Friday, February 01, 2008

After one day... doesn't appear as if February's getting much easier to play than January was. Stocks go crazy yesterday, and bonds barely budge. Employment data is horrible, and stocks nudge higher yet again...only to reverse as ISM is better than expected! Throw in the news that one bloated tech behemoth is buying another, and it's tempting to break out the monkey and having him start chucking darts at the FT.

The payroll data as reported was pretty unambigously weak, but that and £1.65 gets you a cup of black coffee at Starbucks. Macro Man was amused to read a wire story suggesting that "payrolls fall for the first time in five years." Actually, no; are memories so short that people don't remember the negative first print for August's data? Regardless, the trend is pretty clearly weakening, which of course is a big reason why Bernanke is taking his Sikorsky for a spin. Not that it did too many people on Wall Street (or, judging by today's data, Main Street) much good. The chart below illustrates the January returns for what might be termed "asset class benchmarks." Unfortunately, Macro Man couldn't dig up the total return for the Lehman Agg, which he has to believe would be the best performer of the lot. (Anyone who knows the Lehman Agg return, by all means share!) In any event, it was pretty grim for many equity and FX specialists, and commodities did nothing in particular. As noted throughout last month, macro was/is an attractive asset class in volatile environments. While Macro Man managed to claw out a 2.4% gain thanks to some fancy footwork intramonth, he actually underperformed the HFR macro index.
When Macro Man forecast at the end of last year that 2008 would be the "year of alpha", little did how know how true that would be, even from day one! While the final score for the beta portfolio was substantially better than it was at the depths of the abyss, all in it still notched an ugly 3.89% loss.

And while Macro Man's alpha portfolio left him (un)comfortably long risk assets in the first half of the month, he at least had the sense to add short equity risk and quit trying to sell US fixed income. Insofar as a vital element of successful trading is not losing too much money when you're wrong, he can at least breathe a sigh of relief that the remedial action taken in the second half of the month was successful
Particularly encouraging was that every aspect of the alpha portfolio was on song last month, combining to generate a tasty 6.30% return. The year of alpha, indeed! While he still managed to do some silly things (the diastrous attempts to sell US fixed income, cutting the silver long at the low, not stepping up to the plate and selling more dollars), at the end of the day he managed to recognize the bigger picture and salvage a good month for the portfolio as a whole.

On the basis of today's evidence, he'll need to stay on his toes if he wants to repeat the trick in February, particularly as he plans to hit the slopes for much of the second half of the month.


Anonymous said...

Hi Mr. Macro,

Now that you're up 18M+ on your virtual portfolio, I have a question for you.

Do you always size your risk based on 100M AUM or do you adjust relative to your P&L as it shifts? Do you reset your base?


Macro Man said...

Good question, Erik. The portfolio is still managed and P/L accounted on the basis of the notional $100 mio, as opposed to say the current $118 mio or so.

That having been said, the amount of risk taken has increased steadily as the P/L has increased, as can be seen from the steady incerases in the absolute value of the monthly P/Ls. I tried to dial down risk last December, which can be seen in the relatively paltry P/L for that month.

That January's P/L was reasonable large is to a high degree more a reflection of the ex-post volatility of financial asset retruns than an ex-ante decision to bump up risk a lot.

Avoiding the trap of whether or not to accrue "AUM" in P/L calculations is one of the reasons that I just accounbt for everything in gross dollar terms.

Anonymous said...


55in1st said...

Hello Macro-Man,
I am jus a new reader or your very enjoyable website.Do you size your token in bps of NAV based on the stenghth of your view i.e short term tactical 20bps regular mid term 40bps and strong macro driven few a year 100bps (as an example of a potential calibration )
Very much appreciated
Best rgds

55in1st said...

sorry for typo

Anonymous said...

Where's My bubble Dude?

Yaser Anwar said...

Brevan Howard was up 8% in Jan on 20+billion. Now that is some performance.