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

Black Friday for Amazon workers: the human costs behind consumer convenience

 

Black Friday for Amazon workers: the human costs behind consumer convenience

Frederic Legrand - COMEO / Shutterstock

Courtesy of Tom Vickers, Nottingham Trent University

With the holiday shopping season upon us, many people will be taking advantage of the low prices and speedy delivery promised by Amazon. The online retail giant is more popular than ever, and it is bringing on thousands more employees to meet demand.

...

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Biotech/COVID-19

Antibiotic resistance is at a crisis point - government support for academia and Big Pharma to find new drugs could help defeat superbugs

 

Antibiotic resistance is at a crisis point – government support for academia and Big Pharma to find new drugs could help defeat superbugs

Bacteria that are resistant to every available antibiotic in the U.S. already exist. Rodolfo Parulan Jr/Moment via Getty Images

Courtesy of Andre Hudson, Rochester Institute of Technology

Antibiotic resistance poses one of the most important health challenges of the 21st century. And time has already run out to stop its dire consequences.

The rise of ...



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Zero Hedge

You Only Die Once As TINA Quietly Leaves The Building

Courtesy of ZeroHedge View original post here.

It was about a year ago when we first pointed out a remarkable divergence in this broken market: retail investors (as proxied by the 50 most popular retail-held stocks) were outperforming the smart money by a factor of 10 to 1 (and blowing out the S&P500 in the process).

Is This The End For Hedge Funds: Retail Investors Outperform "Smart Money" Ten-To-One https://t.co/UsGDZKCnIx

— zerohedge (@zerohedge) November 13, 2020

But while retail investors conti...



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Politics

Turkey's currency crisis is a textbook example of what not to do with interest rates

 

Turkey’s currency crisis is a textbook example of what not to do with interest rates

Another fine mess. ToskanaINC

Courtesy of Gulcin Ozkan, King's College London

Central banks around the globe are currently staring at inflation rates unseen in more than 20 years. Supply chain problems and labour shortages arising from the pandemic, combined with sharply rising food and energy prices, have pushed prices up by as much as 6.2%...



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Chart School

US Reserve Asset vs Gold and Silver

Courtesy of Read the Ticker

Gold and silver move relative to US interest rates and the US Dollar.

So lets use a custom index of US dollar and US 10 yr interest rates and see what happens.


shrink










NOTE: Posts here are the lite version, more depth on each subject can be found via our RTT Plus membership.

Changes in the world is the source of all market moves, to catch and ride the change we believe a combination of ...

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Digital Currencies

Stablecoins: these cryptocurrencies threaten the financial system, but no one is getting to grips with them

 

Stablecoins: these cryptocurrencies threaten the financial system, but no one is getting to grips with them

Safe as houses? iQoncept

Courtesy of Jean-Philippe Serbera, Sheffield Hallam University

Cryptocurrencies have had an exceptional year, reaching a combined value of more than US$3 trillion (£2.2 trillion) for the first time in November. The market seems to have benefited from the public having tim...



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Promotions

Phil's Interview on Options Trading with TD Bank

TD Bank's host Bryan Rogers interviewed Phil on June 10 as part of TD's Options Education Month. If you missed the program, be sure to watch the video below. It should be required viewing for anyone trading or thinking about trading using options. 

Watch here:

TD's webinar with Phil (link) or right here at PSW

Screenshots of TD's slides illustrating Phil's examples:

 

 

&n...



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Kimble Charting Solutions

Crude Oil Cleared For Blast Off On This Dual Breakout?

Courtesy of Chris Kimble

Is Crude Oil about to blast off and hit much higher prices? It might be worth being aware of what could be taking place this month in this important commodity!

Crude Oil has created lower highs over the past 13-years, since peaking back in 2008, along line (1).

It created a “Double Top at (2), then it proceeded to decline more than 60% in four months.

The countertrend rally in Crude Oil has it attempting to break above its 13-year falling resistance as well as its double top at (3).

A successful breakout at (3) would suggest Crude Oil is about to mo...



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ValueWalk

Managing Investments As A Charity Or Nonprofit

By Anna Peel. Originally published at ValueWalk.

Maintaining financial viability is a constant challenge for charities and nonprofit organizations.

Q4 2020 hedge fund letters, conferences and more

The past year has underscored that challenge. The pandemic has not just affected investment returns – it’s also had serious implications for charitable activities and the ability to fundraise. For some organizations, it’s even raised doubts about whether they can continue to operate.

Finding ways to generate long-term, sustainable returns for ...



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Mapping The Market

Suez Canal: Critical Waterway Comes to a Halt

 

Suez Canal: Critical Waterway Comes to a Halt

Courtesy of Marcus Lu, Visual Capitalist

The Suez Canal: A Critical Waterway Comes to a Halt

On March 23, 2021, a massive ship named Ever Given became lodged in the Suez Canal, completely blocking traffic in both directions. According to the Suez Canal Authority, the 1,312 foot long (400 m) container ship ran aground during a sandstorm that caused low visibility, impacting the ship’s navigation. The vessel is owned by Taiwanese shipping firm, Evergreen Marine.

With over 2...



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The Technical Traders

Adaptive Fibonacci Price Modeling System Suggests Market Peak May Be Near

Courtesy of Technical Traders

Our Adaptive Fibonacci Price Modeling system is suggesting a moderate price peak may be already setting up in the NASDAQ while the Dow Jones, S&P500, and Transportation Index continue to rally beyond the projected Fibonacci Price Expansion Levels.  This indicates that capital may be shifting away from the already lofty Technology sector and into Basic Materials, Financials, Energy, Consumer Staples, Utilities, as well as other sectors.

This type of a structural market shift indicates a move away from speculation and towards Blue Chip returns. It suggests traders and investors are expecting the US consumer to come back strong (or at least hold up the market at...



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Lee's Free Thinking

Texas, Florida, Arizona, Georgia - The Branch COVIDIANS Are Still Burning Down the House

 

Texas, Florida, Arizona, Georgia – The Branch COVIDIANS Are Still Burning Down the House

Courtesy of Lee Adler, WallStreetExaminer 

The numbers of new cases in some of the hardest hit COVID19 states have started to plateau, or even decline, over the past few days. A few pundits have noted it and concluded that it was a hopeful sign. 

Is it real or is something else going on? Like a restriction in the numbers of tests, or simply the inability to test enough, or are some people simply giving up on getting tested? Because as we all know from our dear leader, the less testing, the less...



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Insider Scoop

Economic Data Scheduled For Friday

Courtesy of Benzinga

  • Data on nonfarm payrolls and unemployment rate for March will be released at 8:30 a.m. ET.
  • US Services Purchasing Managers' Index for March is scheduled for release at 9:45 a.m. ET.
  • The ISM's non-manufacturing index for March will be released at 10:00 a.m. ET.
  • The Baker Hughes North American rig count report for the latest week is scheduled for release at 1:00 p.m. ET.
...

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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.