managed futures

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Commodity Trading Advisors: Risk, Performance Analysis, and Selection by Greg N. Gregoriou, Vassilios Karavas, François-Serge Lhabitant, Fabrice Douglas Rouah

Asian financial crisis, asset allocation, backtesting, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, compound rate of return, constrained optimization, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, discrete time, distributed generation, diversification, diversified portfolio, dividend-yielding stocks, financial engineering, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, interest rate swap, iterative process, linear programming, London Interbank Offered Rate, Long Term Capital Management, managed futures, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, p-value, Pareto efficiency, Performance of Mutual Funds in the Period, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk-adjusted returns, risk/return, selection bias, Sharpe ratio, short selling, stochastic process, survivorship bias, systematic trading, tail risk, technology bubble, transaction costs, value at risk, zero-sum game

In all cases the results were very similar, which 3.00 2.50 2.00 1.50 1.00 0.50 0.00 –0.50 –1.00 100 80 20 60 % in Alternatives Portfolio 0 40 60 40 20 100 80 % in Managed Futures FIGURE 1.5 Kurtosis 50/50 Portfolios of Stocks, Bonds, Hedge Funds, and Managed Futures 15 Managed Futures and Hedge Funds 3.00 2.50 2.00 1.50 1.00 0.50 0.00 –0.50 –1.00 100 80 20 60 % in Alternatives Portfolio 0 40 60 40 20 100 80 % in Managed Futures FIGURE 1.6 Kurtosis 33/66 Portfolios of Stocks, Bonds, Hedge Funds, and Managed Futures suggests that our results are robust with respect to the choice of managed futures index. SKEWNESS REDUCTION WITH MANAGED FUTURES Our findings lead us to question what the exact costs are of using managed futures to eliminate the negative skewness that arises when hedge funds are introduced in a traditional portfolio of stocks and bonds.

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. © HFR, Inc. [15 January 2003], www.hfr.com; Managed Futures; ITR Premier 40 CTA Index. Note: Stocks offer substantially greater liquidity and transparency than the alternative investment products noted and may be less costly to purchase. 237 Managed Futures Investing 15.6% 15.4% 15.2% 15.0% 45% Stocks 1 35% Bonds 2 20% Managed Futures 3 14.8% 37% Stocks 27% Bonds 36% Managed Futures Traditional Portfolio 55% Stocks 45% Bonds 0% Managed Futures 14.6% 14.4% 50% Stocks 40% Bonds 10% Managed Futures 14.2% 14.0% 8.6% 8.8% 9.0% 9.2% *Results obtained by adding managed futures component at an incremental rate of 1% while simultaneously reducing the stock and bond portions by 1% each.

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Satchell PART TWO Risk and Managed Futures Investing 149 CHAPTER 8 The Effect of Large Hedge Fund and CTA Trading on Futures Market Volatility 151 Scott H. Irwin and Bryce R. Holt CHAPTER 9 Measuring the Long Volatility Strategies of Managed Futures 183 Mark Anson and Ho Ho CHAPTER 10 The Interdependence of Managed Futures Risk Measures 203 Bhaswar Gupta and Manolis Chatiras CHAPTER 11 Managing Downside Risk in Return Distributions Using Hedge Funds, Managed Futures, and Commodity Indices 220 Mark Anson PART THREE Managed Futures Investing, Fees, and Regulation 233 CHAPTER 12 Managed Futures Investing 235 James Hedges IV Contents CHAPTER 13 The Effect of Management and Incentive Fees on the Performance of CTAs: A Note vii 248 Fernando Diz CHAPTER 14 Managed Futures Funds and Other Fiduciary Products: The Australian Regulatory Model 259 Paul U.

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

activist fund / activist shareholder / activist investor, Alan Greenspan, algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Black-Scholes formula, book value, Brownian motion, business cycle, buy and hold, buy low sell high, buy the rumour, sell the news, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, currency risk, David Ricardo: comparative advantage, declining real wages, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, financial engineering, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, global macro, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, junk bonds, late capitalism, law of one price, Long Term Capital Management, low interest rates, managed futures, margin call, market clearing, market design, market friction, Market Wizards by Jack D. Schwager, merger arbitrage, money market fund, mortgage debt, Myron Scholes, New Journalism, paper trading, passive investing, Phillips curve, price discovery process, price stability, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Thaler, risk free rate, risk-adjusted returns, risk/return, Robert Shiller, selection bias, shareholder value, Sharpe ratio, short selling, short squeeze, SoftBank, sovereign wealth fund, statistical arbitrage, statistical model, stocks for the long run, stocks for the long term, survivorship bias, systematic trading, tail risk, technology bubble, time dilation, time value of money, total factor productivity, transaction costs, two and twenty, value at risk, Vanguard fund, yield curve, zero-coupon bond

TABLE 12.2. UNDERSTANDING THE PERFORMANCE OF MANAGED FUTURES Panel A. Performance of Managed Futures Indices and Top Funds Panel B. Time Series Momentum Explains Managed Futures Returns Notes: Panel A shows the performance of managed futures indices and the five largest managed futures managers in the Lipper/Tass database as of June 2012. All numbers are annualized. The alpha is the intercept from a regression on the MCSI World stock index, Barclays Bond Index, and the GSCI commodities index. Panel B shows the multivariate regression of managed futures indices and managers on time series momentum returns by trend horizon.

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This graph plots quarterly non-overlapping hypothetical returns of the diversified time series momentum strategy vs. the S&P 500, 1985–2012. Source: Hurst, Ooi, and Pedersen (2013). 12.5. TIME SERIES MOMENTUM EXPLAINS ACTUAL MANAGED FUTURES FUND RETURNS We collect the returns of two major managed futures indices, BTOP 50 and DJCS Managed Futures Index,7 as well as individual fund returns from the Lipper/Tass database in the category labeled “Managed Futures.” We highlight the performance of the five Managed Futures funds in the Lipper/Tass database that have the largest reported “Fund Assets” as of 06/2012. While looking at the ex post returns of the largest funds naturally biases us toward picking funds that did well, it is nevertheless interesting to compare these most successful funds to time series momentum.

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Rather than comparing the performance of the time series momentum strategy to those of the indices and managers, we want to show that time series momentum can explain the strong performance of managed futures managers. To explain managed futures returns, we regress the returns of managed futures indices and managers on the returns of 1-month, 3-month, and 12-month time series momentum: Panel B of table 12.2 reports the results of these regressions. We see the time series momentum strategies explain the managed futures index and manager returns to a large extent in the sense that the R-squares of these regressions are large, ranging between 0.46 and 0.64. The table also reports the correlation of the managed futures indices and managers with the diversified TSMOM strategy.

The New Science of Asset Allocation: Risk Management in a Multi-Asset World by Thomas Schneeweis, Garry B. Crowder, Hossein Kazemi

asset allocation, backtesting, Bear Stearns, behavioural economics, Bernie Madoff, Black Swan, book value, business cycle, buy and hold, capital asset pricing model, collateralized debt obligation, commodity trading advisor, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, diversification, diversified portfolio, financial engineering, fixed income, global macro, high net worth, implied volatility, index fund, interest rate swap, invisible hand, managed futures, market microstructure, merger arbitrage, moral hazard, Myron Scholes, passive investing, Richard Feynman, Richard Feynman: Challenger O-ring, risk free rate, risk tolerance, risk-adjusted returns, risk/return, search costs, selection bias, Sharpe ratio, short selling, statistical model, stocks for the long run, survivorship bias, systematic trading, technology bubble, the market place, Thomas Kuhn: the structure of scientific revolutions, transaction costs, value at risk, yield curve, zero-sum game

Portfolio combinations that 147 Sources of Risk and Return in Alternative Investments EXHIBIT 7.9 CTA and Comparison Benchmark Performance (2001–2008) Annualized Total Return Annualized Standard Deviation Information Ratio Maximum Drawdown Correlation with CTA Annualized Total Return Annualized Standard Deviation Information Ratio Maximum Drawdown Correlation with CTA S&P 500 BarCap US Agg CISDM CTA EW −2.9% 15.0% −0.19 −40.7% −0.26 5.7% 4.0% 1.44 −3.8% 0.17 9.2% 8.7% 1.05 −8.7% 1.00 S&P GSCI CISDM EW Hedge Funds FTSE NAREIT All Private Equity −0.5% 25.6% −0.02 −62.2% 0.22 5.6% 6.6% 0.84 −21.1% 0.02 6.4% 20.9% 0.31 −58.8% −0.12 −3.7% 26.4% −0.14 −70.3% −0.14 include traditional and alternative investments for the most recent eight year period 2001 to 2008 are also reviewed in Exhibit 7.10. Over the period of analysis, managed futures reported a higher annualized return and lower volatility than the S&P 500. Compared to the returns of the Barclays Capital U.S. Aggregate Bond Index, managed futures again reported higher rates of return albeit with higher volatility. Compared to the private equity and real estate and commodities, managed futures reported a higher return with significantly lower volatilities. Finally, compared to hedge funds, managed futures reported higher returns but higher volatilities. It can be observed from Exhibit 7.10 that the information ratios for portfolios that include at least a 10% investment in CTAs dominate those portfolios which do not contain an investment in CTAs.

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ALTERNATIVE ASSETS SUCH AS HEDGE FUNDS ARE ABSOLUTE RETURN VEHICLES Yes and no, with the truth lying somewhere in the middle. For example, the sources of hedge fund returns and managed futures are often described as being based on the unique skill or strategy of the trader. Because hedge funds and managed futures are actively managed, manager skill is important. However, academic research demonstrates that hedge fund returns and managed futures are also driven systematically by market factors such as changes in credit spreads or market volatility, rather than exclusively by an individual manager’s alpha. Therefore, one can think of hedge fund and managed futures returns as a combination of manager skill and an underlying return to the hedge fund strategy or investment style itself.

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., event driven, equity long short, and emerging markets) had the most negative returns in the worst S&P 500 months as well as the highest positive returns in the months in which the S&P 500 had its best performance. MANAGED FUTURES (COMMODITY TRADING ADVISORS) The term “managed futures” represents an industry composed of professional money managers known as commodity trading advisors (CTAs) or commodity pool operators (CPOs). Commodity trading advisors or commodity pool operators manage client assets on a discretionary basis, using forwards, futures, and options markets as the primary investment area. Managed futures, through their ability to take both long and short investment positions in international financial and non-financial asset sectors, offer risk and return patterns not easily accessible through traditional (such as long-only stock and bond portfolios) or other nontraditional investments (e.g., hedge funds, real estate, private equity, or commodities).

Portfolio Design: A Modern Approach to Asset Allocation by R. Marston

asset allocation, Bob Litterman, book value, Bretton Woods, business cycle, capital asset pricing model, capital controls, carried interest, commodity trading advisor, correlation coefficient, currency risk, diversification, diversified portfolio, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, family office, financial engineering, financial innovation, fixed income, German hyperinflation, global macro, high net worth, hiring and firing, housing crisis, income per capita, index fund, inventory management, junk bonds, Long Term Capital Management, low interest rates, managed futures, mortgage debt, Nixon triggered the end of the Bretton Woods system, passive investing, purchasing power parity, risk free rate, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sharpe ratio, Silicon Valley, stocks for the long run, superstar cities, survivorship bias, transaction costs, Vanguard fund

Passive investment involves buying a futures contract at the beginning of the period, then closing the position automatically at the end of the period. Active investment involves deciding whether to buy or sell the futures contract or simply staying out of the futures market this period. Many managed futures funds also take positions in currencies in addition to commodities. As a result, the returns on managed futures are low in correlation with those of passively managed futures (as will be seen below). They are quite distinct investments. In a sense, managed futures are a form of hedge fund. You are investing in the manager’s expertise. That expertise will guide the manager on when to be long or short in the commodity, whether to overweight one commodity relative to another, or whether to take positions more aggressively in currencies rather than commodities.

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There is a case for including commodities in a portfolio, but it makes sense to diversify the commodity investment rather than to concentrate holdings in one precious metal. ACTIVE INVESTMENT IN COMMODITIES—MANAGED FUTURES Managed futures are on investors’ minds. In the 2008 downturn, this asset class gave investors an 18.3 percent return in a year when the DJ UBS index was down 35.7 percent and the Goldman Sachs commodity index was down 46.5 percent. Commodity prices turned down at mid-year and the active managers in the managed futures space obviously played this turning point well. Investment in managed futures could have been analyzed in the chapter on hedge funds. But it’s useful to compare the performance of these investments with their passive counterparts.

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P1: a/b c12 P2: c/d QC: e/f JWBT412-Marston T1: g December 10, 2010 15:49 Printer: Courier Westford 252 PORTFOLIO DESIGN TABLE 12.7 Managed Futures Funds Compared with Passive Commodity Futures Indexes, Jan 1994–Jun 2009 Index Credit Suisse/Tremont Managed Futures Index Barclay CTA Index Goldman Sachs Commodity Index Dow Jones UBS Commodity Index Geometric Average Arithmetic Average Standard Deviation Sharpe Ratio 6.4% 6.9% 11.8% 0.27 6.2% 4.7% 6.3% 7.2% 7.8% 22.9% 0.33 0.15 6.2% 7.3% 15.7% 0.23 Indexes for Managed Futures Funds: Credit Suisse/Tremont Managed Futures Hedge Fund Index and Barclay CTA Index. Indexes for passive commodity futures funds: Goldman Sachs Commodity Index and Dow Jones UBS commodity Index.

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

Albert Einstein, Alvin Toffler, Atul Gawande, backtesting, Bear Stearns, beat the dealer, Bernie Madoff, Black Swan, buy and hold, buy low sell high, California energy crisis, capital asset pricing model, Carl Icahn, Clayton Christensen, commodity trading advisor, computerized trading, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Edward Thorp, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, fiat currency, fixed income, Future Shock, game design, global macro, hindsight bias, housing crisis, index fund, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John Nash: game theory, linear programming, Long Term Capital Management, managed futures, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, Market Wizards by Jack D. Schwager, mental accounting, money market fund, Myron Scholes, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Reminiscences of a Stock Operator, Renaissance Technologies, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, survivorship bias, systematic trading, Teledyne, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, William of Occam, zero-sum game

Futures Industry Association Conference Excerpt. Campbell and Company. 69. Mary Ann Burns, Industry Icons Assess the Managed Futures Business. Futures Industry Association (May/June 2003). 70. Value of Adding Managed Futures. Marketing Documents. Campbell and Company. 71. 2003 Disclosure Document. Campbell and Company. 72. Desmond McRae, 31-Year Track Record of 18.1%. Managed Account Reports: Extracting Inherent Value from Managed Futures (March 2003). 73. Barclay Trading Group, Ltd. Barclay Managed Futures Report. Vol. 2, No. 3 (Third quarter 1991), 2. 74. The Futures and Industry Association’s Future and Options Expo ‘98.

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Jack Schwager, Market Wizards: Interviews with Top Traders. New York: New York Institute of Finance, 1989. 97. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 98. William Baldwin, Rugs to Riches (Section: The Money Men), Forbes (March 1, 1982). 99. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 100. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 101. Barbara Dixon, Richard Donchian: Managed Futures Innovator and Mentor. Futures Industry Association. 102. William Baldwin, Rugs to Riches (Section: The Money Men), Forbes (March 1, 1982). 103.

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Their strategy is designed to deal with the following math: CHART 3.3: Drawdown Recovery Chart Size of drawdown Percent gain to recover 5% 5.3% 10% 11.1% 15% 17.6% 20% 25.0% 25% 33.3% 30% 42.9% 40% 66.7% 50% 100% 60% 150% 70% 233% 80% 400% 90% 900% 100% Ruin 109 Chapter 3 • Performance Data Unfortunately, the investment community uses drawdown numbers to paint an incomplete picture of trend following. Trend trader David Harding of Winton Capital offered insight: “A key measure of track record quality and strategy ‘riskiness’ in the managed futures industry is drawdown, which measures the decline in net asset value from the historic high point. Under the Commodity Futures Trading Commission’s mandatory disclosure regime, managed futures advisors are obliged to disclose as part of their capsule performance record their ‘worst peak-to-valley drawdown.’ As a description of an aspect of historical performance, drawdown has one key positive attribute: It refers to a physical reality, and as such, it is less abstract than concepts such as volatility.

Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

Alan Greenspan, Albert Einstein, Alvin Toffler, behavioural economics, Bernie Madoff, Black Swan, business cycle, buy and hold, commodity trading advisor, correlation coefficient, delayed gratification, disinformation, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, global macro, Jim Simons, Lao Tzu, Long Term Capital Management, managed futures, market bubble, market microstructure, Market Wizards by Jack D. Schwager, Mikhail Gorbachev, moral hazard, Myron Scholes, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, Sharpe ratio, systematic trading, the scientific method, three-martini lunch, transaction costs, tulip mania, upwardly mobile, Y2K, zero-sum game

CTAs are the other quants the media never seems to cover accurately. Managed Futures: This is a term that describes regulated fund managers who use futures to trade for clients. It is an awful term because it fixates on the instrument (futures), not the strategy. Here’s the dirty little secret: Almost all successful managed futures trading firms use a trend following strategy. The term is often used interchangeably with CTA. Noted radio host and author Dave Ramsey recently had this to say about managed futures: “The term managed futures is virtually an oxymoron…with managed futures you’re basically betting on the future price of a commodity.

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In its exemplary form, it is based on universal intellectual values that transcend subject matter divisions: clarity, accuracy, precision, consistency, relevance, sound evidence, good reasons, depth, breadth, and fairness.”13 With that in mind, here are some questions to ponder: 1. Is it believable that Joe Kernen, the anchor of CNBC’s longest running program, had no knowledge and/or comprehension of trend following, or other descriptions of it such as managed futures or CTAs? If he was forced to raise his right hand under the threat of perjury, do you think he would still have such a limited understanding of trend following and managed futures? 2. When Kernen asked about trend followers purportedly pushing markets further than they should be fundamentally, did that mean he had a way to determine the correct price level of all markets at all times?

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Technical Analysis of Stocks and Commodities Magazine, Vol. 11, No. 3, March 1993, 122–124. See http://www.traders.com. 12. Francais Vaca quoted in CTA Confidential, “An Ongoing Series of Qualitative Investigations into Managed Futures Trading Programs.” Managed Account Research, 2010. Trade Everything 1. See http://www.clarkecap.com. 2. See http://www.abrahamtrading.com. 3. Francais Vaca quoted in CTA Confidential, “An Ongoing Series of Qualitative Investigations into Managed Futures Trading Programs.” Managed Account Research, 2010. Endnotes 251 Drawdown 1. Covel, Trend Following, p. 263. Entry 1. Ed Seykota. See http://www.seykota.com. This Way to the Egress 1.

Market Sense and Nonsense by Jack D. Schwager

3Com Palm IPO, asset allocation, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Brownian motion, buy and hold, collateralized debt obligation, commodity trading advisor, computerized trading, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, fixed income, global macro, high net worth, implied volatility, index arbitrage, index fund, Jim Simons, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, negative equity, pattern recognition, performance metric, pets.com, Ponzi scheme, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, short selling, statistical arbitrage, statistical model, subprime mortgage crisis, survivorship bias, tail risk, transaction costs, two-sided market, value at risk, yield curve

Although hedge funds don’t fully live up to their first name—they are significantly correlated with equities, especially during market liquidation episodes—they still provide much greater diversification than can be achieved within the long-only world, where different equity investments are usually extremely highly correlated. The Special Case of Managed Futures Managed futures are sometimes considered a subset of hedge funds and sometimes categorized to as a separate investment class. Managed futures refer to investments where the manager trades the futures and foreign exchange (FX) markets (FX is traded both through futures and the interbank markets). Managers who trade futures are referred to as commodity trading advisors (CTAs).

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At one extreme, long-only hedge funds would be highly correlated with equities, and at the other extreme, short-selling strategies would be negatively correlated. Some strategies, such as global macro managed futures, are completely unrelated to equities and tend to have near-zero correlation over the long term. Most hedge fund strategies would have only moderate positive correlation to equities across most months. There is, however, one important exception: During flight-to-safety market liquidations, most markets and most hedge fund strategies (with the exception of highly liquid strategies, such as managed futures) will witness significant losses simultaneously. A classic example of such an event was the financial panic that gripped world markets in late 2008.

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The one reason why it may be useful to think of managed futures as a separate investment class is that it is by far the most liquid hedge fund strategy. Liquidity refers to both the portfolio level and the investor level: Portfolio level. Most CTAs can easily liquidate their entire portfolio in a day, and often in minutes. Investor level. Redemption terms are usually the most investor friendly in the hedge fund spectrum, with monthly redemption (or better) the norm and investor gates2 a rarity. The liquidity of futures provides managed futures with a characteristic that differentiates it from most hedge fund strategies: Managed futures (including FX) are the one investment category that is immune to the “correlations going to one” phenomenon.

Living in a Material World: The Commodity Connection by Kevin Morrison

addicted to oil, Alan Greenspan, An Inconvenient Truth, barriers to entry, Berlin Wall, biodiversity loss, carbon credits, carbon footprint, carbon tax, clean water, commoditize, commodity trading advisor, computerized trading, diversified portfolio, Doha Development Round, Elon Musk, energy security, European colonialism, flex fuel, food miles, Ford Model T, Great Grain Robbery, Gregor Mendel, Hernando de Soto, Hugh Fearnley-Whittingstall, hydrogen economy, Intergovernmental Panel on Climate Change (IPCC), junk bonds, Kickstarter, Long Term Capital Management, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, new economy, North Sea oil, oil rush, oil shale / tar sands, oil shock, out of africa, Paul Samuelson, peak oil, planned obsolescence, price mechanism, Ronald Coase, Ronald Reagan, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, uranium enrichment, vertical integration, young professional

At that time though, Markowitz was still mainly focused on bonds and equities. The theory took another step in the early 1980s when Dr John Lintner of Harvard University concluded in his study that, ‘The combined portfolios of stocks, after including judicious investments in managed futures accounts, show substantially less risk, at every possible level of expected return, than portfolios of stocks (or stocks and bonds) alone’ (Lintner, 1983). For portfolio managers, futures provided an enhanced ability to sell short, which meant investors could make money when the markets fell. Another bonus was that there were lower transaction costs than with equity trading. 244 | LIVING IN A MATERIAL WORLD Among the first large pension funds to become involved in commodity investments were the Dutch government pension fund ABP, and PGGM, which manages the money for Dutch healthcare workers.

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The remaining traders are monitoring the screens for the price of the US treasury contracts, a market that has almost entirely shifted to the computer terminal.2 The consequence of the shift in trading to electronic screens has meant the days of open outcry trading are numbered. The Chicago grain futures market has evolved into a global financial market; for managers of hedge funds, managed futures funds and pension funds, who have absolutely no interest in taking delivery of a tonne of wheat. It is the speculators in the pits who have found this transition the most painful. Once they earned their money from trading against the big players in the grains markets such as Cargill, Bunge and ADM.

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Managed commodity funds can be traced back to 1948 when Futures Inc. was set up by Richard Donchian. Donchian is credited 238 | LIVING IN A MATERIAL WORLD with creating a marketing trading tactic known as ‘trend following,’ which is essentially based on the assumption that commodity prices move in long, sustained patterns. It’s a strategy adopted by programmed managed futures funds, otherwise known as Commodity Trading Advisors (CTAs), of which there are now thousands. The CTA is a misnomer; they do not now necessarily invest in commodities but in all classes of futures, including currencies, fixed interest and stock indices. The term harks back to the era prior to the launch of financial futures in the 1970s, and to the period when the only futures were commodities.

Traders at Work: How the World's Most Successful Traders Make Their Living in the Markets by Tim Bourquin, Nicholas Mango

algorithmic trading, automated trading system, backtesting, buy and hold, commodity trading advisor, Credit Default Swap, Elliott wave, financial engineering, fixed income, global macro, Long Term Capital Management, managed futures, Market Wizards by Jack D. Schwager, paper trading, pattern recognition, prediction markets, risk tolerance, Small Order Execution System, statistical arbitrage, The Wisdom of Crowds, transaction costs, zero-sum game

Is using data really the only way to achieve long-term success in this business? German: I don’t know. You look at the long-term, managed futures guys who have been using trend-following strategies for years, and a lot of them make substantial, double-digit returns every single year when compounded over twenty-five or thirty years. On the other hand, I haven’t seen any evidence that a mutual fund manager can make 15 percent or 20 percent compound annual real returns over twenty-five years. If you know of any, then maybe you could tell me. But it’s just hard to deny the long-term performance of some of these managed futures guys. Bourquin: At some point along the way, you started managing money, correct?

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retail firm swing trading time frames trade plan trading day structure trend lines wealth building wealthy traders Wilson, Rob ambition Bollinger bands British Royal Navy commander currency pairs currency trading economic announcement equity curve EUR/USD currency Forex trading full-time trader gold standard leverage losing trade management fees military training moving averages one-minute chart part-time traders pilot trade price points reinvest stop loss struggling trader support/resistance swings tend time frames trade margin trading bug trading unit volatile swings Wisdom of Crowds World Agricultural Supply and Demand Expectations (WASDE)

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(LEN) Lund, Brian daily charts day trading double-bottoms, ascending triangles economic announcements gambling and trading analogies gap trader high-frequency trading hybrid trader intraday charts larger swing chart moving average news announcement new traders part-time equities trader price and volume poker table positions profit target risk-reward ratio ROI percentage scale in and scale out Stanley, Morgan stocks basket support and resistance levels swing chart swing trading TC2000 technical analysis trading chat room trading mindset trading/poker analogies true traders weekly trade M Menaker, Andrew adverse effect algos auction automated trading Bollinger Bands fundamental analysis hedge fund high-frequency trading market profiling market sentiment momentum trading NYSE TICK psychological consultant risk-reward ratio S&P 500 social context supply and demand support and resistance trading psychology trend days volume occurrence volume profiling VWAP Miller, Don bankruptcy claims breakeven analysis CME member discounted rate schedule E-mini and S&P futures E-mini market ETF fluid market fund manager futures account futures contract futures market holding time human emotion intraday Jellie program jellyfish liquidity under bid under market provider liquid vehicles MACD market cycle market reading market trend market value MF Global account debacle momentum money back moving average PFG single trade speculation stabilization benefit support and resistance technical analysis technical charts Three-Line Break trade journal trading equities trading style vulture funds wholesale Money Talk bulletin boards Morgan Stanley (MS) Moving average convergence/divergence (MACD) N, O NASDAQ and S&P 500 National Futures Association (NFA) New York Stock Exchange (NYSE) Nonfarm payrolls (NFP) P, Q Pacific Coast Stock Exchange Peregrine Financial Group (PFG) Philadelphia Stock Exchange Poker analogy Producer Price Index (PPI) Purchasing Managers Index (PMI) R Raschke, Linda bear flags bond pit bull flags complex mechanical systems complex trade management strategies computer models CTA programs education E-mini S&P 500 futures futures market gamma trade hedge funds internet connections learning curve market maker market risk monetary goals multiple positions options arbitrage pit traders position exit pricing options professional traders S&P pit scale short-term scalpers software programs technical analysis technical chart technical programs trading floor trading place trail stops volatility and liquidity Russell 2000 S Schimming, Derek CCYX currency markets currency traders double tops and double bottoms entry point fifteen-and twelve-pip charts financial instrument fundamental background Monet effect money trading nonfarm payrolls announcement price-action players price-analysis view price-charting tools short-term time frame spot Forex trading stop loss support and resistance swing/position trader technical analysis trade opportunity trading strategy Simple moving average (SMA) SimplerOptions.com Small Order Execution System (SOES) T TheStockBandit.com Toma, Michael algorithmic program trading amateur trader arbitrary stop average retail trader backtesting bond future bond trader bond volume charts data-driven analytics edge effective journaling EMA and WMA E-mini S&P futures (ES) contract trader trade set-up equity index trader fund managers futures market trader HFT MACD market profile midday doldrums missing trade monthly assessment monthly report paper trading professional trader profit target psychology quantitative trader risk management risk/reward ratio secretariat set-up setups short-term trader six-tick stop player stop level support and resistance sweet spot technical analysis ten-year treasury bill trade plan trade targets trading software Trade on MasterCard TradeTheMarkets.com U US Department of Defense and Navy V Volume minus down volume ( UVOL-DVOL) Volume-weighted average price (VWAP) W, X, Y, Z Wealthy traders habits blown-up accounts buying and selling chart right side reading current trading methods decision making experienced traders goat milk good news higher-priced stock independent traders losing position make-my-month market bias market edge market makers minority ranks moving averages naked charts patient trade position size predict movement profit/loss exit retail traders right market environment share size short-term trade spot chart stock price support and resistance technical analysis trade setup trading books trading judgment trading plan trading reversals trading rules Weighted moving average (WMA) White, Jeff bear market bull market correlation daily market analysis entry and exit points equities trader favourable days full-time trading golf playing hedge fund home-based trading impatient traders local broker market environment mid-2000 mutual funds new investor own trading part-time trader playing chicken price and volume professional traders pullback buyers range-trading strategy retail firm swing trading time frames trade plan trading day structure trend lines wealth building wealthy traders Wilson, Rob ambition Bollinger bands British Royal Navy commander currency pairs currency trading economic announcement equity curve EUR/USD currency Forex trading full-time trader gold standard leverage losing trade management fees military training moving averages one-minute chart part-time traders pilot trade price points reinvest stop loss struggling trader support/resistance swings tend time frames trade margin trading bug trading unit volatile swings Wisdom of Crowds World Agricultural Supply and Demand Expectations (WASDE)

Stock Market Wizards: Interviews With America's Top Stock Traders by Jack D. Schwager

Asian financial crisis, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Black-Scholes formula, book value, commodity trading advisor, computer vision, East Village, Edward Thorp, financial engineering, financial independence, fixed income, implied volatility, index fund, Jeff Bezos, John Meriwether, John von Neumann, junk bonds, locking in a profit, Long Term Capital Management, managed futures, margin call, Market Wizards by Jack D. Schwager, money market fund, Myron Scholes, paper trading, passive investing, pattern recognition, proprietary trading, random walk, risk free rate, risk tolerance, risk-adjusted returns, short selling, short squeeze, Silicon Valley, statistical arbitrage, Teledyne, the scientific method, transaction costs, Y2K

One day, I went down with Tim to meet with T H E U L T I M A T E TODING S Y S T E M some traders at Commodities Corporation. After that meeting, I told Tim, "Screw the retail money; let's go after institutional money." I cold-called Eastman Kodak. That initial call ultimately led to their opening a $50 million account—the largest investment ever in managed futures. They eventually upped their investment to $250 million. What did you know about managed futures? Nothing, but I did know enough to realize that it was a waste of time to call individuals and that it made a lot more sense to call institutions. Then how did you sell Kodak on the product? I told them, "Here is an investment that has no correlation with the stock market and has been compounding at about 30 percent per year."

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I loved the job and did very well over the next few years. However, because of limitations that the company placed on me, I realized that if I wanted to take the next step, I would have to do something different. I decided to become a stockbroker. I was interviewed and hired by Shearson Lehman Brothers. While I was there, I met Tim Hoik, who was in managed futures—an area I knew absolutely nothing about. Tim had raised some retail money for Commodities Corporation. [At the time, Commodities Corporation had a group of in-house traders who managed the firm's proprietary funds as well as outside investor funds. Two of the traders I interviewed in Market Wizards—Michael Marcus and- Bruce Kovner—achieved their early success at Commodities Corporation.]

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So, on your first sales call, you landed a $50 million account, and then you never made another sale again. It's hard to believe, but it's the honest-to-God truth. The Kodak account was my only source of income. Still, given the size of the account, you had to be doing pretty well. We were making a lot of money off the account, but the problem was that it was a typical managed futures account—up-and-down, upand-down—it was sickening to watch. The traders would make money, and then they would give it all back. I was concerned about losing the account because of all the volatility. So I started looking around for something else to do. Sometime around 1993, I became interested in a stock market newsletter written by a guy in Texas.

Getting a Job in Hedge Funds: An Inside Look at How Funds Hire by Adam Zoia, Aaron Finkel

backtesting, barriers to entry, Bear Stearns, collateralized debt obligation, commodity trading advisor, Credit Default Swap, credit default swaps / collateralized debt obligations, deal flow, discounted cash flows, family office, financial engineering, fixed income, global macro, high net worth, interest rate derivative, interest rate swap, Long Term Capital Management, managed futures, merger arbitrage, offshore financial centre, proprietary trading, random walk, Renaissance Technologies, risk-adjusted returns, rolodex, short selling, side project, statistical arbitrage, stock buybacks, stocks for the long run, systematic trading, two and twenty, unpaid internship, value at risk, yield curve, yield management

Note: These funds seek to profit from changes in global economies, which are typically triggered by changes in government policy. These changes can affect interest rates and in turn may impact currency, stock, and bond markets. Global macro funds depend on their own fundamental macroeconomic research and often employ a top-down global approach. Managed Futures This strategy invests in listed financial and commodity futures markets and currency markets around the world. The managers are usually referred to as Commodity Trading Advisors (CTAs). Trading disciplines are generally systematic or discretionary. Systematic traders tend to use price- and market-specific information (often technical) to make trading decisions, while discretionary managers use a more judgmental or fundamental approach.

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While quantitative strategies have sometimes produced stellar returns, there have also been some well-known failures of funds using this strategy. Some examples of funds that use quantitative investing strategies are statistical arbitrage, options arbitrage, fixed-income arbitrage, convertible bond arbitrage, mortgagebacked security arbitrage, derivatives arbitrage, equity market neutral, managed futures, and long/short funds. Sector-Specific Funds Some hedge fund managers may use any of the aforementioned strategies, but in doing so would focus investments on a specific sector of the market. Managers of these funds usually have both long and short equity positions. As with the strategies discussed earlier, the popularity of sector-specific funds can rise and fall with the markets—one year energy funds may be hot and outperform, and the next they will be out of vogue and real estate may be the sector of choice.

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

Abraham Maslow, Alan Greenspan, Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, buy low sell high, capital controls, central bank independence, commoditize, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, currency risk, diversification, diversified portfolio, family office, financial engineering, fixed income, glass ceiling, Glass-Steagall Act, global macro, Greenspan put, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, inverted yield curve, John Meriwether, junk bonds, land bank, Long Term Capital Management, low interest rates, managed futures, margin call, market bubble, Market Wizards by Jack D. Schwager, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, oil shock, out of africa, panic early, paper trading, Paul Samuelson, Peter Thiel, price anchoring, proprietary trading, purchasing power parity, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, tail risk, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, Vision Fund, yield curve, zero-coupon bond, zero-sum game

Beams, Nick. “Russian Crisis Shakes Global Markets.” ICFI, August 25, 1998. Brown, Heidi, and John H. Christy.“Growing Pains.” Forbes, June 11, 2001. Burton, Katherine.“Paul Tudor Jones, Saying ‘Adapt or Die,’ Invests More.” Bloomberg Markets, May 3, 2004. Calabro, Seb, and Thomas Dobler. “Macro and Managed Futures: What Can They Add to Your Portfolio?” Goldman Sachs Conference Call Series, November 17, 2003. Caldwell, Ted, and Tom Kirkpatrick. A Primer on Hedge Funds. Lookout Mountain,TN: Lookout Mountain Capital, Inc., 1995. Cecchetti, S.G., H. Genberg, J. Lipsky, and S.Wadhwani. “Asset Prices and Central Bank Policy.”

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“Hedge Funds Today: So Much Money, So Little Talent.” Wall Street Journal,August 24, 2005. CNNfn,“One More Soros Farewell,” June 9, 2000. Connor, Gregory, and Mason Woo. An Introduction to Hedge Funds. London: London School of Economics, 2003. Cottier, Philipp. “The Origin of Hedge Funds.” Hedge Funds and Managed Futures Bern: P. Haupt, 1997. Coy, Peter, and Suzanne Woolley.“The Failed Wizards of Wall Street.” BusinessWeek, September 21, 1998. 357 358 BIBLIOGRAPHY Craig, Susanne. “Goldman to Lose Two Traders.” Wall Street Journal, September 24, 2004. Dennis, Richard.“The Slower Fool Theory.” New Perspectives Quarterly, Fall 1987.

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International Herald Tribune, December 2, 2000. Richards, Patsy. “Inflation: The Value of the Pound 1750–2001.” House of Commons Library Research Paper 02/44, July 11, 2002. Rosenblum, Irwin. Up, Down, Up, Down, Up. Philadelphia: Xlibris Corporation, October 2003. Säfvenblad, Patrik. “Global Macro and Managed Futures Strategies.” RPM Risk and Portfolio Management AB, October 1, 2003. Samuelson, Robert J. “The Risk Manager.” Washington Post, September 3, 2005. Savitz, Eric J.“GameTheory.” Barron’s, March 1, 2004. Skidelsky, Robert. “Commanding Heights,” interview by, PBS, July 18, 2000. Skidelsky, Robert. John Maynard Keynes: Hopes Betrayed 1883–1920.

Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals by David Aronson

Albert Einstein, Andrew Wiles, asset allocation, availability heuristic, backtesting, Black Swan, book value, butter production in bangladesh, buy and hold, capital asset pricing model, cognitive dissonance, compound rate of return, computerized trading, Daniel Kahneman / Amos Tversky, distributed generation, Elliott wave, en.wikipedia.org, equity risk premium, feminist movement, Great Leap Forward, hindsight bias, index fund, invention of the telescope, invisible hand, Long Term Capital Management, managed futures, mental accounting, meta-analysis, p-value, pattern recognition, Paul Samuelson, Ponzi scheme, price anchoring, price stability, quantitative trading / quantitative finance, Ralph Nelson Elliott, random walk, retrograde motion, revision control, risk free rate, risk tolerance, risk-adjusted returns, riskless arbitrage, Robert Shiller, Sharpe ratio, short selling, source of truth, statistical model, stocks for the long run, sugar pill, systematic trading, the scientific method, transfer pricing, unbiased observer, yield curve, Yogi Berra

Siegel, Stocks for the Long Run, 2nd ed. (New York: McGraw-Hill, 1998), 243. 19. G.R. Jensen, R.R. Johnson, and J.M. Mercer, “Tactical Asset Allocation and Commodity Futures: Ways to Improve Performance,” Journal of Portfolio Management 28, no. 4 (Summer 2002). 20. C.R. Lightner, “A Rationale for Managed Futures,” Technical Analysis of Stocks & Commodities (2003). Note that this publication is not a peer-reviewed journal but the article appeared to be well supported and its findings were consistent with the peer-reviewed article cited in the prior note. 21. P.-H. Hsu and C.-M. Kuan, “Reexamining the Profitability of Technical Analysis with Data Snooping Checks,” Journal of Financial Economics 3, no. 4 (2005), 606–628. 22.

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Wolf, “Stepwise Multiple Testing as Formalized Data Snooping,” Econometrica 73, no. 4 (July 2005), 1237–1282. Note, this paper and many others use the term data snooping for what I refer to as the datamining bias. CHAPTER 7 Theories of Nonrandom Price Motion 1. C.R. Lightner, “A Rationale for Managed Futures,” Technical Analysis of Stocks & Commodities (March 1999). 2. Kepler actually proposed three distinct laws. 3. R.D. Edwards and J. Magee, Technical Analysis of Stock Trends, 4th ed. (Springfield, MA: John Magee, 1958). 4. J.J. Murphy, Technical Analysis of the Futures Markets: A Comprehensive Guide to Trading Methods and Applications (New York: New York Institute of Finance, 1999), 2. 5.

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.; Notes 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 507 S. Grossman and J. Stiglitz, “On the Impossibility of Informationally Efficient Markets,” American Economic Review 70 (1980), 393–408. L. Jaeger, Managing Risk in Alternative Investment Strategies: Successful Investing in Hedge Funds and Managed Futures (London: Financial Times–Prentice Hall, 2002), 27. Gains from a true inefficiency are not a free lunch, because it is costly to identify them, but they need not entail the risk of additional volatility in returns. Thus true inefficiencies can generate investment performance with a high relative Sharpe ratio.

Asperger Syndrome and Alcohol: Drinking to Cope? by Matthew Tinsley, Sarah Hendrickx

Asperger Syndrome, autism spectrum disorder, managed futures, neurotypical, selective serotonin reuptake inhibitor (SSRI), theory of mind

The discovery and increasing understanding of their AS is rehabilitation in itself for most individuals, and provides an opportunity to find out who they really are and what they really need. This process of self-knowledge and acceptance of self can take a long time to assimilate, maybe even a year or two. It can be a complete re-assessment of what the person knew to be true but had no idea why. This new understanding of self may enable a more manageable future. Diagnosis The path to a funded diagnosis in the UK requires a referral from a GP to an appropriately qualified diagnostician – typically, a clinical psychologist or psychiatrist, who maybe based at a local (or not so local) hospital, or at a specialist AS clinic. When the person being referred is an adult, this person should be experienced in working with adults, as there are some differences in diagnosing children and adults.

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

Abraham Wald, activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, Bear Stearns, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, book value, business cycle, capital asset pricing model, carbon tax, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, currency risk, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, fail fast, fear index, financial engineering, financial innovation, global macro, illegal immigration, implied volatility, independent contractor, index fund, John Bogle, junk bonds, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market clearing, market fundamentalism, market microstructure, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, power law, pre–internet, proprietary trading, quantitative trading / quantitative finance, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, stock buybacks, stocks for the long run, tail risk, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

For example, in many markets prices have momentum. Securities that recently went up in price tend to continue up; securities that recently went down in price continue to go down. The market knows what the right price is, but cannot get there right away. There are many variants of momentum trading; the best known is called managed futures. It acquired this name because the strategy was first perfected by commodity futures traders, but it is applied today in all liquid asset classes. People disagree about why momentum exists, but it is much easier to explain as a disequilibrium than as a market inefficiency. The simplest story concerns the way information flows into market prices.

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(Livio) Jackknife, the Bootstrap, and Other Resampling Plans, The (Efron) Jackpot Nation (Hoffer) Jessup, Richard John Bogle on Investing (Bogle) Johnson, Barry Johnson, Simon JPMorgan Junk bonds Kahneman, Daniel Kamensky, Jane Kaplan, Michael Kassouf, Sheen Kelly, John Kelly bets/levels of risk Kelly principles/investors Keynes, John Maynard Key performance indicators (KPIs) Key risk indicators (KRIs) King of a Small World (Bennet) Korajczyk, Robert Knetsch, Jack Knight, Frank Kraitchik, Maurice Krüger, Lorenz Laplace, Pierre-Simon Lehman Brothers Leitzes, Adam Lepercq de Neuflize Leverage Levine, David Levinson, Horace Lewis, Michael Limits of Safety, The (Sagan) Liquidity Livio, Mario Logic of Failure, The (Dorner) Long-Run Collaboration on Games with Long-Run Patient Players, A (Fudenberg and Levine) Loss aversion Lowenstein, Roger Mackay, Charles Madoff, Bernie Mallaby, Sebastian Man with the Golden Arm, The (Bennet) Managed futures Managing risk Mandelbrot, Benoit Market: “beating” the efficiency (see also Efficient markets theory) equilibrium (see Equilibrium) portfolio prices return sympathy Mark-to-market accounting Markowitz, Harry. See also Modern portfolio theory (MPT) McLean, Bethany McMahon, Darrin McManus, James Medici Money (Park) Mehrling, Perry Merck Merrill Lynch Merton, Robert Mezrich, Ben Middle office Mihm, Stephen (Mis)behavior of Markets, The (Mandelbrot) Modern portfolio theory (MPT) Momentum investors Momentum trading Money.

The Little Book of Hedge Funds by Anthony Scaramucci

Alan Greenspan, Andrei Shleifer, asset allocation, Bear Stearns, Bernie Madoff, business process, carried interest, corporate raider, Credit Default Swap, diversification, diversified portfolio, Donald Trump, Eugene Fama: efficient market hypothesis, fear of failure, financial engineering, fixed income, follow your passion, global macro, Gordon Gekko, high net worth, index fund, it's over 9,000, John Bogle, John Meriwether, Long Term Capital Management, mail merge, managed futures, margin call, mass immigration, merger arbitrage, Michael Milken, money market fund, Myron Scholes, NetJets, Ponzi scheme, profit motive, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk-adjusted returns, risk/return, Ronald Reagan, Saturday Night Live, Sharpe ratio, short selling, short squeeze, Silicon Valley, tail risk, Thales and the olive presses, Thales of Miletus, the new new thing, too big to fail, transaction costs, two and twenty, uptick rule, Vanguard fund, Y2K, Yogi Berra, zero-sum game

Unlike the strategies just discussed, these strategies do not provide a hedge against market risk; rather they seek to preserve capital and earn absolute returns by taking advantage of global market trends and the direction of movements in the financial market. Strategies within this classification include: Global Macro Funds Managed Futures Global Macro Funds When I think of the global macro hedge fund managers, I always seem to imagine the same scenario: a group of contrarians, pacing back and forth in a war room as they try to assess every price movement that is going on in real time around the planet. Interest rate movements, commodity prices, currencies, stocks, and bonds—basically everything on the Earth that trades!

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

Alan Greenspan, Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, behavioural economics, Bernie Madoff, Black Swan, Bob Litterman, bond market vigilante , book value, Bretton Woods, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, carbon credits, Carmen Reinhart, central bank independence, classic study, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, G4S, George Akerlof, global macro, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, inverted yield curve, invisible hand, John Bogle, junk bonds, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, Long Term Capital Management, loss aversion, low interest rates, managed futures, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, pension time bomb, performance metric, Phillips curve, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, savings glut, search costs, selection bias, seminal paper, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stock buybacks, stocks for the long run, survivorship bias, systematic trading, tail risk, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

It includes infrastructure, timber, and farmland; art and other collectibles (fine wines, rare coins, stamps); and more novel securities such as catastrophe bonds, carbon credits, intellectual property rights, viatical or life insurance settlements, longevity swaps, and others. If hedge funds can be characterized as an asset class, then the list of alternatives may be extended to include managed futures (typically momentum-oriented commodity-trading advisors or CTAs), global tactical asset allocation managers (typically value-oriented investors), active FX, volatility trading, alternative betas and hedge fund replication, as well as investments focused on corporate governance, sustainable development, and shareholder activism.

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The bias is milder for value-weighted averages because backfilling is more often done by small young funds. While many studies make adjustments for survivorship and backfill biases, few studies are able to quantify selection, liquidation, lookback, and lookahead biases. Box 11.4. CTA performance Commodity trading advisors (CTAs) or managed futures may be viewed either as a subset of HFs or as a distinct but close cousin. Unlike most HFs, CTAs tend to be systematic and focus on trend following (diversifying across a large number of liquid assets and both fast and slow models). Chapter 14 discusses simulated trend-following strategies. Bhardwaj–Gorton–Rouwenhorst (2008) present a scathing analysis of CTA performance, titled “Fooling some of the people all the time”.

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Moreover, it is hard to argue that momentum strategies deserve a high rationally required risk premium when these strategies actually are great diversifiers. During financial crises such as 1998 and 2008, these strategies were among the few solid performers. Many empirical studies show that momentum strategies and CTAs (managed futures funds that focus on trend following) have negative or low correlations with equity markets and with value, carry, and reversal strategies. These other strategies tend to be empirically “short volatility” whereas momentum strategies and CTAs tend to be empirically “long volatility”:• The payoff profile of trend-followers resembles that of an unhedged long straddle position.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest by Andrew W. Lo, Stephen R. Foerster

Alan Greenspan, Albert Einstein, AOL-Time Warner, asset allocation, backtesting, behavioural economics, Benoit Mandelbrot, Black Monday: stock market crash in 1987, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, buy and hold, capital asset pricing model, Charles Babbage, Charles Lindbergh, compound rate of return, corporate governance, COVID-19, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, Edward Glaeser, equity premium, equity risk premium, estate planning, Eugene Fama: efficient market hypothesis, fake news, family office, fear index, fiat currency, financial engineering, financial innovation, financial intermediation, fixed income, hiring and firing, Hyman Minsky, implied volatility, index fund, interest rate swap, Internet Archive, invention of the wheel, Isaac Newton, Jim Simons, John Bogle, John Meriwether, John von Neumann, joint-stock company, junk bonds, Kenneth Arrow, linear programming, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, money market fund, money: store of value / unit of account / medium of exchange, Myron Scholes, new economy, New Journalism, Own Your Own Home, passive investing, Paul Samuelson, Performance of Mutual Funds in the Period, prediction markets, price stability, profit maximization, quantitative trading / quantitative finance, RAND corporation, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, selection bias, seminal paper, shareholder value, Sharpe ratio, short selling, South Sea Bubble, stochastic process, stocks for the long run, survivorship bias, tail risk, Thales and the olive presses, Thales of Miletus, The Myth of the Rational Market, The Wisdom of Crowds, Thomas Bayes, time value of money, transaction costs, transfer pricing, tulip mania, Vanguard fund, yield curve, zero-coupon bond, zero-sum game

“I was able to take a more realistic model, a more general model, and show that the outcomes were interesting.”31 Around 1969, as Merton neared the completion of his dissertation, Samuelson nominated him to be a junior fellow at Harvard. However, Merton was rejected for that position, so he continued on to the regular academic job market, interviewing at numerous economics departments. Merton was able to get a job at MIT, not in the economics department but rather at the Sloan School of Management. Future economics Nobel winner Franco Modigliani, who had cross-appointments in both the economics department and at Sloan, made the invitation and convinced Merton that he could teach at Sloan even though he had no formal finance training. “Things were going very well,” Merton recalled from his office at MIT Sloan more than four decades later.

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See also Black-Scholes/Merton option-pricing formula overvaluation: Shiller on, 303–4; of technology sector, Siegel on, 295–98 Ownership Society Bubble, 241 paper currency, 6 passive management: advocates of, 321; Scholes on, 147 path to the Perfect Portfolio, 323, 331–33 pension managers, 214 Perfect Portfolios, 134–39, 308–33; active vs. passive management and, 321; adaptive markets hypothesis and, 320; of Bogle, 134–39, 312–13; differences among, 321; of Ellis, 276–80, 318; of Fama, 111–12, 312; lack of consensus on, 308; of Leibowitz, 221–25, 316–17; of Markowitz, 43–50, 309–11; of Merton, 192–98, 314–16; principles of constructing, 323–26; process of constructing, 323, 326–31; risk and, 321; of Scholes, 166–72, 313–14; of Sharpe, 78–80, 311–12; of Shiller, 251–54, 317–18; of Siegel, 305–7, 318–19; taxes and, 322; Treasury Inflation-Protected Securities and, 322 performance investing, Ellis on, 261–62, 273–74 Pfleiderer, Paul, 158 Phillips Exeter Academy, 256 Pierce, Franklin, 256 Porter, Richard, 234–35 “Portfolio Analysis Based on a Simplified Model of the Relationships among Securities” (Sharpe), 56 portfolio management: future of, 50; Markowitz’s interest in, 24; pioneers of, overview of, ix–xi. See also specific topics “Portfolio Operations” (Ellis), 262 portfolio risk formula, Markowitz’s discovery of, 25–26 “Portfolio Selection” (Markowitz), 27–34 portfolio selection: importance of Markowitz’s contribution to, 44–45; Markowitz’s book on, 39–41; as Markowitz’s dissertation topic, 27–34; work preceding Markowitz’s work on, 35–39 Portfolio Selection: Efficient Diversification of Investments (Markowitz), 39–41, 54 portfolio theory, Marschak and, 35 Portfolio Theory and Capital Markets (Sharpe), 73 Pre-Pottery Neolithic period trade, 1–2 Prescott, Edward, 230, 288–89 prestito, 7 price-earnings (P/E) ratio, 246, 291; cyclically adjusted (see cyclically adjusted price-to-earnings (CAPE) ratio); equity premium and, 291; lower-risk premiums and, 238; Shiller on, 303; Siegel on, 297–98, 299, 302, 303, 305, 306, 307; speculative return and, 133–34; target, in 1719 France, 11 price-to-earnings (P/E) multiple, of Mississippi Company, 11 “The Pricing of Options and Corporate Liabilities” (Black and Scholes), 157 Primecap Fund, 135 Primerica, 346n5 principles of constructing a Perfect Portfolio, 323–26 process of constructing a Perfect Portfolio, 323, 326–31 prospect theory, 42–43 pure yield pickup swaps, 211 Qin Shi Huangdi, 5 Rainwater, James, as Nobel Prize winner, 174 Ramo, Simon, 264–65, 362n34 RAND Corporation, 39, 340n77 The Random Character of Stock Market Prices (Cootner), 83 A Random Walk Down Wall Street (Malkiel), 276 random walks, 82–83, 88–89, 93–94 “Random Walks in Stock-Market Prices” (Fama), 93–94 Rashomon effect, 308 rate anticipation swaps, 211 rational expectations, 344n28; Shiller on, 229–30, 232–34 “Rational Expectations and the Structure of Interest Rates” (Shiller), 230 rationality, critics of, 83–84 Reagan, Ronald, 236 rebalancing, Bogle on, 135–36 “Religion and Science” (Einstein), 227 reputation, importance of, 3–4 retirement, baby boomer, Siegel on effect on investor portfolios, 299–300 retirement planning: asset-liability management and, 214–15; inflation and, 224; Merton’s work in, 192–93, 194–97; Sharpe’s interest in, 75–76; target date funds for, 224 risk: adaptive markets hypothesis and, 320; capital asset pricing model and (see capital asset pricing model (CAPM)); differing approaches to, 321; dragon, 221; Ellis on, 268; endowment model and, 220–21; Leibowitz on, 216–18, 220–21, 224, 316–17; MacroShares and, 251; Markowitz on, 25–26, 310; Merton on, 192–93; portfolio risk formula and, 25–26 (see also modern portfolio theory (MPT)); Scholes on, 167, 171–72, 313–14; Sharpe’s expansion on Markowitz’s approach to, 56; Siegel on, 294–95.

Damsel in Distressed: My Life in the Golden Age of Hedge Funds by Dominique Mielle

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", activist fund / activist shareholder / activist investor, airline deregulation, Alan Greenspan, banking crisis, Bear Stearns, Black Monday: stock market crash in 1987, blood diamond, Boris Johnson, British Empire, call centre, capital asset pricing model, Carl Icahn, centre right, collateralized debt obligation, Cornelius Vanderbilt, coronavirus, COVID-19, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Elon Musk, Eugene Fama: efficient market hypothesis, family office, fear of failure, financial innovation, fixed income, full employment, glass ceiling, high net worth, hockey-stick growth, index fund, intangible asset, interest rate swap, John Meriwether, junk bonds, Larry Ellison, lateral thinking, Long Term Capital Management, low interest rates, managed futures, mega-rich, merger arbitrage, Michael Milken, Myron Scholes, Northpointe / Correctional Offender Management Profiling for Alternative Sanctions, offshore financial centre, Paul Samuelson, profit maximization, Reminiscences of a Stock Operator, risk free rate, risk tolerance, risk-adjusted returns, satellite internet, Savings and loan crisis, Sharpe ratio, Sheryl Sandberg, SoftBank, survivorship bias, Tesla Model S, too big to fail, tulip mania, union organizing

The truth is that hedge funds were not supposed to produce superior relative returns; the goal was to produce persistent absolute positive returns. To be hedged means to deliver profit regardless of the direction of the market, as was the case during the telecom crisis. Hedge funds did not deliver on that promise in 2008. Every hedge fund category but one (managed futures, a subset so nebulous that I really have no clue what they do) produced a negative return. Changing the Model 2008 did not just shake investors, it also provided a wake-up call to hedge fund managers. They realized how fragile and unstable the existing business model was. The crisis served as a catalyst for the entire industry to seek scale and diversification rather than reside within specialization and nimbleness.

The Decline and Fall of IBM: End of an American Icon? by Robert X. Cringely

AltaVista, Bernie Madoff, business cycle, business process, Carl Icahn, cloud computing, commoditize, compound rate of return, corporate raider, financial engineering, full employment, Great Leap Forward, if you build it, they will come, immigration reform, interchangeable parts, invention of the telephone, Khan Academy, knowledge worker, low skilled workers, managed futures, Paul Graham, platform as a service, race to the bottom, remote working, Robert Metcalfe, Robert X Cringely, shareholder value, Silicon Valley, six sigma, software as a service, Steve Jobs, stock buybacks, tech worker, TED Talk, Toyota Production System, Watson beat the top human players on Jeopardy!, web application, work culture

The problem is in the execution: Pay the consultants big bucks going in, then drop them half-way through the conversion; execute the conversion done in hurry-up mode with no prior thought given to infrastructure; ensure that every team is isolated and will stumble across the same common problems one by one and then invent their own set of solutions which probably won't interface smoothly with any other team's (or management's future requirements); schedule a workforce reduction just as the teams are beginning to build those solutions; schedule week-long mandatory face-to-face team kickoff meetings but only at the last minute so the travel budget is blown on high-dollar airfares; hit the paying customers first instead of IBM's traditional method of tasting our own cooking before laying it on the public table; change the customer interface week-by-week as the teams try to adapt again and again; measure progress solely in terms of resource reduction, dropping all pretense of measuring anything relating to effectiveness or customer satisfaction; chase away customers instead of training the marketing staff to make and hold to good costing decisions.

The Handbook of Personal Wealth Management by Reuvid, Jonathan.

asset allocation, banking crisis, BRICs, business cycle, buy and hold, carbon credits, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, currency risk, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, global macro, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, low interest rates, managed futures, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, proprietary trading, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Advisory portfolio management, on the other hand, tends to be designed for clients wishing to retain more control over investment decisions – a more ‘hands-on’ approach. Figure 1.1.4, Investment involvement, shows a broad representation of the types of services differentials that exist between discretionary and advisory approaches. _________________________________________________ THE EYE OF THE NEEDLE 11 ឣ HFs: Macro/Managed Futures 6.0% HFs: Equity Long/short 2.4% Fixed Income – Inv. Grade (International) 18.2% HFs: Relative Value/Event Driven 8.4% Fixed Income – Inv. Grade (Local) 10.2% Fixed Income – High Yield 2.1% Equity 52.6% 11.0 0% Illiquidity 10% Illiquidity 20% Illiquidity 30% Illiquidity Expected Return (%) 10.0 9.0 Model V Model IV Model III 8.0 Model II 7.0 6.0 Model I 5.0 For Illustration Only 4.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Expected Standard Deviation (%) Source: Citi Private Bank as at December 2008 Figure 1.1.3 Illustration line of optimal portfolio ‘fits’ This is provided as a generic illustration only and differences between service offerings will vary.

Rigged Money: Beating Wall Street at Its Own Game by Lee Munson

affirmative action, Alan Greenspan, asset allocation, backtesting, barriers to entry, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, call centre, Credit Default Swap, diversification, diversified portfolio, estate planning, fear index, fiat currency, financial engineering, financial innovation, fixed income, Flash crash, follow your passion, German hyperinflation, Glass-Steagall Act, global macro, High speed trading, housing crisis, index fund, joint-stock company, junk bonds, managed futures, Market Wizards by Jack D. Schwager, Michael Milken, military-industrial complex, money market fund, moral hazard, Myron Scholes, National best bid and offer, off-the-grid, passive investing, Ponzi scheme, power law, price discovery process, proprietary trading, random walk, Reminiscences of a Stock Operator, risk tolerance, risk-adjusted returns, risk/return, Savings and loan crisis, short squeeze, stocks for the long run, stocks for the long term, too big to fail, trade route, Vanguard fund, walking around money

Unlike the GSCI, which lets the positions float and has a 60 percent max weighting, the Dow Jones-UBS Grains index has a max weighting of 33 percent. Over the last 10 years the difference between the Dow Jones and GSCI is that oil has become an overwhelming part of the GSCI Index, contributing to better 10-year numbers. Mutual fund companies love to use the GSCI for particular time periods to sell managed futures funds without fully explaining that the numbers are mostly attributed to a run in oil, not a well-diversified commodity basket like the Dow Jones Index. You would think that we would see some tracking error between the two ETNs. In fact, we see few differences between the two. Overlay the charts and they are twins.

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Alan Greenspan, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bear Stearns, Bernie Madoff, book value, Bretton Woods, business process, call centre, Carl Icahn, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, financial engineering, fixed income, global macro, high net worth, high-speed rail, impact investing, interest rate derivative, Isaac Newton, Jim Simons, junk bonds, Long Term Capital Management, managed futures, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Michael Milken, Myron Scholes, NetJets, oil shock, pattern recognition, Pershing Square Capital Management, Ponzi scheme, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, Savings and loan crisis, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, stock buybacks, systematic bias, systematic trading, tail risk, two and twenty, zero-sum game

Opened as a sugar brokerage by barrel maker James Man in 1783, the company’s first break came a year later when Man won the contract to provide rum to the Royal Navy (the service’s tradition, by which each sailor received a tot of rum daily, was observed until 1970, with Man holding the contract for the entire time). Over the years, the company evolved into the commodities trading firm ED&F Man (which continues in business as a separate entity), and then, through astute acquisition of managed-futures traders and fund-of-funds operations, celebrated its bicentennial with its first acquisition of a hedge fund, New York’s Mint Investment Management Co. By the end of the decade, the company had a billion dollars in assets. The flagship of Man’s operation, with $23.6 billion in assets, is AHL.

Smarter Investing by Tim Hale

Albert Einstein, asset allocation, buy and hold, buy low sell high, capital asset pricing model, classic study, collapse of Lehman Brothers, corporate governance, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, equity premium, equity risk premium, Eugene Fama: efficient market hypothesis, eurozone crisis, fiat currency, financial engineering, financial independence, financial innovation, fixed income, full employment, Future Shock, implied volatility, index fund, information asymmetry, Isaac Newton, John Bogle, John Meriwether, Long Term Capital Management, low interest rates, managed futures, Northern Rock, passive investing, Ponzi scheme, purchasing power parity, quantitative easing, random walk, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, South Sea Bubble, technology bubble, the rule of 72, time value of money, transaction costs, Vanguard fund, women in the workforce, zero-sum game

Winning the Loser’s Game, 2nd, 3rd emerging markets defining diversification benefits, 2nd economies MSCI Emerging Markets Index portfolio construction, 2nd, 3rd, 4th, 5th, 6th product choices, 2nd, 3rd benchmarks return and risk characteristics, 2nd, 3rd future returns past returns rise in correlations between EMH (Efficient Market Hypothesis) emotional decision-making, 2nd, 3rd, 4th, 5th, 6th emotional tolerance for losses Equitable Life equities efficient equity markets global developed markets diversification, 2nd, 3rd, 4th, 5th, 6th fund costs product choices benchmarks and investment behaviour and the investment mix, 2nd, 3rd lump-sum investments in and market timing, 2nd, 3rd risk, 2nd, 3rd stock selection UK active funds equity markets developed diversifiers, 2nd risk, 2nd volatility of equity risk premium equity-oriented assets ETFs (Exchange Traded Funds), 2nd, 3rd, 4th, 5th and DIY investors, 2nd, 3rd, 4th taxes and inflation-linked bonds providers, 2nd eye-openers for investors Fama, Eugene Fidelity, 2nd, 3rd, 4th, 5th FinaMetrica, 2nd, 3rd financial advisers see advisers financial survival goals, 2nd and different levels of need five steps in defining general goals for individuals fixed income securities, 2nd Ford, Henry, 2nd FSA (Financial Services Authority) and commodity futures FTSE 100 Index, 2nd and structured products, 2nd FTSE All-Share Index, 2nd, 3rd, 4th, 5th FTSE Index-Linked gilts fund management/managers average choosing costs, 2nd, 3rd performance, 2nd turnover on funds and UK investor behaviour see also active management/managers futures contracts gambling gilts, 2nd, 3rd, 4th, 5th, 6th and global equity markets index-linked global equities developed markets, risk and return diversification, 2nd, 3rd, 4th, 5th, 6th fund costs product choices benchmarks global real estate see REITs (global real estate) goals see financial survival goals gold Graham, Benjamin, 2nd Halifax UK FTSE All Share Index Tracking Fund Hargreaves Lansdown hedge funds, 2nd, 3rd and leverage history of the financial industry home bias, 2nd product choices Homer, Sidney implementation, 2nd, 3rd DIY or advisers product choices, 2nd risk income and DIY investors index funds, 2nd, 3rd, 4th and DIY investors guidelines for selecting index-fund investing and portfolio construction trackers vs active investors, 2nd, 3rd tracking error index investors index-linked bonds, 2nd India inflation and bond yields inflation-linked investments portfolio construction and long-term investors and savers and structured products inflation-linked bonds, 2nd, 3rd information ratio insights Institute of Financial Planning insurance premiums and commodity futures intuitive decision-making investment behaviour, 2nd, 3rd emotional, 2nd, 3rd, 4th, 5th, 6th see also behavioural finance investment horizon and portfolio choices investment period investment philosophy, 2nd and advisers establishing foundations of and market timing, 2nd, 3rd, 4th philosophy-free investing research evidence rules security selection see also active management/managers investment professionals trying to beat the market investment strategy see market timing investment trusts, 2nd private equity IRR (internal rate of return) and private equity ISAs and taxation iShares Kahneman, Daniel Keynes, J.

All About Asset Allocation, Second Edition by Richard Ferri

activist fund / activist shareholder / activist investor, Alan Greenspan, asset allocation, asset-backed security, barriers to entry, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, book value, buy and hold, capital controls, commoditize, commodity trading advisor, correlation coefficient, currency risk, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, equity premium, equity risk premium, estate planning, financial independence, fixed income, full employment, high net worth, Home mortgage interest deduction, implied volatility, index fund, intangible asset, inverted yield curve, John Bogle, junk bonds, Long Term Capital Management, low interest rates, managed futures, Mason jar, money market fund, mortgage tax deduction, passive income, pattern recognition, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, selection bias, Sharpe ratio, stock buybacks, stocks for the long run, survivorship bias, too big to fail, transaction costs, Vanguard fund, yield curve

The number of strategies is limited only by the imagination of people in the investment industry. TA B L E 10-3 Hedge Fund Categories and Strategies Arbitrage Strategies Event-Driven Strategies Directional/Tactical Strategies Fixed-income arbitrage Convertible arbitrage Special situations Mergers and acquisitions Distressed securities Venture capital Equity long/short Managed futures (CTA) Macro strategies Alternative Investments 209 The Problem with Hedge Funds Hedge funds have a certain sex appeal. The secretive nature of the business, the allure of high potential returns, and the low correlation with stocks and bonds—it is all very enticing. However, in this author’s opinion, much of the hype surrounding the role of hedge funds in a portfolio is misplaced.

Mathematics of the Financial Markets: Financial Instruments and Derivatives Modelling, Valuation and Risk Issues by Alain Ruttiens

algorithmic trading, asset allocation, asset-backed security, backtesting, banking crisis, Black Swan, Black-Scholes formula, Bob Litterman, book value, Brownian motion, capital asset pricing model, collateralized debt obligation, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, discrete time, diversification, financial engineering, fixed income, implied volatility, interest rate derivative, interest rate swap, low interest rates, managed futures, margin call, market microstructure, martingale, p-value, passive investing, proprietary trading, quantitative trading / quantitative finance, random walk, risk free rate, risk/return, Satyajit Das, seminal paper, Sharpe ratio, short selling, statistical model, stochastic process, stochastic volatility, time value of money, transaction costs, value at risk, volatility smile, Wiener process, yield curve, zero-coupon bond

collars collateralized debt obligations (CDOs) color sensitivity commodities commodity futures backwardation contango market price non-financial producers/users trading calculations conditional swaps Conditional VaR (C-VaR) confidence levels constant maturity swaps (CMSs) contango continuous interest compounding continuous interest rates continuous time continuous variables contracts contracts for difference (CFD) contribution, performance convenience yield conversion factors (CFs) convertible bonds (CBs) bond floor CB premium conversion ratio Hard Call protection outcome of operation pricing graph risk premium stock price parity convexity adjustments see also bond convexity copper prices copulas correlation basket options credit derivatives implied Portfolio Theory Spearman’s coefficient VaR calculations volatility counterparty risk futures see also credit risk counter-value currency (c/v) Courtadon model covered period, FRAs Cox, Ingersoll and Ross model Cox–Ross–Rubenstein (CRR) model credit default swaps (CDSs) on basket cash settlement with defined recovery rate market operations variants credit derivatives CDSs credit risk main features valuation application example basket derivatives binomial model CDO pricing correlation measures credit risk models useful measures Merton model “credit events” credit exposure credit risk behind the underlying components data use dangers default rates Merton model models in practice quantification recovery rates credit VaR crossing CRR see Cox–Ross–Rubenstein model CRSs see currency rate swaps crude oil market CTD see cheapest to deliver cubic splines method currencies futures options performance attribution spot instruments currency rate swaps (CRSs) c/v see counter-value currency C-VaR see Conditional VaR D see discount factors DCF see discounted cash flows method decision-making deep ITM (DITM) deep OTM (DOTM) default rates default risk see credit risk delta delta-gamma neutral management delta-normal method, VaR derivatives credit valuation problems volatility Derman see Black, Derman, Toy process deterministic phenomena diff swaps diffusion processes Dirac functions dirty prices discounted cash flows (DCF) method discount factors (D) duration D forward rates IRSs risk-free yield curve spot rates yield curve interpolations discrete interest compounding discrete time discrete variables DITM see deep ITM DOTM see deep OTM drift duration of bonds see bond duration duration D dVega/dTime dynamic replication see delta-Gamma neutral management dZ Black–Scholes formula fractional Brownian motion geometric Wiener process martingales properties of dZ(t) standard Wiener process economic capital ED see exposure at default effective duration, bonds efficient frontier efficient markets EGARCH see exponential GARCH process EONIA see Euro Over-Night Index Average swaps equities forwards futures Portfolio Theory stock indexes stocks valuation EUR see Euros EURIBOR rates CMSs EONIA/OIS swaps FRAs futures in-arrear swaps IRSs quanto/diff swaps short-term rates Euro Over-Night Index Average (EONIA) swaps European options basket options bond options caplets CRR pricing model exchange options exotic options floorlets Monte Carlo simulations option pricing rho Euros (EUR) CRSs forward foreign exchange futures spot market swap rate markets volatility Euro Stoxx EWMA see exponentially weighted moving average process Excel functions MA process Monte Carlo simulations excess return exchange options exotic options basket options Bermudan options binomial pricing model Black–Scholes formula currency options exchange options interest rates Monte Carlo simulations options on bonds options on non-financial underlyings PFCs pricing methods see also second generation options exotic swaps see also second generation swaps expected credit loss expected return exponential GARCH (EGARCH) process exponentially weighted moving average (EWMA) process exposure at default (ED) fair price/value “fat tails” problem financial models ARCH process ARIMA process ARMA process AR process GARCH process MA process MIDAS process finite difference pricing methods fixed leg of swap fixed rate, swaps floating rate notes/bonds (FRNs) floating rates floorlets floors forecasting ARIMA ARMA process AR process MA process foreign exchange (FX) see currencies; forex swaps; forward foreign exchange forex (FX) swaps forward foreign exchange 1 year calculations forex swaps forward forex swaps forward-forward transactions forward spreads NDF market operations forward rate agreements (FRAs) forwards Black–Scholes formula bonds CFDs CRSs equities foreign exchange FRAs futures vs forwards prices options PFCs rates swaps volatility forward zero-coupon rate 4-moments CAPM fractional Brownian motion FRAs see forward rate agreements FRNs see floating rate notes/bonds futures bonds commodities currencies equities forwards vs futures prices IRR margining system market price option pricing pricing settlement at maturity short-term interest rates stock indexes theoretical price future value (FV) bond duration short-term rates spot rates zero-coupon swaps FX see foreign exchange; forex swaps gain-loss ratio (Bernardo Ledoit) gamma gamma processes GARCH see generalized ARCH process Garman–Klass volatility Gaussian copulas Gaussian distribution Gaussian hypothesis generalized ARCH (GARCH) process EWMA process I/E/MGARCH processes non-linear models regime-switching models variants volatility general Wiener process application fractional Brownian motion gamma processes geometric Wiener process Itô Lemma Itô process jump processes volatility modeling see also standard Wiener process geometric average geometric Wiener process German Bund see Bund (German T-Bond) global VaR Gordon–Shapiro method government bonds Greece Greeks see sensitivities Hard Call protection Heath, Jarrow and Morton (HJM) model Heaviside function hedging bond futures delta-gamma neutral management futures 129–30 immunization vs hedging money market rate futures stock index futures heteroskedasticity hidden layers, NNs high frequency trading “high” prices historical method, VaR historical volatility HJM see Heath, Jarrow and Morton model Ho and Lee model Hull and White model Hurst coefficient IGARCH see integrated GARCH process immunization implied correlation implied repo rate (IRR) implied volatility definition historical volatility surface volatility curves volatility smiles in-arrear swaps indexes basket options capitalization-weighted price/value-weighted see also stock indexes inflation-linked bonds inflation swaps Information Ratio (IR) initial margin in the money (ITM) caps convertible bonds deep ITM options innovation term, AR instantaneous returns integrated GARCH (IGARCH) process interbank rates see EURIBOR rates; LIBOR rates interest rate options BDT process Black and Karasinski model caps collars floors forward rates HJM model LMM model single rate processes swaptions yield curve modeling interest rates day counting discount factors futures FV/PV interest compounding IRSs options short-term spot rates term structure see also yield interest rate swaps (IRSs) bond duration and CRSs fixed/floating rates pricing methods prior to swap pricing method revaluation vanilla swaps yield curve see also constant maturity swaps intermediate period, FRAs International Swaps and Derivatives Association (ISDA) intraday margining settlements intraday volatility investor decision-making IR see Information Ratio IRR see implied repo rate IRSs see interest rate swaps ISDA see International Swaps and Derivatives Association ITM see in the money Itô process Itô’s Lemma Japanese yen (JPY) Jarrow, Robert A.

Against Everything: Essays by Mark Greif

1960s counterculture, back-to-the-land, Bernie Madoff, Black Lives Matter, bread and circuses, citizen journalism, collateralized debt obligation, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Desert Island Discs, Donald Trump, fixed-gear, income inequality, informal economy, Joan Didion, managed futures, Norman Mailer, Ponzi scheme, postindustrial economy, Ronald Reagan, technoutopianism, telemarketer, trickle-down economics, upwardly mobile, white flight

Here are the names of some significant bands, post-2004: Grizzly Bear, Neon Indian, Deerhunter, Fleet Foxes, Department of Eagles, Wolf Parade, Band of Horses, and, most centrally, Animal Collective. (On the electronic-primitive side, LCD Soundsystem.) Listeners heard animal sounds and lovely Beach Boys–style harmonies; lyrics and videos pointed to rural redoubts, on wild beaches and in forests; life transpired in some more loving, spacious, and manageable future, possibly of a Day-Glo or hallucinatory brightness. It was not unheard of to find band members wearing masks or plush animal suits. Where the White Hipster was relentlessly male, crowding out women from public view (except as Polaroid muses or Suicide Girls), the Hipster Primitive feminized hipster markers; one spoke now of headdresses and Sally Jessy Raphael glasses, not just male facial hair.

Nation-Building: Beyond Afghanistan and Iraq by Francis Fukuyama

Berlin Wall, business climate, colonial rule, conceptual framework, en.wikipedia.org, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Future Shock, Gunnar Myrdal, informal economy, land reform, managed futures, microcredit, open economy, operational security, rolling blackouts, Seymour Hersh, unemployed young men

Training The U.S. government requires the capacity to prepare agency officials for the responsibilities they will be expected to take on in planning and managing agency efforts in a complex contingency operation. Creating a cadre of professionals familiar with this integrated planning process will improve the U.S. government’s ability to manage future operations. In the interest of advancing the expertise of government officials, agencies are encouraged to disseminate the Handbook for Interagency Management of Complex Contingency Operations published by the National Defense University in January 2003. With the support of the State and Defense Departments, the PDD requires the NSC to work with the appropriate U.S. government educational institutions—including the National Defense University, the National • 101 • • Michèle A.

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster by Nick Timiraos

"World Economic Forum" Davos, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, Bernie Sanders, bitcoin, Black Monday: stock market crash in 1987, Bonfire of the Vanities, break the buck, central bank independence, collapse of Lehman Brothers, collective bargaining, coronavirus, corporate raider, COVID-19, credit crunch, cryptocurrency, Donald Trump, fear index, financial innovation, financial intermediation, full employment, George Akerlof, George Floyd, global pandemic, global supply chain, Greta Thunberg, implied volatility, income inequality, inflation targeting, inverted yield curve, junk bonds, lockdown, Long Term Capital Management, low interest rates, managed futures, margin call, meme stock, money market fund, moral hazard, non-fungible token, oil shock, Phillips curve, price stability, pushing on a string, quantitative easing, Rishi Sunak, risk tolerance, rolodex, Ronald Reagan, Savings and loan crisis, secular stagnation, Skype, social distancing, subprime mortgage crisis, Tesla Model S, too big to fail, unorthodox policies, Y2K, yield curve

They failed spectacularly, causing a run on the lenders that had financed the scheme, which in turn instigated a more generalized panic. Over the next few weeks, New York City’s third-largest trust and numerous regional banks failed. The crisis subsided only after the financier J. P. Morgan put up a large sum of his own money to stabilize banks. Relying on the country’s wealthiest citizens to manage future crises was clearly no way to run a national financial system. Lawmakers began a series of negotiations, encouraged by Wall Street financiers, which in 1913 led to the creation of America’s own central bank: the Federal Reserve. From its beginning, the Fed was criticized by populists as too close to wealthy banking interests, but the institution was also relatively weak.

Trading Risk: Enhanced Profitability Through Risk Control by Kenneth L. Grant

backtesting, business cycle, buy and hold, commodity trading advisor, correlation coefficient, correlation does not imply causation, delta neutral, diversification, diversified portfolio, financial engineering, fixed income, frictionless, frictionless market, George Santayana, global macro, implied volatility, interest rate swap, invisible hand, Isaac Newton, John Meriwether, Long Term Capital Management, managed futures, market design, Myron Scholes, performance metric, price mechanism, price stability, proprietary trading, risk free rate, risk tolerance, risk-adjusted returns, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, two-sided market, uptick rule, value at risk, volatility arbitrage, yield curve, zero-coupon bond

By comparing the worst of these to 72 TRADING RISK your annual returns, you provide yourself with a uniquely effective manner in which to express the risks and rewards in your portfolio, one that does not rely in any way, shape, or form on assumptions about the distribution of your returns. For many professional trading accounts, including those tied to feebased structures typically associated with the hedge funds and managed futures, portfolio managers are only paid for incremental performance. One very meaningful implication of this is that between periods where returns are calculated, if you are operating under this framework, you will not be paid for the revenues you have earned in recovering from a drawdown. This, in turn, has important implications for portfolio management.

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

affirmative action, Albert Einstein, asset allocation, backtesting, beat the dealer, behavioural economics, Black Swan, Black-Scholes formula, Bonfire of the Vanities, book value, butterfly effect, commoditize, commodity trading advisor, computer age, computerized trading, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, Edward Thorp, family office, financial engineering, financial innovation, fixed income, frictionless, frictionless market, Future Shock, George Akerlof, global macro, implied volatility, index arbitrage, intangible asset, Jeff Bezos, Jim Simons, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, loose coupling, managed futures, margin call, market bubble, market design, Mary Meeker, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, Myron Scholes, new economy, Nick Leeson, oil shock, Paul Samuelson, Pierre-Simon Laplace, proprietary trading, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Solow, rolodex, Saturday Night Live, selection bias, shareholder value, short selling, Silicon Valley, statistical arbitrage, tail risk, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, UUNET, William Langewiesche, yield curve, zero-coupon bond, zero-sum game

For example, the Standard & Poor’s Hedge Fund Index has three styles: arbitrage, event-driven, and directional/tactical. Each of these styles has three strategic subsets. Arbitrage consists of equity market neutral, fixed income arbitrage, and convertible arbitrage; event-driven has merger arbitrage, distressed, and special situations; directional/tactical has long/short equity, managed futures, and macro. The problem with this sort of classification, based as it is strictly on the trading style or strategy type, is that it has to be revised over time as new strategies emerge and existing ones fail. An alternative classification matrix, which I developed in 2001, attempts to overcome this problem, but in so doing reveals the existential issue for hedge funds.1 This approach classifies hedge funds by five characteristics: 1.

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

affirmative action, Alan Greenspan, Albert Einstein, Andrei Shleifer, barriers to entry, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Boeing 747, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Cass Sunstein, central bank independence, classic study, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, Great Leap Forward, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, junk bonds, Kenneth Rogoff, libertarian paternalism, low interest rates, low skilled workers, Malacca Straits, managed futures, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, school vouchers, seminal paper, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, tech worker, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

Analysts provide all kinds of legitimate information, just like your real estate agent. When you are shopping for a home, your agent can tell you about neighborhoods, schools, taxes, crime—the kinds of things that matter. Wall Street analysts do the same things for companies; they report on management, future products, the industry, the competition. But that does nothing to guarantee that you are going to earn an above-average return on the stock. The problem is that everyone else has access to the same information. This is the essence of the efficient markets theory. The main premise of the theory is that asset prices already reflect all available information.

World Cities and Nation States by Greg Clark, Tim Moonen

active transport: walking or cycling, Asian financial crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, business climate, clean tech, congestion charging, corporate governance, Crossrail, deindustrialization, Deng Xiaoping, driverless car, financial independence, financial intermediation, Francis Fukuyama: the end of history, full employment, gentrification, global supply chain, global value chain, high net worth, high-speed rail, housing crisis, immigration reform, income inequality, informal economy, Kickstarter, knowledge economy, low skilled workers, managed futures, megacity, megaproject, new economy, New Urbanism, Norman Mailer, open economy, Pearl River Delta, rent control, Richard Florida, Shenzhen special economic zone , Silicon Valley, smart cities, sovereign wealth fund, special economic zone, stem cell, supply-chain management, tacit knowledge, The Wealth of Nations by Adam Smith, trade route, transaction costs, transit-oriented development, upwardly mobile, urban planning, urban renewal, urban sprawl, War on Poverty, zero-sum game

Although, unlike other world cities, Singapore does not have development spillover within its national territory, it does face the task of building a constructive and complementary relationship with Indonesia and Malaysia. However, its future challenges can potentially be addressed through its capable city‐state government in a more coherent way than they can be addressed in most other world cities. Solutions to manage future population growth As a result of increased immigration since the 2000s, Singapore’s population has grown rapidly. Forecast to reach almost 7 million people by 2030, the city’s transport system is increasingly congested, while house prices have gone up as the HDB has struggled with supply. This has put increasing pressure on land supply, including protected areas.

Buy Now, Pay Later: The Extraordinary Story of Afterpay by Jonathan Shapiro, James Eyers

Airbnb, Alan Greenspan, Apple Newton, bank run, barriers to entry, Big Tech, Black Lives Matter, blockchain, book value, British Empire, clockwatching, cloud computing, collapse of Lehman Brothers, computer age, coronavirus, corporate governance, corporate raider, COVID-19, cryptocurrency, delayed gratification, diversification, Dogecoin, Donald Trump, Elon Musk, financial deregulation, George Floyd, greed is good, growth hacking, index fund, Jones Act, Kickstarter, late fees, light touch regulation, lockdown, low interest rates, managed futures, Max Levchin, meme stock, Mount Scopus, Network effects, new economy, passive investing, payday loans, paypal mafia, Peter Thiel, pre–internet, Rainbow capitalism, regulatory arbitrage, retail therapy, ride hailing / ride sharing, Robinhood: mobile stock trading app, rolodex, Salesforce, short selling, short squeeze, side hustle, Silicon Valley, Snapchat, SoftBank, sovereign wealth fund, tech bro, technology bubble, the payments system, TikTok, too big to fail, transaction costs, Vanguard fund

They worried that Afterpay’s model was unproven, and that it did not rely on credit checks. Citibank was also one of the largest players in the credit card market, and there were concerns the bank was funding a new competitor for itself. But the lending relationship put Citi in the box seat to manage future lucrative capital raisings and other deals. Afterpay had the makings of an ideal client. Other brokers were jockeying to help the Afterpay founders place some of their stock in the market. And if the market wasn’t fully alert to the possibility that Eisen and Molnar would soon be free to sell their shares, Hancock’s April 2018 update spelt it out.

The Content Trap: A Strategist's Guide to Digital Change by Bharat Anand

Airbnb, Alan Greenspan, An Inconvenient Truth, AOL-Time Warner, Benjamin Mako Hill, Bernie Sanders, Clayton Christensen, cloud computing, commoditize, correlation does not imply causation, creative destruction, crowdsourcing, death of newspapers, disruptive innovation, Donald Trump, driverless car, electricity market, Eyjafjallajökull, fulfillment center, gamification, Google Glasses, Google X / Alphabet X, information asymmetry, Internet of things, inventory management, Jean Tirole, Jeff Bezos, John Markoff, Just-in-time delivery, Kaizen: continuous improvement, Khan Academy, Kickstarter, late fees, managed futures, Mark Zuckerberg, market design, Minecraft, multi-sided market, Network effects, post-work, price discrimination, publish or perish, QR code, recommendation engine, ride hailing / ride sharing, Salesforce, selection bias, self-driving car, shareholder value, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Skype, social graph, social web, special economic zone, Stephen Hawking, Steve Jobs, Steven Levy, Stuart Kauffman, the long tail, Thomas L Friedman, transaction costs, two-sided market, ubercab, vertical integration, WikiLeaks, winner-take-all economy, zero-sum game

Dead trees would serve as fuel for future fires, increasing the park’s vulnerability. Soil erosion would increase, filling rivers with silt, and killing fish. And visitors to the park would decrease, possibly in dramatic numbers. The Yellowstone fires of 1988 seem a lesson in management—in what not to do. And they hold hugely important lessons for managing future fires not just in Yellowstone but in other parks. They also contain lessons for managers in faraway arenas like media and entertainment, which have been experiencing “digital fires” for more than two decades. Consider benign triggers . Three friends, all early employees of PayPal, try to find video clips of certain events online, leading them to create a video-sharing site—YouTube—that jump-starts the digital video-sharing industry.

Investment: A History by Norton Reamer, Jesse Downing

activist fund / activist shareholder / activist investor, Alan Greenspan, Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, book value, break the buck, Brownian motion, business cycle, buttonwood tree, buy and hold, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, Cornelius Vanderbilt, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, dogs of the Dow, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, family office, Fellow of the Royal Society, financial innovation, fixed income, flying shuttle, Glass-Steagall Act, Gordon Gekko, Henri Poincaré, Henry Singleton, high net worth, impact investing, index fund, information asymmetry, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, John Bogle, joint-stock company, Kenneth Rogoff, labor-force participation, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, low interest rates, managed futures, margin call, means of production, Menlo Park, merger arbitrage, Michael Milken, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Network effects, new economy, Nick Leeson, Own Your Own Home, Paul Samuelson, pension reform, Performance of Mutual Funds in the Period, Ponzi scheme, Post-Keynesian economics, price mechanism, principal–agent problem, profit maximization, proprietary trading, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Sand Hill Road, Savings and loan crisis, seminal paper, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spinning jenny, statistical arbitrage, survivorship bias, tail risk, technology bubble, Teledyne, The Wealth of Nations by Adam Smith, time value of money, tontine, too big to fail, transaction costs, two and twenty, underbanked, Vanguard fund, working poor, yield curve

See also usury interest rates: in China, 29; in Egypt, 23–24; Federal Reserve and, 198; in fiat systems, 201; Great Depression and, 106–7; savings and, 114, 135–36, 205; swaps, 183 Index 425 interisse, 35 international reply coupon, 156–57 inventions, 80–81, 89–90, 332 investment: definition of, 2; professionalization of, 123; theory, 9; vehicles, types of, 10 investment advisers, 137–39 Investment Advisers Act of 1940, 142, 275 Investment Company Act of 1940, 142, 286 Investment Company Institute, 114 investment management: future developments in, 10–11; issues in, 2; views on, 69 investment managers: highestpaid, 304–6, 307; independence and entrepreneurship of, 3, 10, 291–300, 300, 315–16, 319; revenue growth and wealth creation for, 303–8; successful, 10–11; investment partnerships, 51–55; formation of, 258; global influences on, 54–55; Islamic societies and, 53; medieval Europe and, 53–54; in Mediterranean Sea and Middle East, 51–52 investment principles, 3–7, 332–34; financial leverage as, 5–6, 333; fundamental value as, 4–5, 333; real ownership as, 4, 333; resource allocation as, 6–7, 334 investment professionals: performance of, 247–55; relationships with, 10 Investors Diversified Services (IDS), 142–43 Ira Haupt & Company, 168 IRAs.

Hedge Fund Market Wizards by Jack D. Schwager

asset-backed security, backtesting, banking crisis, barriers to entry, Bear Stearns, beat the dealer, Bernie Madoff, Black-Scholes formula, book value, British Empire, business cycle, buy and hold, buy the rumour, sell the news, Claude Shannon: information theory, clean tech, cloud computing, collateralized debt obligation, commodity trading advisor, computerized trading, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, do what you love, Edward Thorp, family office, financial independence, fixed income, Flash crash, global macro, hindsight bias, implied volatility, index fund, intangible asset, James Dyson, Jones Act, legacy carrier, Long Term Capital Management, managed futures, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, merger arbitrage, Michael Milken, money market fund, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, proprietary trading, quantitative easing, quantitative trading / quantitative finance, Reminiscences of a Stock Operator, Right to Buy, risk free rate, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Rubik’s Cube, Savings and loan crisis, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

He has never had a down year, and has been able to combine a solid 17.2 percent average annual compounded net return (25.7 percent gross) with relatively low volatility and moderate drawdowns. Return alone is a highly inadequate metric for a futures manager because it is so dependent on the exposure level chosen by the manager. Futures managers always use only a fraction of assets under management to meet margin requirements. Therefore, any futures manager can double returns by simply doubling exposure without any need for borrowing. High return could just as easily represent excessive risktaking rather than manager skill.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, Alan Greenspan, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black-Scholes formula, Bob Litterman, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial engineering, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, Glass-Steagall Act, global macro, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low skilled workers, managed futures, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, National best bid and offer, negative equity, Northern Rock, Occupy movement, oil shock, price stability, proprietary trading, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, tail risk, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

A quant crisis is one that affects quantitative money managers, vaguely defined as any portfolio managers that use a quantitative system to manage trades, rather than a human-based security-picking system. The quant world includes various types of managers, including those in charge of statistical arbitrage hedge funds, many managed futures funds, and a large class of long-short or market-neutral equity funds. This quant crisis mainly affected funds using quantitative equity strategies. In 2007, the leading quant portfolio companies were Barclays Global Investors (BGI), Goldman Sachs Asset Management (GSAM), State Street, Morgan Stanley’s Process Driven Trading (PDT) group, AQR, First Quadrant, Analytic Investors, AXA Rosenberg, Panagora, Mellon Capital, Acadian, Analytic, and Numeric.

This Changes Everything: Capitalism vs. The Climate by Naomi Klein

"World Economic Forum" Davos, 1960s counterculture, activist fund / activist shareholder / activist investor, An Inconvenient Truth, Anthropocene, battle of ideas, Berlin Wall, Big Tech, big-box store, bilateral investment treaty, Blockadia, Boeing 747, British Empire, business climate, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, carbon footprint, carbon tax, clean tech, clean water, Climategate, cognitive dissonance, coherent worldview, colonial rule, Community Supported Agriculture, complexity theory, crony capitalism, decarbonisation, degrowth, deindustrialization, dematerialisation, different worldview, Donald Trump, Downton Abbey, Dr. Strangelove, electricity market, energy security, energy transition, equal pay for equal work, extractivism, Exxon Valdez, failed state, fake news, Fall of the Berlin Wall, feminist movement, financial deregulation, food miles, Food sovereignty, gentrification, geopolitical risk, global supply chain, green transition, high-speed rail, hydraulic fracturing, ice-free Arctic, immigration reform, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the steam engine, invisible hand, Isaac Newton, James Watt: steam engine, Jones Act, Kickstarter, Kim Stanley Robinson, land bank, light touch regulation, man camp, managed futures, market fundamentalism, Medieval Warm Period, Michael Shellenberger, military-industrial complex, moral hazard, Naomi Klein, new economy, Nixon shock, Occupy movement, ocean acidification, off-the-grid, offshore financial centre, oil shale / tar sands, open borders, patent troll, Pearl River Delta, planetary scale, planned obsolescence, post-oil, precautionary principle, profit motive, quantitative easing, race to the bottom, Ralph Waldo Emerson, Rana Plaza, remunicipalization, renewable energy transition, Ronald Reagan, Russell Brand, scientific management, smart grid, special economic zone, Stephen Hawking, Stewart Brand, structural adjustment programs, Ted Kaczynski, Ted Nordhaus, TED Talk, the long tail, the scientific method, The Wealth of Nations by Adam Smith, trade route, transatlantic slave trade, trickle-down economics, Upton Sinclair, uranium enrichment, urban planning, urban sprawl, vertical integration, Virgin Galactic, wages for housework, walkable city, Washington Consensus, Wayback Machine, We are all Keynesians now, Whole Earth Catalog, WikiLeaks

Wired, August 5, 2009; NOT AN INVESTOR IN BIOFUEL PROJECTS: personal email communication with Freya Burton, director of European relations, LanzaTech, April 18, 2014; Ross Kelly, “Virgin Australia Researching Eucalyptus Leaves as Jet Fuel,” Wall Street Journal, July 6, 2011; email communication, communications manager, Future Farm Industries Cooperative Research Center, April 29, 2014; “HASN’T”: Branson, Screw It, Let’s Do It, 132; BIOFUELS STALLED: “What Happened to Biofuels?” The Economist, September 7, 2013; “INCREASINGLY CLEAR”: personal email communication with Richard Branson, May 6, 2014; FOOTNOTE: National Research Council, Renewable Fuel Standard: Potential Economic and Environmental Effects of U.S.

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

"Friedman doctrine" OR "shareholder theory", "RICO laws" OR "Racketeer Influenced and Corrupt Organizations", Alan Greenspan, asset-backed security, Bear Stearns, Bernie Madoff, Bob Litterman, book value, business cycle, buttonwood tree, buy and hold, collateralized debt obligation, Cornelius Vanderbilt, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, deal flow, diversified portfolio, do well by doing good, fear of failure, financial engineering, financial innovation, fixed income, Ford paid five dollars a day, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, junk bonds, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, managed futures, margin call, market bubble, mega-rich, merger arbitrage, Michael Milken, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, proprietary trading, risk tolerance, Ronald Reagan, Saturday Night Live, short squeeze, South Sea Bubble, tail risk, time value of money, too big to fail, traveling salesman, two and twenty, value at risk, work culture , yield curve, Yogi Berra, zero-sum game

That idea was off the table, he said, although Goldman might consider a few smaller acquisitions, especially among asset managers, where Goldman was still trying to grow the $160 billion it had under management. “We will have some new strategic opportunities, and we will go into acquisition mode,” he said. “I am not talking about mergers, but acquisitions.” As an example, Corzine could have mentioned Goldman’s May 1997, roughly $100 million acquisition of Commodities Corporation, a $2 billion managed futures, commodities, and currencies hedge fund based in Princeton, New Jersey, that counted among its founders Paul Samuelson, Larry Summers’s uncle. —— INTERNECINE WARFARE ASIDE, in the aftermath of the IPO announcement, Goldman Sachs seemed to be floating on a cloud: the partners were united behind a task (underwriting an IPO) for which they were the world’s experts and behind a cause (themselves) that provided them with all the incentive they could ever need to execute flawlessly.

The Prize: The Epic Quest for Oil, Money & Power by Daniel Yergin

anti-communist, Ascot racecourse, Ayatollah Khomeini, bank run, Berlin Wall, book value, British Empire, Carl Icahn, colonial exploitation, Columbine, continuation of politics by other means, cuban missile crisis, disinformation, do-ocracy, energy security, European colonialism, Exxon Valdez, financial independence, fudge factor, geopolitical risk, guns versus butter model, Ida Tarbell, informal economy, It's morning again in America, joint-stock company, junk bonds, land reform, liberal capitalism, managed futures, megacity, Michael Milken, Mikhail Gorbachev, Monroe Doctrine, new economy, North Sea oil, oil rush, oil shale / tar sands, oil shock, old-boy network, postnationalism / post nation state, price stability, RAND corporation, rent-seeking, Ronald Reagan, shareholder value, stock buybacks, Suez canal 1869, Suez crisis 1956, Thomas Malthus, tontine, vertical integration, Yom Kippur War

The worry about too much Soviet oil coming into world markets—which animated so many critical events in the history of oil—could be turned upside down in the 1990s by significant shortfalls. Yet ultimately, if development proceeds, the Soviet Union could end up an even more important exporter. If there are new surprises, new crises, how well prepared are we? After the 1973 oil shock, it was clear that the oil companies could not and would not manage future crises by themselves, and that it was up to governments to take on that role. In the years since, the industrial countries have developed an energy security system built around the International Energy Agency and the strategic stockpiles, such as the U.S. Strategic Petroleum Reserve and similar reserves in Germany and Japan, which can be brought into play to avert a shortfall and counteract a panic.