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DITMo: Eavesdropping on an Adviser Meeting at Starbucks
August 18, 2017

Peter J. de Marigny, Newport Beach, CA


Statistical Mistakes Advisers Tell Clients


I was sitting at a table waiting for my appointment to show up at a local Starbucks when I overheard a financial adviser speaking to a client. The colored chart printouts for asset allocation relative to the client’s investment horizon, liquidity requirements and risk tolerance filtered down to representative investments to fill-in the asset classes. The investor looked unsatisfied, mentioning that he had gotten the same presentations from others over the last year with considerable differences, and that his actual results for the last ten years differed significantly from the expectations of the presentation. The investor was correct in recognizing that the presentation materials were based on assumptions that are not always true, including that variance and correlations are static. Additionally, the investor was interested in adding a new strategy for new funds and he wanted to know how many investing choices there were for his investment universe. These questions the adviser either could not answer or dismissed as having no relevance to investing.

Some answers that I overheard were just wrong.  (read more)



#investmentstrategy #investing #modernportfoliotheory #financialadvisers #hedgefund #wealthmanagement #RIA #financialconsultant #broker  #statistics #investmentstatistics #investmentprobability #assetallocation #financialrisk #DITMo #correlation #variance #risk #peterjdemarigny




DITMo: Red Heifer vs Black Swan
June 29, 2017

Peter J. de Marigny, Newport Beach, CA


Introducing the "Red Heifer" in Capital Markets


A “Red Heifer” is a rare event condition, however, it is an event that differs from a “Black Swan” in that it is not a return observation within a sample of chained return measurements. A “Red Heifer” event is one that creates its own discrete data series. A “Red Heifer” is an event that is more than an outlier on a control chart, it is an event condition that creates a new control chart. (read more)  



#hedgefund #finance #DITMo #correlation #blackswan #investing #capitalmarkets #redheifer #efficientfrontier #peterjdemarigny



DITMo: Death of the Black Swan
June 15, 2017

Peter J. de Marigny, Newport Beach, CA


“I cannot get there from here, baby
And I don’t care where I’m goin’
Change, Unchained… Nothing Stays the Same”


Lyrics from the Van Halen song, Unchained, may be applied to investors’ skeptical view of how asset returns are “chained” together for attributions.  These “chained” returns are then used to create an attribution of returns to make statistical inferences.  Monte Carlo simulations, scenario and sensitivity factor analyses, ANOVA using historical returns may be run on hypothetical investment portfolios to form “optimized” portfolios.  A mean-variance efficient frontier then is represented as the curve upon which the highest return is attained for any level of risk (or the least risky portfolio for an expected return).  Using mean-variance and correlation assumes a gaussian distribution versus a more realistic leptokurtic distribution and linearity.


Can we really “get there from here” as the song goes?  The whole paradigm of financial consulting rests on the methodology of modern portfolio theory.  Virtually every bank, broker, and wealth manager accepts the MPT model for construction of Investment Policy Statements.  What about “Change, Unchained … Nothing Stays the Same”?  The untold assumptions of MPT that may not appear in the course materials for advisers include that correlations are constant and that risk is variance.  Are correlations truly constant or do they change?  Should we be “chaining” returns?  (read more)



#DITMo #assetallocation #blackswan #investing #equitymarket #attribution #efficientfrontier #peterjdemarigny



DITMo: Hedging without Shorting
June 9, 2017

Peter J. de Marigny, Newport Beach, CA


In a bull market hedged portfolios generally underperform.  The problem for most investors is that reducing risk requires forgoing upside benefit.  Should reducing risk be a question of diversification only?  This is an approach of many financial advisors using mean variance historical returns to show an “efficient frontier” curve.  The assumptions are simple: Correlations are known and consistent across asset classes and risk is confined to lower moments.

A discussion on risk is outside the purview of this short article (for topical risk articles go to!/risk-intelligence) but suffice it to say that factor and other risk models are left to the underlying managers.  (read more)



#hedgefund #correlation #hedging #financialrisk #pharmaceutical #attribution #riskparity #LDI #DITMo



DITMo: What is Missing from the Presidential Economic Debate?
September 30, 2016

Pj de Marigny, Newport Beach, CA


The candidates have released their economic plans in the #presidentialdebate and the expected results of their fiscal policies are the subject of great debate and analysis. The choice of which plan will produce growth finds its distinction in tax policy. One model is presented as pay-as-you-go redistribution; the other, a supply-side solution to spur growth using tax incentives. The focus is on the plans posted on the candidates’ websites. What is out-of-focus is what is not mentioned and not debated. What is omitted from the plans will pose the greatest risk.


In broad strokes let us define some of the missing topics that will have a greater profound effect on future economics, and in turn, the capital markets. You would think that policies relating to half the budget would be the salient issues of debate. There is no mention of Social Security or Medicare and barely a whisper on entitlements. So, what is coming relative to #interestrates, #economicgrowth, and financial markets?  (read more)



#presidentialdebate #interestrates #economicgrowth #economy



DITMo: The Biggest Risk - Question to Bill Gross
September 23, 2016

Pj de Marigny, Newport Beach, CA


Just before the Brexit vote, Bloomberg invited fixed income subscribers to their sponsored Fixed Income Summit in Los Angeles where former PIMCO / current JANUS legendary bond magnate Bill Gross (#billgross) was interviewed on stage for about an hour.  Below is a link to the Q&A with Bill Gross.  None believed that Brexit posed a systematic risk and there were no comments nor questions on this subject.


The question at 49’ 30” is from me, answered by Bill Gross to 53’ 53”.  My question was to ask what the next shoe is to drop akin to the subprime MBS and fixed income derivatives debacle of late 2008 that caused the collapse of the most venerable banks. His answer was the same cause that brought down the investment banks in 2008: LEVERAGE.  Gross points to the lure of carry trades but also to the #risk of such trades in the face of negative interest rates overseas...  (read more)


#marketrisk #bloomberg #fixedincomesummit


DITMo: Why Risk Parity Hedge Funds are Return Parity Vehicles
September 12, 2016

Pj de Marigny, Newport Beach, CA


It is no surprise that #hedgefunds are at net long positions of HFs and shorts to LT bonds and Vol (bet on long equities mostly).  As hedge funds increasingly employ new approaches to asset allocation there has been a rise in the use of Risk Parity funds.  The vulnerability of Risk Parity funds is that they allocate by risk rather than by value. That is actually a bet on whether equities will outperform the return of additional risk adjusted asset class allocations utilizing leverage. As you may come to believe after reading this short article, “Risk Parity” is an objective to satisfying a Liability Driven Investment Policy acknowledged or not.  RISK PARITY should actually be termed, “RETURN PARITY.”


The idea behind the growing interest in Risk Parity funds touted mostly by hedge funds is to have an “all weather” approach equalizing risk from all asset classes. Whenever leverage is employed implicitly through derivatives or explicitly through borrowing, certain financial measuring metrics are manipulated out of an apples and oranges comparison, for example, the Sharpe ratio.  One thing in common to both #RiskParity funds and traditional asset allocation models is correlation.


The biggest selling criteria for hedge funds is touting correlation... (read more)


#LDI #assetallocation




A Venture Capitalist Juxtaposition of Presidential Candidates

September 9, 2016

Pj de Marigny, Newport Beach, CA


This is not a political article but a juxtaposition as a Venture Capitalist hiring a turn-around CEO for the United States of the 2016 #PresidentialCandidates. If we view the U.S. #economy as a company that needs to be managed, we may breakdown the economic potential in terms of Products, Processes and People. Let us view the measurements of “Products” as GDP, “Processes” as monetary, fiscal and regulatory policies and “People” in terms of defining the approach to achieve worker satisfaction.


Products then are historically low with #GDP growth below population growth causing declining wages. Processes are counterproductive in stifling the banking sector and small businesses with layers of regulatory complexity where there is no cost benefit analysis and little to no adverse impact study. Processes of monetary policy are seen to be intrusive attempting to fix non-monetary policy problems. The adverse impact of intrusive monetary policy is not measured but reflected in asset price bubbles. Processes of fiscal policy failures are also not measured. For instance, what benefit has there been increasing national debt by $10 trllion in the last eight years? What about People? Policies that affect the People component are those that decrease personal liberties, increase government dependency, lower the standard of living or corruption... (read more)


 #VentureCapital #economicrecovery




QE to Prevent an Inversion and Recession

September 6, 2016

Pj de Marigny, Newport Beach, CA


The following article proposes the fed take action to prevent a yield curve inversion that is imminent causing a massive #recession. Can monetary policy manipulating the yield curve fool the market into avoiding an otherwise determined recession?


So in 2008 there was TARP to bail out banks (who followed government policy into the abyss) buying their bad mortgages forcing mergers to free the prime money markets for businesses to operate. QE ensued in 3 iterations. The immediate effect was lower long yields but that quickly dissipated.


The idea behind #QE was to buy Long Treasuries to increase money supply with low rates to effect output and employment. It didn’t work. Enough said to that point. Now, the question becomes whether there will be an inversion of the yield curve and if so can QE prevent that?


No on the latter. On yield inversion, that means long rates are lower than short rates which foretells a recession... (read more)


 #federalreserve #cryptocurrency




Pricing an Asset by Risk: CNBC Spot on Student Housing

September 2, 2016

Pj de Marigny, Newport Beach, CA


As an asset manager having worked in almost every asset class from venture writing pitch books for securities offerings; to capital markets trading – equity, bonds and derivatives; to alternative classes such as private equity, hedge funds and real estate, it is easy to observe the interdependence and adverse consequences of government intervention in market pricing.


The cause of most financial assets mis-pricing is due to misperception of the true risk. As a former Director of Global Association of Risk professionals in providing educational seminars to fellow FRMs, I learned from risk managers the commonalities and disparities of risk measurement relating to their respective asset classes. In common, pricing trends to define risk. Professionals chain these data observations to model risk that, in turn, establishes pricing.


To chain a data series of observations to establish risk and pricing is sometimes a bad assumption... (read more)


#studenthousing #financialrisk #deep-in-the-money #correlation




Minimum Wage WARNING to the States

August 31, 2016

Pj de Marigny, Newport Beach, CA


Subsistence, livable wage and #minimumwage as monetary terms differ. A person working forty hours weekly supporting an average household should set the minimum bar in the free market for wages enough to provide for that household. This is a livable wage. 


It seems that a free market natural minimum guideline for a forty hour worker would approximate a basic living standard for that worker. To the degree that it does, there is no dislocation in using that as a baseline for a livable wage. Contrast this to the term minimum wage which is a mechanism for valuing a unit of time of an entry level worker disassociated from supporting a household.


This short article highlights some missing economic principles in the political debate on the minimum wage... (read more)


 #fightfor15 #jobs




Saving Europe

May 20, 2012


There are almost 40 billion euro reasons that Germany wants to replace Merkel. Since the 1992 Maastrich Treaty, the EU was a dream that portended great things – create a trading bloc and a currency. By 2002 the Euro was created with rules that capped GDP deficit spending to 103%. The rules were almost immediately broken and in the same way the Euro began – with a mandatory conversion that started on inter-bloc countries’ invoices – the Euro is now ending for some constituents. There are 27 members that either adopted the Euro or by signed or unsigned agreement use the Euro to promote trade.


The measures mandated by ECB....  (read more)


Saving the State of California: Reed Hastings

May 20, 2012


As a manager in Newport Beach, California, concerns over the state's viability have never been so palpable in the face of an almost $16 billion budget deficit and rising taxes. The answer to a certain course of default is not just cost-cutting or raising taxes. The state needs creative entrepreneurs to rethink every process of providing services. If the focus was to promote and incubate business activity along with promoting creative solutions to education and other state services, California could survive.


Reed Hastings, Frank Baxter and Eli Broad who...  (read more)


DITMo: Skew-ed Up

September 28, 2011


Strategies that are Short VOL (long convergence) are more skewed. Using skew to determine range simply means that when out of normal conditions happen, Short VOL strategies will do increasingly worse. That doesn’t however, mean they are worse strategies.


The conclusion is: An investor has a choice of strategies that have better risk/return metrics at the expense of greater frequency of negative returns than implied by a normal distribution when conditions are abnormally bad; or, better consistency, lower skew or positive skew during abnormally bad conditions at the expense of worse risk/return metrics during normal conditions. (read more)


Hundredth Monkey Phenomenon: A Monkey or a Black Swan?

September 28, 2011


In the Ken Keyes, Jr. book, Hundredth Monkey; ( there exists a theory that thoughts, views, and concerns are transmitted mind to mind. This Hundredth Monkey phenomenon may be used to predict trends in consumer products and is an influence for predicting randomness. There are those of us who believe that the 100th Monkey may predict random events such as the present meltdown (see demarigny or DITMo on search term for predictions of unavoidable meltdown late summer 2007). On the side, I even wrote a rock music song ( / 1995) titled, 100th Monkey Phenomenon.


However, there is something more basic to the Hundredth Monkey Phenomenon. (read more)


Is There a Better System than the Fed?

July 14, 2011


Alternative systems to the U.S. Central Bank such as a proxy currency, free banking sytem and commodity system. The balance between Fed and Treasury is all but unsustainable in the U.S. deficit trajectory within our political system. In my view the Euro will be history in three or four years even with Capital Market securitization of sovereign debt in return for austerity. So, what's the next step? Wait for the Fed to layoff agencies, futz with monetary policy, hope for deficit mitigation by Congress, and hope the business cycle can stand without Fed Meds?


Perhaps we can take a page from former Fed Chief Paul Volcker...  (read more)


The Financial Collapse of 2011 and Creation of the World Currency Unit

September 15, 2007


Having gone almost totally unnoticed, there was NO ACTION in the repo market recently and the T bill on-the-run auction was completely mispriced – two events that have NEVER happened. Why no repos? Nobody wanted to lend governments and nobody wanted to borrow even at 1.8% compared to Fed Funds rates 4 points higher. The question to answer is, “What is going on?” In 1998 I was talking to a former Salomon Bros. derivatives trader. We were discussing the fact that the financial newspapers all but dismissed the near miss of calamity that came close to worldwide financial collapse. That is, unless the Nikkei had been supported, the barrier options acting similar to short straddles written by U.S. financial companies triggered.


The warning shot of financial disaster shot across the worldwide bow but we have not learned our lesson.... (read more) 


The Beginning of the End

August 24, 2007


"The Beginning Of The End" article predicted the 2008 meltdown and bankruptcy for Bear Stearns due to derivative embedded credit derivatives.


"the potentially most dangerous and dislocating act - mortgage paper is being accepted for collateral for lending. What is going on? The biggest gamble in US history - accepting mortgage paper embedded in credit derivatives and structured products as collateral. The dislocation of the mortgage market is reverberating at greater amplitude because the presence of this risk in credit derivatives (CDS, futures, etc) and structured products (CDO, Credit linked notes, etc). We have only seen the beginning of the dislocation that may very well spell the end of days for banks like Bear Stearns. You will not see Bear in a syndication again, but will this be the beginning of the end for the entire financial industry? It only takes one default for the domino effect to begin in an unprecedented way that will make LTCM look tame and there will be no market participants to bail us out."  (Read more)



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