Hedge funds that have relied on people to make bets are hiring quants like never before in search of answers to lackluster returns. They’re playing catch-up to firms such as Renaissance Technologies and Two Sigma Investments, among the leaders in using complex mathematical models for investing.
Do bond holders that have a negative yield pay the issuer?
Now let’s look at an example with negative yields. If you buy the same bond at $101, and it matures a year later at $100, then your yield is -1%. You paid more for the bond than you received back when the bond matured, and you didn’t receive any coupon payments along the way. And this same mechanic can work for a bond that pays coupons. Say there is another bond that pays a $1 coupon in one year, along with the $100 you get back in maturity proceeds, in total you get $101. If you pay $102 for that bond today, then in a year you have again earned a yield of around -1%. You paid $102 in return for total cash flows of ($100+$1) = $101.
“It is easy to confuse day-to-day noise with actual and significant signals. If you are merely reacting to the latest market action, then what you have is not a plan — you have an instinctual, fear-driven reaction, and it’s the makings of a disaster.”
Our new leadership elected to sell our position in Valeant Pharmaceuticals, exiting completely by mid-June. Valeant was our largest position to start the year and its 80% decline through June 30 badly penalized our results. – Sequoia Fund Shareholder Letter
Sequoia Fund management’s decision to finally exit their stake in Valeant Pharmaceuticals ends a painful almost year long slide in their biggest position and what was at one time their best performing holding.
Sequoia was an early investor in the Mike Pearson era Valeant. A strong believer in what they saw as a savvy manager who took a value approach to buying healthcare assets and wringing efficiency from them. Sequoia started purchasing Valeant in early 2010, probably at prices in the mid teens, and by the end of the year the position accounted for 10% of the funds assets. At year end they already had a gain of 78%. A fantastic return on investment in less than one year and a big boost to the fund’s performance.
The fund managers continued to build a position over the next five years and were enjoying the outperformance the stock added to the fund’s returns. By 2015 the position reached 20% of the fund’s assets and Sequoia also became Valeant’s single largest shareholder.
Then in August of 2015 the position began to lose money. You can’t fault the fund managers for sitting on the position while the stock declined in August along with the rest of the global markets. Continue reading
|Asset Class||Index||Performance YTD 2016|
|Emerging Markets||MSCI EM||6.6%|
|REITs||NAREIT Equity REIT Index||13.7%|
|High Yield Bonds||Barclays Global HY Index||9.2%|
|US Bonds||Barclays Aggregate||5.3%|
|US Large Cap||S&P 500||3.8%|
|Commodities||Bloombery Commodity Index||14.2%|
|Developed Intl. Markets||MSCI EAFE||-4.0%|
|US Small Cap||Russell 2000||2.2%|
One of the striking things about Grove is that his approach reflected the messy nature of running a business in the real world. Rather than taking a dry, academic approach, he had a hard-fought perspective earned in the trenches of building and running one of the most important companies in the modern world. This perspective is quite valuable for both investors and business leaders.
So, here are four investing lessons from his life, all of which are quotations are from Grove himself. Continue reading
From 1989-2015 the S&P 500 was up almost 1200% in total. The majority of that gain came from a small number of stocks while the rest were more or less worthless.
Barry Ritholtz haas a great piece on Bloomberg.com about how active management is failing to keep up, much less beat passive management. I’ve often wondered having spent about 20 years trying to produce as much alpha as possible in a short amount of time (AKA trading) if there is less alpha to be created now that everyone has instantaneous access to the same information.
There was a time when having a Bloomberg terminal presented opportunities to make very easy profits just by receiving news before other traders, but since Regulation FD and Yahoo Finance those opportunities no longer exist.
Internet has leveled the playing field: How much information that once was the province of a select few is now in the hands of all?It was a huge game-changer when Yahoo message boards begin to fill up with posts from people doing legwork on individual companies. When someone reported that XYZ Tech’s employee parking lots were filled with cars 24/7 — including weekends — anyone paying attention understood that business was booming and that sales were going to beat investor expectations. For the few who grasped that, this was a period of large trading profits.This advantage exists only when a small number of people know what a large number of people are going to find out too late to act on. When everyone knows, the advantage disappears.
For his take on the reasons why active money management is failing to beat their benchmarks follow the link.
|Asset Class||Index||Performance Q1 2016|
|Emerging Markets||MSCI EM||5.8%|
|REITs||NAREIT Equity REIT Index||5.8%|
|High Yield Bonds||Barclays Global HY Index||4.1%|
|US Bonds||Barclays Aggregate||3.0%|
|US Large Cap||S&P 500||2.0%|
|Commodities||Bloombery Commodity Index||0.4%|
|Developed Intl. Markets||MSCI EAFE||-0.4%|
|US Small Cap||Russell 2000||-1.5%|
So often in the investment business, we look for answers in quantitative models. Systemic risk is 19.2 — time to hedge! Systemic risk has fallen to 7.9 . . . Phew, we can all breathe easier now! Alas, if only it was so simple. There is a quote, often and perhaps erroneously attributed to Albert Einstein, “Not everything that can be counted counts, and not everything that counts can be counted.” Apocryphal or not, it’s true in all walks of life and certainly true in evaluating systemic risk.