Ready for Tail events?!

Let me first dispel a myth, just because you apply Money Management Rules does not mean you are prepared for tail events. You are not even close!

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Premium to NAV 17 Dec 2014



Looking at the db Equity Strategies Hedge Fund Index
it comes as a surprise that the ETF Index has a premium to the NAV, whereas other well known

hedgefunds like Bluecrest Allblue (feeder) are listed with 5 % discounts to the NAV since many years.

Check out the chart

Bonds are boring...read this 8 Dec 2014

If you would have invested in 1992 in the DAX ETF - provided it would have been around, of course - you would have earned a decent amount of money.

That's the story of the passive guys and in my previous post I'm borrowing a few arguments of this guys to support Buy & Hold.

I'm sure you know the problem, when you wish to backtest a new strategy over a long period and you don't have enough observations available.

My Bond - Data Proxy is usually Pimco Total Return (PTTRX) and if you believe Bonds are boring read more.


What is Risk? 29 Nov 2014

When we refer to risk in finance, we usually mean a form of standard deviation (SD) - volatility. As most investors would agree you would not mind a stock moving up once you are long or in other words as long as volatility is in your favour. Unfortunately this risk definition would not make any difference, if the market is moving up or down - once it is moving it is considered as risk.

All financial concepts you learn at your MBA, CFA, CIIA, CEFA Courses imply that the more risk the investor carries, the more risk-premium he will ask for. Whereby the risk-premium is usually defined as the risk-free rate + risk premium.

Regression and Correlation 19 Nov 2014


If you've ever attended a so called higher education course - Decision Making is one of the subjects they teach you. 

Apparently all models need some entry parameters and in finance it is the so called rational investor. Please note it is referred to as rational not greedy.

If you wanna read a good book about Decision Making pick Daniel Kahneman's "Thinking, Fast and Slow".

I like the chapter (17) when he explains mean regression and bridges to correlation.
I can not relate to the examples provided earlier in his book I believe they are by now outdated especially when he refers to work of the 70s also there is a bias towards US stereotypes.
But the chapter mentioned above is worth reading the book. 


Absolute Return 16 Nov 2014

Most of the people judge an investment product solely by it's historic returns.
Once we decide to invest money, we expose ourselves to a certain risk framework. Mitigating this risk is a business on it's own and most of the Asset Managers don't pay much attention on this part.

I'm not suggesting that Asset Manager are ignoring the risk but I would argue that they just have inappropriate risk management in place and therefore expose their clients to a risk, they never actively manage.

When we consider a systematic trading approach vs. a passive ETF strategy (Buy & Hold) we need to bear in mind that the number of days we are in the market are lower with the systematic approach, therefore we are not exposed to market risk and might still get a decent return at the end, with the same underlying secutirty but with less downside potential. 

So, if you compare to Buy & Hold have a look at the risk profile during the holding period.