Posts Tagged ‘Finding Alpha’

The Limits of Intellectual Property

Telluride Asset Management LLC v. Eric Falkenstein has been settled but the pain lingered on for many years. I learned about the case recently while reading Eric’s blog and wanted to learn more. Eric kindly agreed to share his experiences in an exclusive interview, and over the last week has been educating me in trade secrets and intellectual property law. 

The Limits of Intellectual Property

Are There Any in the Hedge Fund World?

By Ilene

So who is Eric Falkenstein and how did he become an ex-portfolio manager with no portfolio to manage? 

Eric graduated from Northwestern with a PhD in economics and wrote his dissertation on cross sectional stock returns and volatility.  Prior to joining Telluride as a hedge fund manager in 2004, he had been using strategies that drew upon his education, previous work running his own fund and a fund, Deephaven.
 
Eric resigned his position at Telluride in September, 2006. Several months later, Telluride initiated a lawsuit claiming that strategies used by Eric belonged to Telluride. The claims in the lawsuit would require a court to determine the nature of the components of the strategy Eric had been using and decide who owned them. This is more complicated than it may appear.
 
Consider this analogy.  Baker E goes to work baking sugar cookies for Bakery B.  E, who’s been a baker for ten years, has a favorite recipe calling for flour, butter, sugar, eggs and baking soda.  During the next few years, E tinkers with the ratios of ingredients and experiments with chocolate frosting and colorful sprinkles, but never deviates significantly from the basic recipe.
 
Then one day, Baker E decides to leave Bakery B and open a Cookie Shoppe C in another town.  Bakery B initiates legal action to prevent E from operating C, arguing that E’s cookie recipe will inevitably be derived from privileged information gained while working for B.
 
In response, Baker E argues that his recipe is a standard sugar cookie recipe, using common ingredients. He argues that B cannot own the sugar cookie constituents (sugar, flour, butter, etc.), and that B needs to define the specific recipe in its complaint. Bakery B argues they will provide that, after full discovery has been completed (which could be a few years).
 
And so began Eric's adventure into IP law.  
 
In a hedge fund “trade secret” case, the “ingredients” are variables used to construct


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Psychologists to the Rescue!

I don’t often post book reviews, but this one by Eric Falkenstein is particularly intriguing. I’d also like to welcome Eric as our newest contributor to Phil’s Stock World. Eric’s an economist, author of the book "Finding Alpha," and Managing Member of CapRock Advisors. – Ilene

Psychologists to the Rescue!

Doctoring the mind, psychologyCourtesy of
Eric Falkenstein of Falkenblog
 
With Danny Kahneman’s Nobel prize in economics every other week has a big-name author or journalist writing a breathless article about how the new ‘behavioral economics’ will fix sterile financial theory. Alas, way back in 1951 this was a tired theme. George Stigler noted "each decade, for the past nine or ten decades [ie, back to 1851!], economists have read widely in the then-current psychological literature. These explorers have published their findings, and others in the field have found them wanting—wanting in useful hypotheses about economic behavior."

Take, for example, the anchoring bias, where people do not adjust their prior beliefs sufficiently when presented with new data. On the other hand, there’s the case where people do not sufficiently account for base rate information, as for example when they are told a woman is quiet and assume she’s a librarian, not saleswoman, even though there are more saleswomen than librarians. Thus, over, or underreaction to information is a common ‘bias’, and so Kahneman’s classic work Judgment Under Uncertainty: Heuristics and Biases surveys papers from the 1970s! After a generation, the low hanging fruit has been picked, and where are we? Momentum and mean-reversion are part of the ‘new’ finance, and George Soros proudly notes that his theory of markets has markets biased—though it could be in either direction. Yet, these are not really discovered by behavioral economics, but explained by it on a case by case basis. Prospect theory teaches us that people overweight, or underweight, extreme observations in various contexts. These insights are no more useful than saying the effect of X on Y ‘could go either way, depending on a bunch of other information we probably won’t notice until after the fact’.

Finding AlphaA new book about psychiatry, Doctoring the Mind by Richard Bentall argues that the science of the mind is hardly a successful science. He argues that mental illness is on the increase and sufferers in the developed world with access to psychiatric care actually fare


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Phil's Favorites

Free, Live Webinar on Stocks, Options and Trading Strategies

TODAY's LIVE webinar on stocks, options and trading strategy is open to all!

Feb. 26, 1pm EST

Click HERE to join the PSW weekly webinar at 1 pm EST.

Phil will discuss positions, COVID-19, market volatility -- the selloff -- and more! 

This week, we also have a special presentation from Mike Anton of TradeExchange.com. It's a new service that we're excited to be a part of! 

Mike will show off the TradeExchange's new platform which you can try for free.  

...

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Promotions

Free, Live Webinar on Stocks, Options and Trading Strategies

TODAY's LIVE webinar on stocks, options and trading strategy is open to all!

Feb. 26, 1pm EST

Click HERE to join the PSW weekly webinar at 1 pm EST.

Phil will discuss positions, COVID-19, market volatility -- the selloff -- and more! 

This week, we also have a special presentation from Mike Anton of TradeExchange.com. It's a new service that we're excited to be a part of! 

Mike will show off the TradeExchange's new platform which you can try for free.  

...

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Zero Hedge

Futures Spike After Germany Yanks "Debt Break": Berlin To "Temporarily Suspend" Limit On Public Borrowing

Courtesy of ZeroHedge View original post here.

The Germans may have opposed closing borders in response to the outbreak in Italy, but it appears Berlin is planning to do something about the outbreak.

According to reports, the Germans are stepping up to suspend Berlin's longstanding constitutional "debt break" and deliver the fiscal stimulus for which economists have been begging.

To try and prevent a full-blown recession ...



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Biotech & Health

World economy flashes red over coronavirus - with strange echoes of 1880s Yellow Peril hysteria

 

World economy flashes red over coronavirus – with strange echoes of 1880s Yellow Peril hysteria

Courtesy of John Weeks, SOAS, University of London

As the novel coronavirus pandemic continues to unfold, travel restrictions are being imposed around the world. China is the main target, with various countries including Australia, Canada and the US placing different restrictions on people who have travelled through the country ...



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Insider Scoop

Benzinga Pro's Top 5 Stocks To Watch For Wed., Feb. 26, 2020: DIS, SPCE, BYND, SDC, JCP

Courtesy of Benzinga

Benzinga Pro's Stocks To Watch For Wednesday

  • Disney (DIS) - The company announced Bob Iger will step down as CEO, to be replaced by Bob Chapek. Iger will assume the role of Executive Chair through 2021. Disney shares were down about 2% on the news. 
  • Virgin Galactic (SPCE) - Shares were down 4% following Q4 results. The company reported a nearly $73 million loss on sales of under $530K. The stock is probably one of the most popular stocks on Wall Street right now: about 15 million shares trade per day on average; on Tuesday, ahead of the earnings report, about 41 million shares traded. Virgin Galactic was about a $6 billion market-cap company ...


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Kimble Charting Solutions

Dow Industrials Reversal Lower Could Be Double Whammy for Stock Bulls!

Courtesy of Chris Kimble

Dow Jones Industrial Average “monthly” Chart

The Dow Industrials have spent the past 70 years in a wide rising price channel marked by each (1). And the past 25 years have seen prices test and pull back from the upper end of that channel.

The current bull market cycle has seen stocks rise sharply off the 2009 lows toward the upper end of that channel once more.

In fact, the Dow has been hovering near the topside of that price channel for several months.

But just as the Dow is kissing the top of this channel, it might be creating back-to-back “monthly” bearish ...



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The Technical Traders

Yield Curve Patterns - What To Expect In 2020

Courtesy of Technical Traders

Quite a bit of information can be gleaned from the US Treasury Yield Curve charts.  There are two very interesting components that we identified from the Yield Curve charts below.  First, the bottom in late 2018 was a very important price bottom in the US markets.  That low presented a very deep bottom in the Yield Curve 30Y-10Y chart.  We believe this bottom set up a very dynamic shift in the capital markets that present the current risk factor throughout must of the rest of the world.  Second, this same December 2018 price bottom set up a very unique consolidation pattern on the 10Y-3Y Yield Curve chart.  This pattern has been seen before, in late 1997-1998 and late 2005-2008.

...

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Chart School

Oil cycle leads the stock cycle

Courtesy of Read the Ticker

Sure correlation is not causation, but this chart should be known by you.

We all know the world economy was waiting for a pin to prick the 'everything bubble', but no one had any idea of what the pin would look like.

Hence this is why the story of the black swan is so relevant.






There is massive debt behind the record high stock markets, there so much debt the political will required to allow central banks to print trillions to cover losses will likely effect elections. The point is printing money to cover billions is unlikely to upset anyone, however printing trillions will. In 2007 it was billions, in 202X it ...

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Members' Corner

Threats to democracy: oligarchy, feudalism, dictatorship

 

Threats to democracy: oligarchy, feudalism, dictatorship

Courtesy of David Brin, Contrary Brin Blog 

Fascinating and important to consider, since it is probably one of the reasons why the world aristocracy is pulling its all-out putsch right now… “Trillions will be inherited over the coming decades, further widening the wealth gap,” reports the Los Angeles Times. The beneficiaries aren’t all that young themselves. From 1989 to 2016, U.S. households inherited more than $8.5 trillion. Over that time, the average age of recipients rose by a decade to 51. More ...



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Digital Currencies

Altcoin season 2.0: why bitcoin has been outgunned by crypto rivals since new year

 

Altcoin season 2.0: why bitcoin has been outgunned by crypto rivals since new year

‘We have you surrounded!’ Wit Olszewski

Courtesy of Gavin Brown, Manchester Metropolitan University and Richard Whittle, Manchester Metropolitan University

When bitcoin was trading at the dizzying heights of almost US$2...



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ValueWalk

What US companies are saying about coronavirus impact

By Aman Jain. Originally published at ValueWalk.

With the coronavirus outbreak coinciding with the U.S. earnings seasons, it is only normal to expect companies to talk about this deadly virus in their earnings conference calls. In fact, many major U.S. companies not only talked about coronavirus, but also warned about its potential impact on their financial numbers.

Q4 2019 hedge fund letters, conferences and more

Coronavirus impact: many US companies unclear

According to ...



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Lee's Free Thinking

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

 

Why Blaming the Repo Market is Like Blaming the Australian Bush Fires

Courtesy of  

The repo market problem isn’t the problem. It’s a sideshow, a diversion, and a joke. It’s a symptom of the problem.

Today, I got a note from Liquidity Trader subscriber David, a professional investor, and it got me to thinking. Here’s what David wrote:

Lee,

The ‘experts’ I hear from keep saying that once 300B more in reserves have ...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. Contact Ilene to learn about our affiliate and content sharing programs.