Why this acquisition was the best decision

The three reasons Investor Analytics was purchased by StatPro


Lots of contemplation, emotion and cold hard logic go into the decision to have your company acquired by another firm. While even my own 13-year old daughter made the canonical “but it’s your baby” argument in trying to convince me not to, it’s never been about that for me. Investor Analytics has not been the goal but rather the means. IA has always been a vehicle to promote what I fundamentally know to be true: that we can all make better decisions by understanding and using analytics and methodologies that have passed rigorous testing. For me, Investor Analytics has been an expression of the tremendous benefits of the scientific method, as applied to financial markets. It matters because real people’s livelihoods depend on financial decisions. Good financial risk management can mean the difference between retiring early and working until old age, or between living month-to-month and investing for your future. With a nod to Simon Sinek, that is my Why. Analytics improve decision making and improve human lives. I’ve spent my career applying it to financial markets so people can make better investment and risk decisions and avoid catastrophic financial mistakes.

You can read the rest of the post here.


Number One Reason China Has Begun to Scare Me

chinese-15511_640I haven’t really been too concerned with the recent market gyrations the past few days, but yesterday’s news that China is lowering interest rates again and is now easing bank reserve requirements by 0.5% is, quite frankly, troubling.

A few weeks ago I wrote in a LinkedIn Pulse piece that “…confidence in Beijing’s ability to support the equity markets may be fading, and the real issue is the underlying Chinese economy” but that we didn’t expect a sustained wider sell-off. Last week’s downturn, just as many started their end-of-summer vacations, set off what began to look like a wave of follow-the-sun mini-crises. Yesterday’s move shows just how immature China’s economic policy making really is.

To read why it’s so immature, click here to see the whole text in LinkedIn.




Greece may be the least of our worries…

greece-eu-flag21I’ve just posted another article at the Investor Analytics blog on the developing situation in Greece. Feel free to post comments on the Investor Analytics site directly.

Risk Management on Wall Street and at the Supreme Court

pink-dress-shirt-black-striped-tie-black-belt-black-pantsOne of the first things I noticed as I started my early morning commute today was the number of men wearing pink shirts. On the train, on the ferry from Hoboken to Wall Street and on the streets of lower Manhattan pink shirts seemed to be everywhere. The gym was packed with guys wearing pink shirts too — and when I commented to one of them that we were both wearing pink shirts, he opined that “it’s a low risk choice: it’s a Friday in the summer.” Doing something ‘daring’ becomes easier the more people who accept the behavior. And if a slight majority is ok with it, it ceases to be daring at all. It becomes a low-risk choice.

Gay marraige graph

Click to Enlarge

Which brings me to today’s Supreme Court decision.  Without commenting on my reaction to the decision, it seems to be a low-risk option for the Justices: US opinion polls shows a slight majority of people across the country supporting marriage equality for the first time about 3 years ago. Among 18 to 29 year old voters, the trend is much stronger with 78% of them in favor of equality according to Gallup. While I don’t pretend to know what goes on inside a Supreme Court Justice’s head (I simply do not think like a lawyer does), each one of them must be fully cognizant that the tide of history is clearly on the side of equality. It had became the low-risk decision.

I think I may start to wear pink shirts to work more often.

Fed Rate Hike: it’s how much, not when, that really matters.

This post was originally published in Risk.net.

Volatility is up, correlations are down. Equity prices continue to soar, the US Fed continues to delay its inevitable rise in interest rates, the dollar is up almost 20% since last June, and oil is still cheap. So far, 2015 is proving to be a very different environment than 2014. As one trader recently said to me, “compared to the other world sovereign debt markets, the US can now be thought of as high yield. How often does that happen?” But the last few years have not been kind to hedge funds, and indeed the New York Times headline for May 5 was about how much hedge funds were “paid” for recent lacklustre performance. To say the Times cherry-picked the data is an understatement.

Both Cliff Asness, chief investment officer of AQR, and Matt Levine of Bloomberg critiqued the article quite soundly, pointing out that most of the “earning” that was counted in the managers’ compensation – up to 70% of it – actually came from returns on investing the manager’s own money in their own funds. By this standard, Warren Buffet made almost twice as much as all of the top 10 hedge fund managers combined. But the point of the article was that these managers are being highly compensated despite several of them underperforming the S&P 500 last year, which panders to the popular notion that hedge funds are the devil incarnate – in this case, by unfairly collecting high fees even when they fail to deliver returns. The response from the industry in pointing out the flaws in the article will almost certainly not grace the front page of any newspaper like the article itself did. But the article did point out that more than $18 billion of new assets have flowed into hedge funds this year. With total assets closing in on the $3 trillion mark, many people clearly think they are worth it.

The investment environment those hedge funds face this year looks chock-full of opportunities. One of my clients recently told me “I’m having more fun trading today than I’ve had in years” due to the combination of dynamics in equity markets, fixed income, currencies and commodities – all four cornerstones of global macro traders.


Even while equity indexes break all-time highs, the correlations among equity sectors is quite low, allowing traders to differentiate stocks much more easily than over the past few years when the high correlations made every stock indistinguishable from every other stock. In our analysis, 90-day correlations are lower this year than in 2014 between virtually all sectors. The average correlation between Russell 2000 sectors dropped from 0.71 to 0.58 between the last five months of 2014 and the first five months of 2015. Between the 36 sector-sector correlations, 34 of them dropped. Equity volatility is at a healthy level as well, with the VIX down from earlier this year to near historic norms of around 15%.

Rates and Foreign Exchange

When the Fed raised rates between June 2004 and July 2006 from 1% to 5.25%, it did so in near lockstep: virtually perfectly linearly, as shown in the graph. At the time, it signaled those rate hikes rather clearly so there was really no question about the move well before each rise. The effect was to remove volatility and uncertainty from the markets. This time around, the Fed has been very clear that it has adopted a data-driven decision approach – rates will rise when and if the monitored data says they should. In other words, this time around it is projecting volatility, or at least that it is not going to be doing things “lock-in step” like it did in the past.

Between June 2004 and July 2006, the Fed 'telecasted' its intentions about rate hikes and raised them in small steps at almost every opportunity. The result was a virtual elimination of uncertainty. They will not do the same this time around.

Between June 2004 and July 2006, the Fed ‘telecasted’ its intentions about rate hikes and raised them in small steps at almost every opportunity. The result was a virtual elimination of uncertainty. They will not do so this time.

The main question about the Fed should not be when it will start hiking rates, as that only affects short-term traders, but rather how much it will increase rates. Consensus among the traders I spoke with is that the Fed will initially take a cautious approach and likely start with a 12.5bp or 25bp move so as not to spook the markets. The implied volatility of the data-driven approach has already begun to manifest itself: for quite some time, pundits have called for an increase in June 2015, and until recently the options market implied Fed rate probability of a hike in June was above 50%, but the slowdown in US economic growth has seriously put that time frame into jeopardy. Some have suggested that after five years of solid growth, it is time for the Fed to raise rates, but I disagree, in that the time frame is irrelevant. The Fed has projected its intention of following the data closely and that does not mean averaging over the past five years – it means looking only at recent numbers. The Fed has adopted a deep exponential weighting of information in its very Bayesian approach to monetary policy.

A harder question to answer is once the Fed sets out on tightening, when will it stop increasing rates? Some have argued that they see stability with wage growth at 3.5% based on older Fed speeches and recent statements by chair Janet Yellen. But one trader I spoke with feels that wage growth is a red herring: relentless technological advancements have made return on capital/investment a much more important indicator than return on labor.

Another dynamic the Fed is monitoring closely is the US dollar’s rise. Although off about 5% from its high in March, the dollar is up almost 20% from a year ago. The strong dollar does not just affect US exports – a strong US dollar puts increasing pressure on foreign dollar debtors and can have a disproportionate impact on emerging markets. The pace of this dollar rally is worrying to some as it may be reciprocated by an equally steep decline.

Most hedge fund managers I spoke with agree that the dollar is not done rising. The euro has plenty of downward pressure: the European Central Bank is lowering rates, even though some in Germany are already calling for relaxation of their quantitative easing policy by summer’s end. Additionally, there is a real price for Europe to pay if it hopes to avoid a possibly devastating ‘Grexit’. Behind the dollar is the geopolitical stability and military strength of the US. With America’s physical distance from much of the turmoil in the world and its economic diversity, the dollar’s strength appears secure to many traders. Most of those I have spoken with agree that the Fed does not want a rapidly increasing dollar and is also concerned about too strong a dollar.


That oil is fungible has been put to the test: it actually needs to be stored somewhere and as one trader joked recently, the US has just about run out of places to hide it. This surplus makes an oil spike unlikely even if Saudi Arabia reverses course and backs off production. Every manager I spoke with agreed that the US economy has not seen the benefits of the drop in oil – the extra cash in consumers’ pockets has not yet manifested itself in spending. It seems that Americans have decided to increase savings or pay off debts rather than spend the extra cash, for now. At some point, they will increase spending and that should result in more upward movement in corporate earnings and equity levels.


Some of the concerning risks mentioned to me include liquidity, an equity correction and that the Fed keeps stringing us along and does not raise rates after all. If the Fed does raise rates in the near term, they will keep a very close eye on liquidity levels. Updated regulatory requirements on US money markets start taking effect later this year, already prompting some of them to close shop. If there is a liquidity crisis following even a small rate rise, we could see a quick reversal of Fed intentions back to near zero rates. Such a move would be consistent with their new approach of “data-driven decisions” – if the market tells them to keep rates low because of liquidity or other issues, they probably will.

Hurricanes, Correlations and Wall Street

This post is based on an interview I had with Institutional Investor that you can read here.

News flash: New York is a coastal town and the entire Wall Street area is only a few feet above sea level!  For anyone not familiar with NYC geography, Manhattan is an island sandwiched between two rivers (Hudson and Harlem), an estuary (known as the “East River”) and NY Harbor, which is open to the Atlantic Ocean.  Click on the map to see in detail what New Amsterdam looked like in 1660 when it was still controlled by the Dutch.

Lower Manhattan in 1660

Note the wall on the right side of the map (North), where Wall Street now stands. Follow Prince Straet south from the wall until first bridge over the canal.  Investor Analytics is located on the corner of what was Begijn Gracht (Beaver Street) and that main canal, now Broad Street.  The NYSE occupies the corner of Prince (also now Broad Street) and Het Cingel (the Wall), just North of us.  All of this land is in the flood zone, as it was when the Dutch ran the place, and they know a thing or two about dealing with water.  For the past 400 years, this island has been an important part of world commerce, and during that time it has been hit by quite a few hurricanes.  According to NYC’s Office of Emergency Management, Lower Manhattan was completely flooded as far North as Canal Street during a hurricane in 1821, and a category 3 hurricane hit the city in 1938.  I count eight different significant storms hitting or affecting NYC from the OEM’s website: 1821, 1893, 1938, Carol, Donna, Agnes, Floyd, and Sandy.  That’s an average of 4 per century – quite a bit more than the “one in a  hundred” we hear about.  Given the reality that Earth is getting warmer, regardless of the cause, and the Northern Atlantic can support larger storms, we should expect even more storms of such strength or worse to hit NYC and other Northeastern coastal cities.  What’s a business located in such a city to do about it?  We at Investor Analytics have a few ideas, based on the very same tools we offer our clients to avoid financial risk.

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2012 Risk

If recent history is any guide, 2012 promises to be quite eventful.  We’re entering the new year with continuing financial turmoil across the Eurozone; the US Presidential race is starting in earnest on Tuesday January 3rd with the Iowa Republican Primary; North Korea’s new regime is promising nothing new, meaning that we can expect the same irrational and erratic behavior; we have Iranian sanctions and threats to close the Straight of Hormuz; and we seem to have a ‘new normal’ 9% unemployment in most of the developed world.  For the first time in memory, the most popular New Year’s resolution, as announced by Dick Clark’s Rockin’ New Year’s Eve, was not “lose weight” or “go to the gym more often.”  This year, or rather – last year – it was “Save Money.”  Better late than never, I suppose.

Arguing to myself that a blog about risk management should not itself engage in needlessly risky forecasting, I vetoed the very idea of presenting my predictions for risk in 2012.  So with reckless abandon that comes with New Year euphoria, here goes anyway…

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Radio by Phone

** Update to post on 5/13/11: You can listen to this episode by downloading the .mp3 file.

This post is to promote a terrific radio show I’m a regular guest on – the N@ked Short Club.  That’s right, the N@ked Short Club, which can be heard on the Internet.  Dr. Stu hosts this show Monday evenings in London on Resonance 104.4 FM, and whenever I’ve been there for the past few years Dr. Stu has been kind enough to invite me onto his show to talk about risk, hedge funds and other potentially interesting topics.  It seems that I haven’t been to London in a while (I think my last trip was in 2010 in fact), so Dr. Stu has asked that I participate by phone.  The risks of being live on the radio are one thing.  But the risks associated with not even being able to see the other guests and interact with them is something altogether different.  You see, one of the important communication tools we use while on the show is silent arm waving.  We regularly make gestures (that we think are quite clear) to one another while “live” in hopes of communicating without bothering the listeners.  It’s actually a lot like charades, but instead of a game it’s quite important to convey your meaning.  How am I supposed to do that from America over the phone?

So – if you’d like to hear me try to fit in with the other guests, please point your browsers to http://www.resonancefm.com at 9.00pm London time Monday May 9th.  That’s 4pm NY time.  Formal invitation to follow:


Formal Invitation:

You are cordially invited to listen to the Monday, May 9th edition of the N@ked Short Club: 9-10pm/21.00-22.00 hrs., London time, on Resonance FM [104.4FM within London/ online worldwide via http://www.resonancefm.com]: 1 hour of loose talk about hedge funds and the state of the world, plus sublime poetry and heady music…No promotional agenda, no commercial intent…just lederhosen and light relief in these interesting times.

Host, Dr. Stu and a team of Low Latency Therapists will help callers to the Emergency Hedge Fund Helpline (1-800-DISTRESSED) to realign with their Inner Investors’ Interests, with expert guests: by astral projection from the US, Damian Handzy- CEO, Investor Analytics; plus Richard Edwards- CEO, HED Capital; Matthew Sargaison- Chief Risk Officer, Man AHL; Gus Black- Partner, Dechert; Alessandro Di Soccio- Managing Partner, Titian Global; Margie Lindsay- Editor, Hedge Funds Review; Veteran hedge fund allocator, Hal McMath; & the Unique genius of featured artist/singer/poet/artiste, Anne Pigalle [www.annepigalle.com] and the Galleon-smooth Anna Delaney. Feedback to doctorstu@resonancefm.com

Resonance FM is not-for-profit (UK registered charity no. 290236): supported entirely by grants and donations [the Guardian calls it “the best radio station in London”; the Village Voice, “the best radio station in the world”] If you enjoy the N@ked Short Club, you can support the station’s continued growth with a secure donation via http://www.resonancefm.com

Volcanic Ash Redux

My very first blog post – Volcanic Ash is Financially Risky – pointed out that the European authorities did a foolish thing by shutting down European air space without even bothering to test if the ash had made it dangerous to fly.  They assumed that it was dangerous because of only one other known incident of a jet flying through a different ash cloud years ago. The point of my blog entry was not that they should have kept the skies open, as some have interpreted it.  Rather, the point is that they should have closed the skies and immediately ordered tests to verify their assumption that it’s dangerous to fly.  Instead, they waited two or three days until the Dutch had had enough of this ridiculous approach and flew tests themselves.  Lo and behold – it was safe!

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NTSB for Financial Services

This is not a new idea – lots of people have called for financial regulators to set up a body for markets that resembles the NTSB.  It isn’t even all that brilliant – it’s more like the proverbial no-brainer.  Why don’t we have an NTSB for Financial Services?  Why don’t we treat market crashes the same way we treat airplane crashes?  The National Transportation Safety Board has made airline travel (and railway, ferry and other public transit)  extremely safe in a relatively short amount of time.  How did they accomplish this feat?  Simple – every time there is an accident, or a near accident, a team of investigators figures out what caused the accident/incident and then regulations are put in place to prevent that particular thing from ever happening again.  Airlines are required to adhere to the new rule.  Required – as in “you don’t fly if you don’t do this.”  The NTSB’s origins can be traced to the Air Commerce Act of 1926 in which Congress required the Department of Commerce to investigate the causes of airplane crashes.  At first the benefits were slow in coming.  But over time air travel has become much safer.  Sure, it takes time to investigate and it takes time to enact the appropriate new regulation, and the process is far from perfect.  But it works.  Today, I am completely comfortable getting on a commercial airliner (in the developed world) because of this.  It has reduced the accident rate to a negligible level.  And as long as this process continues, air travel will remain safe.

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The Asymetry of Death

I’ve been waiting to post this for Halloween, when most of us get dressed in fun costumes or walk around with our children in a light-hearted celebration of candy.  Not too long ago the day was All-Hallows’ Eve, the day before All Souls’ Day, when the spirits of departed loved ones were honestly believed to come back and share a day (and a night) with the living.  The rite goes back to pagan celebrations of the harvest and spirits of the dead.  For thousands of years, this was an attempt to deal with the inevitable reality of death and the harshness of non-existence that awaits us all.  That reality, though, has some very real consequences for how we deal with risks. Read more of this post

Ironic Lesson

Today I gave two back-to-back presentations at a conference on Financial Risk Management.  In preparation for this day, the conference organizers required me to send them my slides months ago.  I explained to them that I use PowerPoint on the Mac and that the advanced features I use don’t always translate well if they’re putting the slides on a PC.  So after they put the slides into the official template with the right colors and all that, they sent the file back to me to make sure everything still worked.  All this happened two months before I got here.

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Risk Reading List

I’m often asked for my suggested reading.  Here are some of the books that I’ve found especially insightful, listed by sub-topic.  I also include a favorite authors section – basically, I read everything by these people whenever they publish a new work.  This post will be updated from time to time as new books or authors come across my desk.

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