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I’ll be posting the monthly results for the strategies in short order.  Suffice to say they all did well – not exactly shocking in this rally – you really could have thrown a dart and be looking like a genius right now.  In any case, we have 3 stocks for purchase tomorrow at the close being generated by MOMO1 – SLX, GDX and EWS.  We also have the Skills Index about to go on Buy again.

The Junk Rally and Quant Hedge Fund Performance: A Lesson in Asymmetric Risk

Simons Questioned by Investors & Live-Blogging The Renaissance RIEF Call

R/Finance 2009: Applied Finance with R

April System Updates

April continued to be dominated by two themes:

  1. None of the strategies I track did much – they’re all pretty much sideways in a market like this.  They have a month up and then a month down.  In terms of MOMO1, this is actually what I would expect – the system performs best in a bull market and despite the rally, we are not yet in a bull market in my view.  It could also be that we are in a very different market – closer to 1930 or 1970 rather than 2000-2008 – so the systems may simply not come back to life for a while.  As such I continue to monitor them and make changes as I see fit.
  2. The little time I have these days is split between my family and my job.

Despite all of this, I’ve been impressed with the rally in the market over the past two months although I have not been as invested as I should have been.

Also exciting this month: Amibroker update that makes doing this reporting much, much easier.  The other really nice feature about the new reporting is that it is customizable – so you can program new charts which is pretty darn neat and something that I used Tradersstudio for.  The individual strategy pages have been changed to reflect the new reporting.

MR1 was the bigger winner in April.  Stats are below.  Disappointing is that all the strategies significantly underperformed the market – I’m not really shocked at this given the huge change in trend during the past month – but it is disappointing nevertheless.

As normal, you’ll find the individual strategies pages (MOMO1, TREND1, MR1) have updated equity curves, statistics and current holdings. As was true of my last update – all the trading systems below assume an Interactive Broker‘s-like commission plan – for these, it is .01 cent per share with a $1 dollar minimum.  None of these system count dividends.

MOMO1:

  • Return for April-09: -0.3%
  • Return YTD: 3.1%
  • Current holdings: IGN, EWT, HHH

TREND1:

  • Return for April-09: -1.9%
  • Return YTD: -1.8% (includes some of May)
  • Current holdings: AGG, IWM

MR1:

  • Return for April-09: 5.1%
  • 2009: -3.9% (includes some of May)
  • Current holdings: See blog for updates.

Benchmarks (from March 31,2009 till April 30,2009):

  • S&P500:
    • April-09: 9.39%
    • 2009: 2.88% (through May 8th)
  • DOW:
    • April-09: 7.35%
    • 2009: -2.30% (through May 8th)
  • Nasdaq:
    • April-09: 12.72%
    • 2009: 15.06% (through May 8th)
  • IWM (proxy for the R2000):
    • March-09: 15.39%
    • 2009: 3.59% (through May 8th)
  • EFA (proxy for developed foreign markets):
    • March-09: 11.52%
    • 2009: 2.43% (through May 8th)
  • EEM (proxy for developing foreign markets):
    • March-09: 15.56%
    • 2009: 26.51% (through May 8th) – Wow!

As always – thanks for reading and I hope you have a good May!

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The Skills Dat Pay Da Bills album cover
Image via Wikipedia

That is all for today – the index is now, once again, on sell.  That means we’ll look for short side opportunities here.

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The Ultimate Sin album cover
Image via Wikipedia

A few years ago I found a document put out by DrKW Macro Research called “The Seven Sins of Fund Management” (caution – PDF) – it is truly an awesome piece of work, and a brilliant critique of the mutual fund space (and active managers in general).  I could not remember where I had found it – so I’m going to thank whoever originally posted it and then re-post it here for others.  This paper really formed a lot of my thoughts on why I should either be using a quant strategy or just be passive in my investing approach.

The paper is full of great insights – but my favorite is the analysis they did of stock picking performance relative to confidence in the outcome.  Here, they measured both students/lay people and professionals.  The outcomes are truly eye-opening – in this first chart, you’ll see that the students bested the professional in accuracy, but did so while having a lower confidence rating.  In other words, the professionals were both cocky and wrong.

ss_graph1

This one is great as well – it shows what perfect calibration on stock picking accuracy is as confidence rises, and then it shows both lay people and professionals.  While the lay people are static, the professional actually get worse as their confidence goes up.

ss_graph2

Anyway – it’s a great read – hope you enjoy it as much as I did.

In a related continuing story, fund managers continue to underperform the market.  Shocking!  ;)

Opaque
Image by jurek d. via Flickr

I’ve been crazy busy with my day job and Max – so my apologies for not posting more – that’s just the way it is at the moment.  But in the meantime, I wanted to post a little diatribe I’ve been thinking about.

I’m going to start with a generalization – people that are used to investing based on typical investment metrics (Cash flow, earnings, etc) have a strong distrust of black-box quant strategies.  I’ve seen it first hand.

But here’s my question: for the outside investor, why do they find it comforting that they have invested with, say, a value portfolio manager vs. going with a quant fund?  The answer is pretty obvious: they think they understand what the value PM is looking at, and, more importantly, they have faith in the particular set of metrics that the PM uses.

I’ve read a lot of detailed fund prospectus (some from very large hedge funds), and I find them all pretty, well, general.  “The portfolio manager selects stocks based on value metrics such…blah, blah, blah.”  So why on earth would they have confidence in this methodology?

The answer of course is performance.  This is why people chase performance.  They see a hot hand and they move in.

But in my mind, they have no greater understanding of what the fund manager is doing than in a quant fund.  So given that, is it even important that you understand how a quant fund works?  Isn’t the only judgement the performance?  And even if you did know what the value or quant portfolio manager was doing, how would that help you?  Would you give them a call and say “hey, I know how to fix your issue!” and expect them to welcome the critique with open arms?

I guess what I’m saying is that if you’re investing with someone else, it doesn’t matter if they are a human or a black box quant strategy – they are both equally opaque.  It is just that the value PM has the illusion of being understandable, and the quant strategy has the reputation of being either voodoo or genius.

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The Bankling site is still new to me, but apparently they found me – and they’ve named Skill Analytics to the six sites they mention under Technical Analysis.  I’m in good company there with Ripe Trade and ETF Trends.  I’m going to have to check out the others that they mention.  Thanks to the folks over at Blanking for reading my little blog.

I do find it a bit funny that I’m mentioned in a mutual fund toolbox when I clearly have demonstrated a true dislike of the mutual fund industry.  Ah, the irony!

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