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Archive for August, 2008

And I thought I was doing bad…

From the WSJ (Subscription Required): LONDON — The two-year-old hedge fund founded by Jonathan Wood, a former UBS AG trader, is down about 85% from its inception through July, according to a person familiar with the matter.

Just as a reminder, when you’re down 85%, you’ll need to make around 200% 570% (thanks everyone!) just to get back to flat. Adding insult to injury, the fund has a 5 year lock-up – not that it would help anyone if they could get their money out.

There are some seriously ironic things about this fund:

SRM was the largest outside shareholder in British lender Northern Rock, which, in September 2007, experienced the first run on a bank in the U.K. in a century. Northern Rock was nationalized by the U.K. government in February.

The Case for Shareholders

Mr. Wood has been an advocate for shareholder rights, complaining that Northern Rock shareholders were short-changed when the U.K. government nationalized the bank. SRM is seeking a judicial review of the U.K. government for allegedly employing an unfair process in valuing the bank.

So, let’s see – he’s an advocate for shareholder rights, but has a 5 year lock-up period. Not entirely contradictory, because he would argue he needs that time to insure the investments work. Ok – but 5 years? Not very investor friendly. Then there is where he gets his money – from Northern Rock! Wow – Northern Rock, in addition to being terrible at managing mortgages, turns out to be terrible at picking hedge funds – and they call themselves financial services firm.

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I just wanted to drop everyone out there a quick note.  A lot of you have written to wish me well during my recent drawdown.  I really appreciate the support and positive feedback.  Having worked at a hedge fund, drawdowns are part of the game – if you don’t have the stomach for risk, you shouldn’t be playing the game.  Having said all that, I’m not stressing about the losses, because relatively speaking I’m still doing ok relative to the market.  I’m also spending more time looking at both risk management and the systems themselves and will be making changes to make sure this doesn’t happen again.  So, more to come, but again, thanks to everyone for the support!

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Or, taken to the woodshed, or, well, pick your favorite analogy.  Bottom line, all the strategies took it on the chin this past month and have given back their gains for beginning of the year and then some.  In one way, this isn’t unexpected – momentum strategies always have trouble “at the turn” when there is a major change in trend.  But it was even worse than that due to the high concentration of the portfolios (for MOMO1 and TREND1) in the energy and materials sectors.  I’ve known for some time that momentum strategies tend to do better in bull market periods and I think that remains the case.  So what to do now.  Well, I’m looking at a bunch of ways to modify the strategies going forward.  To begin with, I’m going to start using a Chandelier exit on my MOMO1 trades with a wide stop to keep me out of future trouble.  I’m also looking at a forcing diversification in the portfolio by requiring allocations to certain sectors – I’ll talk more about that in future.

When I started this blog, I wrote about how it was designed to “keep me honest” and I also want to be honest with the readers of this blog – so I’m publishing the data.  I’ll continue to update on the strategies going forward as well.

Anyway, enough excuses – 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.

MOMO1:

  • Return for June-08: -22.8% (does not include dividends)
  • Return YTD: -6.3%
  • Current holdings: IBB, OIL, IWM
  • Notes: People following this strategy should rotate out of DBC and UNG.

TREND1:

  • Return for June-08: -24.7% (does not include dividends)
  • Return YTD: -9.3%
  • Current holdings: IWO
  • Notes: Only one holding as of this time.

MR1:

  • Return for June-08: -11.0% (does not include dividends)
  • Return YTD: 5.9%
  • Current holdings: GLD.
  • Notes: Even MR1 couldn’t save my portfolio for destruction.

Benchmarks: All my benchmarks are from Google Finance – so your results may be slightly different.

  • S&P500:
    • July-08: -1.41%
    • YTD: -14.91%
  • DOW:
    • July-08: -0.18%
    • YTD: -15.2%
  • Nasdaq:
    • July-08: -0.2%
    • YTD: -13.79%
  • IWM (proxy for the R2000):
    • July-08: 2.41%
    • YTD: -7.67%
  • EFA (proxy for developed foreign markets):
    • July-08: -4.19%
    • YTD: -17.41%
  • EEM (proxy for developing foreign markets):
    • July-08: -5.43%
    • YTD: -16.34%

So, the only good news here is that the portfolios continue to outperform all the benchmarks on a year-to-date basis, but I don’t take much comfort in that.  Clearly I’ve got some work to do – you’ll be seeing more on that in the coming months.

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