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Friedberg Mercantile Confirms Collapse In Traditional Market Neutral Strategies, Laments Death Of Efficient Markets
We have long warned about the collapse in traditional market neutral trading strategies which for the past decade provided a major portion of the moderate market liquidity, and whose participants offset at least to an extent the disastrous influence of the HFT self-fulfilling prophecy that drives fractal momentum to ridiculous levels and whips the market into an irrational, lemming-like frenzy based on microvolatility, until everything snaps. Furthermore, our observations of the deplorable performance of various MN indices and funds, confirms that between liquidations and capital losses, this investment category may be doomed. The second quarter report by the Friedberg Mercantile group confirms this observation: "We continue to experience problems with our equity hedge program, a market-neutral strategy applied to U.S. stocks. For many years a successful program, earning above-average returns that were totally uncorrelated to S&P 500 returns, the program has repeatedly disappointed us in the most recent past, losing money in each of the past five quarters. This persistence of unfavourable outcomes is a totally unique event in the 19-year history of the program... Structural changes such as the proliferation of exchange-traded
funds and super-rapid computer-based bloc trading, activities that are
totally unconcerned with valuation metrics and/or long-term trends, are
still taking place and there is little or no prospect of this
development coming to an early end." There is a massive shift going on behind the scenes in market structure, and it is now far too late for the SEC or really anyone to do anything about it now. We anticipate implied correlation to approach 1 quite soon as every trading day becomes a manic-depressive bout in which the last few remaining traders and algorithms push the market up and down by a thousand points as the market becomes nothing than a sleaazy, unregulated, second rate, back-door Atlantic City illegal gambling parlor with a few stripper poles on the side for the CNBC cheerleaders. The point being anyone who tells you they can predict any movement in stocks now that valuations play no role in asset prices, is a charlatan, an idiot, is selling a subscription to a newsletter, or all three. Full must read Friedberg observations below.
We continue to experience problems with our equity hedge program, a market-neutral strategy applied to U.S. stocks. For many years a successful program, earning above-average returns that were totally uncorrelated to S&P 500 returns, the program has repeatedly disappointed us in the most recent past, losing money in each ofjavascript:void(0); the past five quarters.
This persistence of unfavourable outcomes is a totally unique event in the 19-year history of the program. To boot, the cumulative loss for this five-quarter period, at 18.45%, has materially affected the fund’s performance. A rough estimate, taking into account the average allocation given to this program, puts this effect at approximately 500 basis points. What is noteworthy is that this has occurred despite the fact that we have not changed any of our procedures, neither the selection process nor the hedging formulas. For some time we have speculated that the results have been affected by the lack of, and perhaps growing lack of, dispersion among stocks. A recent article in The Wall Street Journal, entitled “The Herd Instinct Takes Over” (July 12), fully confirms this suspicion. The sub-title of the article is: “Component stocks’ correlation to S&P 500 at highest level since ’87 crash,” and the article goes on to say that the correlation has recently hit 83%, a remarkable number when one considers that it has averaged 44% since 1980. The growing popularity of exchange-traded funds, among other things, has leveled the returns of individual stocks and sectors. By maintaining (or freezing) over- and undervaluations, this phenomenon has become a nightmare for stock and sector pickers. And, while it is true that this phenomenon raises hopes that, at some point in the future, large profits will be able to be made by exploiting these inefficiencies, such may not be the case for quite some time. In fact, structural changes such as the proliferation of exchange-traded funds and super-rapid computer-based bloc trading, activities that are totally unconcerned with valuation metrics and/or long-term trends, are still taking place and there is little or no prospect of this development coming to an early end.As a result, we have temporarily decided to downscale the program, reducing the allocation by 10 percentage points. Simultaneously, we have decided to reduce the number of stocks in the program to approximately 25 from 45 to 50. With the greater concentration, we hope to ensure a more robust selection, one perhaps capable of overcoming the leveling effect of indexing. The future of this program will be decided towards the end of this quarter, after we have had a chance to assess results.
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I say down, down, down ... but again, I do like Atlantic City and Vegas baby.
But not to perform the function of a serious market, surely.
I agree with the whole lack of dispersion among stocks, HFT pollution and ETFs wagging the market dog thing but it would be helpful if there was more detail about their "equity hedge program" that has been doing so poorly in this market.
Is "program" Canadian asset management lingo for "strategy?" - if so, what is the selection criteria in a nutshell beyond long/short, market neutral? Is this a strict, rules based value screen of some kind or is it a bunch of analysts/PMs sitting around a table just trying to pick stocks they like/don't? If it's more like the former it's somewhat harder to generate sympathy for the thesis that automated/formulaic trading is screwing up this part of their business model.
Surely this is progress? A 20 year old piece of code has slowly migrated from being the smart money to being the dumb money.
Yes, I know, replacing this with scalping bots and cross-asset algos doesnt feel like progress, but that's because you and I are human, and and our feelings on the matter were already outmoded 20 years ago when this piece of fortran was written.
</sarcasm>
Their Vic 20 finally gave up the ghost.
http://www.youtube.com/watch?v=PUEI7mm8M7Q
everyones getting DUMBER ...even the programs....
Great article! I'm not sure why freidberg thinks going to 25 stocks from 45 is going to help, when they have already identified the problem as "structural changes" that are not going away.
If that is their best approach, they deserve to lose. They could have just sat in gold, and went to the beach.
HFTs are surely whipping the markets in an irrational way...even a newbee like me can see that.....but whatever....i think even the PTBs like their numbers and patterns...we should be seeing the RIGHT shoulder around july 31 ....for a time symmetry H&S.....what say...1127 today...1139 tomorrow....1150 may be after that.....
i got 2 questions foir u guys:::
1. How to paste a PHOTO in this blog??
2. Any significant occult dates around this time???.
Answer Q1:Make a phat donation to ZH to earn that privilege.
I'll let somebody else answer Q2.
Wow. All I can say is I got away real cheap to become a photo posting contributor because Tyler pulled me (and a few others) from the comment section AND he didn't charge me a penny. I hope he doesn't retroactively hit me up for a phat donation. :>)
To answer question # 1, no one can post pictures to ZH except Tyler, Marla and (phat donating) contributors.
Thanks for the disclosure.
Still,who knows,it could still be a trick.
**Master of deception ZH invites you in, gets all friendly by granting you special privileges,everything looks hunky-dory and then all of a sudden you find yourself washing the ZH dishes for the rest of your life.**
Well, I have been wondering who's been using all that extra Tide and Downy fabric softener. Maybe Tyler and company are sneaking into my home while I'm at the office and doing laundry, watching porn and blogging from my new killer laptop. Time to change my home network password. :>)
Gawd! I can imagine the pics that would show up....
Would make RobotTrader blush.
I like the status quo.
i really did have some pretty enjoyable pics
Contributors do make sizeable donations to this site, and I'm not talking about money. It's no small task to produce a compelling, well researched article; it can take hours and I am guessing that most of these writers' time has some value. Even when they are completely wrong-headed (i.e., when I disagree with their arguments), contributing members add value to Zero Hedge and deserve small perks like being entrusted to post images within comments.
If I wanted to gain this exalted status (which I don't, there is way too much work involved) I would pick a topic I feel comfortably knowledgable about, develop a theme, check the facts, organize and re-organize for coherence and readability, then simply submit it. Worth a try anyway.
Arch Crawford says that this a very bad time in planetary alignment....from the 30 to the 3rd of August, he say it is way bad...FWIW =for what its worth.
Ah - so their algorithm devised a decade or more ago - and making money on autopilot - no longer works?!! Cry me a river.
Maybe they need to dust off the old cranium , open their eyes and try to figure out the world for themselves - rather thean relying on granpa's algorithm and crying that it doesnt work any more. lazy basturds.
Another day and the markets are going up on virtually nothing.They must be building up the credits for what lies ahead,then we will hear that this rally is all about confidence returning to the markets,what a joke.Germany had an excuse for its collapse starting after WW1 and reparations,what do fellow members of Zero Hedge think the excuses will be when this lot goes tits up ?
China stole our jobs, bought the world's assets, then sold our bonds.
China stole our jobs...
China didn't steal our jobs, our dumb ass politician's policies did that.
We willingly gave China our jobs.
Some did, causing us to get that much closer to 3rd world destitution.
Not all of us did it to ourselves, only the ignorant, or those bent on America's destruction through perverted ideology. Either way the current administrations motives, consciously, or unconsciously, are for the later, because their actions prove it.
Iran is the fall back IF they can't keep the joke going.
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"...as the market becomes nothing than a sleaazy, unregulated, second rate, back-door Atlantic City illegal gambling parlor with a few stripper poles on the side for the CNBC cheerleaders..."
love this quote
Am I reading this wrong or did they just lose 18% while the S&P gained 30%? Trying to pin that performance on anything other than their own ineptitude is a lot like the people who blame their losses on the PPT.
Shorting crap stocks fails because these are exactly what the financial industry sold to idiots at local government pension funds and various other ultra-dumb money investors. Therefore, these names have an extra focus from the PPT in order to disguise how insolvent these funds are, thus creating a huge political clusterfuck.
So, buy crap, sit back and watch the hidden hand make you money.
...the market becomes nothing than a sleaazy, unregulated government-controlled, second rate, back-door Atlantic City illegal gambling parlor with a few stripper poles on the side for the CNBC cheerleaders.
There, fixed that for ya. It's hard to imagine that anyone would call today's regime "unregulated":
- SEC
- CFTC
- litigation up the wazoo
- Fed money pumping
- too big to fail
- FHA, Freddie, Fannie, Community Reinvestment Act
- FDIC moral hazard brigade
- Operation FD
- Sarbanes Oxley
- 2000 more pages (on top of tens of thousands) of FinReg that no one knows what it means yet
- The federally-protected Ratings Cartel of Fitch, Moodys, S&P
- federal licensure (protections) for brokers, dealers, etc.
- regulation keeps all but high-net worth investors out of "non standard" investments
- etc.
It amazes me to see opinion after each and every failure of regulation demanding MORE of the poison that's killing the patient (and the country)! Ask yourself this: after how many (or how big) regulatory failures would you finally question the regulatorium?
EURO buying support mentioned since June continues and further upside is expected.
http://stockmarket618.wordpress.com
Those darn unfavorable outcomes! Gamblers' ruin.
"anyone who tells you they can predict any movement in stocks now that valuations play no role in asset prices, is a charlatan, an idiot, is selling a subscription to a newsletter, or all three"
I had to chuckle about this statement, and the solar pusher on this site.