March 8, 2013
Attain Capital
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Some hedge fund bigwigs generate headlines with live arguments on CNBC, but Jeff Gundlach of Doubleline (while not exactly a ‘hedge fund guy’) has been opting instead to make huge – and for the most part, uncannily accurate – calls on various markets. These calls (what we have called the “Gundlach Spreads”) have generated a fair bit of buzz, and now there’s a piece from Business Insider quoting him on another catchy investing idea – something he calls Gundlach’s Rule of Investment Risk.
If you run things and you try to get them very smooth, without ever any downside, you’re trying essentially to eliminate the frequency of problems. I believe the frequency of problems times the severity of problems when they occur equals a constant. Frequency times severity equals a constant.
Essentially – he is saying that there is one pain point, and it is a constant. And it can be arrived at via frequent but small downside, or infrequent but large downside. Business Inside breaks it down in terms of the economy, saying the idea is essentially that you can have 1) frequent, yet shallow recessions or 2) infrequent, yet deeper recessions.
Now that sounds a lot like the description we give of managed futures and their long volatility profile – whereby they accept small but frequent losses for large but infrequent gains. Conversely, short volatility programs such as option sellers trade off small but frequent wins for large but infrequent losses. Throw in a little bit of Nassim Taleb’s thoughts on randomness happening lot more in financial markets than you would think, and you can see why we believe it is such a good idea to be on the side where you can benefit from these large outlier moves.
But Gundlach takes the idea a bit further by saying the frequency vs. severity difference is a constant. What that means for long volatility type programs is the less frequent the big moves are, the larger the next move is going to be – so that the frequency times severity equals the same number. This meshes well with our experience watching markets and managed futures programs over the years, whereby the big moves often come out of the quiet periods. Just look at the Japanese Yen’s recent move, where that market followed 5 months of being in a tight 3% range with a decline of 16%. As we read Gundlach’s “Rule” – with the frequency of “problems” nearly zero in the Yen during the quiet period, the magnitude of the next “problem” had to be much bigger in order for the frequency*severity to equal the constant.
Gundlach’s message appears to be that the Fed’s machinations are suppressing the frequency of problems, meaning the severity of those problems will be that much bigger when they come. The question then – is whether the Fed can suppress the frequency indefinitely to escape the severity. Put us in the doubtful camp.
Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.
Limitations on RCM Quintile + Star Rankings
The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.
See the full terms of use and risk disclaimer here.
Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.
RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.
Limitations on RCM Quintile + Star Rankings
The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.
See the full terms of use and risk disclaimer here.