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What Risk? "The Spoils Go To The Ignorant Only - The Fed's True Heroes"
Submitted by Dominique Dassault via GlobalSlant.com,
Headline: Equity Risk Is Increasingly Non-Existent…By The Numbers
The concept of risk for hedge fund managers is a constant concern. The internal monologue goes something like this…“what’s my downside if I initiate this position…how much can I lose if I am not right?” The real answer is that you really have no idea…despite best efforts…even with stop losses [which I abhor]. The true, measurable risk of any position is only exactly known after you liquidate the position. Plus, risk management is more capital management than single stock management. How much capital are you assigning to each position in the context of the entire portfolio capital? And are your different positions correlated or not? Even if they are [not], historically, there is no guarantee that correlation [or not] will continue.
Anyway…back to risk. Every day my prime broker blasts me with a report loaded with scores of trading metrics calculated over many time frames [mostly the last twelve months]. It is all very interesting but the only real metrics I care to focus on are total returns and risk adjusted returns. Most clients could not care less about risk adjusted returns…but I sure do. And, as many are aware, the holy grail of risk metrics is the Sharpe Ratio [as calculated according to the title of this post]. The most interesting precept of the Sharpe Ratio, in my opinion, is that it treats volatility as random…both upside and downside volatility. No way to predict it in either direction so both directions are assigned the same discounting value. Basically, according to Bill Sharpe, all volatility is a penalty against your performance. I get it.
Still, in a perfect world, what if most of the volatility experienced by a portfolio of equities was actually favorable? So rare…if not impossible…but still at least worthy of consideration. And so the Sortino Ratio [or as I refer to it as the Gain/Pain Ratio] was born…essentially, it is exactly as the Sharpe Ratio but stratifies favored and un-favored volatility. Favorable volatility is not penalized. Unfavorable volatility is scored as a legitimate demerit. It has always seemed fairer to me.
Naturally, both ratios are relevant and higher values for both measurements reflect better risk-adjusted returns. And portfolio managers realize that, no matter the ratio, both need to positive…or you are losing money. However, given full investment of capital, the Sharpe Ratio can be strongly positive yet still not offer high absolute returns. Conversely, if your Sortino Ratio is high, you are probably delivering very strong absolute returns…again, assuming full investment of capital.
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Given all of this…What is a good numerical value for both ratios? Generally, over time, any value > 1.5 is pretty good and numbers > 2.0 are stellar. Be advised the data may vacillate, a little bit, based on the time frame used in your calculation i.e. weekly or monthly.
Recently I constructed a model that required one, three and five year Sharpe Ratios for the S&P 500. I also decided to include the Sortino Ratio. Prior to the results I hypothesized that the numbers ought to be pretty impressive given the endless equity “bull” since March 2009 but I was still curious to get the exact data. Plus, a weekly price chart of the S&P 500, since 2009, visually reflects the anomaly of very limited draw-downs in the context of extremely strong returns. The calculations are as follows and as Mrs. Doubtfire once said…“Effie…Brace Yourself”.
Sharpe Ratio
1 Year = 1.37
3 Year = 1.86
5 Year =1.0
Sortino Ratio
1 Year = 2.65
3 Year = 3.41
5 Year = 1.69
Collectively, these numbers are clearly impressive but even more so in that they are calculated from a passive, long only strategy. This is a hedge fund manager’s worst nightmare as, for five years, most “hedging” has proved to be only performance degrading.
Furthermore, the Sortino Ratio data are nothing short of staggering.
What they really say = Plenty of Gain with Very Little Pain.…and it really is unsustainable if only because it has become much too easy to generate positive returns with very little effort, pain or savvy.
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It actually seems, at times, as though there is this mysteriously large buyer that suddenly appears whenever the equity market most “needs it”... and the subsequent buying is so aggressive and so desperate... not the style of the mostly steady “hands” I personally know. It just seems too good to be true and the Sortino Ratio numerically reflects that belief. Plus, we all know that the economic fundamentals are not as smooth as the weekly or monthly charts of the S&P 500 would suggest.
Remember that equities typically offer the most risk of any asset class... not the lowest risk as the above data set suggests. Nevertheless, Yellen and Bernanke must be “psyched” as their “wealth effect” model has been so effective…actually too effective as the market distortions grow ever larger…and more market bears become contorted “road-kill”.
To be sure these distorting effects may be entirely assigned to The Fed... the debt monetizing, interest rate suppressing “Masters of the Universe” who always GET WHAT THEY WANT while answering to nobody.
They’ve literally trounced and expectorated on the concept of “MORAL HAZARD” and, it seems, purposely reconfigured and redefined its meaning into: WE HAVE NO ECONOMIC MORALS AND THIS POSES AN ENORMOUS HAZARD TO THE PERFORMANCE OF HEDGED MONEY MANAGERS. THE SPOILS GO TO THE IGNORANT ONLY…THE FED’S TRUE HEROES.
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"It actually seems, at times, as though there is this mysteriously large buyer that suddenly appears whenever the equity market most “needs it”... and the subsequent buying is so aggressive and so desperate... not the style of the mostly steady “hands” I personally know."
Ya think??
Which is why all attempts to AUDIT THE FED will be crushed.
steady “hands” I personally know
when the risk is transfered to the population, you take as much risk as you can until you can't.
Apple's "wealth" (market cap $700B) could purchase 5 months of world oil consumption (92 million bpd x 150 days x $50/barrel). Sounds balanced to me.
Or 8 years of global Gold production !!
Or 50 years of global Silver production !!!!!!!!
"efficient markets"
HA HA HA HA
what could go wrong ?
Spoils go to the ignorant and the cynical, but both will give it all back with interest when their "FED guarantee" fails at the most inconvenient moment.
"mean ol' levee, taught me to weep and mourn ..."
People are ignorant. In its most innocent meaning, all it says is that they, "don't know". Possessing no knowledge of something----or worse--- a little knowledge, is not necessarily a failure on one's part as this quote implies.
Who on earth has the time to learn what they need to about even one serious issue befuddling the people?? Unless you are retired with little to do, the amount of time it would take from the ordinary family's life to get up to speed on a single issue is enormous, and well beyond the means of nearly everyone who matters. (Yes, a great many do not matter in the grand scheme of things). Imagine anyone trying to get a handle of several big
The acolytes here who are likely the most curious and dig into issues, are a rare and tiny breed.
I don't hold it against anyone I associate with that they do not possess even a neophyte's knowledge of, say, Joe Cassano, Little Dick Fuld, Ace Greenberg, Jon Leibowitz, the House Ways and Means committee, the FED, or the Treasury. When I attempt to start a conversation about the gold standard, or inform them about that which they do not know, it is very confusing to them and soon the conversation will have to move off to, "ow bow them Steelers?" "Didja catch the Grammies' Sam Smith the other night and isn't he the personification of Pussified Homosexuals, who can't sing for shit"?
Sometimes I think that's why they're allowing weed to be legalized; to help make us stupider and more apatheic.
Can't dispute that but the tax revenue to be raised, the business opportunities that arise from this relatively new stream of income, can't be dismissed from a politician's calculations. Nor the votes of a public looking for decriminalization of the equivalent of alcohol.
But a stupid people is certainly politicians' wet dream.
Is that the best you got trollfag?
Gee Shake Shack IPO or Grilled Cheese Truck Inc.... BTFD ZIRP NIRP look the other way nothing here.
Risk, schmisk. It's president's day. Go out, borrow some Benny bucks, and buy yourself some marked up then down again cheap Chinese furniture and don't worry about such nonsense. You'll thank me later.
Edit. And I didn't charge you 2 and 20 for my advice. This one's on the house.
...but, i just took out an 84 month, zero % loan for that new piece of shit.....i mean prius that cost $28K. luckily, my credit was just good enough at 419 and my monthly welfare of $1800 was enough.
The ignorant are the majority of Americans who don't know what the FED even is, or if they do, don't understand it is the Banker's Bank and works to devalue the currency, crush employment, and pay nothing to savers and the retired.
So how does one become ignorant when I have soent the last 6 years getting smart. Damit i thought by being smart I would get rich but the smarter I get the more money I lose. Ugggggg
That trade goes right against all the "momentum" trades of the ignorant.
It's not quite as simple as that. Being 'Smart' does not necessarily equate to "understanding", genuinely UNDERSTANDING what is happening on a partickler subject.
People remain ignorant about something---- that they are curous about------because they do not QUICKLY understand it. When it becomes clear that superficially scanning a subject will not yield its mysteries, most people will lose interest in it. Even if they are 'smart' and getting ever smarter.
I am a Sudoku affickianado. There are levels of this puzzle that escalate to super difficult, and if I stick to what I already know, I will never get beyond an amateur status. There are techniques available to learn how to solve more and more dfficult levels. But I have become stalled at a 4th level of ten because I cannot quickly understand those techniques. I've been stuck for years here and become frustrated at my poor progress, but without several hours of digging into each of the advanced techniques, here I remain. The same applies to any difficult subject, like the National Debt, the Deficit, Lord Blankfein's billions in bonuses for abject failure.
6 years 'getting smart' is not near enough to deal with even one of those.
Wait, you mean the people who didn't realize that the fed was supporting asset prices and that prices would keep rising until QE ended weren't the ignorant ones?
Ok I get it...kewl...now can I get a loan ?
So the stock markets are the new savings accounts. Note to self. Next.