Twitter IPO

A colleague just sent me this:

"Twitter filed to go public yesterday, choosing the stock ticker TWTR. Twitter shares are expected to start trading before Thanksgiving this year.

But it looks like some investors are a bit confused. A company called TWTR Inc., which as far as we can tell has nothing to do with Twitter, is up a whopping 1,500% today, but fluctuating wildly."

I'm amazed by how many investors don't do even the most basic research. C'mon people, at least check if what you are buying is really what you want to buy. Then some complain that markets are like a casino...

 Read more: http://www.businessinsider.com/twtr-stock-up-1500-percent-2013-10#ixzz2glzgyHNl

Late Summer Readings

Every year the FT publishes the books shortlisted for its "Business Book of the Year" prize. While I of course don't read more than 1-2 from the list (if that). There are always some books that I feel sorry for not reading.

From this year's shortlist, I'd really like to read Jeff Bezos's story and Alan Blinder's book on the financial crisis.

Here is the URL:
http://www.ft.com/cms/s/2/b126d26e-fb7a-11e2-a641-00144feabdc0.html

Brazil: Where Is It Heading? How Did It Get Here?

Last week I taught a class about Brazil to participants at the Cambridge Advanced Leadership Programme.

While it was very different to summarize 500 years of history and future outlook I think they had a good time. As I've mentioned before, I think that education and infrastructure are the two main bottlenecks the country faces.

To me, Brazil has milked all the benefits from the economic reforms made by the Cardoso government (1994-2002) and the benefits of the huge expansion in coverage of the welfare program (i.e. the Bolsa Familia) during Lula's term (2002-2010). Now that the global commodity boom is cooling off and China is no longer buying commodities like crazy, Brazil has to step up its game and carry on the reforms that it still needs to make if it wants to move to a higher class of development.

The most striking slide is, I think, the last one showing how poorly we do relative to other countries in education. While it is a good sign that the number of people with high school degrees has significantly increased from my parents' generation to mine is still near the bottom. I won't even talk about the tertiary education progress as it makes me angry (we rank bottom and haven't improved at all).

I wish I could be more optimistic but I do think we'll face slow growth over the next few years unless the government gets its act together.

Here are the slides I've prepared to the class. You can download them from this link. 

   ALP 2013 - Pedro Saffi - Brazil by psaffi

Big Data and Big Crashes

Today the FT carries an op-ed by two of the most respected finance academics in market microstructure, Maureen O'Hara and David Easley.

The heavy number-crunching behind many hedge-funds nowadays poses a new type of risk to financial markets arising from erroneous interpretation of information. They write:

"
About two years ago, it became common for hedge funds to extract market sentiment from social media. The idea is to develop trading algorithms based on the millions of messages posted by users of Twitter, Facebook, chat rooms and blogs, and detect demand trends in relation to individual companies. However, these algorithms typically do a bad job when it comes to making guesses on small data sets. In recent months, it has become very popular to develop algorithms that fire off orders as soon as unscheduled information is published, such as natural disasters or terrorist attacks. More hash crash-type events, which are caused by a single erroneous data point, are disasters waiting to happen."

 Computers need not only to process things fast but also correctly. If something is mistakenly posted in AP's newsfeed, a human being might check it before acting while a computer wouldn't (at least until AI is here for good).

Nowadays, I'm leaning more and more towards setting some sort of minimum trading time. I guess that 0.1secs won't help much with the type of crash described above, but that's another story.

New website

I have finally taken some time to put my old personal homepage back up.

It doesn't have much and it definitely doesn't look stylish but if you want to see what I've been working on, this is the place to go:

www.pedrosaffi.com/

Brazil's Possible Future: Italy

In Brazil there is saying that if we ever become a first-world country we will be like Italy, with all the good and bad.

This FT article kind of describes the bad things:

"In Italy we have a huge bureaucracy but no state, an administration of nothing,” he says. “In Italy you start a project without money. In France politicians say you have to do this and the bureaucracy organises with public and private money and then there is the tender and building. A linear process. But here it is not like this."

Mainstream Radio and High Finance

This is weird. Just heard an ad in Brazil's main news radio station (yes, some people still listen to the radio) with a company advertising their colocation services.

How many people can understand and care about this type of services? My mind can never understand the mysteries of marketing...

Brazil: College Education and Growth Challenges

This picture here summarizes the biggest challenge faced by Brazil and the shambolic state of our educational system.

Not only Brazil ranks last in terms of people with college degrees,  we can see no improvements between my father's generation and my own generation. If Brazil ever wants to become a first-world country, it must not only increase the quantity but the quality of all levels of education.

It is easy to say that you want to follow Korea, but their evolution shows how difficult this is. Unfortunately, this takes time and the current rate of progress is abismal. It is not a matter of money (which is relatively easy) but of how well it is spent....

Football & Passion

FT Weekend has a nice column by Simon Kuper and his disillusionment with football. I met him once during a Sport Economics workshop at IESE, where he was one of the panelists.

He says "A friend who supports Manchester United told me he believed United’s long-serving players Paul Scholes and Ryan Giggs loved United. I asked him if he loved the bank where he worked. Obviously not, he said. Well, Scholes and Giggs don’t love United either. They just have happy employee-employer relationships."

 

Indeed, very few players today seem to have that "old school" feeling that they would play for the club for way less money just out love.

Indeed as I get older I get less excited with football. Of course there are big moments and matches, but indeed there seems to be an excess supply on offer that makes even the big matches less special than when I was a kid.

Flow vs. Stock

This might be more of a tweet than a blog post, but I have always been deeply annoyed bypeople that compare flow variables like GDP,  to stock measures like bank assets.

"...he presides over an institution with assets that come close to the GDP of Spain..."

Compounded mistakes

This interesting article in the FT talks about the review on JP Morgan's models following the derivatives some months ago.

Regardless of whether you believe or not on your models, allowing silly mistakes in Excel formulas to go undetected when billions of dollars are shifting hands is really outrageous.

During my period in an investment bank in Brazil a long time ago, I remember a saying that "those who input things should let someone else double check the outcomes"...

If only they heard the wisdom from a BRIC country...

Deleveraging Risk

Just finished a new paper. This one is about a source of risk, we call it deleveraging risk, that affects leveraged investors during crisis the hardest. The idea is that they lose funding (either due to a loss of confidence in themselves or their capital providers) and have to cut their positions to repay their loans. Our assumption is that this hurts short investors more than long ones, as short selling inherently uses more leverage than long positions.

Here is the abstract with a summary of the results:

We assess whether deleveraging events have an impact on the cross section of stock returns. Deleveraging risk is the unique risk attributable to the existence of levered positions. When funding liquidity evaporates and short positions need to be covered, securities with greater presence of levered investors experience a significant shock as the levered investors unwind their positions. Using a unique dataset of equity lending data as a proxy for the degree of leverage in a stock, we find strong evidence of extreme return realizations attributable to the unwinding of these levered positions. We further find that these deleveraging risk events are attributable to (i) discrete liquidity events such as the quant crisis of August 2007 and the Lehman Brothers bankruptcy in September 2008, and (ii) reductions in funding liquidity as reflected in a variety of measures such as TED spread, LIBOR-OIS spread and credit risk of banks that facilitate the provision of levered capital to arbitrageurs. 

 

Academic Papers, Inefficiencies and Alpha.

Here is an interesting article on The Economist a couple of week's ago on academic articles trying to find hidden inefficiencies in stocks markets. The story talks about whether these inefficiencies uncovered by academics have disappeared over time or not.

In Finance, "alpha" is the component of returns that cannot be explained common sources of risk (like the movements of the S&P500) and several academics spend their careers trying to find anomalies that cannot be explained by current models. Thus, chasing positive alpha is what any active manager is trying to get. Of course given the huge number of people (myself included) looking at the same databases, there is always the danger of data-mining, finding patterns that are just flukes (like the Halloween effect, etc.). 

However, there are some anomalies that still persist even after they have been widely published and analyzed. This can either be due to (i) the benchmark models are missing some component of risk, (ii) market frictions (like trading costs or investment constraints) that prevent inefficiencies from being corrected, (iii) behavioral biases that human beings suffer from.

My hunch is, as things often are in life, that the answer lies in a combination them. Anyway, no wonder hedge funds and banks pay top money for good academics to join their ranks.

A good financial innovation

I just read this weekend on the FT about a new UK listed-fund whose goal is give money to cancer research, called BACIT: Battle Against Cancer Investment Trust

The idea to have a plain-vanilla fund-of-funds that will allocate investors' money in 28 other money managersbacking the fund. The interesting twise is that  is that the "... two dozen prominent property, private equity, bond and hedge funds backing the vehicle have also agreed to waive their fees – in full, and in perpetuity – to maximise returns for the scheme."

BACIT will donate 1% of its assets to charity every year. Half of all the proceeds will automatically go to the Institute of Cancer Research, one of the world’s leading cancer drug laboratories, and the remainder will be allocated to charities chosen from a list by shareholders themselves.

That's a nice idea, hope it works. Just departing from the usual 2-20 model should be more than enough to make investors interested.

 

 

The End of Alpha?

Interesting article on the FT about the end of alpha. While beaten up badly in the past 5-10 years, this is the kind of result that supports the efficient markets theory.

Given the amount of money currently chasing anomalies combined with the increase in the availability of information it will become more and more difficult to beat the benchmark.

A colleague of mine told that once he heard about a candidate for a sales position saying that he "could sell beta like it was alpha". I guess they will have to do it more and more over time...