Laurence Fletcher of Reuters writes “Black Box” Hedge Funds Profit in Volatile Markets”:

LONDON (Reuters) – Hedge funds run by sophisticated computer programs are profiting from large falls in stock markets and a rocketing gold price this month, even as funds managed by human beings struggle to cope with high market volatility.

Insiders say so-called managed futures funds [read: trend following], which try to latch onto market trends, are making money from declining bond yields and falling equities, as investors seek safe havens amid the eurozone debt crisis and after the U.S.’s credit rating downgrade.

These “black box” funds are up 4.2 percent so far this month, according to Hedge Fund Research’s HFRX index, while the average hedge fund is down 4.0 percent and managers betting on rising and falling stock prices have lost a hefty 7.3 percent on average.

Why does he use the word “black box”? If he was just “reporting” he would not immediately use a pejorative to describe trend followers like Winton. Bottom line, trend following is making a killing because it is sound trading strategy that performs especially well when the rest of the world ***** their pants. Why is THAT still news after all these decades?

Aug 25th Note: I asked Laurence why he used the term. His reply:

Hi Michael, thanks for your email. I’ve used ‘black box’ as a quick way to describe to the man on the street what computer-driven funds do. Why do you ask?

I asked back, “But how does that tell them? Meaning, how does the word black box tell folks what Winton does?” No word yet.

While flipping channels just caught a guy on a finance show utter:

“The markets are extremely rumor driven now.”

On how many different levels is that statement doltish?

Maybe a rumor, maybe not, but how the hell does knowledge of it one way or the other make you money? It doesn’t. However, if you like flipping coins as an investing strategy, I would say his advice is spot on.

A reader of mine, Oswaldo, sent along this excerpt from The History of Greed:

“Now, be honest. If you have ever bought a stock, why did you buy it and not one of 10,000 others? Of course, you expected the price to go up. But why did you expect that the price would move up? Did you receive a hot tip from your brother-in-law? Did your broker want to reward you as a (supposedly) favored customer? Did you read something in an obscure place? Whatever your reason, somehow you thought that you had the inside track on that stock, and that you knew something the market didn’t. You thought you had an edge, and you wanted to take advantage of your special knowledge. So then you too have a bit (or a lot) of larceny in your heart, and you too want your unfair share of the market. You and I then have something in common; we’re human.”

My reader Oswaldo writes:

“Again and again, people don’t get it. They should read Trend Following.”

Good point!

An excerpt from here:

When markets become tumultuous, which is often, lots of people pop up to explain what’s going to happen next. Many of their arguments are highly plausible. Sometimes they’re well written. Occasionally they’re both. Unfortunately, unless physics is completely wrong and time travel is actually possible they’re all engaged in an activity we usually call ‘guessing’.

Although this is often entertaining, spending a lot of time reading this stuff is pretty much a waste of time when it comes to investment. After all, in 1939 markets completely failed to take account of the possibility that Hitler might run amok in Europe despite small hints like the invasions of the Rhineland, Austria and Czechoslovakia. As we saw in Why Markets Crash they didn’t spot the First World War either: so a perfect record when it comes to global conflagrations, then.

Meanwhile, in 1987 stock markets collapsed for reasons no one has yet been able to agree upon, let alone figure out how to predict (see Black Swan Down). In fact, if anything, if you and I can see a crash coming there’s a reasonable chance even the buffoons that run the world’s finances might manage to avoid it.

Although it’d be best not to count on it.

The ultimate tonic to all of these predictions that lead nowhere? The ultimate non-guessing investment strategy? Trend following. Read one of my four books. Tell me where I am wrong. After you do that–tell me how your old way is still better.

Hat tip to @ritholtz for article find.

Mebane Faber, who was kind enough to offer positive praise for my new book Trend Commandments, takes a look at outliers here (PDF). Take a read–worth your time.

From accounts:

ENGLEWOOD CLIFFS, NJ–Citing a need to provide quality programming 24 hours a day, CNBC has extended an invitation to anyone who owns a suit to drop by the financial news network and be a guest expert, cohost a show with Larry Kudlow, or do whatever. “Don’t worry about what kind of shape your suit is in,” said CNBC president Mark Hoffman, who explained that his network’s studio has an iron and some old phone books that people can press their jackets on. “Just come on down, run a comb through your hair, and if you’re here by 8 a.m., we’ll have you on Squawk Box at 8:15 making stock picks. But don’t forget your suit!” Hoffman added that men of ruddy complexion with neck sizes exceeding 19 inches are not required to wear a tie.

p. 161 of Trend Commandments…shows this to be closer to truth over parody.

Just received an invite to a seminar (cost $2695) that promises I will “Gain vital insight as we discuss such topics as”:

• Making Money in 2011-2012: What to Invest in Next
• Investment Styles and Strategies-Next generation default investment options for DC plans
• Protecting purchasing power: The case for multi-strategy currency investing
• Identifying Emerging Talent- Identifying Strategies for Changing Markets
• New governance rules on Investing in Alternatives: Fiduciary Control and Client Demands
• SPACs As a Re-Emerging Asset Class: Principal Protection with Equity Upside
• Emerging Markets: The Next BRIC Thing
• Private Equity: Is it Time to Increase your Allocation?
• Managed Futures; the Past or the Future for Hedge Fund Investing?
• Successful Real Estate Investment Strategies in Today’s Time
• Alternative Asset Allocation Models for Institutional Portfolios in Times of Academic Re-orientation
• Socially Responsible Investing

Well, they did toss in managed futures–which could be trend following!

From The New York Times:

When the government announced in April that the economy had grown at a moderate annual pace of 1.8 percent in the first quarter, politicians and investors saw evidence that the nation was continuing its recovery from the depths of the financial crisis. The White House called the news “encouraging” and the stock market extended its bull run. Three months later, the government announced a small change. The economy, it said, actually had expanded at a pace of only 0.4 percent in the first quarter. Instead of chugging along in reasonable health, the United States had been hovering on the brink of a double-dip recession. How can such an important number change so drastically? The answer in this case is surprisingly simple: the Bureau of Economic Analysis, charged with crunching the numbers, concluded that it had underestimated the value of vehicles sitting at dealerships and the nation’s spending on imported oil.

The real reason? America and many of its leaders:

1. Either live in Alice’s Wonderland or…
2. are incompetent.

There you go. Ready to pony up your hard earned capital and bet off government stats still?

Irving Kahn, age 105, is among the world’s oldest working investment bankers. He was working during the Great Depression and says now that “there are a lot of opportunities out there, and one shouldn’t complain, unless you don’t have good health.” More.

Maybe he is right, maybe he is wrong, but his is just another prediction…

click pic for high res

Buy now on Amazon.

The sheep imagery here is thought provoking!

My film? More sheep.

Ritholtz on the death of buy and hold.

The markets are a chaotic ride–more than ever before.

Buy and hold is as dead as Elvis.

Typical ‘jobs’ are becoming a myth (see: Tom Friedman Aug 13).

What are you going to do?

Trend following sits in the catbird seat.

From Morningstar:

There have been quite a few winners and losers in the immediate aftermath of the 2011 crash (does this move have a name yet?), and one of the biggest losers has been discretionary trader Dighton Capital. We posted their ‘defense’ of their position two weeks ago, but things went terribly wrong since then, with a dramatic move higher in the Swiss Franc causing losses of more than -50% for Dighton in August (on top of -30% losses in July), putting the drawdown on their composite track record at a disturbing -76%.

More:

What are the lessons to be learned from this flame out? One, discretionary managers without set risk per trade limits carry a unique set of risks which aren’t shared by their systematic counterparts (namely that they can/will hold onto a trade a little longer if they have a heavy conviction). Two, contrarian/counter-trend/mean reversion strategies carry unique risks (the market may not mean revert). Three, be wary of investing in a managed futures program doing something different than the typical managed futures trend following type strategy

From Dighton Capital’s disclosure document:

The Dighton Trading Program (formerly known as the Swiss Futures Trading Program) is a combination of systematic, technical chart analysis for the markets, the interpretation and analysis of economic and other fundamental data and use of discretion based on the experience of the Advisor. The Advisor will trade most of the liquid US future markets like currencies, stock indices (especially Mini S&P), bonds and notes, energy, corn, grains and other commodities such as cotton. The Advisor does not initially plan to trade foreign futures or options contracts but reserves the right to do so at a later date. The Advisor reserves the right to trading in any futures market. The Advisor analyses thoroughly the charts of these markets every week and monitors them then during the week.Chart analysis techniques include (but are not limited to) wave analysis (Elliot Wave), W.D. Gann principles (angles), Fibonacci retracements, Time cycles, Volume, Trix Indicator, divergences, and pattern analysis. In general, the Advisor tries to locate points where to buy in markets that have fallen and where to sell in markets that have risen. By this the Advisor is trying to buy when prices are low and to sell when prices are high. This approach is trend anticipating but not really counter trend. When a position is established the Advisor attempts to let the profits run and attempts to exit when the market gets to a point where a reversal in the trend could be expected.

A Ouija board might be better?