Tag Archives: earnings-center

Trading Volatility: The Hunt For Disaster Is The New Gold Rush

Summary Lessons from the original Gold Rush. Trading volatility on the long side is rarely profitable. Time, math and yourself are your enemies when you are long volatility. The Original Gold Rush On January 24th, 1848, James Marshall, a carpenter out of New Jersey, found gold flakes in the American River at the base of the Sierra Nevada mountains in California at a sawmill owned by John Sutter. Word spread of the gold finding and storekeeper Sam Brannan set off a frenzy when he paraded through San Francisco with a vial of gold obtained from Sutter’s Creek. At the time, the population of California was 6,500 Mexicans and 700 Americans (not counting Native Americans). By mid-June, 75% of the male population of San Francisco left town for the gold mines and the number of miners reached 4,000 by August of 1848. Throughout 1849, people around the United States (mostly men) borrowed money, mortgaged their property or spent their life savings to make the arduous journey to California. By the end of 1849, the non-native population of California ballooned to 100,000 with San Francisco establishing itself as the central metropolis of the new frontier. This invasion of the 49ers promptly lead to California’s admission to the Union as the 31st state. By 1850 (1 year later) surface gold in California largely disappeared even as miners continued to arrive. Mining is a difficult and dangerous labor and striking it rich requires good luck as much as skill and hard work. You have to be able to canvas a large territory, pick at various locations and if they don’t produce, abandon them immediately for the next opportunity. While most gold miners didn’t succeed in getting rich from gold mining, California’s economy got off the ground and the by end of the 1850’s California’s population was north of 380,000 with a bustling economy. The Hunt For Disaster Is The New Gold Rush Trading volatility on the long end is very much like gold mining. The opportunities are very few and far in between, but when they come, they can make you money quick. The ProShares Ultra VIX Short-Term Futures ETF ( UVXY) has had the following streaks since its inception in October of 2011 (these streaks are on closing basis): As you can see, if you took the same amount and invested it with just the perfect timing and got in at the bottom and got out at the top, you would have made 800%+ in about 280 days. On average about 50% return for each winning streak which lasts about 19 days. 50% return in 3 weeks? I would take that anytime. There have been 15 winning streaks since October of 2011 or about 1 streak per quarter. But therein lies the promise and curse of the Long Volatility Trade. While the returns can be spectacular while volatility is rising, it takes a lot of waiting for the moment to come when you can strike. Only 20% of the time does UVXY rise. Only every 3 weeks out of 3 months do we get an opportunity to make a good UVXY trade. 80% of the time UVXY goes down and it plunges head first. Since its inception, the fund is down 99.99% . If you bought and held UVXY since inception and you invested $1,000,000, you right now have about a $1. That’s right, $1 for your efforts! I mean if you are going to do that, go to Vegas and at least get some free drinks. The Psychology of Being Long Volatility In 2014, after having made some good money on being short volatility in 2012 and 2013, I decided to take a portion of the winnings in the VelocityShares Daily Inverse VIX Short-Term ETN ( XIV) and go on a psychedelic world tour through the dark side. I knew full well the statistical percentages and the pain I am about to experience, but like playing with fire, you don’t really know your physiological limitations until you experience it firsthand. I wanted to experience trading pain and ultimate ecstasy via the UVXY. The neural points that are triggered during a winning trading experience release higher quantities of serotonin (happy neurotransmitter) and as such explain the addiction to hopeless trading. So I decided to be very disciplined and have a rock solid stop-loss discipline, as I knew I’ll be on the bad side of the trade most of the time so I have to cut my losses short quickly. In the beginning I did exactly that. Starting in April of 2014, I made about 10 trades, in and out, 5% stop. But the losses started to add up. May 2014 didn’t provide a drawdown. 10 trades with 5% loss, by June I had only half the capital. Still knowing that I can hit 100% pretty quickly and recover my losses, I stayed in. June, July, August. Waiting and waiting for the right moment. Finally September came and provided the draw I was looking for. But at that point, I had been burned so many times over the past 4 months, I was now more wary and judicious. The first draw came and I missed it. I then waited for a quick rip and went long UVXY again. Another move down, boom. Made 50% on the trade. But then when we nearly hit the 10% drawdown, I decided to double down. If this had gone 10% down, it’s surely heading to 20% and that is when the big money in UVXY happens. The panic after the panic. And very briefly the futures completely collapsed over night on October 15th below every technical support. I am on my way to big money. Finally! But by the morning a sharp reversal came overnight, magically the futures went from 30 down to positive by the open, the HFT algos then took it and pushed it higher. I stayed in thinking that this was just a 1-2 day bounce. But not only was it not a bounce, it was a heart stopping rip. In 3 days, it rallied 80 points. The double on the UVXY position was down 50% just like that and the original profit was now completely gone. I stayed a couple of more days hoping for another dip to bail on better terms, but a dip was not to be. V shaped snap back usually found near bear market bottoms just happened at the top of a bull market 5 years strong. It was a major shorts carnage. Never happened before, but it happened now. That was the final nail on my UVXY adventure. With pretty much 85% of the capital lost, with my stop-loss discipline in tatters by the methodical pounding of UVXY’s relentless losses, betrayed by the worthless hope of high percentage returns, I quit the experiment. It’s ok to experience pain here and there, but this is simply well-refined torture. The medieval inquisition would be proud. Disaster may be fascinating, but it is a waste of time So while it is very tempting to trade disaster, disaster in fact happens only rarely and the losses far outweigh the gains. We are all drawn to disaster. There is nothing more exciting that to watch a well-designed and complex system fall apart. As an engineer or an analyst, you can love nothing more. You get to see how all the pieces interact, how these interactions malfunction, how the different pieces themselves malfunction. It’s like performing a surgery. It’s very educational. But we need not intermingle our fascination with disaster with our trading. It is a very expensive proposition. If you want to avoid disaster, go to cash, gold, something stable and ride out the moment. Trading it for profit is fool’s gold. The iPath S&P 500 VIX Short-Term Futures ETN ( VXX) and UVXY – do not touch with a 10-foot pole. Forget they even exist. Just go back to the world prior to 2009, when they didn’t exist. If I was the NASDAQ, I would require Option Level 2 approval before letting people trade those two instruments. Just stay out. Disclosure: I am/we are long XIV. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

American Century Launches New Fund And New Alternatives Brand

By DailyAlts Staff Although American Century launched its initial alternative mutual fund more than a decade ago, the firm is best known for its traditional strategies involving stocks, bonds, and cash. But American Century has been making more of a push into liquid alts, with the hiring of Cleo Chang as Head of Alternative Investments, and the recent launch of the AC Alternatives Income Fund (MUTF: ALNNX ). The new fund is the first of several to be launched as part of American Century’s new AC Alternatives brand, and the firm’s other alternative products have been re-branded as part of the AC Alternatives line, as well. AC Alternatives Income The newly launched AC Alternatives Income Fund is managed by Perella Weinberg Partners Capital Management, a leading global institutional asset manager with over $9 billion in assets under management. The firm’s sub-advisory team is headed by Chris Bittman, chief investment officer of Perella Weinberg’s outsourced CIO service unit Agility, and rounded out by his Agility colleagues Kent Muckel and Darren Myers. “We’re excited to be collaborating with Perella Weinberg to bring our clients a range of alternative investment solutions,” said Ms. Chang, in a recent statement. “Perella Weinberg’s experience managing both traditional and non-traditional asset classes serves as a nice complement to American Century’s own expertise as a multi-boutique, risk-aware, institutional-quality asset manager.” “For the new AC Alternatives Income Fund, we’ve assembled a team of portfolio managers and subadvisors with deep experience investing across a range of asset classes under varying market conditions,” said Mr. Bittman. “Like American Century, our asset management business is predicated upon the principle that, over time, a client’s success ultimately translates into the success of the firm.” Mr. Bittman and the rest of the Perella Weinberg sub-advisory team seek to provide the fund’s shareholders with “diverse sources of income” by using a “flexible and opportunistic investment strategy” that allocates assets among various underlying subadvisors, each pursuing different investment strategies. Currently, the fund’s sub-sub-advisors include Arrowpoint Asset Management, Sankaty Advisors, Third Avenue Management, and Good Hill Partners. American Century Investments provides additional oversight. ACAlternatives.com In addition to the re-branding of American Century’s two previously existing alternative funds with the AC Alternatives moniker – the AC Alternatives Equity Market Neutral Fund (MUTF: ALHIX ) and the AC Alternatives Market Neutral Value Fund (MUTF: ACVVX ) – American Century has also launched ACAlternatives.com as an alts-education website. A section at the site titled ” What are Alternatives? ” lists 6 reasons to own alts, the evolution of alts, types of liquid alts, and liquid alts versus private structures; another section on ” Using Liquid Alternatives ” provides links to pages on allocating, special goals, and risks. ACAlternatives.com is optimized for tablet users and also features insights from investment professionals, videos, and “other tools designed to help investors make informed decisions when considering alternative investments.” AC’s Other Alts The fund now known as the AC Alternatives Equity Market Neutral Fund was originally launched back in 2005. For the three years ending July 31, the fund’s 2.23% returns ranked in the top one-third of funds in its category, earning it a four-star rating from Morningstar. American Century’s Market Neutral Value Fund was launched in 2011. Its three-year returns of 3.00% through July 31 ranked in the top 22% of funds in its category, earning a matching four-star rating. The AC Alternatives Income Fund, which launched on July 31, is just the first of three Perella Weinberg-advised funds American Century plans to launch this year. The others will include the AC Alternatives Equity and AC Alternatives Multi-Strategy funds. The former will combine several equity-oriented strategies in pursuit of attractive returns with low correlation to the stock market; while the latter will employ several sub-strategies, including long-only equity, long/short equity, and event-driven, in pursuit of the attractive returns with low correlation to the stock and bond markets.

Invest Like Henry Kissinger

By Carlton Delfeld “I’ve always acted alone. Americans like that immensely.” – Henry Kissinger Have you seen Henry Kissinger lately? At 92, he’s as fluent as ever on foreign affairs. It makes you wonder whether, even at this advanced stage of life, he could do a better job managing American foreign policy than our current leaders. This brings me to Ukraine, Russia, and China. They look like a beautiful mess right now – but within a reasonable period, American foreign policy will gravitate back to a Kissinger dictum: America can only afford one big power adversary at a time. At this time, the one adversary is clearly China. In short, the whole Ukraine-Crimea-Russia fiasco could’ve and should’ve been avoided. Unfortunately, Ukraine is a prisoner of geography and history. It’s a bridge between East and West – a classic buffer state. The country will always need to balance closer ties to Europe with good relations with Russia, and this practical consideration should be reflected in American diplomacy. Pushing Russia closer to China is certainly not in American interests. Lord Palmerston once said, “Nations have no permanent friends or allies – they only have permanent interests.” Thus, the probability is on the side of U.S.-Russia relations improving in the long run. The stakes are simply too large and the logic of some sort of rapprochement too clear and convincing. In fact, while headlines have created a perception of a crisis in U.S.-Russia relations, the reality is that diplomats on both sides are working hard on “alliance management.” As an emerging bond trader active in Russia put it to me, “A lot of this is elaborate political theatre.” I believe that the gap between perception and reality is where fortunes are made, and Russia is the perfect example. Despite the country’s reputation as being a non-competitive, monopolistic economy, there were over 21,300 foreign capital enterprises operating in Russia by the end of the second quarter. And American companies invested $1.18 billion in Russia in 2014, nearly double the $667.2 million recorded in 2013. What’s more, Russia’s stock market is trading at astoundingly cheap valuation multiples right now. We know the reasons: economic sanctions imposed by Western democracies, falling energy prices, and, finally, the falling ruble, which is down sharply against the dollar this year. The stocks in the Market Vectors Russia ETF (NYSEARCA: RSX ) are trading at an 80% discount to the S&P 500 Index and at less than 65% of break-up value. Howard Marks of Oaktree Capital puts price and value at the center of his book, The Most Important Thing: For a value investor, price has to be the starting point. It has been demonstrated time and time again that no asset is so good that it can’t become a bad investment if bought at too high a price. And there are few assets so bad that they can’t be a good investment when bought cheap enough. Plus, we don’t need a miracle to profit from the situation, either. An American hedge fund trader active in Russian markets put it to me this way: “Things don’t have to turn around in Russia for me to make money. They just have to get a little bit better.” This is the key. If energy prices stabilize or rise, if the situation in Ukraine improves, if the ruble bounces back – any one of these catalysts could spark a sharp rally. RSX is down 32% over the past year and has pulled back 16% from its recent peak in mid-May. So it’s a good time to get ready to pull the trigger on one of the largest oil and gas companies in the world, Lukoil ( OTCPK:LUKOY ). Lukoil exceeds even Exxon Mobil (NYSE: XOM ) in total proven oil reserves. Even more impressive, the company has remained free cash flow positive during the entire past decade. The company also has a very low risk of government intervention, with a professional board and management at the helm. Despite this, Lukoil is trading at 37% of break-up value and 4.4 times trailing earnings. Right now, I’d nibble on a position and take a more sizable stake when a clear uptrend develops in the stock. Like Kissinger, don’t fear acting alone. Investing in undervalued – even hated – stocks when they turn is the most consistent way to build substantial wealth. Original Post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.