that. Any trading approaches future sustainability can be questioned.
Will value investing stocks continue to outperform growth stocks as they did over the last 100 years? Who knows, there are no guarantees.
Even if that analysis were positive it wouldn't scientifically guarantee future performance.Quote from Daal:
Thats why I would like to see the net $ return figure of TFs and CTAs researched by an uninterested party before holding a strong view
Quote from makloda:
Even if that analysis were positive it wouldn't scientifically guarantee future performance.
Its a matter of Bayes' theorem, since markets tend to close out edges if the $ return of TF funds is negative over say the last 10 years, that means is likely that TF is not currently working(at least when their AUM is very high).
This wont make it to encyclopedia britannica because it can't be considered science but it works from a alchemical/pratical perspective that one should avoid those systems since it looks likely the market has wised up regarding momentum
Why don't you take the 10 biggest TF funds, and analyze their future returns and AUM over the next couple of years (so you don't get fooled by hindsight bias). That should answer your question.
I personally see NO WAY the total net AUM return of all TF funds can be negative. There certainly were a couple of smaller blowups (< $1bln) but the big funds each made 60-100% aggregate over the last 4-5 years that would easily lift the total money made into highly positive territory. The same funds that were big 5 years ago are still the big boys today. This is not scientific though, this is just my gut feeling following the industry for years.
Trendfollowing funds are only a small part of the funds market. I think I read it's around $250-$300 bln, which is tiny compared to global financial markets. I see little risk of them arbing eachother, there's enough money to be made trading against trillions of dollars in discretionary money, from people picking tops and bottoms on bubblevision.
Investors don't understand how trend folllowing could ever make any money, they prefer funds with some glamorous guy with a hot hand using smart fundamental analysis. That sounds logical, we love to invest what's logical. Buying stuff that goes down is logical cause it's "cheap". Buying stuff that goes up goes against human nature because it's too "expensive." Others love strategies that bring in consistent returns day by day like clockwork with a high winning trade percentage. That's why they love vola selling funds and Madoff. Until they blow up.
I personally see NO WAY the total net AUM return of all TF funds can be negative. There certainly were a couple of smaller blowups (< $1bln) but the big funds each made 60-100% aggregate over the last 4-5 years that would easily lift the total money made into highly positive territory. The same funds that were big 5 years ago are still the big boys today. This is not scientific though, this is just my gut feeling following the industry for years.
Trendfollowing funds are only a small part of the funds market. I think I read it's around $250-$300 bln, which is tiny compared to global financial markets. I see little risk of them arbing eachother, there's enough money to be made trading against trillions of dollars in discretionary money, from people picking tops and bottoms on bubblevision.
Investors don't understand how trend folllowing could ever make any money, they prefer funds with some glamorous guy with a hot hand using smart fundamental analysis. That sounds logical, we love to invest what's logical. Buying stuff that goes down is logical cause it's "cheap". Buying stuff that goes up goes against human nature because it's too "expensive." Others love strategies that bring in consistent returns day by day like clockwork with a high winning trade percentage. That's why they love vola selling funds and Madoff. Until they blow up.
Quote from makloda:
This is not scientific though, this is just my gut feeling following the industry for years.
And thats my problem with it. VN said in the surfer interview
"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."
You are arguing the opposite, both are using anecdotal evidence(as opposed to broad industry data collection) and 'gut feelings'(which anyone who has used it knows it can easly go wrong). So I'm far less certain that there is 'no way' they could be $ losers. I'm on the coin flip camp, I have no idea either way