Trader Philosphy

Great advice we traders should follow before making a trade. I found this on a blog I often read oiltradersblog.blogspot.com. To quote Gordon Gecko, "Don't get emotional about stock.":


Humans have weaknesses that hamper their trading capabilities. Many
were developed in ancient times and were important for survival. I will
enumerate the most important:

1) Loss Aversion: the strong tendency for people to prefer avoiding losses over acquiring gains

2)
Sunk Cost Effect: The tendency to treat money that already has been
committed or spent as more valuable than money that may be spent in the
future

3) Disposition Effect: the tendency for people to lock in gains and ride losses

4)
Outcome Bias: The tendency to judge a decision by its outcome rather
then by the quality of the decision at the time it was made

5) Recency Bias: the tendency to weigh recent data or experience more than earlier data or experience

6) Anchoring: the tendency to rely too heavily, or anchor, on readily available information

7) Bandwagon Effect: the tendency to believe things because many other people believe them

Belief In The Law Of Small Numbers: The tendency to draw unjustified conclusions from too little information

All
traders have in one or another time been affected by one or several of
these biases. Its easy to make mistakes when you are under pressure and
dealing with money. As Jesse Livermore once said, above all other
things we have to guard against ourselves.

By the way, I have
finished the decoration on my beach house. We chose a very clean
concept with all furniture in white. The seaview is awsome and I think
this new house will really inspire me in the future. I am having a
great time with my family and I am loving the experience of being a
father. Enzo is by far my best trade ever.

I have been lacking
form in the markets recently but I have not lost any significant money.
That is not bad for any dry spell. Anyway I have been taking some time
off for some research and I am building or rebuilding a few trading
systems. I am gaining confidence in one of them in particular and being
as agressive as I like to be when things are going well for me, I am
antecipating some great trading days in the weeks ahead.

Don`t let them beat you. And as we heard time and again on Hill Street, "be careful out there".

Another one:

"Good trading is not about being right, it is about trading right. If you want to be sucessful, you need to think of the long run and ignore the outcomes of individual trades" in Way Of The Turtle

I think we should all print this sentence and place it on our trading screens. The recency bias is the tendency for individuals to place greater emphasis on recent more data or experiences. A trade made today weights more heavily then do trades made last week or last month. Two months of losing trades can count as much or represent something like 6 months of winning trades that happened previously.

Today I sold some S&P short in the beginning of the trading session when the us dollar was making new highs and crude oil was turning negative after being up all morning. The Us dollar and Crude Oil are 2 of the indicators I normally use on my S&P trading decisions. With the info I had, the shorting was a good trade. In similar circunstances I would do the same trade again.

love the philosophical aspects, we should definitely emphasize the
philosophical aspect of our boutique as well. Lot of these strategies
and ways we trade are routed in philosophical beliefs

Funny you say that. When I was explaining our fund to a few people tonight I said our strategies are philosophical. We definately hada goodfdiscussion this afternoon.

Batman wrote:

"Consider the trading rules that work:
1) Follow the trend; 2) Let profits run; 3) Cut your losses short; and
4) Manage your money so you can stay in the game. If you design
something around the following rules, you`ll make a lot of money." --Van K. Tharp Ph.D.

hehe, can't count the numerous times i hear this... but then again hard to fault... after all I am a trend trader

Batman wrote:

"Consider the trading rules that work:
1) Follow the trend; 2) Let profits run; 3) Cut your losses short; and
4) Manage your money so you can stay in the game. If you design
something around the following rules, you`ll make a lot of money." --Van K. Tharp Ph.D.

I highly recommend Van. K. Tharp's book "Trade your way to the financial freedom" (or something like that) to build a trading system. The "expectancy" concept he discusses is the thing.

OK, OK sounds like I read 10,000 trading books, but actually ... I did !!!

Thanks for the recomendation. "Information is the most valuable commodity I know of" (Gordan Gecko, Wall Street).

Batman wrote:

Thanks for the recomendation. "Information is the most valuable commodity I know of" (Gordan Gecko, Wall Street).

Ahhh Gordon Gecko would deserve a forum with only his quotes...
A few ones :

"I don't throw darts at a board. I bet on sure things. Read Sun-tzu, The
Art of War. Every battle is won before it is ever fought."

"If you need a friend, get a dog."

"You see that building? I bought that building ten years ago. My first
real estate deal. Sold it two years later, made an $800,000 profit. It
was better than sex. At the time I thought that was all the money in
the world. Now it's a day's pay. "

"Lunch is for wimps."


and of course his speech on greed (i read that it was inspired by a guy who really did a si;ilar speech, can't remember the name):

"Teldar Paper, Mr. Cromwell, Teldar Paper has 33 different vice
presidents each earning over 200 thousand dollars a year. Now, I have
spent the last two months analyzing what all these guys do, and I still
can't figure it out. One thing I do know is that our paper company lost
110 million dollars last year, and I'll bet that half of that was spent
in all the paperwork going back and forth between all these vice
presidents. The new law of evolution in corporate America seems to be
survival of the unfittest. Well, in my book you either do it right or
you get eliminated. In the last seven deals that I've been involved
with, there were 2.5 million stockholders who have made a pretax profit
of 12 billion dollars. Thank you. I am not a destroyer of companies. I
am a liberator of them! The point is, ladies and gentleman, that greed,
for lack of a better word, is good. Greed is right, greed works. Greed
clarifies, cuts through, and captures the essence of the evolutionary
spirit. Greed, in all of its forms; greed for life, for money, for
love, knowledge has marked the upward surge of mankind. And greed, you
mark my words, will not only save Teldar Paper, but that other
malfunctioning corporation called the USA. Thank you very much."

"The richest one percent of this country owns half our country's wealth,
five trillion dollars. One third of that comes from hard work, two
thirds comes from inheritance, interest on interest accumulating to
widows and idiot sons and what I do, stock and real estate speculation.
It's bullshit. You got ninety percent of the American public out there
with little or no net worth. I create nothing. I own. We make the
rules, pal. The news, war, peace, famine, upheaval, the price per paper
clip. We pick that rabbit out of the hat while everybody sits out there
wondering how the hell we did it. Now you're not naive enough to think
we're living in a democracy, are you buddy? It's the free market. And
you're a part of it. You've got that killer instinct. Stick around pal,
I've still got a lot to teach you."

--Gecko

Batman wrote:

"Information is the most valuable commodity I know of" (Gordan Gecko, Wall Street).

In that precise case, "information" referred to inside information, hey we put Gekko's quotes in the "philosophy2 thread!!!!

Sauros wrote:

Batman wrote:

"Information is the most valuable commodity I know of" (Gordan Gecko, Wall Street).

In that precise case, "information" referred to inside information, hey we put Gekko's quotes in the "philosophy2 thread!!!!

*cough* Galleon *cough* anyone?

True story Snapman. It is amazing to me how many people think they can cheat the system over a long period of time and win. Everything reverts back to the mean. Everyday you don't get caught increases the severity of your consequences. Here are some good philosophical quotes that can be applied to trading (all anonymous) :


“Anything that is a must see, must try, must read, should almost certainly be avoided, especially if it is popular.”

“Never
act upon wishful thinking. Act without checking the facts, and chances
are that you will be swept away along with the mob.”

“Learn to stay calm especially in times of pressure or turmoil. You will make much better decisions.”

“Do not get married until you are at least 28 and know a bit more about yourself and the world.”

“Learn to do as much arithmetic and figures as possible in your head.”

"Most good traders would agree that risking less than 1% of equity in a
trade (where 1% is the amount you lose if your stop loss was hit) is a
prudent risk. Risking between 1 and 3% gets into the gunslinging range.
Risking any more than 3% is usually financial suicide, and the average
trader commits financial suicide all the time without knowing it"

Van K Tharp, IITM

Batman wrote:

"Most good traders would agree that risking less than 1% of equity in a
trade (where 1% is the amount you lose if your stop loss was hit) is a
prudent risk. Risking between 1 and 3% gets into the gunslinging range.
Risking any more than 3% is usually financial suicide, and the average
trader commits financial suicide all the time without knowing it"

Van K Tharp, IITM

That's one of main Van Tharp's point : the sizing of a position is key in a trading system. Sizing answers to the question : how much can I risk in a trade ?
To me the most important thing in sizing that it needs to be an anti-martingale : the more you have winning deals the more you increase the size of your positions (while some guys argue the very opposite, that's the famous "I double until I make my gain" which I consider I sure way to ruin).

Putting a % of the equity is an anti-martingale and that's the sizing system that I use myself. I tend to agree with Van Tharp's figures here : I generally put 0.5-1% in a deal, but when the deal profits, I happen to add on it up to 2-3% or even more

Once again, I strongly advise Van Tharp's "trade your way to the financial freedom" where all these concepts are widely discussed.

Start Your Own Personal Hedge Fund (and Pay Yourself the 2 & 20)


The “standard” fee
arrangement at most hedge funds is 2% of the assets they place at risk
for you and 20% of any profits they make. Losses? That’s your problem,
though new fees are typically not assessed until / unless you have
surpassed the previous “high water mark” – that point at which your
assets were at their highest paper value. So give some hedge
fund a million bucks and if they turn it into $1.2 million, they get 2%
of $1.2 million and 20% of the $200,000 they made for you. Total fees:
$20,000 + $40,000, or $60,000, leaving you with a profit of $140,000,
or 14%. Not bad – when everything is sunshine and lollipops. If,
the next year they lose 20%, however, that leaves you with $912,000,
less $18,240 in fees, or $893,760. Bottom line, you made 20% then lost
20% -- but thanks to their fees alone, instead of your original $1
million being worth $960,000, for a 4% loss, you’re down $106,240. Supposedly
the smartest kids in the classroom are running your hedge funds so they
will always make money. Riiiiggghhhhttt. Look, there are only so many
exceptionally bright kids with exceptionally good discipline who are
exceptionally lucky in exceptionally good bull markets. As John Kenneth
Galbraith observed, “Financial genius is a short memory and a rising
market.” There are as many types of hedge funds as there are
clever pitches on how to separate a fool from his money, but there must
be a better way. One of the earliest types of hedge fund was a
“long/short” hedge fund where the manager would decide to enter, say,
the airline sector, and would go long the airline he thought most
highly of and short the worst. So he might have gone long Southwest (LUV) and shorted US Air (LCC). If you want to establish your own long/short hedge fund, I can suggest two possibly “better ways.” The Lazy Man’s way is to buy shares of the ProShares Credit Suisse 130/30 ETF (CSM)
which is a publicly-traded variation of a long/short hedge fund called
a 130/30 fund. The portfolio managers of this actively managed ETF use
margin to buy 130%, rather than merely 100%, of the positions they
believe will do best on the long side, then short for 30% of the
combined portfolio those firms’ stocks they believe will do best on the
short side, giving them a net net 100% long exposure. If they are among
the brightest lights in the night sky, they will earn hedge fund-like
returns for you without hedge-fund fees.The second way intrigues
me even more. Sy Harding is a friend and competitor who takes technical
analysis as seriously as I take fundamental analysis and his results
show that fact. Sy is consistently ranked #1, 2 or 3 for market timing
by Timer Digest. He is among the best of the best. Sy’s flagship
publication and financial website StreetSmart Report and his free daily market blog
are must reading for a great market timer’s take on current markets.
But to these two, Sy has added a new, subscription publication, The Street Smart Long & Short Stock Advisory, which has a fine grasp of both technical and fundamental analysis. I
may be somewhat swayed because many of Sy’s technically-selected picks
mirror those I’ve chosen based upon fundamentals. In the current issue
of Long & Short, for instance, he has four selections on the long
side, all of which are in our own favored metals, energy and food &
ag sectors. He notes that closed-end fund ASA Limited (ASA)
is invested 75% in gold mining firms with the rest in platinum, silver
and diamond firms, and currently sells at a 6% discount to NAV. Another of our favorites that Sy profiles is Silver Wheaton (SLW),
a “royalty override” company. SLW produces no silver itself by drilling
for or operating silver mines but rather buys some part of (and
sometimes all of) a mine’s future output, thus providing capital to
silver miners to do what they do best – find silver – and a steady cash
flow to provide SLW investors with what we like best – steady cash flow
on what we believe will be an asset that rises in value over time. In the energy sector, Long & Short recommends Frontier Oil (FTO),
an operator of complex refineries (“complex” meaning they can process
the heavy crude from Canada and elsewhere and turn it into usable
products like gasoline and other petroleum products.) Sy notes that FTO
has nearly half a billion dollars in cash and sells at just ten times
earnings. Finally for the long side, in the food industry Long & Short features Diamond Foods (DMND).
Sometimes you feel like a nut; sometimes you don’t. When you do, you’ll
probably reach for a can of Diamond or Emerald brand nuts. When you
don’t, you might instead go for their Pop Secret brand popcorn. In
either case, DMND provides snacks that are healthy and inexpensive, two
trends that bode well for it whether in recessions or expansions. The two short recommendations of Long & Short Stock Advisory this issue are Garmin (GRMN) and Marriott Intl (MAR).
Sy’s logic for shorting Garmin is that it is the leader in an industry
that is about to become as commoditized as personal computers. The
“early mover” advantage is gone – with every deeper-pocketed smart
phone vendor now incorporating navigation into their phones, it will be
difficult for Garmin to “stay relevant.”

As for Marriott, its
entry into the timeshare market may prove to be quite the albatross
when added to the industry-wide decline in both business and vacation
travel for its basic hotel business. Losing $466 million in the 3rd
quarter alone, the additional 25,000 rooms Marriott is in the midst of
constructing is likely to mean another big anchor on earnings. So
you could construct your own long/short portfolio, buy CSM, or
establish an account of your own that mirrors the one Long & Short
Stock Advisory already puts together and gives the logic of its
recommendations every couple of weeks. If you are tempted to
create your own personal long/short hedge fund, try to remember that
the inherent logic of any such portfolio is not that the longs will all
rise and the shorts will all fall, no matter the market. Rather,
well-selected stocks continuing to make money in favored sectors will
likely do better than others even in bad markets, and poorly-run
companies or inappropriate-for-the-times business models will do less
well even in up markets. The idea of creating a long/short portfolio is
somewhat similar to using fixed income for a portion of your portfolio:
you want to dampen the effects of market volatility and earn more
consistent returns – and perhaps sleep better at night, as well. There
was a time when your stockbroker held all the information about the
companies you bought. He or she enjoyed a monopoly on information. You
called your broker to find out what a particular stock was trading at
or sat in his lobby to watch the magic of the tape showing all (on slow
days) buys and sells. By the same token, hedge funds once held a
monopoly on the ability to create long/short portfolios without you
having to do extensive research and paperwork on your own to establish
and maintain the portfolio. But sitting in a broker’s office
just to see the tape is now so yesterday. And with the advent of 130/30
ETFs like CSM or services like Sy Harding’s Long & Short Stock
Advisory – both of which I predict will be the first in their category,
but not the last – giving “20 & 2” to some guy just because he has
an address east of the Hudson will be a sucker’s game, eschewed by
those smarter and more knowledgeable.Full Disclosure: Long CSM, ASA, SLW, & DMND. Short MAR.

Fame is a dangerous thing



There were two reactions I got to my column last week on Greg Zuckerman's new book The Greatest Trade Ever about John Paulson's $20 billion bearish housing trade in 2007: "He was lucky" and "He won't do it again."

Even though these comments are mostly sour grapes, here's the problem
with overanalyzing winners -- for the financial media, potential
investors and even money managers, like Paulson himself. Our
society celebrates winners (athletes, politicians and investment
managers like John Paulson) and ignores losers. From 1994-2007, in the
eyes of many, Paulson was a loser. His hedge fund, Paulson & Co.,
had mediocre returns during this period. He was defined as a merger
arbitrage guy. Because of this categorization, some investors were
alarmed by his ideas about betting against the housing market using
credit default swaps. Yet, he did -- and we know the results. Although
his pre-2007 performance didn't stand out, people who knew Paulson
thought highly of him, according to Zuckerman. Investors were often
impressed with his understated but effective way of clearly
articulating his investment theses. Post-2007, the perception of
Paulson went from career underachiever to seer. He is now celebrated,
and his recent stakes in Citigroup(C), Bank of America (BAC) and gold are seen as green lights to other investors to buy. If Paulson told us tomorrow that Martians were going to invade us next month, there would be a run on Martian army gear. Yet,
this reaction is equally superficial in the opposite direction. We
don't care why he thinks gold is a buy or why Bank of America will
double in two years. This isn't Paulson's fault. He can't help it. It
is the reality that's developed around him while he's gone about his
business trying to make money for his investors. It's exactly the same
as the heavy attention paid to Warren Buffett's moves. This is
classic "survivorship bias." There were 20,000 hedge funds in the
halcyon days of 2007. No matter what the markets did over the next 18
months, five to 10 funds would have had scored 100%-plus returns and
been celebrated. If Bernanke had cut interest rates drastically in
2006, maybe New Century would have continued to be a huge moneymaker by
issuing subprime mortgages. David Einhorn would be known today
as having the canny intuition to get long that stock (and join its
board) in 2006, instead of for calling Lehman's implosion in early
2008. Had the housing boom continued, perhaps Greg Zuckerman's book
would be about former Bear Stearns hedge fund manager, Ralph Cioffi. Of
course, this didn't happen and, instead, Cioffi is fighting civil
charges by the SEC, and John Paulson is the hero. Survivorship
bias leads to celebrating the winners and -- usually --
overinterpreting their moves leading up to their success and trying to
apply these actions to future situations. At least no one in the
mainstream media has yet called John Paulson "the next Warren Buffett." Remember Eddie Lampert? That's what Business Week
and countless other magazines called him back in 2004. Although many
still defend Lampert as smart, his past five years of performance have
been very disappointing, and his Sears Holdings (SHLD) investment specifically has been ... early. Although
it's easy to pick on the financial media for these flubs in hindsight,
they are merely reflecting our own deep-seated human desire to make
sense of a seemingly senseless market. They wouldn't tell us who'll be
the next Warren Buffett, unless we wanted to buy their magazine (or
click on their links) to find out. We gravitate to "winners" for pearls
of wisdom to help us be more winner-like. This is why investors
"performance-chase." The best performing hedge funds (and mutual funds)
will always attract the most capital. After all, performance is what
it's all about. Most investors will overlook lots of quirks, ethical
lapses and hard-to-follow musings about the state of the markets in
investor letters, if the money manager performs. The longer and
better he or she performs, the more leash we give him or her (like
Madoff) or the more we celebrate him (like Peter Lynch, Lampert and now
Paulson). But past performance (and a fund's ability to raise capital)
is no guarantee of future success. Investors should judge money
managers on their current ideas. If you'd done so when John Paulson
made his argument for why to bet against housing in 2006 and 2007 --
despite the fact that he wasn't a "housing guy" -- you made a lot of
money. His pro-gold and pro-financials views now should be also judged
on their merits, not because "John Paulson thinks so." Of course, you
and I will probably never have the chance to place money with Paulson.
So this lesson becomes even more important. How are you going to know
the next John Paulson when you bump into him or her? Finally,
let's turn to the critique of "Paulson will never do it again." Most
people assume that smart people will, over time, outperform their
peers. This is true. Yet, we also know smart people drove Enron,
WorldCom and Lehman Brothers off cliffs -- all companies that, before
their collapses, had been celebrated in the financial media with books
written about them "getting it" while their competitors didn't. How can
this happen and how can Paulson avoid this fate? Michael Burry,
a doctor-turned-hedge fund manager also profiled in Zuckerman's book,
who also profited from betting against housing despite great
protestations from his investors, had a memorable line: "A money
manager does not go from being a near nobody to being nearly
universally applauded to being nearly universally vilified without some
effect." Paulson's gone from obscurity to being perceived by
many as the top hedge fund manager in the world. With that change,
Paulson has received enormous wealth, but at a cost. His every trade
gets discussed and debated in the media. He's likely become more
isolated for security reasons, making it harder to relate to the "real
world" in which his investments operate. And he likely has more "yes
men" around him than ever before. If you're on Paulson's team,
you've made huge money recently. Unwittingly, you'll start agreeing
with him more on his new investment ideas. Anyone who doesn't agree
will probably leave on his own accord or be asked to leave. Those
remaining on the team are the most loyal and the least likely to
disagree with the boss's views. Active debate helps form great
investment ideas. But, as money managers get more successful, they face
less and less debate. I disagree that John Paulson was lucky in
betting against housing. From Zuckerman's account, Paulson did his
homework, while everyone else stayed too long at the party. I also
think that he can still conceive of and execute great trades. But
there's no question that it will be more difficult now than before. Ask
Lampert. Paulson's continued success is not his birthright. Any
investor choosing a money manager needs to remember the story of the
emperor's new clothes. Managers like to dazzle investors with technical
terms and fancy charts. However, they should be able to clearly and
articulately explain their basic strategy. No amount of buzz or press
clippings is an adequate substitute for clear-headedness. (In fact, if
they seem overly concerned with their media appearances, this signals
they care more about their image than managing your money.) You
shouldn't worry about asking a stupid question. If they show a whiff of
arrogance in responding to your questions, run away as fast as you can. Answering
these questions will help you skate to where the puck's going, not
where it's been. It will also help you ensure differentiating between
"flash in the pan" money managers from those with staying power. And,
just maybe, you'll find the next John Paulson.

Good read...I'd like to learn more about different types of strategies/philosophies that fund managers employ. If anyone has any good literature please pass it on. Good interview, quick read.

=================================================================================================






The Interview - Lars Steffensen, Ebullio Capital:
"Industrial production and GDP figures from the rest of the world are
right and the figures from China are wrong"


Tue, 18/08/2009 - 00:27


Ebullio Capital managing partner Lars Steffensen believes that as the world's
economy tips downward again in the second leg of a W-shaped recession
and central bankers court hyperinflation as they ride to the rescue,
the Ebullio Commodity Fund will profit by going short on the way down
and then going long once real signs of recovery emerge.


HW: What is the background to your company and fund?
LS: The Ebullio Commodity Fund is a pure discretionary
commodity hedge fund. Ebullio invests in all commodity markets via
futures, options and some physical trading. A discretionary approach is
employed along with additional technical and fundamental signals, with
hedging strategies applied.
Ebullio Capital aims to achieve annualised returns of 20 to 30 per
cent and has a wealth of talent and experience in trading all
commodities. The Ebullio Commodity Fund has capacity of USD500m and
opened to outside investment in October 2008. The fund currently has
assets of USD64m.
The fund is characterised by transparent risk management techniques,
standard deviation of 5 to10 per cent, with a positive rolling 12-month
period, a single commodity margin to equity ratio not greater than 10
per cent and total fund margin to equity ratio not greater than 20 per
cent.
The fund is an open-ended, Cayman-incorporated mutual fund with its
base currency in US dollars and a minimum subscription of USD100,000.
Subscriptions are monthly and redemption notice is 30 days.
Ebullio carries out event-driven and technical trading of futures
and options of all commodities, including trading on an opportunity
basis of energy, agricultural and soft commodities, physical trading of
LME metals such as copper, nickel, zinc and lead, and event-driven and
technical trading of futures and options in LME and Comex metals, Nymex
energy and Comex and London bullion.
I am the managing partner and director of commodity trading group. A
graduate of Denmark's University of Aarhus, I have 22 years' experience
in the commodities and metals trading industry with vast multistrategy
experience, including directional, spreads, physical and arbitrage. I
have returned an average of 40 per cent per annum since 1987.
Partner and commodity trader David J. Sutcliffe has experience in
soft commodities and industrial metals, and specialises in the trading
of futures, spreads and options of LME metals. Commodity trader Gregory
Cain studied international finance and financial markets at France's
Ecole Supérieure de Commerce, writing a thesis on pricing credit
derivatives and market risk. He too specialises in the trading of
futures, spreads and options of LME metals.
HW: Who are your key service providers?
LS: The custodian for segregated accounts is JP
Morgan, while the fund administrator is GlobeOp Financial Services and
the auditor is Kinetic Partners. Our legal advisers are Walkers in
Cayman and Cummings & Co. The fund's prime broker is Marex
Financial and other various executing brokers. The compliance adviser
is Complyport.
HW: Have there been any recent changes to the management team?
LS: In line with market development and with our
client-centric focus, we recently opened a US office in Denver,
Colorado, run by David Maynard, to service new and existing US clients
and help US investors gain exposure to our Ebullio Commodity Fund.
Denver's positioning in terms of geography and time zones enables us
to service our existing clients comprehensively with an eye on any new
opportunities. We feel that our commodity fund offers a type of risk
and exposure that is becoming extremely appetising for the US market,
and the regulated and compliant nature of our fund makes it a
tremendously attractive proposition.
David heads investor relations in the US for Ebullio. During his
20-year career in commodities and trading, he has been a trader,
marketer and analyst for some of the world's leading investment banks
as well as mining and metals companies.
HW: What is your investment process?
LS: It is based on a qualitative assessment of risk and
return characteristics of the trading strategies, involving intensive
analysis of the underlying fundamental, quantitative and technical
market picture.
HW: How do you generate ideas for your funds?
LS: We obtain a significant informational advantage
over conventional commodity funds from involvement in the physical
commodities markets. We gain valuable and timely insights from
sentiments and trends that drive prices in the futures market. A
physical trading strategy contributes healthily to absolute returns and
provides Ebullio with great flexibility in the trading of calendar
structures.
HW: What is your approach to managing risk?
LS: We create daily NAV and trade/position statements
and audited monthly transparent performance reports. The fund has low
credit risk due to exchange derivative focus, and counterparty
insurance is taken for physical transactions. We use option hedging
strategies, while all physical transactions are fully hedged. In
addition, we employ a risk management suite, and positions are slowly
scaled into.
HW: How has your recent performance compared with your expectations and track record?
LS: Our recent track record is more in line with our
targeted returns of around 20 to 30 per cent. May 2009 was a decent
month for the Ebullio Commodity Fund and we took pleasure in reporting
a net return on capital of 2.91 per cent for the month, which brings
our total return for first five months of 2009 to 13.76 per cent and
since launch to 118.32 per cent.
In line with our philosophy of being an opportunistic and aggressive
but conservative capital manager and with our validated trading
strategies, we spent the equivalent of around 10 per cent of the
month's return on options in May in order to ensure a limited downside
on our positions.
HW: What opportunities are you looking at?
LS: We continue to believe that the grotesquely bad
industrial production and GDP figures from the rest of the world are
right and that the figures from China are wrong - call us cynics, but
we just don't believe that China can keep reporting electricity output
down 25 to 30 per cent with the rest of the economy going ahead
unchanged or even allegedly growing.
Furthermore, we believe that most of the Chinese stimulus cash is
being used by various state entities and semi-state entities to
speculate in all asset classes, because they full well know that
actually consuming stuff will just lead to the production of unsellable
product. So the perceived massive Chinese demand is basically bogus and
these sorts of scenario normally end in tears.
HW: What events do you expect to see in your sector in the year ahead?
LS: We still believe that we are looking at a W-shaped
pattern from the middle of last year. We collapsed, have recovered on
irrational exuberant optimism and massive quantitative easing, but it
won't be enough, and as more horrible macro figures will show over the
next six months, we will collapse again.
Then the Fed, the Bank of England and even the European Central Bank
- once Angela Merkel finally realises that the German export model is
broken - will throw so much money at the world that they pass the point
of no return on hyperinflation. But we need another down leg to provoke
the central banks to throw any pretence of caution to the wind and
start completely destroying their own currencies.
In Weimar Germany, the central bank decided that the only way to pay
off massive debts incurred through massive government spending on the
war effort, war-related reparation payments and a massive domestic
stimulus to protect German industry from the results of the war-induced
collapse in world trade and German exports was to print money. The
results are well known and had horrific consequences. The result for
commodities was a booming domestic price, which killed consumption and
industry and the world price actually collapsed.
HW: How will these developments affect your own portfolio?
LS: As, if and when the trend turns, we will be short
on the way down and remain vigilant for real signs of recovery and then
get long for the long term. Sell in May and go away may not be entirely
appropriate and out by a couple of months this year, but we still agree
with Frank Sinatra: "That's life/That's what all the people say/You are
riding high in April/Shot down in May..."

I don't find myself dabbling in options too much. Can one of the Senior traders explain this options trading strategy? (second to last paragraph)

Via Barron's:
=========================================================================================

THE STRIKING PRICE

EPICTETUS, THE GREAT GREEK PHILOSOPHER, understood adversity and how it should be handled. Born into slavery, he lived free, studied and taught Stoic philosophy, and said things like, "It is difficulties that show what men are." Epictetus never managed money or ran a trading desk, but he
naturally comes to mind as Greece's financial problems menace the global market's stability. Though never mentioned by name, Epictetus' stay-calm-and-carry-on sensibilities animate much of the trading, and a lot of institutional-investor sentiment, in the U.S. options and stock market. "When the market is macro-driven, all you can really do is just slowly buy the market and hope it's up two years from now," one very candid strategist said.

The main theme, and it isn't a very grand one, among many institutional investors is finding ways to approach U.S. stocks that have strong fundamentals, but whose prices still could be crushed if the European Union fails to clean its PIIGS' sty. Portugal, Ireland, Italy, Greece and Spain borrowed too much money, and may need to be rescued by more fiscally conservative EU members. The answer, at least to investors who use options, is a nascent type of financial isolationism. The isolationists focus on better-than-expected first-quarter earnings for many U.S. companies, and use options that typically expire in one month to hedge away the risk presented by foreign economies.

This is by no means a foolproof measure, but it is the market stance mentioned by countless senior traders and strategists who preside over institutional options trading. The one fact that inevitably arises in every situation is the financial health of U.S. corporations. As of Feb. 25, Thomson Reuters said 470 companies in the Standard & Poor's 500 Index bested first-quarter earnings expectations, 10% matched estimates, and 17% missed the mark. Overall, earnings have thus far beaten expectations by almost 12%.

The use of options that expire so quickly underscores the difficulties investors confront as they try to hedge U.S. stock portfolios from the impact of far-away events that most investors aren't even able to track. This creates hedging problems. Dennis Davitt, head of U.S. equity-derivatives trading for Macquarie, addresses this conundrum by focusing on stocks that have high dividends, like Altria (ticker: MO), AT&T (T) and Verizon (VZ), and whose options are inexpensive due to their implied volatility levels. Altria pays a 35-cent quarterly dividend, for example, that can be used to offset the $1.96 cost of a January $20 put. Davitt also likes using dividends to help pay for AT&T's October $24 put, and Verizon's October $28 puts.

"These stocks present a opportunity to play for free or with the house's money," Davitt says. Such an approach, which uses one's native intelligence to deal more wisely with the challenges of the world, is just the type of solution that would surely please Epictetus.