Tagged: Hedge Funds

Hedging Bets

We’re in Steamboat Springs this week watching the moose on the snowbanks and letting the world slow down with them for a bit. 

It sets me to thinking. “Hedge funds would be better off doing nothing.”  So postulated (requires subscription) Wall Street Journal writer Laurence Fletcher last week after data from Chicago hedge-fund researcher HFR Inc. showed stock-betting funds that as a group manage about $850 billion lost money in 2016. 

You’re tempted to smirk. The smartest folks in the room can’t beat an algorithm! They can’t top the S&P 500 index fund your 401k owns.  Losers!   

Let’s rethink that perspective.  These are the professional athletes of finance. The New England Patriots of investing. If the best are failing, the ones sorting good companies from bad and chasing them either direction, then maybe we’re missing the real problem. 

Perhaps it’s not that hedge funds are losing but that the market isn’t what it seems.

And if hedge funds are confusing busy with productive, might we be too? The investor-relations profession shares common ground with them.  Great effort and time go into telling the story so it resonates. Hedge funds come at a cost because they’re ostensibly better at sorting fact from fiction. Both disciplines are about standing out.

Apple stands out for instance, touching a 52-week high yesterday following resurgent growth. Yet as my friend Alan Weissberger at fiendbear.com notes, Apple earned $8 billion less in 2016 than the year before and spent $20 billion buying back stock.

People are buying its future, is the retort. If by that one means paying more for less since it’s likely AAPL will continue to consume itself at better than 5% per annum, then yes. But that’s inflation – more money chasing fewer goods.

I’m not knocking our epochal tech behemoth. It’s neither pulp fiction nor autobiography to the market. AAPL is its pillar. Models aren’t weighing mathematical facts such as its 5.5 billion shares of currency out, 15% less than three years back. But who’s counting? Not SPY, the most actively traded stock, an exchange-traded fund and AAPL its largest component.

If the models needing AAPL buy it, the whole market levitates in a weird, creaking, unsteady way.  This is what hedge funds have missed. Fundamentals are now back seat to weighting. If you pack weight, the cool kids of the stock market, you rise. When you’re out of the clique, you fall.  Your turn will continually come and go, like a chore schedule.

Hedge funds are also failing to realize that there is no “long only” money today.  Not because conventional longs are shorting but because the whole market is half short – 48% on Feb 6. One of our clients was short-attacked this week with short volume 23% below the market’s average. We doubt the shorts know it. 

Hedge funds are chasing the market because they don’t understand it anymore. No offense to the smartest folks in the room. They’re confusing busy with productive, spending immense sums examining business nuances when the market is a subway station of trains on schedules.

There are two lessons here for investor-relations folks and by extension executives of public companies and investors buying them.  IR people, learn by observation. Don’t be like hedge funds, failing to grasp market structure and getting run over by the Passive train.  Learn how the market works and make it your mission to weave it into what you tell management. Structure trumps story right now.

Second, hedge funds show us all that there’s a mismatch between the hard work of studying markets and how they’re behaving.  Either work, smarts and knowledge no longer pay, or there’s something wrong with the market.  Which is it? 

Stay tuned! We’ll have more to say next time.   

A Year Ago

In Luckenbach, Texas, ain’t nobody feeling no pain. We were just there and I think the reason is the bar out the back of the post office.

A country song by that name about this place released in 1977 by Waylon Jennings begins by asserting that only two things make life worth living, one of which is strumming guitars.

In equities, what makes life worth living is certainty.  TABB Forum, the traders’ community, had a piece out yesterday on the big decline in listed options volume, off 19% from last July to a 14-month low. TABB attributed the drop to falling demand for hedges since the Brexit, the June event wherein the UK voted to leave the European Union and exactly nothing happened.

The folks at Hedgeye, responding to a question about whether volume matters anymore since it’s dried up as stocks have risen to records said, paraphrasing, big volume on the way down, low volume on the way up, is as valid as it ever was for investors wary of uncertain markets and means what you think it does. You should be selling on the way up so you don’t have to join those people distress-dumping on the way down.

I got a kick out of that. Sure enough, checking I found that SPY, the world’s most active stock (an ETF) traditionally trading $25 billion daily is down to $11 billion.  Whether it’s August is less relevant than volume.

On August 24 a year ago, the market nearly disintegrated on a wildly delirious day.  August options-trading set a near-period record.

Now what’s that mean to investor-relations folks trying to understand stock-valuation and trading? We’ve long said that behavioral volatility precedes price-volatility. You can apply it anything. As an example, if housing starts plunge, that’s behavioral volatility.  If a movie starts strong and viewership implodes the second week, that’s behavioral volatility.  Both point to future outcomes.

We track market behaviors. They tend to turbulence anyway around options-expirations, which occurred in the past week, and August 2016 was no exception.  On Aug 19, triple-witching, Asset Allocation (investment tracking a model such as indexes and ETFs) surged nearly 11%, Risk Management – counterparties for derivatives – by 3%.

It’s the double-digit move that got our attention.  Double-digit behavioral change is a key indicator of event-driven activity, or trading and investing following a catalyst such as Activism or deal-arbitrage.  It’s very rare in the whole market.

We also tracked a whopping jump since Aug 15 in Rational Prices, or buying by fundamental money.  When it’s coupled with hedging, it implies hedge-fund behavior.  In effect, the entire market was event-driven under the skin yet not by news. Nor did it manifest in prices or volume (Activism also routinely does not).

We’ve got one more data point for this puzzle. Volatility halts in energy, metals and emerging-markets securities have returned after vanishing in June and July.  Remember, market operators have implemented “limit-up, limit-down” controls to stop prices from moving too much in a short period.

So though the VIX is dead calm other things are moving.  Short volume marketwide is nearly identical (44%) to where it was in latter November preceding December volatility and the January swoon.

We conclude that currency volatility may surge, explaining volatility halts in commodities.  Hedge funds are shifting tactics. The dearth of options trading may rather than mean a lack of hedging instead signal the absence of certainty.

Pricing options accurately requires knowing prices of the underlying securities, plus volatility, plus time.  Volatility isn’t the faulty variable. It’s got to be either the prices of the underlying or the uncertainty of time.

Now it may be nothing. But our job here is to help you understand the market’s contemporary form and function. If behavioral volatility precedes change, then we best be ready for some.  We may all want to pull on the boots and faded jeans and go away.

But hang onto your diamond rings (and that’s all the obscure country-music humor I’ve got for today!).

Macro Factors and IR

Congratulations, IR profession! It’s happened.

One of our ranks stepped up to the stock-exchange rule-filing plate, planted, and cracked that fastball out of the park. Thank you, Katie Keita, for commenting on the Nasdaq’s proposal for ETF sponsors to pay market-makers.

I hope it’s a trend. Your stocks underpin everything else. These are your markets.

More on that later. But speaking of trends, yesterday the dollar rose and stocks fell. When the greenback gains on other major currencies, things valued in dollars often decline. Stocks are stores of value, and value ebbs or flows according to the measuring tape – currencies. The dollar fell in April (after an early buck spike garroted equities), so stocks rose proportionally. Then as April ended, the dollar strengthened on mounting global worries (especially from Europe). Stocks shrank. It’s a macro effect that trumps stories.

How should you view macro factors from the IR chair? “Macro factors” is jargon for “how appraisers view the global neighborhood.” There was a good article on the Big Picture (page R9, “How the Big Picture Affects Stock Picks”) in the Wall Street Journal Monday May 7. Writer Suzanne McGee says macro factors shouldn’t make investors reflexive but can’t be ignored either.

You’re not investing, of course. But you’re selling to investors. If your target market is influenced by macro factors, and you’re not, you may be striking discordant notes. (more…)

Influencing behaviors in your trading

In politics, Bill Clinton perfected the “trial balloon.” You float an idea of one shade because you’re planning on getting people to embrace an idea of another larger construct.

In fiction writing, authors will create portent by ending a chapter with something like: “She could never have imagined the consequences of her decision.” You can’t wait to turn the page to find out what she couldn’t imagine. The writer has subtly influenced your behavior.

The Fed is always trying to influence our behavior. Market performance October 4 (today) was mostly about Fed influence. Affirming commitment as lender of last resort – which sounds good but means “we will print endless piles of cash” – is the same as devaluing the dollar. So the dollar plunged in the last hour of trading, and stocks soared. (We all want stocks to rise but think about a teeter-totter. That’s stocks and dollars.)

In trading markets, exchanges continuously toy with behaviors by changing the spreads between fees for taking shares away and credits for bringing them to sell (this is the root cause of high-frequency trading). Exchanges are influencing behaviors.

Why does it matter? IR is about influencing behavior. In the past, we did it mostly with operating results, investment thesis and investor-targeting. Today, it must go further. Do you consider the impact of Fed policy and adapt your institutional outreach to match your investment thesis to impending changes in behavior? You should. If programs stall, don’t keep talking to growth money; shift to high-turn, deep-value money. (more…)

Insider Trading and Rational Investment

Here in Spokane, the landscape is bleak and wintry, the temperature hovering at ten above. Crisp! Before we gather round our well-laid tables (in America at least) Thursday and give thanks, let’s weigh on the scales of investor-relations justice this insider-trading scandal soaking print ink.

The allegation, if you missed the story of the week outside South Korea, Ireland and Cambodia, is that funds are using “channel check” style information to gain an illegal advantage. Federal agents have swept into capital-markets concerns to seize files and persons and stop this pusillanimous peculation.

The last time government contended information misuse, machines took over the trading markets. (more…)

Missing the Mark in Algorithmic Trading

Do you think your stock trades well?

While you ponder, a confession: We’re guilty of a bait and switch. If I’d written “implementation shortfall,” which is what I mean, rather than “missing the mark” above, which is what I said, I might be responsible for a chain-reaction narcoleptic catastrophe, people randomly falling asleep mid-word and banging heads on laptops, iPads, desks, afternoon pub beverages. (more…)

Actionable

What does the word “actionable” mean to you?

It’s a decent name for a rock band, yes. But it means “what stuff can you do with this?”

Traders want actionable data – something to drive opportunity for profit. Investor-relations professionals want actionable tools – something that’ll improve stock ownership, share price, results of IR effort.

Knowing who owns your stock is good. But what actions can you take? Talk to sellers? That’s uncomfortable. Plus, unless you’re screwing up, selling is a compliment, an investment objective. The sellers should well buy again, when the time’s right. (more…)

We were on the bikes at dawn in Denver where on the oval at Washington Park it was 45 degrees as the sun rose.  That’ll wake you up!

Speaking of waking up, did you read Sebastian Mallaby’s article in the weekend Wall Street Journal called “Learning to Love Hedge Funds?” Going back to the first hedge fund in 1949, run by Alfred Jones, Mallaby contends that hedge funds represent the optimal risk-management model.  Government tries to prevent bad things from happening. Hedge funds, where owners put their money at risk and earn returns when profits are produced, view risk as a pathway to opportunity, but one marked by prudent insurance, or hedges, against downside.  Jones produced cumulative returns of 5,000% from 1949-1968, Mallaby notes. (more…)