代替投資ヴェリアンアレンのヘッジファンド 对冲基金 對沖基金


Stock or bond

Stock and bond beta or alpha capture? Why does most financial advice fixate on how much to gamble on various betas? Why don't financial planners plan for devastating stock market drawdowns? Or the end of the multi-decade bond rally? Ride them out or avoid them in the first place?

My long BRIC versus short the street's BRIC delivered plenty of alpha this year. Since I wrote about it, long Colombia/short China returned +50%, long Indonesia/short India +30%, Bangladesh beat Brazil and Romania rocked Russia. Relative value doesn't usually make money on both sides.

Despite China hype, $1m invested in Colombia in 2000 is now $25m but only $2m from "booming" China and even less in "developed" countries. Economic growth doesn't imply strong stock markets. As always with emerging markets, security and country selection is critical. Asset allocation is no way to proceed for conservative investors.

Seek alpha or bet on beta? The more "risk averse" the more in bonds? Is it sensible to maintain the same static allocation at 1% yields as when they once paid 10%? Can opportunity cost, interest rate and default risks be ignored with coupons so low and borrowing so high? There are no risk free bonds but at least higher yields delivered the income on which many individuals and institutions depend. Regulation has as much chance of preventing the NEXT crash as ordering oceans to stop rogue waves. Get sunk again or ride them?

I've researched many successful investors and a common factor is that none paid attention to asset allocation. Instead they skillfully analyzed securities and tactically timed markets. I have also studied unsuccessful investors and they all put static asset allocation front and center.

Why waste time on something that the best don't? Asset allocation drives returns ONLY if you emphasize it. Selecting which beta to track and then searching for funds to deliver it (and maybe a bit of alpha) hasn't worked. What does work is finding good unconstrained managers and let them figure out how to produce absolute returns. Passive "managers" take no action regardless of risks on the radar. Fiduciary duty? Better to focus on skilled strategies not unskilled asset classes.

Many investors suffer from Anton's syndrome. They think they can see but they can't. The mind confabulates a vision of smooth-sailing for their portfolio. Investment inertia and the endowment effect favors what they own not what they should own. Chronic cases delude themselves that efficient frontier combinations of unhedged asset classes will achieve +8% over the long term.

Market timing is "impossible" so buy and hold for the economic utopia they can see but blind people like me cannot. Security analysis is a waste of time so buy them "all"? Whether inflation, deflation, reflation or biflation, the 60/40 portfolio is "optimized" for all yields and default probabilities? Buy even more bonds if you "see" yourself as conservative?

What if your required return is much higher? Worrying how quickly 2008 is being forgotten and falling off track records. Asset class amnesia is hazardous but financial anosognosia is worse. To have a defect is bad but to be unaware you have the defect is dangerous. The world divides into the few that know they don't know and the many that don't know they don't know. Using financial legerdemain that masks huge risks, famous index fund clairvoyants sell their "vision" that everything will be fine one day. I hope passive stock and bond portfolios don't die before then. How many planned retirements and retirement plans were wrecked by long only? Too many. A bond bull market is almost as bad for liability matching as a stock bear market. Pension underfunding is considerably worse discounted at CURRENT government and corporate bond yields.

Asset allocation varying by age? High opportunity cost putting capital in low yield securities. Bonds are good to trade but not buy and hold anymore. There are no stable laws in finance. Conventional wisdom was to put one's age in "bonds" and the rest in "stocks". But the rapidly growing cohort of centenarians needs an adequate income too. Why should a 20 year old have 80% in stocks? Because equities supposedly rise if you own them long enough? The gradual switch from stocks to bonds over time doesn't cut it. More sensible is to have 100% of the portfolio in alpha strategies. The bond bull market has persisted for 30 years. Long only funds are like the Titanic; unsinkable till they do. Portfolio lifeboats include puts, shorts, derivatives and most importantly ALPHA for when beta hits the iceberg. Again.

Portfolio dead weight? High grade bonds were thought to match liabilities. They did once but now they do not. More a liability mismatch. A flat to down equity market combined with lower interest rates is not positive for the pension crisis. If you need an +8% income you can hope the stock market will deliver that "expected" return or focus on better alternatives. At such low yields, every cent in "risk free" bonds is a wasted chance for higher risk-adjusted performance. Also not enough bond buyers are worrying about return OF their capital. There are superior investment opportunities available. The attraction of skill-based strategies rises as bond yields decline.

Keep it simple investing? Occam's razor? The only bar in William of Ockam's home town is called The Black Swan. Simplicity requires preparing for the worst case, most "unlikely" situations. I don't worry about unlikely events happening. I presume they are imminent and act accordingly. Every investor should apply a PROPER stress test to their portfolio. Instead of VaR, assume all stocks, bonds and real estate are worth ZERO tomorrow morning. Preparing for the doomsday scenario is true risk management. It has happened several times in many places in the past. That is not economic eschatology; it is prudent fiduciary duty. How many investors are ready for a 90% global stock market crash and widespread debt defaults? If not why not?

Someone asked my forecast for the Dow 1 year from now with 90% confidence. My best guess is between 0 and 20,000. That is as tight a bid-offer spread as I can manage. Predictive accuracy declines exponentially with time. While the Dow might never see 20,000 it is a physical and astronomic CERTAINTY it will one day fall to zero. Before then there are numerous armageddon scenarios that would nullify the stock market. Just takes a few drunken generals or mad scientists accidentally pressing the big red button. How do you know a large asteroid isn't on its way here? What would assets be worth if a black hole from a Magnetar was discovered headed towards us? If it can happen it will happen is not a prediction, it's a philosophy. Buy and hopers should remember that they are betting AGAINST the inevitable end-game. The true long term drift is down.

Risk management? Thinking the unthinkable is an essential requirement for portfolio construction. The recent "flash crash" was a reminder of the ephemeral "value" in the markets. It came back, that time. 2008 offered an expensive investment lesson for risky long only but still some invest in index funds. Two -50% drawdowns in a decade and MUCH worse coming in the future. It's the notorious Dunning-Kruger effect. Many people think they are smarter than they are which is why we get bubbles and crashes. Unskilled AND unaware of it. Scarier than a real black hole but with similar results. No-one with a sensible risk tolerance invests a cent in index funds.

Invest in alpha opportunity sets. How much to allocate to "emerging markets"? How much to "submerging markets"? So many countries, cultures and disparate outlooks for all those stocks, bonds, commodities and currencies. "Frontier markets" don't have long track records but weren't all countries "frontiers" once? The China economy is larger than 3 years ago but the stock market is over 60% below its high water mark. The Japan economy is bigger than 20 years back but Nikkei 75% off its high. Plenty of Chinese and Japanese securities are doing well as are the good hedge funds that focus on finding them and short ideas. How much should you allocate to "hedge funds"? Every investor needs 100% in skilled strategies and that requires a lot of analysis and due diligence.

Search for yield? Earlier many experts said inflation was inevitable so short sell bonds but now deflation is the hot topic so buy them instead? Many gurus have lost big money shorting JGBs over the years but now treasuries are doing the same. If you need an explanation for the rally it is as much a short squeeze as flight to "safety". Trade bonds but don't hold them. Just like stocks. Applied skillfully, long/short equity is safer than long only. I'll take long/short credit, fixed-income arbitrage and distressed debt strategies over unhedged "investment grade" bonds every time. Some returns compensate for the risks. Asset classes never do including during bull and bubble markets.

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