Follow along with this chain of events:
1. I made this post in November about Geetesh Bhardwaj at AIG who was criticizing trend followers.
2. Within a few weeks of my original post I noted on a new post that Geetesh Bhardwaj was now at Vanguard. Trend followers make fortunes in October 2008 and a mutual fund that has just been devastated is leveling criticism. I thought it was odd to say the least.
Now? The author Geetesh Bhardwaj has clearly noticed that I have been posting about him and his work. He posted here today:
If my affiliation is the only criticism that you have of the results, I am vindicated. So stop taking about who I work for and start justifying the industry wide Sharpe Ratio of 0.09 to your invstors [sic]. You have been stealing investor money for too long, 2-20 for trend following really?????
Let me get this straight:
1. Bhardwaj worked at AIG until a few weeks ago.
2. Bhardwaj now works at an index mutual fund - Vanguard.
3. Bhardwaj, who clearly wants to show off his intellectual prowess, thinks the Sharpe ratio is a fair measure of trend following traders. It is not. Read (PDF).
Bhardwaj is a pawn of the mutual fund industry. The mutual fund industry spends millions through lobbying in Washington and propaganda (i.e “academic research”) to keep trend following traders from advertising their performance. Why do this? The mutual fund industry has a stranglehold on the average investor that they don’t want to lose. They keep the average guy stuck in ‘long only’ dead-end strategies to spin off their massive fees. Bhardwaj is no prophet. His attack is transparent and ignorant. When the immediate retort back is, “Sharpe Ratio”, you know the dice were loaded.
December 11th, 2008 at 3:45 pm
I also find it odd that Geetesh Bhardwaj uses the word “steal”. Trend traders with performance for all of the world to see, month by month, are apparently “stealing”. The only people stealing are the mutual funds Bhardwaj works for. Those mutual funds have taken billions in fees over the last decade and delivered NOTHING.
December 11th, 2008 at 3:56 pm
The Sharpe ratio would penalize trend traders for their outsized positive performance for Oct and Nov 08, correct?
December 11th, 2008 at 5:29 pm
What a joke!
I suppose Victor Niederhoffer is a hero in Bhardwaj’s eyes-
The trend following success story is one that has been overlooked and this year in particular has settled the outcome once and for all that technical trend traders do have the edge.
December 12th, 2008 at 12:10 am
Just another hack AIG “employee” who got fired and doesn’t deserve a rebuttal. Empirical scientific evidence trumps subjective and flawed opinion. Furthermore AIG is hemorrhaging another 10 billion on credit default swaps and top management just received another 4 million dollar retention package AKA bonus. I too would be embarrassed if I worked as investment specialist for AIG.
December 12th, 2008 at 12:34 am
Dear Michael, Please do not waste time on justifying trend following and/or giving importance to idiots and nincompoops like Geetesh. When the market trends up, people like him think that they made the money. But when markets trend down, they will try and deride everyone who makes money. He is not worth wasting your time on.
December 12th, 2008 at 12:41 am
JBajaj I really don’t view as a waste of time. You need people like this to make points. He is helpful in that sense!
December 12th, 2008 at 12:43 am
Remember guys like this are actually listened to. So when they do something dumb, like post a whiny comment on my blog, a comment that makes all of his academic “credentials” hanging around the web look suspect, I like to throw the punch so to speak.
December 12th, 2008 at 1:55 am
Dear Michael, what I actually meant that please do not waste time in converting him to being a trend follower. No matter how much the facts stare in his face, it is unikely that he will view them in the right perspective. I was actually provoked and outraged at his using the word “steal” - by his definition, anybody (other than him) or rather anybody who makes money by not following his method (sic) has no right to being in the market.
December 12th, 2008 at 2:27 am
JBajaj good point!
December 12th, 2008 at 10:18 am
Bharadwaj worked for AIG, then quit to join Vanguard.
Cut your losses short and run with the winners as they say.
Obviously, Mr Bharadwaj seems to be a trend-follower when it comes to his career choices.
Apparently, buy-and-hold does not work with career choices. And neither does it work with investments.
Also, what would be the Sharpe-ratio of buy-holders for 2008 ? Oh… never mind.
December 12th, 2008 at 11:23 am
So called “Trend Followers”, you do not UNDERSTAND Sharpe Ratio (and how we calculated it, please read the paper first), do you want to talk about returns. Let us talk about returns that investors are getting, that should be simple enough even for you guys. Or do you have a problem with that as well. For the period of study 1994-2007, the average annualized returns for your investors above the risk free rate was 85 basis points. Remember the study did not cover 2008. Where you got killed, well you still made money (at least 2%) THE INVESTORS GOT KILLED. You have been stealing money for too long and now some one is saying that you have been. It hearts and you are in pain and respond by taking cheap shots at me. I understand. Now stop your cheap shots and start justifying to your investors why they made 85 basis points over the period 94-07. Wait till I update the data for 2008 and tell them they did not even make 85 basis points, they lost money investing with you as an asset class.
Our finding is perhaps even more striking considering the broader historical context of commodity funds provided by the studies of Elton, Gruber and Renzler (EGR 1987, 1989, 1990). They studied the performance of publicly traded commodity funds between 1979 and 1985, and document a similarly poor performance in their earlier sample. EGR attributed the existence and persistence of poorly-performing CTAs to misinformation. They find that no fund is able to outperform its prospectus track record. EGR concluded that the historical returns series provided in the prospectuses of public commodity funds were misleading. The past performance was unreasonably upward biased and investors had no other information to rely on.
The EGR studies were widely reported on in the press, sometimes in scathing terms. See, for example, Newswire (September 18, 1986), the Wall Street Journal (September 29, 1986), the Toronto Star (October 5, 1986), Chicago-Sun Times (November 17, 1986), the Washington Post (March 1, 1987, September 28, 1987), the St. Petersburg Times (September 26, 1987), the San Francisco Chronicle (October 5, 1987), the New York Times (August 20, 1988), Business Week (November 28, 1988), The Economist (December 1, 1990), Forbes (September 2, 1991). As an example, here is one part of an article on their studies by Jane Bryant Quinn in the San Francisco Chronicle (February 21, 1989):
The larger - and more intractable - scandal lies in the entirely legal deceptions that surround the selling of commodities funds in the first place. Brokerage firms mislead you as a matter of course, with the full approval of the market’s so-called regulators.
The problems lie in the sales brochures and prospectuses for new commodities funds. They “disclose” the portfolio manager’s past performance, which is never anything less than spectacular. Gains may be claimed of 50 percent, 60 percent, even 70 percent a year.
But those astonishing track records can be a clever form of fiction. They’re not wrong, exactly. But they’re biased and misleading. They greatly exaggerate the manager’s chance of success.
For proof, I give you a study by three New York professors - Edwin Elton and Martin Gruber of New York University’s Graduate School of Business, and Joel Rentzler of the Baruch College of the City University of New York. They took 77 new commodity funds, and compared the managers’ past performance with how well the funds actually did in practice. The verdict: disaster.
December 12th, 2008 at 11:45 am
this might be dumb, but:
comparing the performance of a trend follower and a CTA isn’t really the same thing, is it? a CTA doesn’t have to be a trend follower, right?
December 12th, 2008 at 11:51 am
So the performance data in my books is fiction? Apparently when someone calls you out it is a cheap shot? But everyone else is stealing money? You do realize that all of this rambling like a mad man stays around forever?
December 12th, 2008 at 12:13 pm
Andy you are right, we never said we are analysing trend followers, We looked at CTAs, Mr Covel decided to make it sound like we are talking about Trend followers. That is why I put trend followers in quots. The study is about CTA. And it goes back to the old literature on CTA that is guoted above.
December 12th, 2008 at 12:15 pm
Even the title of the paper says CTAs.
December 12th, 2008 at 12:21 pm
The vast majority of CTAs are trend followers. Write a paper on “CTAs” invariably covering trend followers.
December 12th, 2008 at 12:23 pm
Mr Covel an academic paper stays around for ever and is an open book. So I am not worried about it staying for ever. The paper is in public domain with all its results. Here I have just restated the results. The data is also in public domain for every one to check. Good luck to you.
December 12th, 2008 at 12:49 pm
Restated the results? You are just a nice simple academic guy putting out the “numbers”? While at the same time throwing around the word “steal”? Intelligent people see your argument holes and your motivations.
December 12th, 2008 at 5:22 pm
Ahhh, now I get it. The buy and hold crowd justifies their 50% drawdowns and 0% 10-yr total return by the Sharpe ratio, of course! I can hear the funds on the phone with their investors now, “Yes you’ve lost half your money in the last year and you have made nothing in 10yrs but don’t worry, the Sharpe ratio was good!”, lol. Is this what Vanguard means by “sensible buy and hold”? If the Sharpe ratio is good then it must be sensible, returns and drawdowns be damned!
December 12th, 2008 at 6:36 pm
I am confused as to what your purpose of the article was, Geetesh? To be ingenuous, I dont think most people can afford to hire a CTA to begin with. Nor would I suspect that most people have heard of a CTA or any big names in the field. I was only able to read the abstract of your paper, but what is it about CTAs, as a whole, that they fail to make standard returns?
December 13th, 2008 at 8:04 am
Dear Mr Covel, I did not realize I was trying to have a conversation with some one who likes to call himself “Intelligent”. I rest my case, good luck to you, and good-bye.
December 13th, 2008 at 12:16 pm
I guess that means my questions wont be answered?
December 13th, 2008 at 1:05 pm
CTA funds are an excellent diversifier. That’s the only strategy in my universe at least that is holding up very well this year. Of course, there can be rough months, however it is my experience that the draw downs and recoveries from the draw downs are pretty swift. It is essential to have a CTA strategy as part of ones investment portfolio that should also include equity indexes (ideally systematic allocation based on a moving average to reduce the horrendous drawdowns we have seen this year), multi strategy hedge funds, commodities and bonds.
December 13th, 2008 at 5:55 pm
Geetesh you are out there pumping your PhD as “credibility”, hawking “econ” papers everywhere…& someone calls you out and the best you can do is whine, accuse people of stealing and throw around misinformation. You are a great example of the dirty underbelly of so called academic research. The funny thing is that you were on the dole of AIG a few weeks back, now Vanguard. I wonder if the people who cut your checks at Vanguard are following along with you on the web?
December 15th, 2008 at 11:51 pm
People like Geetesh just do not get it. Let life move on
December 18th, 2008 at 2:22 am
Here is some info on just how difficult this year has been ( For Mutual Funds ).
There are 10,002 US Stock Mutual Funds that Morningstar tracks and none are up this year. The average performance is minus 43.63%. They track 2,892 Foreign Stock Mutual Funds, and none are up this year. None were down less than 10%, and the average performance was minus 50.75%.
-Dr. Alexander Elder in his Dec ‘08 letter
December 18th, 2008 at 1:04 pm
Geetesh is quite the rambling blowhard, confuses shrill rantings with conversation, and is full of unsubstantiated claims and charges. He’ll no doubt continue to pimp his losing mutual funds, but that won’t get much traction here.
Good riddance.
December 18th, 2008 at 4:55 pm
The performance of mutual funds got me motivated to find something to do with my money other than let MF managers flush it down the proverbial toilet.
I bought Trend Following, read everything I could find and wrote a LTTF system absolutely from scratch. I can’t hire a CTA, but I can write my own system. God bless cheap historical price data, low margin requirements and having a BS in computer engineering.
My laptop is sitting at home running the back testing, and should be done in about a week. Lots of data to crunch. The plan is to use real money after 6 months of reality-check paper trading. If paper trading doesn’t go well, it’s back to development and more back testing.
So I have the likes of Geetesh Bhardwaj to thank for putting me on the trail of something other than buy-and-hold, and Michael Covel to thank for the book “Trend Following”, it showed me that you could trade based on something other than divination.
December 18th, 2008 at 6:25 pm
Let’s see… the average mutual fund investor has lost over 40% of their account in the past few months, while my trend trading the currency market has generated more than a 200% gain in the month of October alone. It will also more than likely generate over 400% for the year of 2008. Hmmmm… wonder which way I’ll trade in 2009???
December 18th, 2008 at 6:34 pm
Michael
I Think Geteesh has a bit of a point under all his ramblings. I have about half a dozen trendfollowers in my portfolio and their performance varies from OK to stupendous. My worst performers turn out better than the CTA indeces so someone is buying the crap. Who are these underperforming CTAs and what lessons can we learn from them. Perhaps you could take a look at some of the “dirty underbelly” of the CTA industry sometime.
December 19th, 2008 at 11:30 am
Please let Geetesh Bhardwaj think that is right and let him convice people that is, because as long as people will think and invest this way we’ll make a lot money :-)
December 19th, 2008 at 2:12 pm
I agree Johny Foreigner. There has been very little discussion of the content of Geetesh’s paper on this thread. I think it’s fascinating that the CTA index has performed so utterly atrociously, when there are *big* managers out there earning nearly 20% annualised. That’s a puzzle that needs to be solved. What are most CTAs actually doing with their clients money? How could one guard against falling prey to a lousy manager? What questions could you ask up front to decide if your manager will be like a John W. Henry, vs a Bernie Madoff, going forward ?
December 19th, 2008 at 3:52 pm
The first defense out of Geetesh when questioned: “look at the Sharpe ratio!” How much more time is needed? That response should be the cue that he has a basic foundational problem.
December 20th, 2008 at 4:02 pm
I have been a buy-hold and pray for years. My 401k and stock accounts are down 25 - 40%. Not good. About 7 months ago i opened up a trading account to trade currencies with a trend-following system and am up a lot (especially in last 2 weeks). Unfortunately, I didn’t have more of my net worth included because the great performance in the currencies doesn’t move the overall needle of my total investments, too much. However it did move my sentiment of investing towards that of trend following.
I don’t care about the arguments put forth above because at the end of the day i only care about absolute returns. The same arguments that Mr. Geetesh put forth can be discussed with the mutual fund industry as well. There are studies of the same that Mr. Geetesh puts forth about investing in mutual funds.
I now focus on the historical aspects of my trading system to give me confidence moving forward. I know it won’t perform exactly as it said (in fact this year has been an outlier for performance) but I know it will be around that range.
I want more and more folks like Mr. Geetash as it gives me comfort knowing that I can take their money or others like him.
Please keep up the good work Mr. Covel, just don’t convert any shills who promote the status quo with their conventional wisdom and efficient market hypothesis.
December 23rd, 2008 at 6:46 pm
Michael,
With all due respect, the David Harding paper you cite is the creation of Winton Capital– a trend following fund. I would be very cautious in leaning on any “research” from an obviously biased source. Tooting their own horn, so to speak, trying to knock down metrics that do not jive with their opinions. Although there is some truth in the paper, it’s far from comprehensive support on why Dr. Sharpe’s ratio is not applicable.
As I was have always said, when trend followers guess right, they do well. When they guess wrong, they do poorly. Very similar to buy/sell and hold.
regards,
dave g
December 24th, 2008 at 6:43 am
Dave G - You miss the point - Whether the research comes from Winton or not - its a fact - its nobodies opinion - the simple un-arguable “fact” is that the sharpe ratio is a ridiculous non useful measure of investment performance.
With regards to trend followers - let me put this to you - I spend a lot of time studying the industry - Ive studied over 50,000 investment vehicles - in my studies there are 11 investment vehicles (anywhere in the world - any style of trading) that have averaged 20% per year net for more than 20 years - 7 of these 11 are systematic trend followers and 3 of the remaining 4 (covered in market wizzards) are effectively long term trend followers although they classify themselves at global macro.
I’m a long termtrend follower who has averaged 30 % + for the last 4 years - Net
The only guessing Im going to do is what happens first ? Does Warren Buffet blow up in 2009 / does the Dow hit 2500 or does the entire Worlds pension fund system collapse - because believe me - all 3 are on the way
December 26th, 2008 at 1:39 pm
Hi.
i never post in this site before..
I am a Trend Follower my self, I run a proprietary trading system in Brazilian stocks index futures since 2001. My performance is what trend following is about. Also I have investments in some Trend Followers around the world like, Superfund, Trans Trend, Clarke and etc.. since mister Geetesh says that Trend Following is the same that “steel money” I was forced to send this message..
I do have the returns that Mr Covel says in this site and in his books, it is not some backtesting argument, it is the real thing. No one in good mental health can say that over the last 30 years trend followers wasn’t the most stable and profitable type of investment.
I love this kind of guys that speaks about sharp and all that bullshit.. the thing is how many % you are making with mow many % drawdown’s and for how long.. That’s what meters the most. If you show me anything that comes close to Trend Following i will take a plane from Brazil and pay you a lunch myself.
Mr Geetesh you got to come in to reality. trend Following is amazing in all aspects, it is simple, profitable and very few people can apply in to the markets. Maybe the simplicity of trend following make you nervous…
you should start think in putting some of your AIG money ore vanguard money in Trend Trading..
Happy New Year for everyone..
Daniel