Sunday, December 28, 2008

Hedge Funds- Persistence of Returns

Burton G Malkiel and Atanu Saha published a report in 2005 looking at hedge fund returns, persistence of hedge fund returns, and variance of those returns. The work was supported by Princeton's Center for Economic Policy Studies.
The "persistence of returns" figure caught my eye. Essentially, Malkiel and Saha asked "If I am fortunate enough to invest in a hedge fund that displays better than average returns for a year, what are the odds that that same hedge fund will persist with better than average returns for the following year?"
In their 2005 report, Burton G. Malkiel and Atanu Saha claimed "We found similar results for the entire 1996-2003 period. Indeed, the probability of observing repeat winners during during the period was basically 50-50."

So there you go. Hedge funds provide low correlation, but high variance in returns and a 50/50 chance of persistently above-average returns. They have a high barrier to entry, are very illiquid, are lightly regulated, and lately seem to be a lightning rod for types like Madoff.

Saturday, December 27, 2008

Mad Mad Mad Mad World

At last count there were between 30 billion and 50 billion reasons to be upset at Bernard Madoff this month. In fact, if you count the (now excluded) potential recipients of funding from the charitable organizations he harmed, you can add thousands more to the list. In one fell swoop, Mr. Madoff harmed individuals, businesses, the arts, and sciences for decades to come and generations to follow. If you believe in the butterfly effect, his selfish actions may have wiped out whole worlds.

The need for transparency and regulation is obvious. If transparency eliminates "the edge" that exists for certain managers, so be it. If regulation becomes onerous and difficult, so be it.

The LTCMs, Madoffs, Enrons, Leesons, Amaranths, etc. have soiled the sandbox for everyone.

Monday, September 29, 2008

Size of the stock and bond markets in the United States

The capitalization of the US Stock market, according to August 2008 figures from Wilshire Associates, is $15.59 trillion.

The capitalization of the US Bond market, according to 2007 figures released by FINRA, is in excess of $27 trillion, making it the largest securities market in the world.

It is no wonder that the normally ignored bond market can shake things up worldwide when the market begins to deteriorate. Many investors focus only upon the stock portion of their investment portfolios- and TV news, magazines, newspapers, etc. all do the same. Stocks are "exciting", bonds are "boring." We continue to encourage those with balanced portfolios to look at ALL aspects of their portfolios. Find experienced advisors who can truly bring some value added to your portfolio!

Wednesday, August 27, 2008

The Short End

For those seeking shelter on the short end of the curve, the instruments with some of the best yields may also be the instruments with the least amount of risk- a somewhat unusual situation in the bond markets.

According to Bloomberg, spreads currently show 3 year Aa2 rated industrials at +146, with 3 year Aa2 rated financials at +275. However, when one looks to the CD market, they'll see 3 year CDs at +220 or so...cheaper than AA2 rated industrials and within 50bps or so of the financial paper.

CDs? Boring old CDs? Yup, boring old, FDIC insured, certificates of deposit are yielding more than Aa2 rated industrials...something to consider next time you are looking on the short end of the curve.

Tuesday, August 12, 2008

Economic Recovery Act of 2008

In addition to providing relief to those stuck in subprime, high interest rate mortgages, the Housing and Economic Recovery Act of 2008 also provides a unique opportunity for those investors who use municipal bonds in their portfolios. With municipal yields in the ten year range at around 3.75%, and equivalent Treasuries at 3.90%, everyone who pays any taxes at all should be taking a hard look at municipals.

With the signing of the Act, the housing cap that existed for states to issue non AMT housing bonds has all but disappeared. Issuance of non AMT housing bonds is expected to rise dramatically over the next few months as states issue bonds to finance mortgages made available by the Economic Recovery Act. As supply increases, so too should the yields available to the municipal bond buyers. In fact, non AMT housing bonds are yielding approximately 100 basis points (1%) more than non housing bonds with the same rating.

Tuesday, June 3, 2008

Urban Sprawl, Urban Growth

"Now Coming To A Town Near You"

Gina Olszowski, a first time author, grew up with rapid development and urban growth all around her. At the ripe old age of 24, helped out by a grant from Wild Gift, an Idaho based 501(c)(3) public charity, Gina wrote and published her first book, titled "Now Coming To A Town Near You." 66% of revenue from the book sales go to The Conservation Foundation, a local land and watershed protection organization.

The book has many voices, some collective, some disparate. Gina interviewed small town mayors who faced pressure to increase their town's nascent tax base. She interviewed farmers who faced pressure from family to give up their difficult life and sell to developers. She interviewed teens, seniors, new residents and old residents.

The photography in the book is all by Gina, and the voices heard represent the various participants in the sometimes out of control, life of its own, growth that is occurring in rural and suburban America.

There is little blame cast- the book is more essay than expose- but an interesting essay nonetheless. More information, including purchase information, can be found here.

Friday, May 2, 2008

Corn, ethanol, and the net energy saved

According to a recent Washington Post article, "If every one of the 70 million acres on which corn was grown in 2006 was used for ethanol, the amount produced would displace only 12 percent of the U.S. gasoline market. Moreover, the "new" (non-fossil) energy gained would be very small -- just 2.4 percent of the market. Car tune-ups and proper tire air pressure would save more energy."

The biofuel argument is certainly timely and popular, but like many solutions, it does not come without its own set of problems.

One might argue that biofuel production is our latest bandaid solution to an issue that needs to be more deeply examined: our energy usage. Perhaps rather than using cheaper fuel, we need to also use less fuel.

Tuesday, April 29, 2008

Biofuels and starvation

Corn prices are being buoyed by the confluence of higher ethanol demand, China moving solidly into first world status, and drought conditions worldwide. US prices for corn have risen due to increased demand for ethanol. China's demand for corn has risen due to its population being able to afford higher quantities of pork (China has the world's second highest per capita consumption of pork, and the pork comes from hogs which eat corn). Drought conditions the world over are making grain production more difficult.

Is it ethical that the US pursues corn based ethanol production in light of the fact that corn could be used elsewhere for food?

Tuesday, April 1, 2008

Recycling and the coal industry

From the April Blue Haven Capital newsletter quiz:

The answer is C) 72mm tons....

Fly Ash is a recyclable byproduct of coal combustion. According to the American Coal Ash Association (ACAA), ash has been used as a strengthening ingredient in concrete since Roman times. Volcanic ash, similar to fly ash, was used in the construction of the Roman aqueducts as early as 312 BC.

The ACAA reported that in 2006, U.S. coal-fired power plants produced over 72mm tons of fly ash. Of the 72mm tons, approximately 36mm tons were recycled, the most common product being concrete and concrete related items. That still leaves over 36mm tons of fly ash that was "landfilled", which equates to a volume of almost 24,000 acre feet. In laymen's terms: 36 square miles covered one foot deep with ash.
Coal powered energy production is making great strides in recycling some of its waste byproducts, but there is still room for improvement. Like any power production method, there are negatives associated with coal, but many of those negatives are being addressed by the industry.

Monday, March 31, 2008

China and the Olympics

NPR had an interesting debate between David Kilgour, a human rights activist and former Canadian Parliament member, and Anita DeFrantz, a former Olympic rower who missed the 1980 Moscow Olympics because of the U.S. boycott. Ms. DeFrantz is now a member of the International Olympic Committee and is opposed to a boycott. She believes that because the Olympic games are being held in China, that alone has forced China to be more open about its human rights practices.

In February, Steven Spielberg stepped down as artistic director to the Olympic games in protest to China's human rights practices. Corporate sponsorship discussions for the Olympic games have not really made headlines yet, and may not.

That seems to be the question right now: Should one support the Olympics and encourage interaction and openness with China, or should one boycott some or all of the Olympics in protest to the historic and ongoing human rights abuses so prevalent in that country?

Wednesday, February 27, 2008

Straighter Noodles

It's true!
In their ongoing effort to become more environmentally responsible, General Mills began making the noodles in their Hamburger Helper product a little bit straighter. The end result is a 20% reduction in packaging size, leading to a yearly savings of 890,000lbs of paper fiber, and resulting in 500 fewer trucks on the road. General Mills' effort caught the eye of Matt Kistler, senior vice president for sustainability at Wal-mart who said recently that this "...illustrates some true product innovation that has led to an even greater packaging reduction." Regarding Wal-mart, Kistler said "I don't consider Wal-mart to be a 'green' company, but we're certainly doing the right thing and making immense progress in the area of sustainability."

Monday, February 18, 2008

Mission Related Investing: Granting vs Investing

Mission related investing provides an additional way for today's foundations and charitable organizations to further their mission. If an organization can grant out 5% of its foundation's assets and make a genuine difference in a particular area, it stands to reason that investing the remaining 95% of the foundation's portfolio in a similar direction can provide an even greater difference. Foundations and other charitable groups are now able to support education, literacy, health care, and other mission areas through their investments, thereby multiplying the effect they can have in their mission area. Through Mission Related Investing, not only can private foundations support their mission, but they can make sure that their investment dollars are not at cross purposes with their goals.

The LA Times provided a great story back in early 2007 (Dark cloud over good works of Gates Foundation)about just such a conflict of interest. The Gates Foundation was found to be granting upwards of $218 million worldwide into polio and measles immunization and research, while at the same time investing over $423 million worldwide in Eni, Royal Dutch Shell, Exxon Mobil Corp. and Chevron Corp. In Ebocha Nigeria, the residents' immune systems are being weakened by exposure to airborne toxins such as benzene, mercury, and chromium making the residents more prone to measles and polio. The main culprit of the airborne toxins? The Eni petroleum plant smokestacks in the surrounding area...and one of the investment vehicles of the Gates Foundation.

If the Gates Foundation decided to practice Mission Related Investing, not only would they be granting money to eradicate polio and measles, but they would also be examining the influence they have as an investor in changing the habits of the corporations in which they are invested. That influence could be shown by letter writing, proxy voting, negative screening, etc. In that way, their grant dollars and their investment dollars would not be at cross purposes and both would be furthering the mission of eradication of polio and measles.