What is the best approach to hedging? Systematic vs. Discretionary

October 9, 2017 in Hedging

Part of Pack Creek’s compensation is linked to our ability to beat a benchmark. This value-added trading is at the core of what we offer our commodity hedge clients – when our clients achieve their hedge objectives, Pack Creek earns a performance fee. The better they do, the better we do.  It sounds straight forward but in reality this is a skill based activity that draws from decades of experience and knowledge.  Can this knowledge be systematically coded into a trading algorithm? Perhaps a better question is, should it be coded into an algorithm?

When speaking with clients, this topic of systematic trading comes up often. There is a natural tendency to compare systematic methods to discretionary methods. Driving the conversation is a single theme, “which method produces better performance?”

In the following piece, Cliff Asness and his team at AQR Capital Management tackle the issue.

Here are some highlights:

  • The terms ‘quantitative’, ‘systematic’ and ‘rules-based’ are often used interchangeably; they represent an investment approach that is often perceived to be in direct opposition to what a ‘fundamental’, ‘discretionary’ or ‘stock-picking’ approach may be.
  • While it is fair to contrast systematic and discretionary approaches, we stress that they are not opposites. Indeed, both systematic and discretionary managers pursue the same objective and both can be fundamentally-oriented. That is, they can use very similar inputs, but in different ways, to try and achieve the singular goal of improving investment performance.
  • Neither systematic nor discretionary managers are inherently superior. Each has the ability to deliver good investment outcomes and, as we show in the data, there is little evidence that one approach is better than the other.
  • The historical correlations between excess returns from systematic and discretionary managers are low, which suggests that many investors may benefit from incorporating both types into their allocations.
  • Importantly, historical correlations among systematic investors are also low, as low as they are among discretionary investors, suggesting that the notion that ‘all quants trade on the same signals’ is misplaced.

 

Are Grain Markets Sparking Hedge Fund Interest?

August 21, 2017 in Commodities

Happy Hump Day! What a week it has been thus far for the grain markets. Consistent weather concerns that the Corn Belt is facing higher temperatures drove the grain markets higher. Today we saw another spike as counties from South Dakota through Nebraska and as far east as Indiana are under heat watch at the National Weather Service after the Corn Belt reached triple-digit temperatures.

This week the media reported on hedge funds taking net long positions in the grains after the CFTC reported the largest positions taken since June 2016. The data shows an unwinding of a short position and resulting in a decent net long position in corn. The media attributed this shift in interest to money managers seeing grains as the cheaper alternative to an overvalued and expensive equity market.

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Agrimoney.com reported accelerated hedge fund buying grains could lead to a rapid reversal on positive crop production news in the future. The notions that the market is vulnerable to a sell off because fund managers are long is crazy. Positions have shifted. We are late in terms of a typical weather scare as this happens in the beginning of June.

Back in 1979 Business Week ran a famous cover story: The Death of Equities. We know how that turned out. Yesterday Bloomberg ran the store that Goldman Sachs is reviewing their commodities business and biggest banks commodities incomes have halved. (See yesterday’s post).

Now we start to see an epic shift in commodity prices. The market quickly unwound the reflation trade after it became clear that the US president is going nowhere. We now face a worsening drought in the Northern Plains and has gotten the attention of money managers.

Please see the following articles we read this week.

Agrimoney.com: Hedge Funds Buy Grains at Record Pace, as Weather Woes Threaten Crops

New York Times: A Possible Alternative to Stocks and Bonds: Commodities?

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Greetings from Bolivia!

August 13, 2017 in Commodites and Hedging

At 7:30am EST on Friday morning, August 11, our team summited the mountain of Huayna Potosí, one of the highest mountains in Bolivia 15 miles North of La Paz. The summit sits at 19,974ft or 6,088m.

Today we are setting off to attempt the mountain of Illimani, the second highest peak in Bolivia at 21,122ft  or 6,438m.

I experienced this same trip back in 2013 and am in shock by how much the glaciers on both mountains have receded. We will publish more info and comparison of pictures within the four years when we return later in the week.

For now, we are fueled up and ready to carry the Pack Creek Capital banner up another mountain!