AMAZONIAN sized risk

We can’t help but stare at the Amazon ($AMZN) charts this month in amazement. An investment down -25% over the case of a few weeks is generally seen as an unmitigated disaster. As a sign of big problems and a failing business. But while Amazon has shed a quarter of its Trillion dollar value recently (with Bezos personally losing a record -$20 Billion over two days),  it’s still up by about 50% over the last 12 months and 10s of thousands of percent overall (and Bezos is still the world’s richest person), making Amazon and Bezos’ resulting wealth the mother of all outliers.

Amazon is widely considered one of the best investing success stories of all time, up 2,350% since the March 2009 low for a compounded annual return of about 40%. That’s good for doubling your money about every two years, per the rule of 72, making it among the most popular holdings of everything from mom and pop investors to hedge funds to mutual funds.  But would these same sophisticated investors invest in this story if it weren’t a story at all. Would they invest based on the stats alone. There’s surely a lot to like from the return side. An Amazonian amount to like in terms of gains. But the risk side would send most (hedge fund) investors we know running for the hills.

What’s your Sharpe?

Most sophisticated investors don’t fall just for the story. They invest based on hard cold statistics, frequently failing to even look at an investment if it doesn’t clear some basic hurdles they’ve setup to separate the wheat from the chaff.

These are just some of the mandates and filtering mechanisms employed by sophisticated investors analyzing hedge fund strategies. And these are actually the more reasonable ones,  there’s the 5.00 Sharpe, 30% returns with 5% drawdown fringe out there as well (who inevitably end up in premium selling programs which have yet to display their true risk yet, but that’s a story for another time). But our point is that the road to hell under performance is paved with good intentions stats. We entered the monthly Amazon stock percent returns into our online portfolio tool, and just look at some of the metrics hedge fund investors would use if analyzing Amazon’s stock ($AMZN) as if it were a hedge fund or commodity trading advisor program.

A max drawdown of -93% which took 72 months to recoup! Ouch.

Past performance is not indicative of future results.

An annualized volatility of about 64%!  So long 12 vol.

Past performance is not indicative of future results.

A worst month of -42%. Worst quarter of -60%, and worst year of -85%.  Yelp, ouch, owww.

Past performance is not indicative of future results.

And finally, a Sharpe ratio of just 0.77…boring.

 Past performance is not indicative of future results.

Which is as good of a case against the Sharpe ratio (We’ve covered its many issues before, including here in ‘Sharpe Ratio: the black sheep of risk analysis’) as we’ve maybe ever seen.

But all of this is to say, you don’t get Amazonian type returns without the corresponding risk. There’s no free lunch (or soup). Which leads us back to not just the current levels in the stock market, but also alternative investments – which have shown the non-attractive side of non correlation of late by going down at the same time as stocks.  Which brings us all the way back to the old conversation about getting in at the highs and out at the lows. How many investors do you think got out at some point in Amazon during one of those big down drafts saying the environment was wrong for the company, it’s underperformed x, y, or z asset class, and thousands of other reasons.  More than a few, to be sure. And which investors stayed in?  Those who had a long term view. Those who believed more in the vision of the company than the stock performance.

What investments are out there right now sitting at a similar spot? There’s surely some unloved stocks which might fit the bill. And there’s more than a few alternative investments. Commodities anyone? Managed futures… your global macro hedge fund?  Where’s the Amazon equivalent of those underperformers? Where’s the innovation and research focus that you believe will be a long term success?  There’s an Amazon out there somewhere – go find it!

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.