Michael Covel is the author of the internationally bestselling book Trend Following

Leverage Fear

April 30, 2007

From the Wall Street Journal comes a familiar refrain today:

Hedge-fund manager John Paulson made $1 billion using a complex financial instrument to pump up a bet that the subprime-mortgage market would crater. The parent company of retail giant Sears made $74 million using a similar device to boost its wager that a basket of stocks would rise in value. Both were playing with leverage -- the magical power that allows investors to make big investments without putting big money on the table. These days, they have lots of company. Thanks to advances in financial engineering, investors have never had so many different ways to make commitments that exceed their bankrolls. And never before has leverage wormed its way into so many nooks of the financial world. We're living on planet leverage, and regulators and market gurus are growing nervous. How did this happen? For starters, hedge funds and leveraged-buyout funds have proliferated. They're pioneers in boosting returns using borrowed money, the most traditional form of leverage. Also, investment banks are pumping out newfangled leveraging tools such as derivatives, complex securities that allow hedge funds and other investors to add leverage without borrowing money.

Whole article.

Covel Podcasts

April 28, 2007

A reminder to new readers, you can find my regular podcasts here.

How Do You Define Risky?

April 27, 2007

A while back I was interviewed by reporter Kambiz Foroohar for an article he was working on. I will go back and check my notes for more detail, but I remember telling him that if Christopher Cox and the SEC were ok with mutual funds selling NASDAQ index funds, which we all remember dropping -77% during the last market bubble pop, then the idea that average investors should be turned away from hedge fund opportunities (with track records that don't come close to -77%) by the GOVERNMENT was contradictory and frankly bogus. I also implored this reporter to address the word "risky" - what in the world does it mean in the government's eyes? I still don't know.

The government can't on one hand sanction mutual fund strategies that we already know can go down to zero, but then turn around and keep people away from hedge fund opportunities that have actually assembled track records of note and make money. That doesn't even address the issue of the average Joe having his pension monies put into hedge funds anyway - just without his knowledge by the institutional manager who controls his retirement future.

Here is the article in question where my comments did not make the final cut. The article features Christian Baha of Superfund.

The Fear Is Palpable

This article puts "fear" front and center:

All the World's a Bubble
By Brett Arends
http://www.thestreet.com/funds/followmoney/10353243.html

"My colleagues," wrote Grantham, "suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."

Statistics and Gun Control Debate

April 26, 2007

WSJ writer Carl Bialik makes good points about the complete picture frequently going missing in the gun control debate.

Hedge Funds & Politics: Paul Tudor Jones Hedges the Presidential Election

John Carney writes:

Paul Tudor Jones II’s is hedging his political bets. He donated to Republican Rudy Giuliani’s presidential “exploratory committee” (apparently that’s political speak for the campaign before the campaign). And next month he’s holding a big fund raiser for Democratic nomination hopeful Barack Obama, the New York Observer’s Politicker blog notes...The event will be held at Jones' oceanfront Greenwich mansion, which reportedly sits on top of a 25-car garage. More than 500 guests are expected to attend. The Politicker implies that Jones may have dumped Giuliani in keeping with his reputation for getting out of losing investment positions. We’re not so sure. While we’re not exactly experts in presidential politics here at DealBreaker, it seems to us that this is not so much a strike against Rudy as much as Hillary. She’s supposed to be the candidate with all the pull on Wall Street (wife of Bill Clinton, connected to Citigroup's Robert Rubin) and her position as a senator from New York, should give her connections to nearby Greenwich, Connecticut’s hedge fund money. But Obama has been cleaning her clock when it comes to donations from the world of finance. And now he can add PTJII to the list.

Black Swans and Virginia Tech

April 24, 2007

A recent op-ed in the LA Times examines Black Swans and Virginia Tech (PDF). An excerpt:

Efforts to explain the Virginia Tech massacre perfectly illustrate one of the central points of an idiosyncratically brilliant new book by Nassim Nicholas Taleb, "The Black Swan: The Impact of the Highly Improbable." When completely caught out by some random event, we humans are wonderfully good at retrospectively predicting it. In reality, however, Cho was what Taleb calls a "black swan."

David Harding of Winton Capital

April 22, 2007

I had the opportunity to interview David Harding in his London office a while back. He is one helluva trader:

The Jock Exchange

The Jock Exchange article (PDF) by Michael Lewis is a good view of the future of "markets".

Nassim Taleb and the Black Swan: A Retrospective, by Dave “Surf” Goodboy

April 21, 2007

A first hand account about Nassim Taleb's new book from Dave Goodboy.

The Most Successful Turtles Are...

April 19, 2007

Liz Cheval, one of the Turtles, was blunt:

“The most interesting, thing about the Turtle program was observing who succeeded and who did not."

Since the Turtles went out on their own in 1988, the performance numbers (see charts below) show the top Turtles:

1. Jerry Parker (Chesapeake)
2. Paul Rabar (Rabar)
3. Liz Cheval (EMC)
4. Howard Seidler (Saxon)
5. Tom Shanks (Hawksbill)
6. Jim DiMaria (JPD)

Those 6 Turtles are the ones with the continuous track records back to 1984 and 1985. From a trading perspective - they are the Turtle winners. One of those six told me that the most successful Turtle in terms of performance since 1988 has been Jiri Svoboda, but Svoboda has no public fund and remains invisible. Other former Turtles have portrayed an image of success with no real results, but in terms of trading that group of six Turtles is it.

99 Percent

April 18, 2007

A great example of something many people believe in. So what happens if 99% of the time you win little to nothing, but 1% of the time you lose it all? Focusing on percent accuracy refuses to acknowledge the core issue: magnitude of winning and losing trades.

Abraham Trading

April 17, 2007

An example of the type of charts I will be using more of soon:

The Wisdom of Crowds

April 16, 2007

Michael Mauboussin recently wrote Explaining the Wisdom of Crowds: Applying the Logic of Diversity (PDF).

Sad Day

Sad situation at Virginia Tech today. Only a few hours from my home. I have many relatives who are graduates of Tech. It is the State University specializing in engineering, but now the school will forever be remembered for something horrific.

Financial Disasters Will Keep Coming

April 14, 2007

Richard Bookstaber has a new book called A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation. Bookstaber also recently wrote this article for TheStreet.com titled Financial Disasters Will Keep Coming. The article:

While I didn't cause the two great financial crises of the late 20th century -- the 1987 stock market crash and the Long Term Capital Management hedge fund debacle 11 years later -- let's just say I was in the vicinity. My actions, which seemed insignificant at the time and their consequences unintended, did help get the ball rolling.

Continue reading Financial Disasters Will Keep Coming »

Hedge Fund Overview

April 13, 2007

An interesting hedge fund overview (PDF) sent in by a reader.

John Arnold of Centaurus

April 12, 2007

The Globe and Mail ran an article today. The end of the article:

Michael Covel, author of a book about trading called Trend Following, said some skeptics believe successful trading is in the end all about luck, but he added, "To some degree, I think that's somewhat disingenuous, specifically when you have some traders in business for 20 years." In terms of how it's done, it's all about volatility, and there are few markets as wild as natural gas, which gyrates daily, often because of the weather. Among Mr. Arnold's employees is a full-time meteorologist. "The good traders don't really care if it's natural gas or corn or some obscure Chinese stock. All they care about is if there's enough movement and enough liquidity," Mr. Covel said. "I'm sure Mr. Arnold is agnostic to the market. He just wants to find the opportunity. And if Mr. Arnold has the golden touch, all props to him."

As a quick clarification, I was not referring to Arnold being in business for 20 years. He is after all only in his early thirties.

Boone Pickens Slams It Home

April 11, 2007

Last fall I met with Boone Pickens in his Dallas office and posted this. This feedback came into me last fall after my post:

Perhaps a good question would be to ask how much Mr. Pickens is down year to date some say over forty percent.

I responded last fall:

I was told numbers that differ greatly than yours. All positive.

My happy friend responded:

If he is actually doing well this year, I'm glad for him, but I feel holding him up as as example is misleading....there's no proof he's not just a black swan event in and of himself. I notice you don't spend much time talking about the thousands of managers / CTAs who perished....you are making the mistake of being fooled by the survivorship bias...and anyone who knows statistics knows Boone Pickens is likely an example...

Well, to update the situation, Boone's 2006 earnings are in:

From Trader Daily this week:

T. Boone Pickens
City: Dallas
Firm: BP Capital
Age: 78

The world’s biggest oil bull may have gotten gored in late 2006 and early 2007 as crude prices slipped, but that slide didn’t last long. Besides, his prudent bearish play on natural gas in the fall of ’06 was more than enough to fuel his energy-futures and derivatives fund to a startling 98 percent return.

“Most of our money came from shorting natural-gas futures,” says Dick Grant, BP’s CFO. The firm’s total assets, across two main funds, are around $3.6 billion, 45 percent of it Pickens’s own money. Grant wouldn’t confirm Pickens’s take, but if our estimate isn’t pretty close, we’ll build Oklahoma State a new football stadium.

Estimated Income: $1 billion–$1.5 billion

Nice Paychecks

April 09, 2007

From Trader Daily (full article):

NEW YORK (Reuters) -- The wealthiest U.S. hedge fund managers and traders became a lot richer last year when five of them took home $1 billion or more each.

Simons, Lampert and Pickens have ranked among the top three earners since magazines such as Alpha and others started tracking their paychecks.

Kenneth Griffin Profile

A fun read.

Interesting Questions? Perhaps. Ask Your Banker? Well...

April 08, 2007

I found this list of 25 questions (PDF) to "ask your private banker" interesting. My question: when someone gives you these answers, have you not just received glorified stock tips?

Trading Firm: Altis

April 07, 2007

I was forwarded this trading brief on a firm called Altis (PDF).

More: www.altispartners.com.

Deception In the Internet World Is Fleeting

April 06, 2007

I have had my share of critics. There are those who don't like trend following trading. There are those who don't like the fact that TurtleTrader.com was even started and has become a great resource for thousands. I have met and talked with many of these people. Some are stand up people with differing opinions, some live in a world of deception. A few of the latter are somewhat well known.

That world of deception is something I have come to know more about in the last 6 months. Specifically, the deception of email and chat forum posts. Consider that last fall on the same day I received (2) emails. One was from a supporter and a considered friend of mine for years. The other email was an anonymous attack email telling me how dumb I was. Fair enough. One good email, one bad! That's life. Ah, but here is where it gets interesting. Those (2) emails, both sent from Yahoo email accounts, had the same IP address. It was the same person.

Then in the last few months, unrelated to the case above, I started noticing chat forum posts offering agenda type criticism. There seemed to be (2) people leading the charge. One of critics was from a "name" known in some small Wall Street circles, the other was an anonymous alias. The named critic heaped on the negatives from his perspective and so did the anonymous critic. However, the anonymous critic with the alias was VERY praiseworthy of the other critic who was using his real name. It all struck me as odd since they sounded like the same person. The two chat forum posters were one in the same. They were posting under the same IP address.

In a past life I was a baseball catcher. On the baseball field we had a way for dealing with people like these. It was called a fast ball high and tight, and if they got hit, well, that was the point.

One of the best quotes about internet chat forums comes from David Silverman in an issue of Stock, Futures and Options Magazine:

Just as they did in the pits, traders continue to trash-talk, deceive, manipulate, confuse and lie. What I was told so many years ago remains fresh today, and anyone who does not understand this and totally relies on the information they read in chat rooms may get eaten alive. That the Internet is being used to pass misleading information about the markets - and thousands of other things - comes as no great shock, but what I realized as I read one bogus posting after another, is that the anonymity the medium provides can make chat room lies far more insidious than any ever told in the pit. On the trading floor, market professionals, fully aware of the rules of the game, aware of the stakes involved, and able to look any trader in the eye to help determine the degree to which the truth might be shaded, needed protection only from the egregious lie. In chat rooms, by contrast, where the naive and uninitiated congregate with the potential hustlers and con men, it is no fair fight. Anonymity fuels the liar's sense of invincibility, and often statements are so bold and outrageous it's amazing anyone takes this nonsense seriously.

WallStrip on ABCNews with Michael Covel Promo

April 05, 2007

WallStrip was featured on ABCNews recently here. During the interview with Howard Lindzon and Lindsay Campbell a video of the WallStrip website was played. Each time ABCNews showed the WallStrip website it was an image of my WallStrip interview. I will take that press any time I can get it!

Buy and Hold Issues

Mark Hulbert, at MarketWatch, writes:

Here's a depressing realization...Consider two hypothetical individuals who started investing on the same day: Nov. 30, 1999. The first put everything in the stock market, while the second put everything into 90-day Treasury bills. Guess what: Both investors' portfolios are today worth almost precisely the same amount. Since then, each has produced a 3.1% annualized return. (To calculate the stock market's return I used the Dow Jones Wilshire 5000 index. This means that a stock investor has nothing to show for the agony and sleepless nights he has incurred over the past seven years. The investor in T-Bills has slept like a baby and has just as much money in his portfolio.

Mark makes a good point. There is not enough emphasis on how much the Dot-Com 2000-2002 crash still affects the millions of people who bought into buy and hold.

More Beta and Alpha

April 03, 2007

Two articles regarding beta and alpha in the context of hedge funds: "Hedge Funds Selling Beta as Alpha" (PDF) and "Hedge Funds Levering Betas" (PDF).

Why the Rich Get Richer

Read article 'Why the Rich Get Richer'. That article got me Googling around until I found another piece of research tangentially related, but definitely interesting.

Download PDF.

Bob Pardo on System Testing

April 02, 2007

Bob Pardo, an expert in trading systems and someone whose work I respect, let me know about a workshop he will be giving titled "Building Trading Systems: Laws and Flaws".

Check it out.

Bio: Bob Pardo, president, Pardo Capital Limited and Pardo Group Limited , which have provided money management and consulting services in all aspects of trading strategy design, application and of computerized trading tools to the trading community since 1988. He has been designing and creating trading software and trading systems since 1983.

What Really Ruined Baseball

An article from the New York Times with implications beyond baseball:

April 2, 2007
Op-Ed Contributor
What Really Ruined Baseball
By J. C. BRADBURY

WITH an off-season that included Mark McGwire’s rejection by Hall of Fame voters, Barry Bonds’s continuing problems and accusations that Gary Matthews Jr. of the Angels had obtained human growth hormones, it’s hard not to think about the influence of performance-enhancing drugs this opening day.

Continue reading What Really Ruined Baseball »

Waft

April 01, 2007

Victor Niederhoffer recently posted on his blog:

I have often thought that there are hidden signals in markets. My favorite signal is silver, which I call the omniscient market in that whenever something is good or bad it seems to hit the silver market first. Recently, I have been discovering the hidden signals in the Dow Jones, which seems to go the 50 and 100's during the day, much more than randomness would suggest. Another hidden signal is the movement in bond prices that always seem to predate a major move in stocks. Another one is the Israel market, which I have found quite useful in predicting where the US markets will waft.

If Niederhoffer can profit from this, and stir clear of those sudden market moves that quash belief in mean reversion, I wish him well. The word "prediction" strikes as a problem in waiting.