Strategies

- There was enough volatility in the market this past week to permit some great buying opportunities. I still believe the right strategy is to dollar-cost-average your way into the market by buying on the dips of 250 points.

Important Quotes

- As Robert Schiller, the economist who specializes in bubbles points out, human beings tend to put too much emphasis (weight) on recent experiences.

- The trick is to survive long enough to wrestle that beast to the ground.

- All you have on Wall St is your reputation, if you lose that you are toast.

- Pulling off a few all-nighters - Wall Street Meat book

- "Late night at a bar" syndrome !

- If you don't have an equity in your house forget about refinancing it! Mortgage improvements will not solve the problem.

- Deflationary expectations : Delaying the purchase - Feeds on itself (Lack of demand lets the prices to fall faster which increases deflationary expectations) - Encourages you to wait until prices hit rock bottom.

- S&P500 $40 per share earnings x 15 (inflated P/E because of easy monetary policy) = 600 (Estimated index rate) 

- In crisis everything is correlated 1.0

- Rush-in and rush-out -> Creating bubbles

- 3 years of prolonged recession -> Depression

- It's possible that due to the economy, the number of H1B filings may be fewer than in recent years.

- Multiple filings by different employers 

- 20,000 cap-exempt individuals

- Doesn't require advanced degree requirement job description

- Beginning traders, especially those with scientific or engineering backgrounds, tend to underestimate the importance of psychology.

- Money management rules allows you to have more trades when you are on a roll, but slows you down when you are starting to lose money!

- Fundamentals drive long term trends. 

- John Maynard Keynes, who speaking about market irrationality, said, "Markets can remain irrational longer than you can remain insolvent!"

- 10% unemployment is the key figure for the economy. Otherwise all of the models will fail: Credit cards, Mortgage industry, Auto loans and student loans

Hedge Fund Strategies

- Covered call: Selling out-of-money call options to improve portfolio performance

- Covered put: Short sell first and sell out-of-money put options - Either you will reach your 

profit target or you will receive a premium out of it

- The gross market exposure tells us how much money the manager has actually put to risk.

- Beta adjusted market exposure

- No management style is always winning, it's up to the manager to understand where he stands along the economic cycle and what management style is to be favored. 

- A hedge fund manager learnt that interesting short selling ideas could be found in companies that carry out large acqusitions relative to their market capitalization, in particular companies that make acquisitions outside of their domestic market.

- The greated the number of arbitrageurs operating on a given market, the higher the competition, which means that the returns realized by the arbitrageurs will be lower. The current trend in the hedge fund business is that the massive money flow toward arbitrage strategies makes it more and more difficult for managers to generate interesting returns. Most of the low-hanging fruits have already been picked!

- All managers attach great importance to reducing transaction costs so as to expand the opportunity universe of profitable trades.  (Newly discovered arbitrage opportunity (very profitable) vs. mature arbitrage opportunity (less profitable - high volume is required)

- Transaction costs represent economies of scale, a broader universe of arbitrage opportunities are available for big boys. 

- Hedge funds don't reveal their short positions in order not to attract short squeeze attempts.

- The rule-of-thumb of the art of contrary thinking is that in times of market turning points most investors make the wrong move. Experience suggests that at the peak of optimism, it's better to be more prudent, while at the bottom of pessimism it's good to start overcoming one's fears. 

- Being a contrarian on the market is inevitably going to be extremely uncomforable. It takes courage and a high stress tolerance.

- In a long-short portfolio, short positions have a double advantage, they provide a negative exposure to securities which are believed to be overvalued and reduce the portfolio's market exposure by hedging the systematic risk.

- All short positions must stand on their own two feet, short positions must be constructed to generate a profit, rather than to hedge long positions.

- The realization that one could use speculative techniques to conservative ends was the most important step informing the hedge fund.

- This example shows that power of the logic of capital protection and that in the long term it is more important to preserve the capital during bear markets than to participate completely in bull markets.

- Hedge Funds - Explorer and Frontiers

- High performances can be sustained only on relatively small investments. The hedge fund business is no scalable business, due to inherent diseconomies of scale.

- It's difficult to determine if one good catch is by pure chance or due to the manager's skills.

- It's extremely difficult to recover from a loss.

- The fund could be hit by a wave of redemptions that might cause its liquidation.

- Hedge fund arbitrages in practice are directional positions on spreads.

- An arbitrage opportunity may appear when given technical, geographical, legal or administrative barriers interfere with the correct interaction between two markets trading the same security, thus preventing the security from having the same price on both markets.

- Over time, inevitably, other arbitrageurs will get organized to take advantage of arbitrage opportunities narrowing down the price difference until it disappears. Once again to make a return it's necessary to take on risks!

- A hedge fund's rewarding system is asymmetric. Fund managers receive a portion of the profits but don't share in the losses. If a manager suffers a loss, he tends to take on greater risks to start showing a profit again. (High-watermark rule)

- Ownership is a direct and powerful incentive that can guarrantee a careful asset management!

- Instead of working to recover the losses, they may decide to resign and go to work for hedge funds that are performing well.

- Absence of stringent regulatory framework often the greatest innovations come from people who draw from a very different experience than most of the other players, because they can look at problems from a fresh slant.

- Traditional sources of beta are the stock market, bond duration and credit spreads.

- Liquidity, volatility, correlations

- A good manager is a person, who with special insight digests a huge amount of information and is able to attach a meaning to it.

- Alternative investments are characterized by a low correlation with traditional investments.

*REIT's

*Hedge Funds

*Private Equity

*Venture Capital

*Securitization

*Physical Assets

- Hedge Funds: Investment funds that employ hedging techniques: or more accurately investment funds that have a different risk/return profile compared to traditional stock and bond markets.

- Low barriers to entry - sign of a leveled playing field

- For a successful manager it's very easy to raise money to invest.

- The residential real estate market in the USA is overexposed to interest rate hikes. Interest rate rises in 2004 and 2005 will cause real estate market prices to slow down. Some hedge fund managers indicate that there is a potential speculative bubble on the US real estate market. US consumers tend to use their home as an ATM to create additional cash to spend. There are some signals pointing at the unsustainability of the price levels reached by the US real estate market.

- Debt service remained constant despite the strong drop in interest rates in the past years. How will private consumption will fair in an environment of growing interest rates. Will private consumption be in a position to go on sustaining GDP growth in the United States? 

- The long mortgage refinancing cycle, which lasted while interest rates kept decreasing in the USA, has come to an end. It was the interest rate cuts and mortgage refinancing that left US households with the additional cash that sustained private consumption.

- Having analyzed Italy's unsustainable macro-economic situation in 1992, Soros short sold the Italian Lira.

- Performance analysis must always be associated with risk analysis, because every performance is connected to the assumption of some risks.

- In order to fully measure investment risks, it's necessary to remember that:

*correlations depends upon market conditions

*leverage induces an acceleration of both profits and losses

*in times of crisis, correlations rise

*in times of crisis, the liquidity of financial instruments drops drastically