Bye bye 2008!

I never thought that world would see a 1929 again, however, I should have remembered that history always repeats itself. 2008 was a mixed year; while the first half began with a huge promise of making this world a happy place despite what had happened in August of 2007, the second half saw a free fall in the world markets. Situation went just worse from bad leaving thousands jobless and probably many more to go. The equity markets, commodities markets, currencies and fixed income markets have witnessed a once in a century event. Financial history text books in future would refer to 2008 as a year of error(s) ... "an error of optimism"

The world paradigm has shifted and to what extent - gone are the days of easy personal loans, gone are the days of making quick bucks in the stock / property markets and with that has gone down the legacy of many institutions around the world which were considered to be the best in their business. I don't have much experience of down falls. The first even correction known to me was the Indian market correction post the HM era. Second known was the dot-com bubble. However, this is my first ever live correction. I was one of the fotunates to have joined the market when the trend was always on the upside; only to see the fall now.

A lot of people ask me where has the money disappeared from the market? Who gained out from this kind of selling in the market? .. My answer to this question is 'No One'. Hard to believe isn't it. No one gain's..how's it possible? Like I mentioned previously, we all have been caught in an error of optimism at the same time. Bad luck! may be. Some of the common features of this error of optimism are as follows:
1. Banks start to lend money freely - they want to earn more and thereby risk more capital
2. Suddenly every one in the markets tries and discounts cash flows which are gonna occur in 3 years from now and sells you a forward 3 year P/E
3. Even a hawker on the street talks about investing long term
4. Growth becomes the ultimate goal of every soveriegn in the world, be it with inflation - doesnt matter
5. A lot of new players enter into the Asset Management, Private Equity and Real Estate business
6. The term 'Value' takes an entirely different meaning...

An error of optimism is nothing but the fact that every one around you is overly optimistic about the state of the world. Unfortunately, we all get stuck into the markets when things look bright and are caught for not exiting because we are too optimistic. Happens to everyone! ... even the writer of this blog ;-)

The good news is that 2008 is coming to an end and 2009 makes new promises about the happy state of markets. May be this correction will soon see its bottom and there will be some massive consolidation in 2009. I just hope 2009 doesn't turn out to be as bad as 2008 was. (I am still optimistic :-) ...hopefully I am not making that error again). Bigger, better, joyous and fruitful 2009 is all I want!

Emerging Markets...

In last few years emerging markets investments proved to be extremely fruitful and everyone on the street wanted to be invested in the emerging markets..why not? Between 2003 and 2007 MSCI Emerging Market index annualized 48% in returns. However at the begining of 2008, when we were deciding our allocations to long short managers we had done a small study if emerging markets were gonna continue to do well or not? In hindsight not increasing our emerging market exposure seemed to be fruitful this year to date.

The study done was really simple..we analyzed the significance of the Emerging Market Index against the World Index. The ratio of price between the world index and the emerging market index touched a low of 0.2446 in 1998 after hitting a high of 0.92 in 1994. This ratio stood at 0.8 at the begining of the year and things weren't looking that good fundamentally (I will explain this in the fundamentals sections)

Also, when we looked at the Alpha generated by the emerging markets over the world index we found that this alpha was never significant in the long run. The 20 years weekly data gave an alpha of 0.016 and the standard error of alpha was 0.011 (0.016 +/- 0.011*1.96 would include 0). However during the period between 2003 and 2007 this alpha was actually significant and emerging market index did produce excess returns over world index.


Fundametals:



So when do emerging markets tend to perform better?

1. Commodity boom: Commodity boom explains the most significant factor contributing to the positive excess performance of the emerging markets. If we look at all the emerging markets; they have one thing in common..excess commodity .. may it be minerals, oil & gas, agro commodities or most importantly labour

2. Global Liquidity: Global liquidity is another major reason for the emerging markets to do well. Liquidity drives consumption which drives demand for emerging market commodities. Hence, now when the global liquidity is drying up we see dwindling growth rates for the emerging markets.


At the begining of 2008 both of these factors seemed to had ran out of steam, however we did see a final frenzy rally for commodities till the middle of 2008. The ratio of emerging market index to the world index now stands at 0.60; a decline of 20% YTD. Emerging Market Index has declined 52% YTD against a decline of 37% for the world index. I believe this ratio will fall further; emerging markets would underperform the developed markets for some time to come. I wont be surprised if we see this ratio going down to 0.40 in the coming months. Long term mean of the ratio is at 0.48 with std dev of 0.16 and I am sure we are going to see one std.dev move on the downside. We shall all wait for the global liquidity to come back with a bang for emerging markets to do well in future.


(P.S. World Index does include a proportion of Emerging Market Index in its composition)

The big slide ...

For past few days, as every other analyst on the financial street, I am trying to figure out when this turmoil going to come to end .. or whether there is some steam left in the sell off's we have witnessed globally ..

Incidentally I pulled up the charts of S&P and Dow Jones since 1990 and tried to figure if one could draw any conclusions from these weekly charts ... .

So here's the chart for S&P 500. It has seen two major falls in the past 18 years ... one was when the S&P peaked in 1998 and we had the russian bond crisis and the crisis of asian currency. The fall had lasted for nearly 4 years ... obviously this peiod had 9/11 happening as well dampening the spirits in the market. Interestingly look at the recent fall on the extreme right you may see the the velocity of the fall has been far more striking .. in just one year (from July 2007 to Sept 2008) we have had a fall similar to 4 years during 1998 to 2002. S&P is now approaching a very important support level of 800 ... if this support gets taken out ... the double top suggest that we may fall another 700 points...

Similiar is the story for the dow jones index as . The index had a trend upwards since the begining of Dec 1993 till 1998 and then a consolidation during 1998 to 2002. A strong trend again from 2003 to 2007 before finally reversing in July of last year. I fear based on the chart that INDU may go down to 7300 levels and may be there's a big support waiting for us then ..
These two charts indicate that we are very close to important supports and if we break these ... may be thats gonna be the end of the finance world!!

Doom strikes ...

Last few days in office have not been less than sheer disaster and this day, 13th October 2008, I see one of the hedge funds being the scapegoted purely because of whats going on in the financial markets world-wide.

This incidentally is (was) the first fund (and only till date) that I created by myself. Right from deciding on the capital allocation to checking the custody agreements and blah blah was done by me when we had launched this fund in August 2007. Wasn't perfect timing; however, everything we could do to protect our capital was done....infact the fund outperforms its benchmark by more than 10% YTD.

Sometimes I wonder what financial sense is? .. is to redeem out of relatively better performing positions or is it staying away from the bad one's. Incidentally whats been happening off late is that investors are selling good positions to fund some of the bad one's. How is that logical... when the market is at peak every one wants to be a part of it and when it turns bad everyone wants to leave ... bizzaaare isn't it ... however that behavioral finance. It feels disgusting to the fund manager though when peer's lose more than you do and you are bashed because you were better than the rest .... I am always gonna keep this email from my boss which said that investors are redeeming all their money from our fund and we have to close it down.... and most f*$%king thing of all we had to prepare the proposal ourselves.

Sometimes when you get up in the morning you feel there is something not right .. this has clearly been a bad day ... right from 9AM (when I saw this mail) the mood's just been terrible ...

Just as I write this blog ..my boss walked into my office ... and I said ... 'what a dis-appointing day ... we are left with only one fund ... I fail my driving license final test ...' and my boss told me strikingly ...'atleast you have a job' (pun intended)

What a week!

I wasn't too surprised to see S&P end positive w-o-w last week. My previous experience was the week of August 6 2007. However in a week's time, it turns out of that 4 of the major investment banks get wiped off the street - Lehman which will be sold in parts, Merrill which got sold in whole and Goldman - Morgan which are now full banks and no longer just independent investment banks.

It also turns out that for the first time in American history a 700 billion dollar rescue package has been annouced. Paulson is undoubtedely going to be the biggest trader of all times. There is no doubt that if any one were to buy these subprime mortgages at 20 cents on a dollar; give a consumer the time he needs to fulfill his obligations; he would profit from the 80 cents he is going to earn. Even if this were to happen in the next 20 years, US treasury earns a 7% r-o-r on their invested capital. However, the only trader who could have bought this market was the US treasury.

Whether it means good or bad for the markets? - difficult question to answer! ... is Socialism the pivotal issue and Capitalism always secondary? or is Socialism always the last resort for all Capitalist wrong doings of the 20th and the 21st century? take a guess ... few men take risk, they get paid for that .. when their trade falls out to be wrong government raises its hand .. wrong doings are never punished for it means bigger harm to the larger society. Isn't that really good .. you may do whatever you want, there's no punishment ... you lose money .. you get more to lose. "Regulations" is an economic term used for Socialism and we will surely witness regulation play a bigger role in shaping financial future. If regulators drive away speculators, an important part of the markets will go missing. Indeed, speculators who failed need to be driven out. Bigger question though is why pull out swords on the successful one's.

Past week wasn't huge because 4 investment banks failed ... it was big because we saw a glimpse of time to come .. time where businesses will be guided by regulations, time where central banks would decide market actions and who know's time where free economy will go back to the books again ...

Few greedy men!

So there it is.... Lehman Brothers is history now. The stock trades at 21cents (closing 15th Sept 2008), down 94% over the previous day. The institution which ran for 158 years was finally brought down by greed of few traders who traded mortgages.

In a way I would say this is a good thing to have happened. Somehow the concept that Leverage mangifies losses was forgotten in the first decade of this 21st century and the financial market did require a sanity check. However, the magnitude of this lesson is certainly glorified by the write off's we have seen over the last one year in the subprime credit markets. Estimates suggests this figure to be somewhere around USD 600 Billion (FED's balance sheet size is USD 800 Billion) and may be there are more losses coming our way. Unfortunately this isn't just a US story any more. It is now going to be a global contagian, Europe has to follow next; no doubut on that. Chineese (Asian) real estate; god save 'em ... Middle East; I dont want to hear about it any more .... It is going to extremely hard to think of new money making opportunities in the next 2 years or so.

The crux of the problem is excessive liquidity. Dick Fuld - CEO of Lehman had mentioned in one of the meetings that ample liquidity is hiding a lot of evils. He was so true. Unfortunately, Investment Banks were the greedy men who gave markets excessive liquidity speaking purely of mortgages. As the velocity of money increases when you package CDO's / CMO's, it free's up capital to be re-invested and if you dont have enough deals to re-invest your money you have two options - one to sit on TIPS or second to make a bad deal look good. Everyone choses the second (after all its a question of pay and perks) :-)

Paradox of plenty...

Ever imagined a situation where having more money is bad?!! ... suddenly it reminds me of Uncle Scrooge (the cartoon character) who used to say 'More money is always good for health'

GCC countries are facing a peculiar problem called 'Paradox of plenty' ... yeah, having more and more oil revenues is actually proving to be a disaster for these economies nowadays. One doesnt have to be an economist to understand that more money you have the more you can spend it as well. Hmm ... however spending more money means that you artificially inflate the price of commodities which are avaliable cheaper and then comes into picture the inflation dragon. Sometimes inflation does play a 'Casper' however it is a ghost afterall.

So lets first understand where did inflation come from .... the answer is not as easy as one would think - its actually a combination of multiple things explained as: firstly, a USD peg when Mundell, MC Kinnon and Kenen's theory proves that Gulf economies and US are no more an "Optimum Common Currency Area"... a falling US dollar meant increasing import prices and since any of the Gulf countries hardly produce goods of basic neccessity the price was surely gonna go up! ... Secondly, as the prices went up the demand for short term funding in name of personal loans started to rise (leave aside an laready looming public debt amount drawn to finance asset price bubbles - specially in the UAE) adding more liquidity in the market. However, these two reasons didnt pose a major risk previously. This was because while the local government's were investing their petro dollar's outside the region, foreigner's were actually pooring in money into the Gulf economies anticipating removal of USD peg's by some of these economies. Due to this available liquidity the interest rates were low and financing inflation or an asset bubble was an easy option.

However, as the anticipation of removing peg's abated we saw the foreign money returning to its destination and a huge shoot up in the short term interest rates (as much as 40% in a month's time). This is a good thing to have, high interest should correct inflation over the long run, however, in the short run it creates tremendous squeeze for liquidity so much so that it affects corporate productivity for every business (the ROC is no longer greater than the COC). Also, if one was to look at the real growth equation: its a function of marginal change in employement and marginal change in productivity. And in the short run both employement and productivity suffer affecting the growth of the economy. GCC equity markets have been hammered (may be 'hammered' is a soft word to use) because the visibility on growth has dwindled. Banks are indeed facing a miny liquidity crisis ( no matter how much one denies), Real Estate: main driver of these economies is showing signs of weakness, government intervention is at its peak and all possible efforts to restore balance in the economy have been made.

Usually, the 'Paradox of Pleanty' is a self-correcting phenomenon and hopefully this correction should happen over the next year. However, governments in the Gulf countries have to re-think their strategies on USD peg, diversifying the growth base away from construction and real-estate, increasing credit standards to avoid piggybacks and most importantly have a regime to control inflation and increase the affordability of living in these countries for expats.

What happened here!

I remember the days when recruitments happened in our B-School ... India was a good place to go to ... not surprisingly Indian companies did offer similar packages to what some of foreign companies did... yes the Sensex was at 16000 and on its way up! when it touched 21! I started to wonder if I had missed the boat....In the hidsight though whatever happened; happened for good...

This morning when i checked all NAV's for the MF's I am invested, I happened to have lost a significant chunk of money ... however, investing in funds was any day a better idea than investing in stocks... nopes ... this is not a crib blog ....


It is amazing about how dramatically things can change; you lose 30% of the market cap in 5 months ... what changed is the bigger question. Specifically in case of India things dont look brighter any more ... you have a soaring inflation; an unstable government; a haphazard monetary policy (let alone the fiscal policy) and a frightened 'white' ghost. The never ending capital flow into the indian market has suddenly figured out a new tourist destination or rather is just sitting at home trying to save itself from depreciation. A large current account deficit which eventually results into a weaking currency is adding salt to the injury at the central bank in India. 11% inflation (reported) is a huge number and today we saw one more CRR hike to take out the liquidity from the market.

The India central bank (RBI) has not been premptive in chasing down the inflation and one cant blame them because growth was the only objective till last year. Also, I must say that the policy makers have got it spot on in terms of the foreign currency reserves. I remember my argument with my economics professor in B-school over spending FC reserves for long term infrastructure projects in India. Now when you have dollar leaving the country, the central bank is able to restore some semblance in the currency market by selling these reserves .. if not; the INR must have been down to 45 atleast adding to the existing inflation woes.

So what does all this translate into ... the market is down 30% YTD and is there more pain left? .. I think yes.. India was an overbought story ... the stock market was a crazy place ... analyst's had ego's as big as an elephant's shit ... Being into hedge funds; i have learnt that the first golden rule of shorting any equity is when the management of that company doesnt wanna own that stock at the prevailing price ... and again the first golden rule of buying an equity is when a marginal buyer see's a huge value left in it... I think India is caught somewhere in between ... Even though stocks have corrected as much as 50%, we see no corporate intending a buy-back (may be one argument is that debt trades at high yields at the moment) ... second reason is that there has to be an earnings revision and this can only be on the downside at the moment and third and the most importantly you find cheaper markets than India with ample liquidity coming either from agricultural or energy commodities.

Having said what I have, I believe we may be approaching the golden rule for buying equities, how far is it depends upon each specific stock. If you believe that India can grow at 6% p.a the indian GDP doubles in 9 years and taking into account the target inflation rate of 5.5%, your money invested in stocks can double in 6 years. Hey thats not a bad deal at all; however for now I wake up in the morning and ask myself .. 'hey what happened here'...

Perception rules!

"Fact of the market is the Perception of its participants"! there is no better time to explain this statement; now that panic has set in and the market just cant figure out a bottom, least to say a direction in which it should go....

Perception cant be defined in a scientific terminology; its like air ... everybody knows its there however no one can touch or smell it ... no one know where does it come from or where it goes. Recent financials crisis has been no different than a perceptional paradox. Investors are caught in two minds as to what they can do to save their capital. Every one believes there is more weakness in Banks; and therefore everyone shorts them; its like herd's ... contrarians would be punished ... a few people who did well in the last year would be able to drive the sentiment in favour of their positions. No one believes central banks today ... you see wild swings in the currency markets ... suddenly a 0.5% move in EUR for e.g. which was considered to huge about 1.5 years ago seems to be the norm nowadays .. suddenly every asset class is volatile which kind of shows perceptional paradox going around in the markets these days.

At this point in time people who are on the short side are doing marginally better than their counterparts partly because the long guy has no money left to buy new instruments and partly because the perception really is that one can find companies which may go from 100 to 40 in a days time! (I saw the move on Man financials yesterday and coudnt believe my eyes)..

Its a market where every1 has forgotten the fundamentals ... equity analyst are losing their jobs ... portfolio managers now decide to have a long holiday ... CEO's are been thrown out ...best of all Lehman wants to sell itself .. pbbttt.... are we in a shit or are we?! ...

This is sentiment at its best! ....

What results in a change of perceptions; I dont know .. lesson learnt is perception governs all !

150! be next...

If you are related to the field of finance in any small way .. u cant ignore but discuss about one instrument which could have made a jackpot for you this year. No prizes for guessing that this instrument is 'Oil'. Yesterday (friday - june 6th) saw highest intraday move for oil .. the price was $138.54 up 8.41% to a life high!

Now the question is who would buy oil at $138.54 a barrel? and most important who brought it upto $138.54 a dollars? .. answer to both these questions is not only difficult but devious. Here is just a possibility of reasons which have led to oil price explosion.

If you recollect; just recently Calpers had decided to increase its global allocation to commodities and so did other pension funds and endowments. An increase in unemployement rate; decelarating US economy and global infaltion fears have prompted these pension / endowment funds to re-think their asset liability mismatch. To the extent now that US interest rates trade at a negative real yield and fear of losing substantial capital through inflationary pressure has spurred a huge investment demand for oil. As we all know that only commodities serve as an anti-inflationary hedge; investment demand for Oil, gold and other soft commodities will continue to rise. Fact of the matter is oil is not a replacable input into industrial production; and a stable production demand coupled with this investment demand is spuriing up oil prices. Even if the global growth rate was to go down 2% this year and assuming 50% industrialization of growth; the demand for oil would be down just 4% ( 2%/50%); however, the investment demand has already covered up this difference. This is now becoming a problem for economies with current account deficits; as widening deficits are leading to currency devaluation which turns into a higher cost of input and further an inflation which is impossible to contain. And the mother of all problems is that no one can dare raise interest rates now to contain inflation as the financial market is already in midst of an impending credit distress. Any weak data now is an impetus for commodities like oil and there is no reason why Oil can't reach $150 in a months time.

Second reason for this spree in oil price is less of an issue but still a cause!... Being into the structured products world; i remember that during jan/feb/march many of the investment banks were engaged in selling Structures on oil which profitted from a fall in oil price. Infact one of the ideas we sold to our client was shorting Oil at $117 when the spot was $90; I am glad we didn't sell this one to our client. Such structures were caught by the investment demand mentioned earlier and resulted in a Bear trap. When these structures were squared off eventually it resulted in a price push to an already inflated price.

On the supply side nothing much has changed and to be honest nothing much has changed in terms of the real demand for Oil. However, we have just added two more dimensions to the demand-supply balance; Capital Protection (investment demand) and Leveraged trading (structured products) and unfortunately both of these are on the demand side of things.

There is reason to believe that this price of oil has no fundamental justification .. however I cant be sure to short Oil till the I know some god father has raised interest rates; killed inflation (or alteast put it to bed); our investment banking friends have sqaured their structures and most importantly there is investable real yield avaliable for pension funds in the markets.

Stay Delta nuetral! (Long Straddle)

Who moved my cheese!

This is one other blog dedicated to Private Equity alternatives and difficulties faced by the PE business in this period of stringent credit!

Having worked in the middle-east for a year now, I certainly believe that the next wave of private equity would come from economies having sufficient current account surplus and a vision to spend on utilities, infrastructure and improving weaker area's of the economy. However, as of now, private equity in the frontier markets seems to be taking a bit of breather. I say this as an insider who see's capital pool bring dried up for new launched/to be launched funds in the Middle East. Interestingly, my boss was perplexed this morning as to why Private Equity fund raising was not picking up for Middle Eastern firms? The answer to this is simple - however, complex it might be - Hedge Funds are eating the Private Equity cheese!

Let me explain how:

If I were to open my calendar and look at the hedge fund managers I have met in the year 2008, I find that amazingly 75% of the managers who met me represent a distressed or high yield strategy within the HF strategy universe. And now let me you what these guys are doing that making the PE fund raising more and more difficult. Due to the recent credit crisis, we see that in the developed world, bonds are trading at a significant discount to par. Due to the recent sell off in the convetible markets, one can find convert's trading anywhere between 65 - 75 cents on a dollar making the current yield go upto 15%-25% in most of the cases. Similar scenario is being witnessed in the senior secured market, where paper of fundamentally good companies are trading between 50-60 cents on a dollar relaizing a current yield of 10%-15%. Hedge funds managers have been waiting for this opportunity since long and finally it has arrived. Investors have also become smart; imagine you pay 65 cents for an asset that yield 8 cents for 3 years with a guarantee of getting a dollar back - this trade yields you 26% annualized over 3 years. Tell me would you want to go for a private equity investment or invest in a 26% annual bond of a listed company in developed markets? I am sure you are smart enough! Hedge funds exploiting this opportunity at the moment are raising tremendous pool of money. Recent estimates suggest that High Yield managers are raising any where close to 8 billion of assets.

The private equity market has dried up - specially in the middle east. Distressed Hedge fund investing in one of the reasons newly launched funds are finding it difficult to raise significant assets.

P.S: There are a few other reasons why frontier market Private Equity is stalled; however, I leave that to be discussed in some other blog of mine.

email: patelhiraln@gmail.com

SPAC'ing Private Equity

Every time one thinks we have reached a peak of financial innovation, something new pops up and makes one realize how foolish it was not to think of it earlier. One such recent financial innovation has been 'SPAC'. SPAC stands for 'Special Purpose Acquisition Company'. The purpose of a SPAC is essentially acquiring some company - may or may not be a public listed company. Most interestingly SPAC are companies without any balance sheet and therefore most regulating stock exchanges didnt allow SPAC to be listed, however, this has changed now - with the first listing of SPAC in July 2007. Just recently both the Nasdaq and the New York Stock Exchange have announced plans to allow listing SPACs in 2008 as 'Blank Cheque' companies.

Why SPAC (and difference from Private Equity)?
SPAC companies are formed particularly for the purpose of acquiring another company(ies). What makes it different from a Private Equity deal is that SPAC is essentially a bet on Listed company (though not always). Unlike private equity the philosophy is not to build a company, however, is to better manage the company. More so, SPAC is a like a buy-out fund in terms of its characteristics. However, as SPAC is a listed entity by itself and it goes to its investors to seek approval for investing in target companies; a Private Equity GP or a Buy-
Out manager doesnt do that. This, most importanly SPAC provides transperancy to the investor regarding the location, size and liquidity. Hence SPAC provides an investor who cant invest into private equity an alternate route to earn potentially similar returns with limited risk on transperancy and frauds by PE funds. Also the lock-up for a SPAC is not as long as private equity and exit for investors is very easy as these SPAC shares are traded on exchanges.

Mechanism of SPAC?
SPAC units are sold as a combination of a share and a warrant to acquire shares in a 'Blind' target. The money raised by the SPAC is held in a trust which essentially invests in Government bonds or other such low risk instruments. The SPAC signs a letter of intent to acquire a company within, typically, 12-18 months of raising money. If these proceeds are not utilized during the said period, the SPAC shall dissolve automatically and the investor would be returned his money + interest accrued on investments made in govt bonds. The SPAC managers typically operate on a private equity / buy out philosophy to look for undervalued companies and acquiring such companies at a reasonable rate. The management team of a SPAC typically receives 20% of the equity in the new entity at the time of acquisition, locked-in for 2-3 years which is very typical to the performance fees paid for Private equity and Buy-out funds.

Is SPAC the future of private equity investments?
Though a vanilla SPAC structure is different from direct private equity investments, variants in SPAC structures are able to mimic private equity funds in a more transparent and easy way. Essentially a SPAC cannot be thought of as an 'Angel investor' and this part of the private equity business will always be the same (again I may think 2 years down the line - how big a fool i was not to think of something which could replace angel investing). However, with all due-respect to private equity firms, I believe SPAC is the future of all private investing. Gone are the days where investors preferred lock-ups, gone are the days of seeking exorbitant returns from private equity funds; investor now prefers liquidity, more so, tranperancy. Investments are becoming more and more liquidity driven rather than performance driven, cost of exit has gone incredibly higher and more interestingly now, a known devil is certainly becoming better than an unknown god.

Future perfect...

My recent adventure in NY with some of the US hedge funds brought back memories of last August where everything seemed to be going down ... A part of the meltdown as explained by every manager I met was the impact 'Quant Funds' had on the market..

Incidentally my last visit today (to end my business trip in NY) was at a hedge fund called Renaissance Technologies. This is one of those 'black box' investing idea driven fund where all of the managers managing the funds are PhD's. Most surprisingly none of these PhD's is a finance professional, they all come from Physics or Mathematical background and my first impression of these guys running a huge sum of money (USD 25 Billion) is that either these guys or I am a misnomer in the field of finance. I saw large boxes of computer doing all the trading and immediately thought - is this the way future is going to be!? As I sat across the table with these PhD's I tried to figure out what they do which makes the operation so special - what algorithms go into making these systems work; and again amazingly the answer was 'Price' and 'Volume'. Two variables determining what happens next to the price. It was really amazing how each of those algorithm would generate a trading signal and let us know what the best trading idea is for the next 2-3 days.

It became more and more convincing that what I saw was the future of all trading to happen in probably 10 years time. However, I had my own set of apprehensions. To my surprise, when I asked one of the PhD's that met me about how an algorithm can capture human behaviour, he told me it couldnt and then I wondered as to how one could trade without knowing the market instinct. And at that moment all my conviction in quant systems was gone...

what I took away from this meeting was systems help you decide a lot of things, however, can't be decision makers themselves. Firstly, because (however ironic it may be) systems dont understand emotions, they dont understand that fact that humans behaviour is as random as randomness can get..Secondly, no system in the world can tell you what the corporate earnings are going to be 2 years down the line ... Principally how do u adjust for irrational behaviour? I understood that price captures present human behaviour, however, no one knows what happen's tomorrow...

This is what exactly happened to these quant funds in August, systems failed to take into account the irrationalism in the market. They failed to understand that there is more to markets than price and volume; something we know as fear and greed ... and no matter how good the present is ..future cant be perfect !b

Upside down..

Its that period of the market cycle again where hypocrisy is masking market well being..

What I mean by the above statement is the change in the attitude of the so called 'Capitalist' world which has learnt a new lesson of 'Socialism' in the last 6 months of this major financial distress. No points for guessing that this blog is about US policy makers!

When the markets began to tumble at the begining of the August 2007, our friend Ben approached the crisis as a self regulation mechanism and did react as if it was just another day where he sits over shit and reads newspaper. It was only after a few farts that he realised what actually had happened to him was loose motion. Incidentally, that loose motion of his isnt being cured yet. One thing which incredibely came out of this episode was a change in thinking. Suddenly Ben decided to become a socialist; he forgot what capitalism was; he forgot that the rule of the market is 'survival of the fittest'. Instead Ben choose to help the orphans, ya ya ... poor little investment bankers who forgot Basel II. Papa Ben will buy all junk paper in the market and go to house's to collect rents. Papa Ben will give orphans more money to spend more money to waste ... Papa Ben will make sure they get food to eat .. given that Indian's eat more food now, Papa Ben along with grandpa Bush has to make sure american orphans get food and become smart when they grow up... Papa Ben has an 800 Billion dollar Balance sheet and he is gonna rescue us all !

No, the objective of this blog is not to disgrace american's ... its about how hypocratic US policy makers are ... they would come to all WTO rounds asking developing countries to reduce food subsidies; asking for a capitalist approach out of these countries. Where the fuck has capitalism gone now? .. why the fuck Mr. Ben fears american investment banks being taken over by Chinese banks now? It was a rule US propogated, so why isnt it being implemented now?... Why go beg money from Arab's now .. you always had an anti-muslim propoganda? .. this is as hypocratic as it can get ... You dont have food to eat; dont blame it on others...if you got the balls to do it; try and strengthen US dollar...

Fact of the matter is short term Socialism is not bad ... we all know developing world needs socialism to compete with the big boys and there is no shame in thinking about the well being of one's country however socialistic that is. The truth as it stands today is that the developing world is more capitalistic than the developed world, banks are more solvent in the developing world, the middle class can afford a better living standard, kids have better education and the biggest irony of all is that developing world has food to eat which the riches dont have.

Its time that countries like US realize; their time to dictate terms has gone; better not propogate something they can't follow themselves. Its time to respect the developing world, its time where 'war' is not your solution to get out of recession ! The world is turning Upside down and no power can stop this from happening because its time has come..

the 1st one ...

The title is so bcuz this is my first post of a new blog dedicated to 'Finance'...

As most of us who decide to study finance go through the books of many legendary investors and traders who made it big in the world of finance, I did go through some of them myself. One of the quotes that I remember distinctly from an investment guru 'Warren Buffet' read .."It doesnt matter if you lose my money, though, never lose my trust". I decided to mentioned this word 'turst' in first blog bcuz today being a fund manager I realize that most important for me to do as a person who manages money for investors is not to lose their trust ... and let me now explain what did Buffet mean when he said that sentence.

Trust; when comes to managing money is a term pharsed to distinguish 'Mistake' from 'Irrationality'. We are all humans and we all tend to make mistakes, no one can be perfect isnt it. There is no shame in making mistakes, what matters though is to understand if you behaved irrationally when you made that mistake or whether that mistake was an outcome of irrationality. There is a thin line of distinction between Mistake and Irrationality and its very difficult to prove the absence of other if the first one is proved. Essentially irrationality is an outcome of continued mistakedness and failure to accept the condition when one is wrong.

One quality about all good investors and traders I found in the books I read was their ability to realise their mistakes quickly. And most important the courage to accept their mistake and go ahead with the next trade. Some how they all are mechanical, they accept that the world is smarter, have a low ego when it comes to trading / investing, stop loss and profit taking is a religion to be followed, greed is matched with the level of caution, have tremendous wit to decide the risk reward ... they all made mistakes, however, they could distinguish it from irrationality.

So here's the first lesson of finance: No matter how good you are, you cant avoid mistakes.. just dont be cynical to make that mistake turn into irrationality.