Pj de Marigny, PM DITMo Strategies; Director, GARP SoCal
23 pages on 20 Hedge and Index Strategies with Attributions, Probabilities and Rankings over 10 YearsDITMo Hedge Strategy Monthly Feb12-Issue7

Tags: aqr, Barclays, Barometers, bridgewater, citadel, CogentHedge, credit suisse, DITMo, Dow Jones, Edhec, Eureka Hedge, FTSE, HedgeCo, hedgefund, hedgegate, hennessee, hfr, Lipper, lyxor, mondohedge, Morningstar, rbc, renaissance, skybridge, tass, ucits

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Newly Revised 20 Strategy and Index Report with VaR, Drawdown and Sharpe Rankings, Probabilities on Risk and Return, Attribution Breakdown, 20 pages by Pj de Marigny, Director, GARP SoCalDITMo Hedge Strategy Monthly Jan12-Issue6

Tags: aqr, Barclays, Barometers, bridgewater, citadel, CogentHedge, credit suisse, DITMo, Dow Jones, Edhec, Eureka Hedge, FTSE, HedgeCo, hedgefund, hedgegate, hennessee, hfr, Lipper, lyxor, mondohedge, Morningstar, rbc, renaissance, skybridge, tass, ucits

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JEFFERSON REVOLUTION! Vote RON PAUL
JEFFERSON LIBERTY! Vote RON PAUL
JEFFERSON SLAVERY: Vote OBAMA
GREATER THAN JEFFERSON: Vote OBAMA
JEFFERSON UNDERWEAR: Vote ROMNEY
ANOTHER CONSTITUTION OF JEFFERSON: Vote ROMNEY
JEFFERSON BIOGRAPHY: Vote NEWT
JEFFERSON CONSULTING: Vote NEWT
JEFFERSON PHILANDERER: Vote BACHMANN
JEFFERSON ISN’T CONSERVATIVE: Vote BACHMANN
I LIKE JEFFERSON TOO: Vote SANTORUM
I WILL CHANGE MY NAME TO JEFFERSON; Vote SANTORUM
I READ NEWT’s JEFFERSON BIOGRAPHY: Vote PERRY
DID JEFFERSON PLAY FOOTBALL?: Vote PERRY

KILL THE MONSTER! Vote RON PAUL
FEED THE MONSTER! Vote OBAMA
CONVERT THE MONSTER! Vote ROMNEY
NEGOTIATE WITH THE MONSTER! Vote NEWT
OUTLAW MONSTERS! Vote BACHMANN
I HATE MONSTERS, TOO! Vote SANTORUM
WE EXECUTE MONSTERS IN TEXAS! Vote PERRY

Tags: deMarigny DITMo President RONPAUL Santorum Bachmann Obama Paul Perry Romney Newt Gingrich Mitt

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GARP SoCal Director, Pj de Marigny, PM DITMo Strategies: 20pgs, 20 Hedge Strategies and Indexes with Atrributions, Probabilities of Risk and Return for 10,5, 3, 1 Yr periods, Ranking Color-coded Matrices, Risk/Return Graphs and Commentary.DITMo Hedge Strategy Monthly Dec11-Issue5 (PRINTABLE Version)

Tags: Lipper Tass Reuters HedgeWorld HedgeCo demarigny de marigny DITMo Skybridge HFA GARP CIMA imca CFA family office advisor barclay barometers cogenthedge dow jones hedge fund indexes edhec eurekahedge f

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The increased use of cloud-based services is undeniable. Analyst firm Forrester forecasts that the global market for cloud computing will grow from $40.7 billion in 2011 to more than $241 billion in 2020. The advantages of using “the cloud” include the ability to:

• Quickly implement and use enterprise-grade technology systems and applications without employing a dedicated IT team;
• Outsource management and maintenance of technology to third-party experts responsible for ensuring continuous availability and high performance levels;
• Transition technology spending from capital expenditures to operating expenditures; and
• Easily scale technology environments to match business needs – eliminating the need to over or under buy when forecasting business growth.

When weighing adoption of cloud-services, it is important to understand the difference between cloud deployment models, namely public and private clouds.

• Public clouds are owned and operated by third-party service providers and benefit customers by delivering cost-savings derived from economies of scale. While competitively priced, public clouds aren’t always the best option for firms that require custom configurations and applications or desire high-touch service from support staff that understand the financial services market and associated technology.
• Private clouds are those that are built exclusively for an individual enterprise and can minimize concern around resource availability, security and resiliency. In the private cloud category, there are two flavors – on-premise and externally hosted.

An on-premise private cloud is generally known as an “internal cloud” that is hosted within an organization’s own data center. An externally hosted private cloud is, just as the name indicates, hosted and managed by an external cloud computing provider. Externally hosted private clouds are a popular choice for hedge funds as they allow for greater customization and flexibility while still providing compelling cost-savings.

Beyond the types of clouds, the cloud-based services market is frequently divided into three subcategories based on the services delivered. These categories are: Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). Of these, IaaS and SaaS are gaining the greatest traction and interest in the hedge fund market.

• In the SaaS model, an application is hosted and managed by a vendor or service provider and made available to users via the Internet. Customers share all or part of an application but do not control the underlying platform or infrastructure.
• PaaS is the delivery of a computing platform via the cloud. The PaaS model enables hedge funds to build and test applications without incurring the cost and complexity of buying and managing the underlying software/hardware.
• IaaS provides computing resources without requiring a firm to purchase physical hardware such as storage, servers and networking equipment. Many IaaS providers bundle the infrastructure services with business applications, such as Microsoft Exchange and Office, to deliver a complete solution. With IaaS, customers can control processing power, networking components, the operating system, storage and deployed applications, but do not control the underlying physical infrastructure.

Cloud-based services aren’t right for every hedge fund, but the potential value delivered via the cloud makes it essential that firms become knowledgeable about their technology options.

About the Author
Mary Beth Hamilton is director of marketing for Eze Castle Integration (www.eci.com), a leading provider of IT and cloud computing services, technology and consulting to hedge funds and alternative investment firms. She has over a decade of technology and marketing experience and holds an MBA from Boston College.

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GARP SoCal Director, DITMo Strategies PM, Renovatio Asset Management Alternatives Risk Manager: “Deep-In-The-Money Hedge Strategy Report” November 2011, Issue #4 Revised Version.  Probabilities on Return and Risk over 10, 5, 3, 1 Year with Color Pullout Rankings Matrices and unique metrics.  Free Download.DITMo Hedge Strategy Monthly Nov11-Issue4

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I have often made the case to clients that diversification and volatility are portfolio management distractions. Not because they are uniformly irrelevant, but because industry dogma gives them a status well above their merit. Our industry uses diversification and volatility as yardsticks of comparison, so funds are naturally incentivized to alter their behavior to maximize their performance based on these measures. If a potential investor gauges a fund’s performance using return per unit of volatility, Value-at-Risk, Beta, tracking error, and diversification – guess what happens? You get lots of fund managers building portfolios with too many positions and avoiding volatility. Not surprising then that our industry has been increasingly dominated by high diversity / low volatility funds since the advent of Modern Portfolio Theory (average fund has 140 positions – study by Pollet and Wilson).

Scott Vincent of Green River Asset Management published an article titled “Is Portfolio Theory Harming Your Portfolio?” In it, he describes how Modern Portfolio Theory (Efficient Frontier – Markowitz, CAPM – Sharpe, and Efficient Market Hypothesis – Fama) has changed the shape of the investment industry from stock picking funds to super-diversified quantitative or quasi-quantitative funds. Volatility gained acceptance as the standard measure of risk for one primary reason, it was measurable (see answers to questions 2 and 10 in “Great Investor Mentality Quiz”). But being measurable doesn’t make it right. In “Is Portfolio Theory Harming Your Portfolio?”, Vincent explains:

Amazingly enough, there’s not much empirical “proof” as to why we should use variance as a measure of risk, yet it plays a critical role in almost all large financial transactions. It seems that academicians needed a way to quantify risk to fit mathematical models and they grabbed variance, not because it described risk very well, but because it was the best quantitative option available. But just because it is convenient, and it carries a certain intuitive appeal, doesn’t make it right.

If volatility is not a very good proxy for risk then are our historical judgments of active managers wrong? Yes. Do we need to change the way that we judge managers? Yes. In fact, there are half a dozen “risks” that are more important than volatility. I’m often surprised by investors that care more about volatility than leverage. I certainly believe the latter is more indicative of potential risk (i.e. Asian Financial Crisis, Mexican Financial Crisis, Russian Financial Crisis, S&L, Junk Bond, Sub-Prime Mortgage, et. al. – see article comparing Sub-prime and Junk Bond). Volatility can be tough to stomach, but potential downside loss is true risk. As Vincent says (concept described in “Eight Mistakes Money Managers Make” presentation):

Risk is often in the eye of the beholder. While “quants” (who rely heavily on MPT) might view a stock that has fallen in value by 50 percent over a short period of time as quite risky (i.e. it has a high beta), others might view the investment as extremely safe, offering an almost guaranteed return. Perhaps the stock trades well below the cash on its books and the company is likely to generate cash going forward. This latter group of investors might even view volatility as a positive; not something that they need to be paid more to accept.

Recognize that there is more than one measure of risk and that volatility is not a synonym for risk. Risk is a combination of downside potential, liquidity, time horizon, sector exposure, leverage, market correlation, and volatility (and probably several more). Just like a pilot cannot look at one gauge to fly the plane, a portfolio manager cannot look at one measure of risk to manage a portfolio.

Another major point of “Is Portfolio Theory Harming….” is that diversification is not only over-rated, but it becomes corrosive at a certain point:

The appeal to diversification, according to quantitative finance, is the idea that it allows us to enjoy the average of all the returns from the assets in a portfolio, while lowering our risk to a level below the average of the combined volatilities. But since we can’t call volatility risk and we can’t reliably predict volatilities or correlations, then how can we compile diversified portfolios and claim they are on some sort of efficient frontier? These super-diversified portfolios may be inefficient — it may be possible to earn higher rates of return with less risk. It may be that by combining a group of securities hand-selected for their limited downside and high potential return, the skilled active manager with a relatively concentrated portfolio has greater potential to offer lower risk and higher returns than a fully diversified portfolio.

Even if we were to make volatility reduction paramount, the case for extreme diversification does not hold true. A study by Fisher and Lorie concludes that, “Roughly 40 percent of achievable reduction is obtained by holding two stocks; 80 percent, by holding eight stocks; 90 percent by holding 16 stocks.” Other studies by authors such as William F. Sharpe, Henry A. Latane’ and Donald L. Tuttle make similar statements.* Needless to say, it is hard to argue that 100 positions is necessary for volatility reduction.

But honestly, the more damning case against super-diversification is time:

A fund manager’s job is to identify assets that are priced “inefficiently,” where the market has ostensibly made an error and a stock is available at a level that allows for relatively little risk versus expected return. But finding inefficiencies and maintaining a portfolio is difficult work and requires resources (a manager’s time and brain power, among the most important of these). Resources are not unlimited (most importantly a manager’s time). Therefore, the amount of resources devoted to each specific investment varies inversely with the amount of investments owned in the portfolio. The more positions added to the portfolio, the less likely a manager is to capture these difficult-to-find inefficiencies because he/she has less time and other resources available to do so.

I have used the concept of “mental capital” for years with clients. I ask the client how many hours a month it takes an analyst to cover an investment. For example, let’s say 10 hours. Then we’ll also assume that the analyst has other ideas that are being considered for the portfolio and for each existing investment, they spend another 5 hours working on new ideas. That works out to 15 hours for each portfolio position. If we assume each analyst works about 150 hours a month (excludes time staring at the P&L and filling out March Madness pools), that means each analyst can cover about 10 names with 10 on the watchlist. That means a fund with a team of four can reasonably cover 40 names. But a majority of funds end up with 80 positions meaning that something is being sacrificed for the sake of diversification. More than likely, the portfolio ends up with a mix of insignificant positions that take just as much time as the “core” positions, but have very little impact on the portfolio’s returns. Very rarely will the 50bps position have a large impact on portfolio returns. If it does not matter, get rid of it because it is a drain on mental capital.

All of these facts lead to the question, how do low diversity / high volatility portfolios perform? In fact, fairly well, granted that we do not have a good way to “risk adjust” portfolio returns given that we are no longer using volatility. However, Vincent highlights, “Multiple studies indicate that funds which are more actively managed, or more concentrated, outperform indexes and do so with persistence (Kacperczyk, Sialm and Zheng (2005), Cohen, Polk, Silli (2010), Bakks, Busse, and Greene (2006), Wermers (2003), and Brands, Brown, Gallagher (2003), Cremers and Petajisto (2007)). While we need to acknowledge that because we can’t measure risk, these studies, like any empirical work, need to be taken with a grain of salt. It is nonetheless interesting that if we compare the studies that focus on teasing apart the influence of more active, concentrated management, to the broad all-inclusive studies, there’s a large change in the signal received.”

Funds with the highest Active Share [most active management] outperform their benchmarks both before and after expenses, while funds with the lowest Active Share underperform after expenses …. The best performers are concentrated stock pickers ….We also find strong evidence for performance persistence for the funds with the highest Active Share, even after controlling for momentum. From an investor’s point of view, funds with the highest Active Share, smallest assets, and best one-year performance seem very attractive, outperforming their benchmarks by 6.5% per year net of fees and expenses. – Cremers and Petajisto (2007)

Basically, volatility is a distraction, diversification is a drag, and active concentrated management is a superior method of investing. That is music to the ears of Graham & Dodd’er out there. In a world where the dogma is against you, hold fast that the truth (i.e. common sense) is on your side.

Finally, I have saved my favorite quote of Mr. Vincent’s for last because it describes Alpha Theory perfectly, “The degree of concentration in a fund should reflect the confidence a manager has in the inefficiencies found, and the weight of those investments should reflect the probability of success as well as the level of asymmetry present in the prospective return profiles of the assets.” Right on Mr. Vincent, write on.

*If volatility reduction was the game, then holding 8 positions would get you almost home. But that would mean that the average position size would be 12.5%. I believe that diversification can be approached from another angle that involves downside tolerance. Start by asking, what is the maximum position size I am willing to take? Let’s say it is 6% of fund value. And if the minimum position size is 1% and position sizes are scaled linearly then a 100% gross exposure fund would have about 29 positions (6% max position size – 1% min position size = 5% / 2 = 2.5% midpoint + 1% min position size = 3.5% average position size – 100% gross exposure / 3.5% average position size ≈ 29 positions).

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Pull-out Color Return Matrices for a Pitchbook, 12-page Hedge Strategies Report with Unique Return and Risk Probabilities, 18 Strategies, 10 Years of Data, New “Universe Batting Average” and “Summary” just released October 2011, Issue#3 “DITMo Hedge Strategy Monthly” Oct11-Issue3

Tags: angelo, apaloosa, aqr, avenue, barclay, baupost, Bloomberg, davidson, demarigny, DITMo, elliott, esl, eureka, farallon, hedge fund, HedgeCo, hfri, highbridge, king, landsdowne, man, moore, october, renaissance, reuters, shaw, skybridge, tass, winton

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Pj de Marigny, DITMo Strategies
Director, GARP, S. California Chapter

Two GARP Conferences (One past, one present):
Go to www.GARP.com (Free membership for all Powerpoint Presentations of Worldwide Chapters)

GARP S. California will be hosting an invitation only conference in Los Angeles sponsored by IBM. Chief Risk Officers of major financial institutions.
Date: 29November2011
Time: 7:30am – 10:30am
Place: Los Angeles Area Hotel

GARP Meeting: Newport Beach, CA
Conference – A Risk-Driven Paradigm for Cash Management

Location Pelican Hill Resort, Newport Coast, CA – Pacific Room
Dates 26 May 2011
Organizer
Contact Trevor M. Saliba (Director, Los Angeles / OC Chapter)
tel.: 3107798500
americade@aol.com
201.719.7210 Nina Lopa, GARP
Cost Free (must Register at GARP.com)
Newport Beach, California Chapter Meeting A Risk-Driven Paradigm for Cash Management Date Thursday, May 26, 2011
Time 5:30PM – Registration 6:00PM – Introduction 6:15PM

Featured Presentation sponsored by Renovatio Asset Management 6:45PM – Q & A 7:00PM – Networking / Reception 8:00PM – Meeting Concludes -

Location Pelican Hill Country Club, Pacific Terrace A 22701 Pelican Hill Road South, Newport Coast, California 92657

Topic A Risk-Driven Paradigm for Cash Management

Speaker Pj de Marigny, FRM, Head of Portfolio and Risk Management Alternative Strategies, Renovatio Asset Management and GARP co-Director, Newport Beach, California Chapter

Synopsis Cash management investment policies may include risk-driven constraints allowing alternative strategies. Pension and endowment liability-driven policies, treasury excess cash and capital budgeting projects and fund of fund redemption vehicles share a common framework for decision-making.

Registration Fee Free. Click here to register.* *Photographs may be taken at GARP Chapter meetings and featured in the photo gallery section of our website. By registering and attending a GARP Chapter meeting, you agree to our photography policy, and understand that your photo may be included in the photo gallery. Please click here to review our photography policy. If you do not agree to this policy please email chapters@garp.com immediately. You must be a member of GARP in order to register. Click here to join our organization free of charge. For more information, please contact GARP co-Directors, Newport Beach, California Chapter: Pj de Marigny, FRM | americade@aol.com Trevor M. Saliba | Managing Director and Chief Executive Officer, NMS Capital Group, LLC – trevor.saliba@nmscapital.com

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Presented by: Pj de Marigny / DITMo Strategies

Tags: ibm cro garp enhanced cash hedge fund hfa conferences orange county

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100th Monkey Phenomenon: A Monkey or a Black Swan?
Pj de Marigny, DITMo Strategies
Director, GARP, S. California Chapter
23Oct2008, Newport Beach, CA. In the Ken Keyes, Jr book “Hundredth Monkey” (http://www.amazon.com/Hundredth-Monkey-Ken-Keyes-Jr/dp/094202401X)there exists a theory that ‘thoughts, views, and concerns are transmitted mind to mind.’

This Hundredth Monkey phenomenon may be used to predict trends in consumer products and is an influence for predicting randomness.

There are those of us (deMarigny is a Hedge Fund Strategist Portfolio Manager / DITMo / americade.com) who believe that the 100th Monkey may predict random events such as the present meltdown (see “demarigny” or “DITMo” on village.albourne.com search term for predictions of unavoidable meltdown late summer 2007). On the side, I even wrote a rock music song (AMERICADE.com / 1995)titled, “100th Monkey Phenomenon.”

However, there is something more basic to the Hundredth Monkey Phenomenon. I believe that when 51% of the thoughts and activities become dishonest, the system fails. Though this view is not widely accepted, I believe this is the cause of the Great Depression. Others try to rationalize after the fact the reason for an outlier event, but the causality was present previous – so why does an event happen when it happens?

The reason is that when 51% of thoughts and activities become dishonest an outlier event of randomness becomes certainty. Sometimes the system is to blame – a bad design. Government and Legislative bodies engaging in social engineering cause adverse impacts at the expense of the system; and there are those who will exploit it. This creates a fertile environment for dishonesty, and when 51% of the activities and thoughts become dishonest (the point where good faith or destructive activities begin) the system melts down. Fortunately, capitalism affords a self-correcting system so that dying leaves in the form of mulch recreates a fertile system (until the next cycle).

This cycle may be viewed as far back as the evil Israel Kingdom of Ahab/Jezebel (OMRI) in which wealth was greatest until 51% tilted to injustice, leading to reform by subsequent kings but ultimately resulted in Assyrian capitivity. The same fate is before the United States in that if the system disappears there will be nothing left to correct or reform. I believe the system will recover but if we were to truly reform the system to an imposed honesty, we would overturn the Federal Reserve Act in favor of a world central bank that controls central banks through a non-governmental body of non-market participant experts in financial risk.

The Hundredth Monkey Phenomenon will change the meltdown into stability in 2009 but by 2011 (see demarigny article on village.albourne.com “Financial Collapse and Creation of the World Currency Unit 2011″) there will be a universal currency that requires a world tax for legal tender. It is said that fear of punishment is the only true form of crime prevention, but the rules on white collar crime provide no clarity – violation is not clear and derived after abuse rather than providing avoidance by clarity. A world organization of financial expert non-market participants is needed, not government regulators, not more criminal proesecution. The system needs change. *.*

Tags: 100th Hundredth monkey black swan randomness ditmo trend fed

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