Improving Investment Decisions with Quant Analysis

Below are some excerpts on a SeekingAlpha article -- that highlights "the application of quant analyses to produce meaningful and objective investment information."  

With so much at stake in the finance and investment world, there are constant debates about investment performance, asset allocation, active vs. passive approaches, and more. In this article, we review recent articles on the application of quantitative models to the investment world - and look at the stock market's technical outlook.

History can tell us where we have been -- and a scientific and mathematical approach can help guide our investment decisions going forward. Quantitative analytics can be applied to many areas within finance, ranging from asset allocation and risk management to trading / investment strategies and the growing interest in alternative assets.

Quantitative approaches can be used to improve investment decisions by producing objective analysis. The goal is to improve investment results and the probability of repeatability. Math and scientific methods can help put history and patterns on our side. Here are some important takeaways:

• Varied interests and motivations can reduce optimal investment decisions.
• Performance data is not necessarily useful in predicting future results, especially when studying short-term manager performance.
• Behavioral finance has shown that many investors overreact to recent events, and tend to ignore long-term historical patterns.
• Mathematical models can minimize the negative impacts of greed and fear, improving discipline -- and taking emotion out of the equation.
• Robust quantitative analysis can improve "forward information" and repeatability.

Systematic and scientific approaches can yield meaningful information and help improve long-term performance by providing objective analysis to investment committees.

Read more here:

http://seekingalpha.com/article/879811-improving-investment-decisions-with-quantitative-analysis

On Diversification & Active vs. Passive Management

In our work and research related to portfolio optimization, asset allocation and quantitative investment strategies, we use historical data and seek to maximize “forward information.” Our goal is to improve risk-adjusted returns and achieve prudent diversification.

In a recent article on Managed Futures and Commodities, we reviewed the performance of several asset classes during 2011 (through the end of November). Some investors noticed that the actual performance of some key asset classes outperformed professionally-managed funds. For instance, the S&P 500 is actually positive (+1%) as of the end of November, beating many actively-managed funds. In addition, because the S&P 500 was positive – along with government bonds (intermediate-term government bonds are +8% through November) – some investors are surprised to see Global Macro approaches down for the year.

Active versus Passive Management

Based on the performance of the S&P 500 and government bonds so far in 2011, we can see that a simple 60% stock / 40% bond mix would have eked out a small, but positive return, through the end of November. Why, then, are Global Macro, as well as many stock funds – and so many hedge fund categories, down for the year?

Professional portfolio managers are paid to manage risk. In the case of the stock market, we have seen very large swings – and money managers need to protect their clients and portfolios from large declines. In 2011 alone, the S&P 500 had at least five declines of 100 S&P points, or relatively large declines of about -7.5%. These declines took place in March, May, August, October and November. The August decline totaled about 200 S&P points, or about a -15% decline.

Read more here:
http://seekingalpha.com/article/314209-diversification-active-vs-passive-management

Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He is a specialist in quantitative investment strategies, managed futures, alternative assets, global macro & strategic asset allocation. Carlton combines a CTA hedge fund background with portfolio optimization work for institutional investors. 

MF Global: The Search for Missing Assets... AND when will Assets be Transferred?

It is now the middle of November, and it has been several weeks since the MF Global bankruptcy on October 31, 2011.  There have been numerous articles detailing the news and sometimes sensationalizing speculation about the MF Global debacle.  In this article, we give some background, update relevant news, and summarize thoughts we have heard from alternative investment industry participants – on how the industry can move forward.

Website Links to the Major Parties
Here are several important links (Trustee, CFTC, CME) involved with the MF Global bankruptcy and asset transfer.  These sources typically post factual and relevant information:

MFGlobalTrustee.com – this link forwards to:

http://dm.epiq11.com/MFG/Project/default.aspx

CFTC – The Commodity Futures Trading Commission page on MF Global:

http://www.cftc.gov/IndustryOversight/Intermediaries/mfglobal

CME – The Chicago Mercantile Exchange page on MF Global:

http://www.cmegroup.com/clearing/mfglobal.html

Recent MF Global News


The links above, along with several informative articles on the MF Global situation have been archived at this blog: z-Trader.blogspot.com.  Below are several recent news articles related to the MF Global bankruptcy and customer asset transfers.  More specifically, many are interested in the search for missing customer assets – and when the bulk of assets will be transferred.

Here are some excerpts from a recent article on the continuing search for missing MF Global Assets.

“(the) CME Group pledged $300 million to help accelerate the release of customer cash and other collateral from MF’s bankruptcy…”

“In addition to helping make customers whole, some additional assistance may be appreciated by the 1,000-plus MF employees fired on Friday…”

“The case of the firm’s missing $600 million also continued this week.”

Read more here:

http://wallstcheatsheet.com/stocks/mf-global-continues-to-reverb-across-wall-street.html/

Here are excerpts from a detailed Forbes article on what may have transpired.

“When did MF Global exploit the customer segregated accounts and why?  How were the proceeds used to stem the firm’s deepening insolvency?”

“Based on the sequence of events described… I believe that MF Global transferred assets, not cash, from customer segregated accounts to a “house” account sometime late Wednesday or early Thursday.”

“I’ve given those who executed the ‘nuclear option’ to save MF Global the benefit of the doubt.  I believe those executives used all available legitimate means to raise cash first, including trying to sell proprietary assets, as CNBC reported, and exhausting existing credit lines.”

Read more here:

http://www.forbes.com/sites/francinemckenna/2011/11/09/mf-global-assets-have-left-the-building-how-when-where/

Below are excerpts from an interesting article that discusses JP Morgan tactics, as one of MF Global’s main creditors. 

“Similar in nature to one’s bank account or stock market account, JP Morgan is trying to sweep titled segregated accounts into the assets of MF Global into the bankruptcy courts.”

“The analogy is very simple.  Let’s say you have a bank account in your name.  The bank makes bad business decisions.  Then a company like JP Morgan makes a claim on your personal assets that happen to be at the bank.  How would you feel?  How safe do you think your money is?”

Read more here:

http://myinvestorsplace.com/2011/11/14/mf-global-clients-cry-foul-over-jpmorgan-tactics-in-bankruptcy-recovery/

What Now?
At this point, many investors and interested parties want some action – and many investors and industry participants hope the process of transferring the bulk of the assets starts very soon.  With the whirlwind of media information swirling around, here are several key questions and thoughts:

• SIPC protection:  There has been speculation about SIPC protection.  The general consensus is that this protection exists for securities accounts, but not necessarily for futures accounts.  But what about T-Bills?
• It appears that MF Global used a loophole to invest customer assets in "sovereign debt" – and then used the "segregated accounts" to cover margin calls.   
• The Trustee has stated that they need to understand everything before they start transferring assets.  Others are clamoring for the quick release and transfer of MF Global customer assets. 
• In the name of the integrity of the business, and practicality, industry participants hope asset transfers for the bulk of client assets start very soon.  Assets cannot be held hostage for this long.
• Some industry insiders feel that JP Morgan Chase, as a major player in the financial industry, will feel the pressure to help make customers whole.
• Many hope that the industry and regulators will work to maximize the “integrity” of the business and financial marketplace.  It is always best to maximize client trust and regain customer confidence. 
• It has been several weeks, and many are surprised that the large majority of assets have not yet been transferred.  If 11% of assets in segregated assets are in question, why have 85% of assets not yet been transferred?  

Lessons – and Moving Forward

• Many investors typically prefer less government regulation, but some sort of checks and balances would be a good thing.
• Where applicable, it is best not to have all of your "eggs in one basket."  That is, if possible and practical, it is good to diversify your brokers.  It is especially good to have more than one broker and more "outs" for your trading positions.
• Although some point to CFTC rule (1.29) that allows the use of customer assets for “sovereign debt” – most people would recognize that the intent of the law would not allow the use of highly leveraged positions.  
• There are many offsetting responsibilities and wants.  The Trustee is trying to do the right thing.  All interested parties want to access their assets as soon as possible.  The industry wants to maintain the integrity of the marketplace.
• With the increased pressure on JP Morgan and regulators to move forward, many expect progress and asset transfers in the near future.  
• In times like these, it reminds us that it is important to know who we are doing business with – including financial advisors, hedge funds, and even our financial institutions.

In the end, many in the investment industry hope that the Trustee, industry, and exchanges will start the transfer of the bulk of the assets very soon, and make the customers "whole" soon after the dust settles.  This will do a lot to sooth customers and regain a measure of faith and confidence in the financial industry.

This is a summary of relevant information surrounding the MF Global bankruptcy and does not necessarily represent the views of the authors nor the z-trader blog.  

For additional articles by z-trader contributors, please visit:

http://seekingalpha.com/article/295688-a-trader-s-thoughts-on-recent-market-volatility

http://seekingalpha.com/article/277851-a-well-balanced-portfolio-including-alternative-investment-etf-allocation


Carlton Chin, CFA, is chief investment officer at Adamah Capital, a specialist in managed futures and quantitative & alternative investment strategies.  Alternative assets offer diversification to traditional portfolios of stocks and bonds.  

A Z-Trader's Thoughts on Recent "Vol" 9/25/11

Excerpt from one of our contributor's articles at SeekingAlpha:

Here are a few quick thoughts for these volatile conditions, during these difficult economic times:

• Don’t try and catch a falling knife. Most good trading systems will minimize risk and “stop losses” from accumulating. You can never tell how far emotions will carry a large market move.
• When “contagion” spreads, it is sometimes best to step aside and reduce positions because psychology and emotions can also spread – causing markets to move past any "reasonable" level.
• Many portfolio managers are reducing positions, so markets become more "correlated" to one another.
• “Diversification helps until it no longer helps.”
• Trade down to the level that lets you "sleep at night."
• From a trader's perspective, once the markets find footing, these "dislocations" may offer opportunities.

Read more here:
http://seekingalpha.com/article/295688-a-trader-s-thoughts-on-recent-market-volatility

Trading Systems: Managing the Ebb & Flow of Futures Markets

Here are some excerpts from an article Carlton Chin of Adamah Capital wrote at SeekingAlpha on the recent sharp reversals in the futures markets -- and how trading systems need to find balance between profit opportunities, risk management, and potential losses (drawdown).

...The futures markets (both financials and commodities) -- and in particular, currencies, metals, energy, agriculture, and several softs -- have presented profit opportunities to futures traders. However, after a strong December, early January has seen some sharp reversals in the future markets.

...

Back in November, we wrote about the sharp reversal in the futures markets. At the time, we saw severe reversals even sharper than this week's moves... However, at the time (back in November), traders had to manage their risk -- and protect profits from potentially severe drops.

...

Managing the Ebb & Flow of Markets

There is a trade-off between "potential profit opportunities" versus losses -- and a "decline or drawdown" for any trading strategy. In a nutshell, traders must "surf" the waves of the markets -- and manage their positions and strategies through the inevitable "ebbs and flows" of the markets.

...

There are always risk and return trade-offs, but good research can help traders and investors capture profit opportunities in the financial markets. We have studied and developed trading methodologies that attempt to capture profits while managing risk. Please check out the results in this FX/Forex trading challenge (top few percent). In addition, several of our trading strategies can be tracked at this third-party tracker, Collective2.

We will follow our trading methodologies and continue to monitor and research the markets. Ongoing research and a systematic, disciplined, approach can help put the numbers -- and market action -- on your side.

__________

For the complete article at SeekingAlpha, please click here.

Overbought Indicators flip to slightly bearish 12/2/10

With the S&P reaching new recent highs in the 1220 area, our overbought / oversold stock market indicators are flipping to slightly-bearish from a moderately-strong bullish signal. Our long-term indicators remain strongly bullish. Both indicators have followed the market higher, with the intermediate-term overbought/oversold indicators flipping to bullish on 10/25, when the S&P was 1185.

The long-term models remain strongly bullish, having ridden the current market from the 1148 level, when the model went long on 9/24 -- to the current levels of 1220.

Please keep an eye on this blog, as well as our SeekingAlpha.com page, and Twitter -- for updated information on our stock market indicators, managed futures, commodities, and trading strategies.

http://z-trader.blogspot.com/

http://seekingalpha.com/author/carlton-chin-cfa

http://twitter.com/#!/z_trader

Commodities: Prices & Volatility Increase (Capturing Profits with Managed Futures)

Below are excerpts from our SeekingAlpha article on the recent spike in commodity prices -- and sudden sharp reversal. The increased volatility presents challenges to CTAs as futures traders balance the offsetting goals of:

• capturing additional profits, while
• protecting existing principal.

The article discusses methods that managed futures programs use to capture -- and retain profits from the futures markets. For the complete text and some charts, please visit the link.

http://seekingalpha.com/article/236692-commodities-prices-and-volatility-increase

Recent months have seen a continued decline in the U.S. dollar and an associated rise in commodities prices. After a relatively steady climb in commodity prices since May, commodity prices spiked early in November. Gold crossed above the $1400/ounce level and crude oil challenged the $90/barrel level. Along with the rise in commodity prices, volatility has suddenly picked up this past week in the commodity futures markets.

Some additional recent futures market activity, reflected by the Liquid Commodities Index (LCI):

• Since hitting a recent low at May 31, 2010, commodities have rallied strongly, with the LCI rallying more than 20%.

...

The investable, "Liquid Commodities Index" (LCI), was designed so that Adamah Capital could more easily track the price movements of the commodity futures markets. The LCI has a very high correlation (about 0.98) to other commodities indices, has slightly better risk/return characteristics, and is a good low-fee alternative for investors seeking the diversification benefits of the major commodities markets.

Managed Futures

In addition to a passive approach to investing in commodities, some investors seek a more actively-managed approach to futures, namely "managed futures." These products can capture both up and down movements within the futures markets. The Liquid Commodities Index showed the "buy and hold" performance of the commodities markets over the past several months.

...

... The Adamah Diversified Program captured profits in the futures markets over the past few months -- and protected profits during the sharp reversal of the week ending November 12, 2010, maintaining about 75% of the month's gains.

...

Many managed futures programs are systematic and aim to capture moves within the futures markets. While no program will be successful all of the time, a good trading strategy will attempt to capture the profit opportunities within the markets -- maintain these profits -- and minimize risk and whipsaw losses during more difficult trading environments.

Quantitative trading programs often manage and monitor risk on both a "trading system" level as well as on a "portfolio level." Trading strategies are often based on historical simulations, as well as statistical and systematic research. They are also tested in a multitude of ways to increase the comfort level of robustness and improve the "forward information" of the strategies. These methods include blind-testing, bootstrapping, Monte Carlo, and other methods to maximize the effective use of data.

Finally, CTAs monitor and manage risk within their portfolios using a number of metrics and models. In addition to capturing the opportunities the futures markets offer, it is essential to protect these profits. In today's economic environment -- with commodity price volatility increasing -- risk management and "protecting profits" are particularly important.

___

Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He founded Adamah with his long-time friend and associate, George Parr. Carlton has been quoted and featured in the Wall St. Journal, NY Times, MARhedge, Futures Magazine, and Financial Trader. He holds both undergraduate and graduate degrees from MIT.

Stock Model Indicators Remain the Same

Our stock market models remain the same:

• Our long-term models remain bullish, with a full buy signal.
• Our intermediate models remain slightly cautious, with a neutral to very-slightly-bearish signal.

As a result, our stock positions lean to the bullish side, depending on the short-term models. As usual, we will post any changes in long-term or intermediate-term stock market indicators to our blog.

Note that we are increasingly using SeekingAlpha to publish trading articles and investment information since they named Carlton Chin, CFA (Adamah Capital & CARAT) a SeekingAlpha.com "contributor."