Michael Covel: News & Info.

I moderated a panel yesterday on systematic trading in Austin, Texas. The panel included Salem Abraham. If you ever get the chance to meet Salem or hear him talk, take it. He is easily one of the most interesting people and trend followers you will meet.

This event was put on by The University of Texas MBA Hedge Fund Organization and brings together “names” in the industry every year. This year the keynote was given by Byron Wien the Chief Investment Officer of Pequot Capital Management. Wien is formerly of Morgan Stanley.

As I mentioned earlier, my alma mater George Mason is more known for their economics department (one with a certain libertarian flavor) than their sports department. In today’s Washington Post, one of their writers ties in Mason’s economics team to the current sports run (PDF). An excerpt:

“Think of a basketball game as a vastly simplified proxy for the real world. There are laws that govern behavior (the rulebook), people who enforce those laws (referees), and a way to measure who is succeeding and who isn’t (the score). Just as lawmakers can change the way wealth is distributed by changing tax and other rules, changes to the rules of basketball can have sometimes unpredictable effects on what teams score the most, and how. Peter Boettke, a George Mason economist and avid basketball fan, offers an outlandish example: “I can change one rule in basketball and Michael Jordan will no longer be the best basketball player of all time. You could change the rules to require the game be played on stiletto heels. Then Cindy Crawford would be the best player.”

Here is a starting point for checking out economics/behavior research at George Mason University.

Investment banks spend millions upon millions to produce research. J.P. Morgan Securities Ltd. recently produced “Volatility, Leverage and Returns”. Read PDF. An excerpt:

“We find, though, that active managers of bond and hedge funds earn lower alpha when volatility rises unexpectedly. This is because many are structurally long risky assets that get hurt when volatility rises. Alpha returns when volatility stops rising and becomes high only when volatility starts falling again.”

Of course, much of this report is the opposite of a trend following thought process.

I am reading a new book titled “What We Believe but Cannot Prove: Today’s Leading Thinkers on Science in the Age of Certainty”. Definitely pick it up. Quick read, but thought provoking. One description of the book:

“In this informative and often surprising book, more than 100 notable scientists and scholars answer the question, “What do you believe even though you cannot prove it?” The responses range from the thought-provoking to seemingly trivial (or just plain silly). Professor of cosmology and astrophysics Martin Rees, for example, admits that he believes intelligent life is unique to our world (in sharp contrast to many of his fellow contributors). Alun Anderson, senior consultant to New Scientist magazine, believes cockroaches are conscious. Mathematician and science-fiction novelist Rudy Rucker believes in a multiplicity of universes. Susan Blackmore, who has written widely on the subject of consciousness, appears to believe that she doesn’t exist. The contributors touch on a broad spectrum of subjects, from religion to science and many points in between. Although some of the responses are arrogant or nitpicky, the majority are thoughtful, honest, and revelatory of the contributors’ own intellectual and philosophical biases. And the book certainly gets us thinking about our own deeply held, if entirely unprovable, beliefs.”

A recent article of mine on skill-based trading (PDF).

I have been very lucky to receive support from numerous banks and hedge funds in the form of bulk book buying. More than a few funds and banks have bought my book as a required text for their traders. Last year one trading firm bought 1000 copies of “Trend Following”. I still don’t know anything about their firm or anything about their business. Along those lines, feedback from tonight:

“Let me first just say that I work as an energy trader for a large investment bank and have read many books written directly or indirectly about trading and have found your book on trend following to be one of the best I’ve read on the subject. Furthermore, I may push to have all of our junior traders in the group read it.”

A good question that was posed to David Harding of Winton Capital and his answer:

Q: Are you convinced that your investors really do understand the risks that you’re taking with their funds?

David Harding: Investors, as I said before, are all different. Some have a greater appreciation and some a lesser appreciation. I think all of the investors are aware in theory of the risks that we are taking. But I think that when it comes to actual losses, loss-making periods, losing months, often that theoretical understanding dissolves into a not instinctive understanding. Every investor that has been through our offices, or has seen one of our sales representatives, will have been shown a chart that shows that we have a semi-variance of daily returns of 1.35 per cent. That translates to about 22-23 per cent a year; the same level of risk, roughly, as the UK stock market or the US stock market. Nobody expects the UK or US stock market to go up day after day after day, or month after month after month. Everybody expects there will be bull markets. There will be periods, sometimes long periods, where the market goes sideways.

An article about famed trader Bruce Kovner (PDF) worth reading. Kovner was heavily influenced by Michael Marcus who in turn was influenced by Ed Seykota. These connections are all made in Market Wizards. The trading community is a very small group…

My school George Mason just beat UConn to advance to the Final Four. That has to be one of the biggest upsets in NCAA history.

An excerpt from Reminiscences of a Stock Operator:

“My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision. All my life I have made mistakes, but in losing money I have gained experience and accumulated a lot of valuable don’ts. I have been flat broke several times, but my loss has never been a total loss. Otherwise, I wouldn’t be here now. I always knew I would have another chance and that I would not make the same mistake a second time. I believed in myself. A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip I must sell those same stocks on Smith’s tip. I am depending on him. Suppose Smith is away on a holiday when the selling time comes around? No, sir, nobody can make big money on what someone else tells him to do. I know from experience that nobody can give me a tip or a series of tips that will make more money for me than my own judgment. It took me five years to learn to play the game intelligently enough to make big money when I was right.”