Market Commentary
Market Comment ary November 2016
www.qplum.co
Page
1620 Plaza 5 Jersey City, NJ 07311 (201) 377-2302
[email protected]
(201) 604-5422
November Comment ary
Nost algia can be a dangerous emot ion We love to look back and remember the "good old days". That pleasant fuzzy feeling where we smoothen the rough edges and remember how lovely the past was. We know it is not coming back. It is irreversible and we are lamenting over a past memory but it feels good and bad at the same time. The financial markets are going through a similar period of reminiscence. The 1.32% low that we saw earlier this year in 10-year US treasury yield is not coming back, according to many macro forecasters. November events have jolted many and irrespective of individual political affiliations, we all will agree that it seems like something has changed since the outcome of the elections. It is not just the market sentiment but a realization that rates don?t always go down. In the last four years the 10-year US treasury yield has had four swings of a hundred basis points, i.e. 1.0%. That is way too much volatility for something to be demanding a cost of capital only 1.32%!
Fake news is real This year has brought into light a lot of questions about the information that we consume. Be it a facebook feed, a series of tweets or a post on a blog. We cannot just assume that anything on the internet is verified by the crowd. What is true and what is fake? Sometimes it is easy to tell by looking at the content and it not being coherent with our world view. However, the events of the last few months have shown us collectively the need for curation in the content we consume. They have shown that as a society, those of us who know need to make an effort to share our knowledge with others. Top investment managers have traditionally taken the stance of being secretive. As Mansi described in a discussion on demystifying quantitative investing, it is a lot of hard work to find out what strategies work well in investment management. If one has spent years figuring out what works, it just does not make sense for the portfolio manager to publicize their findings when they are likely to reap much more financial benefit by being secretive. Why should we then contribute our best ideas and collaborate?Why put in the arduous work of being transparent? The perception is that the best asset management firms have some ?edge?in the data that they can use to find a pattern that no one else has. The truth is quite far from that. As our co-founder and Head of Strategy Development, Gaurav Chakravorty, mentioned at a recent conference, our dream at qplum is to make investing collectively a science. It?s not a game or a competition for us. It shouldn?t be something that only experts can do and others can just follow. It needs to be a genuinely inclusive process and all investment managers need to realize that we are all service providers in the investment stack with the investor, and real risk taker at the top. Every layer in this stack needs to demystify our work to the layer above. Every one of us needs to generate confidence in those who are using our services. We are talking about investing money after all. Surprises are not what people are looking for. While data-driven methods make it accessible and affordable at scale to have a thorough scientific investment management processes, if you look behind the curtains, there are many engineers and quants cleaning and processing data to figure out what is fake and what is real!
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
2
Fract ional Rebalancing
November Comment ary
W hat happened t his mont h t hat mat t ers t o my port folio? The drop in US bonds dominat ed everyt hing else.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
3
Fract ional Rebalancing
November Comment ary
Huge drop in bond prices The drop in US bonds was close to 77% of their annual volatility. At a panel on Global Macro Investing where Gaurav was speaking, a fellow panelist remarked that the 33% rise in interest rates on the US ten year this month hasn?t happened in fifty years.
In equit ies, it did not pay t o be diversified t his mont h. US stocks were up close to 3.5% while the non-US stock markets were down roughly 2%. Similarly, real estate positions had a particularly tough month along with the bond markets. Average U.S. household wealth probably came in flat for the month, with equities doing a bit to cushion the blow to real estate positions.
Tough show for quant funds Our regular readers are very familiar with our ?3 truths of data-science?where we point at the quandary of most quant funds: they only have past data to work with. And a month like November shakes out the assumptions that many typical quantitative models are based on. AQR?s Risk Parity and Momentum funds were down close to 3% and 4.5% respectively. These are huge drops considering that these funds have annual volatility of 10%.
Great mont h for a few Global M acro funds Some large global macro funds, like Brevan Howard had blockbuster months, probably dominated by being short bonds. Over the Global Macro index did not perform that well and eked out a small gain.
Dollar st rengt h The amazing strength of the US dollar is perhaps a story only second to the drop in US bonds. It makes sense in a way of course. US interest rates are now more than double the average interest rate of other developed countries in Europe and Japan. This carry trade itself adds a lot of interest in buying up dollars. However, this questions the inflationary claims of traditional media.
Scraped t hrough wit h just a scrat ch At qplum we are very much data dependent and as Mansi described in her interview on the NYSE floor just after the election, the market reaction to the election was very very different to the market reactions to speculation about election prior to the event. This is not the sort of market where data-driven investing is supposed to do well. We eked out a 0.64% gain this month, primarily due to having lowered the risk going into the event and increasing soon after.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
4
Fract ional Rebalancing
November Comment ary
New st rat egies at qplum t his mont h Across all our portfolios, we are adding several short term indicators that can take advantage of short term mean reversion and momentum trends along with some volatility, yield and volume indicators. We are particularly excited to share our improvements in our ?income-generating? Fairway portfolio that runs at an incredibly low risk of less than 5% annual volatility. We expect the target yield of this portfolio to be close to 4%-5%. 80% of the ?income?is coming from high yielding products along with risk management and 20% of the ?income?is sourced from our short term strategies. If you want to park some cash and still earn some extra yield, take a look at our Fairway portfolio
here!
References and Dat a 1. 2. 3. 4. 5. 6. 7.
Singapore?s GIC moving into Big Data based portfolio management Paul Tudor Jones sees an urgent need to data-sciencify his fund Brevan Howard up 5.6% in November on track for first positive year since 2013 The Next Generation of Hedge Fund Stars: Data-Crunching Computers Top ideas from thought leaders in institutional investing Demystifying Quantitative Investing TABBForum Qplum Investment Methodology Paper
Disclosures The factual information set forth herein has been obtained or derived from sources believed to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information?s accuracy or completeness, nor should the attached information serve as the basis of any investment decision.
This document is intended exclusively for the use of the person to whom it has been delivered and it is not to be reproduced or redistributed to any other person.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
5
www.qplum.co
Page
1620 Plaza 5 Jersey City, NJ 07311 (201) 377-2302
[email protected]
(201) 604-5422
November Comment ary
Nost algia can be a dangerous emot ion We love to look back and remember the "good old days". That pleasant fuzzy feeling where we smoothen the rough edges and remember how lovely the past was. We know it is not coming back. It is irreversible and we are lamenting over a past memory but it feels good and bad at the same time. The financial markets are going through a similar period of reminiscence. The 1.32% low that we saw earlier this year in 10-year US treasury yield is not coming back, according to many macro forecasters. November events have jolted many and irrespective of individual political affiliations, we all will agree that it seems like something has changed since the outcome of the elections. It is not just the market sentiment but a realization that rates don?t always go down. In the last four years the 10-year US treasury yield has had four swings of a hundred basis points, i.e. 1.0%. That is way too much volatility for something to be demanding a cost of capital only 1.32%!
Fake news is real This year has brought into light a lot of questions about the information that we consume. Be it a facebook feed, a series of tweets or a post on a blog. We cannot just assume that anything on the internet is verified by the crowd. What is true and what is fake? Sometimes it is easy to tell by looking at the content and it not being coherent with our world view. However, the events of the last few months have shown us collectively the need for curation in the content we consume. They have shown that as a society, those of us who know need to make an effort to share our knowledge with others. Top investment managers have traditionally taken the stance of being secretive. As Mansi described in a discussion on demystifying quantitative investing, it is a lot of hard work to find out what strategies work well in investment management. If one has spent years figuring out what works, it just does not make sense for the portfolio manager to publicize their findings when they are likely to reap much more financial benefit by being secretive. Why should we then contribute our best ideas and collaborate?Why put in the arduous work of being transparent? The perception is that the best asset management firms have some ?edge?in the data that they can use to find a pattern that no one else has. The truth is quite far from that. As our co-founder and Head of Strategy Development, Gaurav Chakravorty, mentioned at a recent conference, our dream at qplum is to make investing collectively a science. It?s not a game or a competition for us. It shouldn?t be something that only experts can do and others can just follow. It needs to be a genuinely inclusive process and all investment managers need to realize that we are all service providers in the investment stack with the investor, and real risk taker at the top. Every layer in this stack needs to demystify our work to the layer above. Every one of us needs to generate confidence in those who are using our services. We are talking about investing money after all. Surprises are not what people are looking for. While data-driven methods make it accessible and affordable at scale to have a thorough scientific investment management processes, if you look behind the curtains, there are many engineers and quants cleaning and processing data to figure out what is fake and what is real!
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
2
Fract ional Rebalancing
November Comment ary
W hat happened t his mont h t hat mat t ers t o my port folio? The drop in US bonds dominat ed everyt hing else.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
3
Fract ional Rebalancing
November Comment ary
Huge drop in bond prices The drop in US bonds was close to 77% of their annual volatility. At a panel on Global Macro Investing where Gaurav was speaking, a fellow panelist remarked that the 33% rise in interest rates on the US ten year this month hasn?t happened in fifty years.
In equit ies, it did not pay t o be diversified t his mont h. US stocks were up close to 3.5% while the non-US stock markets were down roughly 2%. Similarly, real estate positions had a particularly tough month along with the bond markets. Average U.S. household wealth probably came in flat for the month, with equities doing a bit to cushion the blow to real estate positions.
Tough show for quant funds Our regular readers are very familiar with our ?3 truths of data-science?where we point at the quandary of most quant funds: they only have past data to work with. And a month like November shakes out the assumptions that many typical quantitative models are based on. AQR?s Risk Parity and Momentum funds were down close to 3% and 4.5% respectively. These are huge drops considering that these funds have annual volatility of 10%.
Great mont h for a few Global M acro funds Some large global macro funds, like Brevan Howard had blockbuster months, probably dominated by being short bonds. Over the Global Macro index did not perform that well and eked out a small gain.
Dollar st rengt h The amazing strength of the US dollar is perhaps a story only second to the drop in US bonds. It makes sense in a way of course. US interest rates are now more than double the average interest rate of other developed countries in Europe and Japan. This carry trade itself adds a lot of interest in buying up dollars. However, this questions the inflationary claims of traditional media.
Scraped t hrough wit h just a scrat ch At qplum we are very much data dependent and as Mansi described in her interview on the NYSE floor just after the election, the market reaction to the election was very very different to the market reactions to speculation about election prior to the event. This is not the sort of market where data-driven investing is supposed to do well. We eked out a 0.64% gain this month, primarily due to having lowered the risk going into the event and increasing soon after.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
4
Fract ional Rebalancing
November Comment ary
New st rat egies at qplum t his mont h Across all our portfolios, we are adding several short term indicators that can take advantage of short term mean reversion and momentum trends along with some volatility, yield and volume indicators. We are particularly excited to share our improvements in our ?income-generating? Fairway portfolio that runs at an incredibly low risk of less than 5% annual volatility. We expect the target yield of this portfolio to be close to 4%-5%. 80% of the ?income?is coming from high yielding products along with risk management and 20% of the ?income?is sourced from our short term strategies. If you want to park some cash and still earn some extra yield, take a look at our Fairway portfolio
here!
References and Dat a 1. 2. 3. 4. 5. 6. 7.
Singapore?s GIC moving into Big Data based portfolio management Paul Tudor Jones sees an urgent need to data-sciencify his fund Brevan Howard up 5.6% in November on track for first positive year since 2013 The Next Generation of Hedge Fund Stars: Data-Crunching Computers Top ideas from thought leaders in institutional investing Demystifying Quantitative Investing TABBForum Qplum Investment Methodology Paper
Disclosures The factual information set forth herein has been obtained or derived from sources believed to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information?s accuracy or completeness, nor should the attached information serve as the basis of any investment decision.
This document is intended exclusively for the use of the person to whom it has been delivered and it is not to be reproduced or redistributed to any other person.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
5
