Fleckenstein: Market hackers running out of ammo

[t0m]

http://articles.moneycentral.msn.com/Investing/ContrarianChronicles/MarketHackersRunningOutOfAmmo.aspx




[quote]
I'd like to pick up where I left off in last week's column and spend a little more time talking about quantitative trading.



At a recent New York conference, investor Jim Chanos noted a couple of anomalies that, in all likelihood, are a direct function of quant trading. They highlight a disconnect between stocks and their underlying fundamentals that only a computer could love.



It turns out there are two -- and for all I know, more -- closed-end mutual funds that own mundane large-cap S&P-oriented stocks: the Cornerstone Total Return Fund (CRF) and the Cornerstone Strategic Value Fund (CLM). Inexplicably, these funds trade at premiums of better than 50% to net asset value. At one point this year, they traded at premiums far higher.



[b]A Renaissance in overvaluation[/b]



The connection to the quant universe is that Renaissance Technologies, among the biggest quant hedge funds and certainly a very successful one, is the fourth-largest shareholder in both Cornerstone funds.



You have to scratch your head and ask: What is a quant fund doing paying a huge premium for an easily replicated portfolio?



The only logical answer would be that the stock-price characteristics have behaved in a way that makes Renaissance's computer -- which was obviously programmed by someone -- think these funds are a good thing to buy, regardless of the fact that their valuation is beyond absurd. (As an aside, I'm amazed the proprietors of this fund have not sold some shares at that huge premium for the benefit of their shareholders. But that's another topic.)



Meanwhile, a well-placed friend in the quant world pointed out that on any given day, 50% to 70% of stock trading is probably done using a quant strategy of some form. He suggested that folks should think about stocks as financial instruments, looking at volatility, correlation to other stocks, membership in an index and other such characteristics that pertain only to price action.



That's what the computer-driven models at quantitative funds do, setting aside the fundamental questions of what a company actually makes or does and what that business is really worth.



If all that is the case, it explains why, at the margin, the market seems to have become more of a commodity than it has been in the past.



Obviously, no group of operators can change the market's ultimate direction. But they certainly can distort it for a time.



[b]The model of a modern debacle[/b]



My friend believes we're getting closer and closer to a moment when quants no longer rule daily trading, as their universe is losing participants that underperform. The ones that remain are desperate, trying feverishly to chase what's working. He contends that the higher the market goes and the faster it rallies, the more certain and ugly the collapse will be.



He went so far as to suggest that when this unwinds, some big Wall Street firm will essentially go out of business and that the building it occupies will be, in his choice word, depopulated. When I responded by saying, wow, you're more bearish than I am, he replied: No, it's not about being bearish. It's just a fact.

[/quote]

[Maggette]

I don't know...normally I try to stay away from these macro discussions. Not that I am not interested in the subject, but I am an MBA student and have no real clue about the market, so I only read and don't post)..

Here is another interview with that guy..http://www.pbs.org/wgbh/pages/frontline/shows/betting/pros/fleckenstein.html

I don't know much about him besides the fact that he runs an $20 million hedge fund in seattle and has a math degree from University of Washington and that he appears everywhere on finance related matters on the net...maybe only a theory but: he is very outspoken about his stock positions and claims to bet against the market (so maybe thats what espen haugg calls an anti hedge fund Cool ) ...his points seems to be very "common sense" ..and so maybe it is all marketing to get more smaller clients and to raise more money....thats just what came to my mind, but like I said, I have no idear about the markets and no experience(so basically I have no right to talk bad about the guy)

[SirAppleby]

The story on the Cornerstone funds is a managed distribution policy which retail investors seem to focus on rather than the NAV. It's the same strategy that states use to sell lottery tickets with astronomical odds of winning - the payoff is what matters to people.



The Rentech holdings are probably evidence of some kind of behavioral finance strategy.

[schmitty]

> he runs an $20 million hedge fund in seattle



A heavy hitter for sure!



 



Fleckenstien said:



> The stock market has all the ear marks of a bubble or a mania



Except super-exponential growth, log oscillatoins, pervasive overvaluation, etc...



"Ear marks" two words.

[WFMD]

This is the same guy who rips off Peter Schiff's ideas and then uses them to justify "Newmont Mining" as a metals play. Newmont??? Could there be a *worse* mining play?

[sharpend]

Cornerstone isn't a quant issue it is a liquidity result.



I'm not a huge fan of Fleckenstien. But before you critique him or anyone have a good look at your critiques.