Alpha/Beta Amnesiacs

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From time to time the Zeitgeist pulls us in a clear direction.

We are emerging from the year end, so the language shared across financial media articles is performance language. How did stocks, markets, benchmarks, funds and strategies perform in 2019?

It is an opportunity for the financial media to pull its usual amnesiac act – you know, the one where they conveniently forget to pay any attention to the underlying exposures of the strategies and indices they will end up comparing. It is also an opportunity for us to pull our Gell-Mann Amnesiac act, in which we read something we understand well, shake our heads in disbelief at how it misses the point completely…and then happily and gullibly consume another article about a topic we don’t understand nearly as well, assuming they must have it right.

Frequent readers will recognize Gell-Mann Amnesia as a favorite topic here at Epsilon Theory.

Gell-Mann Amnesia

That’s Michael Crichton, the physician turned novelist turned director, talking about his physicist friend Murray Gell-Mann, who discovered (and named) the quark. Crichton pretty much invented the techno-thriller genre of books and film, starting with The Andromeda Strain, which is one of the most influential books in my life, for sure. Crichton is probably best … Continue reading

What is it, really?

The #1 question investors ought to ask of a financial services company trying to sell them something is: “What is it, really?” If you don’t know what you’re investing in, you’re liable to end up eating a lot of crunchy frogs. … Continue reading

So what are the articles which rose to the top of the Zeitgeist and prompted these two highly correlated and problematic kinds of memory loss?

The first was from a few days ago, and didn’t quite make our cut (until we saw its counterpart today). The second popped up in this morning’s daily query of the most linguistically similar financial news.

In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5% [Institutional Investor]

Ackman avoids limelight even as Pershing Square posts record 2019 [Reuters]

I don’t really take issue with the Bridgewater headline’s characterization of Pure Alpha’s 2019. Even evaluated as an absolute return strategy, it wasn’t a banner year. As a term, ‘disappointed’ carries enough emotional weight that it probably counts as Fiat News, but not enough to get too bent out of shape about.

Alas, it doesn’t take long after the lede for the amnesia to set in.

Bridgewater Associates, the world’s largest hedge fund firm, had a tough 2019.

The firm’s flagship Pure Alpha strategy was essentially flat in 2019, with Pure Alpha 18 Percent, the more leveraged version, falling 0.5 percent for the year, according to an investor in the funds. The less leveraged version, Pure Alpha 12 percent, gained 0.5 percent for the year. Pure Alpha 18 percent had been in losing territory all year.

The performance stands in sharp contrast to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index. The S&P 500 gained 31.5 percent last year, including dividends reinvested. 

On the other hand, Bridgewater’s All Weather fund gained 16 percent for the year, according to the investor. Bridgewater declined to comment.

Institutional Investor, “In Disappointing Year, Bridgewater’s Flagship Fund Returns 0.5%”

Sigh. The S&P 500 comparison is absolutely, completely, wince-inducingly irrelevant. I DO appreciate the kinda-sorta attempt to wave in the general direction of this fact. Yes, “…to that of many other hedge fund firms whose performance is more closely tied to the Standard & Poor’s 500 stock index” is about as heroic an attempt to be honest about inappropriate performance comparisons as you’re likely to see in any financial publication. These half-hearted protestations aside, the Narrative being promoted by our financial media missionaries here is absolutely that Bridgewater’s performance is disappointing BECAUSE OF the performance of the S&P 500 and all those long/short funds who charge all sorts of incentive fees for the beta to said index.

If the focus of the article was really on whether and why investors might be ‘disappointed’ with Pure Alpha’s performance, it wouldn’t have used the third paragraph to discuss how the returns “[stood] in stark contrast” to a benchmark they’re bloody designed to stand in stark contrast to. It would have focused on why the Westport crew – like many non-trend systematic/econometric macro shops – struggled to figure out rates and currencies in a year that (for once) was dominated by a narrative (trade) other than one that simply allowed them to get in front of central bank actions.

It’s a topic we felt strongly about going into 2019.

The Many Moods of Macro

Part 2 of the multi-part Three-Body Alpha series, introduced in Rusty’s recent Investing with Icarus note. The Series seeks to explore how the increasing transformation of fundamental and economic data into abstractions may influence strategies for investing — and how it should influence investors accessing them. … Continue reading

The Reuters article just makes the same mistake in reverse. By any standard, the Silver Fox put up a terrific 2019. But even in presenting it, the article can’t help making comparisons to peer strategies (e.g. Third Point, Elliott) which are consistently run with dramatically different net exposure than most of the Pershing Square strategies. Like the II piece, it makes some attempt to explain them away as maybe not-so-good comparisons, but the sheer act of including them strikes me as a pretty transparent attempt to frame the narrative, juice SEO and pump the controversy-clicks, insomuch as activist fund return articles on Reuters have the rabid sort of audience that would respond to those things.

Clear Eyes: don’t let Gell-Mann Amnesia get you. If you read a performance article about anything – a fund, a strategy, a firm, a pension plan, an endowment – read it skeptically. ASSUME that you aren’t being given all of the information to properly compare it, and that the comparison information that IS being given to you is a story-telling technique and almost certainly incomplete.

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