All entries by this author

Responding to a Challenging Tweet about Front-Running

Aug 19th, 2014 | Filed under: Algorithmic and high-frequency trading, Regulatory, Technology, Today's Post

What do I mean by "front run," asked a reader. I use the term for a range of situations in which one party trades on the basis of advance [non-public] information of another party's upcoming trade, Faille replies.

Preqin on PE Distributions & Call-Ups in 2013

Aug 18th, 2014 | Filed under: Alpha Hunters, Alpha Strategies, Private Equity, Today's Post, Venture capital

The 2013 performance of the private equity industry, given any of several metrics, was quite strong. Why? In part because the exit environment has been very good.

How Not to Nationalize the Clearinghouses

Aug 17th, 2014 | Filed under: Derivatives, Insolvency, Risk management, Today's Post

Let's not make clearinghouses too big to fail. Or if, through, Dodd-Frank, we already have, let's turn back and reconsider that decision. That's how not to end up bailing them out or nationalizing them in due course.

Markets Work: The Argument from Robert Bork’s Beard

Aug 13th, 2014 | Filed under: Currencies, Hard metals, Today's Post

Markets work. We are warranted in believing this because it has proven itself in human history and we have studied history. Centralized social planning fails. Now, having said all that, let's talk about the Fed.

SIP and the Law of Unintended Consequences

Aug 12th, 2014 | Filed under: Algorithmic and high-frequency trading, Regulatory, Technology, Today's Post

Christopher Faille reviews the basic facts about SIP, the Securities Information Processor, and cites (with some incredulity) a new contention in some quarters that SIP isn't all that important because nobody really relies upon it.

Advancing the Infrastructure Investment Narrative

Aug 11th, 2014 | Filed under: Alpha Strategies, Infrastructure, Insolvency, Today's Post

Intuitively, the problem with valuing the debt issued by an private SPE in an illiquid infrastructure project is this: the free cash flows of the SPE aren't easily observed. So how does one go about deriving their present value?

GFIA: June is ‘Listless’ for Many Asia Managers

Aug 10th, 2014 | Filed under: Alpha Strategies, Hedge Fund Strategies, Indexes, Today's Post

For many fund managers working in Southeast Asia, and/or China, June 2014 was “listless,” with numbers that suggest a flat tire. The booms on the ASEAN bourses are concentrated where the fund managers aren’t, in “high beta cyclical sectors.”

Terwilliger’s Legal Troubles: Give Mark Cuban a Cigar

Aug 7th, 2014 | Filed under: Alpha Strategies, Media Coverage of Hedge Funds, Regulatory, Today's Post

The great thing about short sellers has always been that -- if they're good -- it's because they have a keen nose that can smell a boiler room. If they are open about what they're doing, they can also serve as a valuable red light for others in connection with overblown enthusiasms. Don't be the bag holder.

Herbalife’s Earnings and Ackman’s Timing: Part II

Aug 5th, 2014 | Filed under: Hedge Fund Strategies, Legislation/Court rulings, Today's Post

Herbalife (NYSE: HLF) may survive the tricky game it is playing. One critical point: even on the worst plausible reading of its behavior, Herbalife as a corporation or a stock isn't a chain letter. The products it offers its distributors and the public -- they are the chain letters. That's an important practical (though not a legal) distinction.

Herbalife’s Earnings and Ackman’s Timing: Part I

Aug 4th, 2014 | Filed under: Hedge Fund Strategies, Legislation/Court rulings, Today's Post

Herbalife (NYSE: HLF) is playing a tricky sort of game right now: outlast the high-profile short. If its underlying business model is sustainable it can win that game. It may also be able to win, or Ackman may lose, even if the model isn't sustainable, although in that case Ackman's odds are obviously better.

The Investment World Has Good News for Philanthropy

Aug 3rd, 2014 | Filed under: Alpha Hunters, Alpha Strategies, Endowments & Foundations, Institutional Investing, Today's Post

Private foundations have "regained solid financial footing" in terms of their investment returns over the last two years especially, after the shaky years that preceded. Their mission-related spending has accordingly increased.

What is Right & What is Wrong With the Sharpe Ratio?

Jul 30th, 2014 | Filed under: CAPM / Alpha Theory, Risk management, Today's Post

Despite what the title (Deflating the Sharpe Ratio) might cause a naïve observer to suspect, de Prado's recent presentation was more pro than con the ratio in question. Mend it, don't end it.

Eurex Clearing and DB Group: New Paper on CCPs

Jul 29th, 2014 | Filed under: Derivatives, Regulatory, Risk management, Today's Post

If such institutions as the ECB keep rewarding indebtedness, then over time they get their way. They'll get a lot of deal making, even if it amounts to a frenzy. Then investors will demand funds that play to that frenzy.

All Regional Mandates in Positive Territory YTD

Jul 28th, 2014 | Filed under: Alpha Strategies, Emerging markets, Performance, Analytics & Metrics, Today's Post

The latest report from Eurekahedge mentions that though instability is "brewing again in the Middle East," things have settled down a bit in Eastern Europe. This report was written prior to the shoot down of a Malaysian jet over the Ukraine.

Deutsche Bank on Investor Demands Today

Jul 27th, 2014 | Filed under: Alpha Strategies, Institutional Investing, Retail Investing, Today's Post

If such institutions as the ECB keep rewarding indebtedness, then over time they get their way. They'll get a lot of deal making, even if it amounts to a frenzy. Then investors will demand funds that play to that frenzy.

A Challenge to Bayesian Probability

Jul 23rd, 2014 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics, Today's Post

The stakes, for mathematics, finance, and the overlap of the two, are pretty high. So my ears pricked up when I heard of a sweeping challenge to Bayesianism.

Winner Takes All, and Liquidity Takers Win

Jul 22nd, 2014 | Filed under: Academic Research, Algorithmic and high-frequency trading, CAPM / Alpha Theory, Derivatives, Today's Post

It does appear that speed is helpful in generating alpha. How is it helpful? Here there are two views, and the less HFT-friendly of these views has received some scholarly/empirical support.

Looking at the Future of World Wealth McKinsey-style

Jul 21st, 2014 | Filed under: Emerging markets, Institutional Investing, Today's Post

In Asia the high-net-worth population still consists largely of the first-generation wealthy. So: what are these Asian entrepreneurs looking for in their private banking services? That is one of the questions McKinsey considers.

Volcker: ‘The Kind of Stuff You’re Being Taught’

Jul 17th, 2014 | Filed under: Asset pricing, Currencies, Today's Post

Paul Volcker is obviously entitled to express his concerns when he senses that the well-educated young people of today are taking economics courses full of the wrong lessons: specifically, that they are unaware of just how nasty a dragon inflation was in the U.S. in the 1970s.

Deal Activity: Beer and Obamacare Both Factor In

Jul 16th, 2014 | Filed under: Alpha Hunters, Private Equity, Technology, Today's Post

Intralinks’ report suggests that “a handful of fundamental and positive shifts” are at work in the recent uptick in M&A activity. On a behavioral note: corporate confidence is returning, and presumably confident managements are more likely to seek out acquisition targets than are nervous managements.

Does the Defined-Contribution Broom Still Sweep All Before It?

Jul 14th, 2014 | Filed under: Institutional Investing, Today's Post

Had the plan not received final IRS approval, the benefits part of the Times/Guild contract would have reverted to a DC plan, and this would have been yet another exhibition of how defined contributions is sweeping all before it. But the IRS did approve, and that broom is for now back in its closet.

Why Yellen is Wrong on ‘Resilience’

Jul 13th, 2014 | Filed under: Currencies, Emerging markets, Today's Post

The Chair of the Federal Reserve cannot with any plausibility look upon market bubbles as something exogenous, something that just happens to the earth, like a meteor shower, something from which she and others in her august circles can seek to protect us.

Traders Sometimes Want Macro-News to Be Free

Jul 9th, 2014 | Filed under: Academic Research, ETFs, Indexes, Today's Post

There exists “robust evidence of informed trading during lockup periods ahead of the Federal Open Market Committee … monetary policy announcements” say three authors. Some agencies can embargo news effectively. The FOMC doesn't seem to be among them.

May Numbers: Long Equity Beats Event-Driven Peers in Asia

Jul 8th, 2014 | Filed under: Alpha Strategies, Emerging markets, Indexes, Today's Post

GFIA says that most of the Asia Pacific managers it tracks generated substantial returns above the relevant index in May 2014. The long-biased firms did best there, their event-driven peers … not so much.

SEC Officially Pressing for Nickel-Tick Trials

Jul 1st, 2014 | Filed under: Algorithmic and high-frequency trading, Regulatory, Today's Post

Neither liquidity nor a small spread is the be-all and end-all of markets. A spread is a sort of price and, like other prices, spreads can sometimes get too small because someone is cutting corners.

GMI Numbers-Crunching Predicts Stock Returns

Jun 30th, 2014 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Performance, Analytics & Metrics, Today's Post

Starting with 350 available metrics of corporate governance and/or forensic accounting, GMI Ratings has boiled their model down to just 64, and from those they get three scores.

Japanese Investors Sticking with Hedge Funds, Expect Nikkei Rise

Jun 29th, 2014 | Filed under: Currencies, Hedge Fund Industry Trends, Performance, Analytics & Metrics, Today's Post

Why it is possible that the recent uptick in animal spirits in Japan comes largely from a sense that Abenomics as originally conceived has run its course, and that Abe and the rest of the gang there will have to move on shortly.

Industry Discovery: Maturity is a Pain

Jun 26th, 2014 | Filed under: Hedge Fund Industry Trends, Hedge Fund Strategies, Institutional Investing, Seeding/early-stage, Today's Post

One takeaway, from the point of view of the managers, is that a close engagement with institutional investors requires a lot of time and effort, and those commodities have to be budgeted. How to handle the circumstances of industry maturity is an individualized call.

SCOTUS Gives NML a Sweeping Win Over Argentina

Jun 25th, 2014 | Filed under: Alpha Strategies, Emerging markets, Regulatory, Today's Post

Justice Scalia's opinion has the support of Justices who aren’t, to say the least, reliable allies of Scalia’s in the kind of ideologically driven splits that draw so much MSM attention, Obama appointee Elena Kagan as well as Clinton appointee Stephen Breyer are on board. On Monday, June 16th, the U.S. Supreme Court delivered a stunningly complete victory for NML Capital, the holdout bondholder in the much-watched litigation arising out of Argentina’s 2001 bond defaults. On the one hand, SCOTUS refused to hear Argentina’s appeal from the Second Circuit’s decision on what the issuing documents meant by the pari passu language. A decision not to decide has no precedential significance itself, but this of course leaves the Second Circuit’s decision, issued in October 2012, intact. Both as a matter of the law as it applies to this case, and as a matter of precedential significance for many similarly worded documents, the Second Circuit is the circuit that counts. What is Left Standing? The Second Circuit left standing, and now the Supreme Court has also left standing, a district court injunction against any payments that in any way rank holders of the restructured debt over the hold-outs. What the Second Circuit said was that in the pari passu clause in the issuing documentation of these Fiscal Agency Agreement bonds (FAA), the sovereign “manifested an intention to protect bondholders from more than just formal subordination.” The language was there to protect them precisely from what Argentina has more recently tried to do, that is, to protect them from any arrangement by which “Argentina as payor [discriminates] against the FAA bonds in favor of other unsubordinated foreign bonds.” On the same day (a few minutes later) SCOTUS also delivered a full-dress opinion on a related issue. The New York district court has interpreted the Foreign Sovereign Immunities Act of 1976 narrowly, so as to allow for discovery orders that assist NML in its search for Argentina assets in third countries where they may not be immune. Since Argentina owes NML more than $1.5 billion, it has plenty of incentive to continue this search. The Supreme Court upheld that statutory construction. The opinion wasn’t closely split. There was one dissent (Justice Ginsburg) and one recusal (Sotomayor). Still, the opinion for the other seven Justices, written by Justice Scalia, had the support of Justices who aren’t, to say the least, reliable allies of Scalia’s in the kind of ideologically driven splits that draw so much MSM attention. The 7-justice majority included Obama appointee Elena Kagan as well as Clinton appointee Stephen Breyer. What Happens Next? Argentina’s immediate reaction was that it will fight on, apparently by continuing to pay the favored creditors [Exchange Bondholders] and by continuing to exclude from these payments the FAA hold-outs. “What I cannot do as President is submit the country to such extortion,” says President Cristina Fernandez. The legal fight is over, though. And I should add that part of what SCOTUS has let stand here is a district court order the copies of its pro-holdout injunction be provided to “all parties involved, directly or indirectly, in advising upon, preparing, processing, or facilitating any payment on the Exchange bond.” Argentina’s New York agents cannot now give out money to the Exchange bondholders without aiding and abetting the defiance of a court order. Argentina must now either pay $907 million to the plaintiffs by the end of this month, or lose the ability to use U.S. financial intermediaries of any kind to pay the holders it has favored. The only possible means by which Argentina can resist the “blackmail” now and continue to pursue the policy it has in recent years is if it can pay the favored creditors without the involvement of any financial intermediary subject to U.S. court orders. This would prove tricky, especially with a tight schedule. The Rest of the World And of course even success there leaves Argentine open to the second of SCOTUS’ two punches, discovery and perhaps successful seizure of assets in third countries. Leaving Argentine matters to the side: what will be the consequence of NML’s victory in this matter, and the now-regnant Second Circuit reading of the pari passu clause, on the market for EM nation bonds? If, as at least some authoritative sources have indicated through this long fight, the pari passu language used in Argentina in the FAA followed “standard language included in substantially the same form in numerous credit documents” and if this decision changes how that language has been understood, then the markets will have to develop work-arounds: because from time to time sovereigns will default, and some sort of restructuring will have to occur. How those work-arounds will work is beyond me. But then, given my poor record trying to predict the twists and turns of this saga that is perhaps for the best.

Isn’t all Software Abstract?: A Meditation on Alice Corp.

Jun 24th, 2014 | Filed under: Intellectual Property, Regulatory, Technology, Today's Post

Justice Thomas writes, "Deciding whether or not a particular claim is abstract can feel subjective and unsystematic, and the debate often trends toward the metaphysical, littered with unhelpful analogies and generalizations.” He has not given the debate a different turn, it will continue to trend toward the metaphysical etc.

Does a Firm Insist on Historical Cost Accounting? Short!

Jun 23rd, 2014 | Filed under: Alpha Strategies, Asset pricing, Derivatives, Today's Post

"Isn't there anything good to be said for the practice of historical cost accounting, especially when the cost figures are higher than the mark-to-market figures? Well ... no. It's reality avoidance."

Eurekahedge: Vehicles Ran More Smoothly in May Than In…

Jun 22nd, 2014 | Filed under: Alpha Strategies, Emerging markets, Today's Post

Given recent political news, it is perhaps unsurprising that, in the words of Eurekahedge, hedge fund managers "investing with an India focus and employing systematic trading strategies [posted] strong gains" in May 2014.

‘I, Algorithm’ Or, Can the Mindless be Reckless?

Jun 19th, 2014 | Filed under: Algorithmic and high-frequency trading, Regulatory, Technology, Today's Post

Who or what is responsible if an ATS' self-learning behavior drifts into terrain that, performed by a human, would constitute manipulative behavior? Does it matter than another algorithm has lately passed the Turing test?

Remembering Enron and Contending with Warren Buffett

Jun 17th, 2014 | Filed under: Alpha Hunters, Alpha Strategies, CAPM / Alpha Theory, Today's Post

An aphorism of Warren Buffett's once again making the rounds can be understood in at least three distinct ways. Faille looks at the possible constructions and decides that, whatever exactly Buffett meant to say or do, his reasoning here does little harm to his target, modern finance theory.

EDHEC: Investors Who Don’t Want to be Mushrooms Need Benchmarks

Jun 16th, 2014 | Filed under: Asset pricing, Infrastructure, Private Equity, Today's Post

Investors need benchmarks, especially benchmarks of likely infrastructure return, because the long-term illiquid nature of that investment increases information asymmetry between investors and managers, whereas benchmarks keep this asymmetry bearable. So explains Frédéric Blanc-Brude of EDHEC.

Loosening the Bank/Sovereign Feedback Loop

Jun 11th, 2014 | Filed under: Insolvency, Regulatory, Today's Post

Crisis-ridden banks yield crisis-ridden sovereigns, and vice versa. One way to make both institutions more resilient going forward is to loosen the feedback loop that connects their troubles. How to do that?

Carried Interest Loophole: A Possible Twist in the Old Debate

Jun 10th, 2014 | Filed under: Private Equity, Today's Post, Venture capital

As always, government wants revenue, and by what is now a reflex action heads have turned to the issue of carried interest. Faille speculates that little, if anything, will happen at the federal level, but that we may soon see a shift in the location of the action.

GFIA Credits Japan Funds with Excellent Risk Management

Jun 9th, 2014 | Filed under: Alpha Strategies, Hedge Fund Industry Trends, Today's Post

Some Japan-focused long/short equity funds did produce positive returns in April, swimming against the stream in a month when Topix, Nikkei, and TSE Mothers all fell.

SIFMA Wins a Famous Victory: We Sort it Out

Jun 4th, 2014 | Filed under: Legislation/Court rulings, Regulatory, Today's Post

We catch up with litigation and administrative actions over the market data fees that exchanges are allowed to charge their customers, issuers, brokers, or dealers. One of the Lake Poets clues us in to what all the fighting means.

Europe’s Valuation Practitioners Say: To Heck With Theory

Jun 3rd, 2014 | Filed under: Asset pricing, CAPM / Alpha Theory, Today's Post

A recent survey of firm-valuation experts from 10 European countries indicates that they can produce wildly different values given the same inputs. Okay: maybe that’s not too surprising. Any valuation model will necessarily include parameters that will in turn require a best-guess approach, often as subjective in inspiration as it is objective in aspiration. So […]

Private Lawsuits Over Order Types Used to Facilitate HFT

Jun 2nd, 2014 | Filed under: Academic Research, Algorithmic and high-frequency trading, Legislation/Court rulings, Today's Post

HFTs and trading venues alike have worked hard to fit their practices into the Reg NMS framework. As a consequence, violations of NMS “are unlikely” Dolgopolov writes, “to provide a basis for civil liability of HFTs who use such orders because of their compliance – however formalistic – with this regulatory norm.”

MiFID Implementation Consultation: A Rocky Start

May 28th, 2014 | Filed under: Algorithmic and high-frequency trading, Derivatives, Regulatory, Today's Post

ESMA defines HFT as “a special class of algorithmic trading in which computers make decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe and of taking a decision in relation thereto.” It then decides that needs further definition.

In SEC Filing, Ackman Makes His Case

May 27th, 2014 | Filed under: Alpha Hunters, Alpha Seekers, Alpha Strategies, Today's Post

Pershing Square owns 9.7% of Allergan's equity. Further, Valeant's proposal is structured so that Pershing Square is more of a co-bidder than a seller.

Contexts for Population Growth, U.S. and China Co-Dependence, Fracking

May 26th, 2014 | Filed under: Agriculture, Book review, Emerging markets, Today's Post

What is the big picture for these authors? Are China and the U.S. trading places, so that China will have a middle class and the U.S. won’t? No. What is happening is a bit more subtle than that.

Brave Phalanx: Asian Managers & Investors Remain Undaunted

May 21st, 2014 | Filed under: Alpha Strategies, Emerging markets, Today's Post

Investors continue to "crave for exposure" to Asia, and even to Japan. India is especially exciting to some, perhaps because of hopes for the near-term political success of the BJP.

A Nordic View of Banking Union

May 20th, 2014 | Filed under: Currencies, Regulatory, Today's Post

Recently we discussed Dr. Stiglitz' view of the Eurozone, a view offered to an Italian audience, with Italy (and Greece) foremost in mind. Today we complement that with Deputy Governor Hakkarainen's view of the Eurozone. He looks down at the same map from the north, with Finland and Sweden foregrounded.

Index Provider Transparency: End Users Unimpressed

May 19th, 2014 | Filed under: Academic Research, Best Practices, Indexes, Today's Post

Europe's index providers, by their own account, already have strong incentives to offer optimal transparency and, in their self-interest, they do so. A survey and report from EDHEC examines this claim.

Hedge Funds: The Transparent, the Opaque and the Tiered

May 18th, 2014 | Filed under: Best Practices, Performance, Analytics & Metrics, Today's Post

Seventy-one percent of private equity/real estate investors, and 89% of hedge fund investors, say they have decided against investing in at least one new fund due to their concern over its lack of transparency.

McGonagle Testifies to the Michael Lewis Hearings

May 15th, 2014 | Filed under: Algorithmic and high-frequency trading, Legislation/Court rulings, Regulatory, Technology, Today's Post

After some preliminaries, McGonagle got around to the central subject of his testimony, the Concept Release on Automated Trading that the CFTC had issued back in September 2013. Much of his testimony was designed to give Congress an inkling of the range of reactions the CR has since elicited.

Stiglitz Against Austerity: For the Consolidation of Europe

May 14th, 2014 | Filed under: Currencies, Today's Post

Stiglitz seems to think the euro can be saved, but that the “structure” of Europe as a political entity has to change. His ideas for a reformed structure sound a lot like a consolidation of Europe into a single nation state.