Our favorite reads of the week and the quotes that make them worthy…

“In other words, humans are the one constant in the markets and human nature doesn’t change. But markets do change and which humans control the assets involved in the markets has changed considerably over time.“

Imagine last September you placed a $500 wager on the Saints to win the Super Bowl this Sunday. Further imagine your heartbreak as a human error resulted in perhaps the worst no-call in the history of sports, thereby thwarting your chance to cash a $6500 ticket. The joy and agony we all experience from our sports obsessions often hinge on the mistakes, biases, and mis-cues of the all-too-human participants.

Our favorite reads of the week and the quotes that make them worthy…

“For me it’s been realizing that what makes people happy is having options – doing what you want, with who you want, when you want, where you want. And options come from savings and assets, which are the opposite of spending.“

Market conditions were challenged with spiking correlations and negative sentiment presenting headwinds for stock pickers. Earnings trends were the only bright spot.

Our favorite reads of the week and the quotes that make them worthy…

“But I’m a firm believer in the idea that the longer you extend your time horizon, the better your chances are of having a positive experience in the markets. And my level of confidence is much higher for a diversified portfolio than any single asset class or strategy.“

Did you know the average person in the U.S. spends nearly half a day interacting with media?* This mass consumption creates information overload for many, and it’s a trend we’ve heard a lot about from our advisor clients. Many of our clients noted that investors are coming into meetings having consumed a lot of data points on investments, and are confused about the statistical terms commonly used. To help alleviate this issue, we’ve created the 361 University of Alts Educational Series.

Our favorite reads of the week and the quotes that make them worthy…

“We all see the same market price and read the same commentary, the latter of which is like gasoline on the flames of herd behavior. So investing misbehaviors can snowball.“

2018 was a strange year, and not just because Baby Shark was playing on constant loop, or because everyone became mildly obsessed with a Netflix movie heavy on blindfolds during the holidays. As far as markets go, it was one of the only two years since 2009 that a multi-factor portfolio delivered a negative return. Global multi-factor portfolios have been positive 8 out of 10 years, including 2011 and 2015 when the MSCI World was negative. 2018 was the only year in the last decade that multi factor portfolios and stocks broadly were down at the same time.

Our favorite reads of the week and the quotes that make them worthy…

“If there is a problem with the stock market, the person in charge of fixing it is a former political science graduate student who once led student efforts against nuclear waste and took a year off from college to travel the world with his guitar.“

The return of volatility this year has brought opportunity—the opportunity to tactically increase allocations to an oversold asset class. This selloff has advisors and clients discussing how to nimbly take advantage if another correction looms. Before eyeing that entry point into a riskier asset class, however, advisors face a conundrum: How can they add a riskier — albeit attractively valued — asset class without upsetting the portfolio’s long-term risk profile?

Our favorite reads of the week and the quotes that make them worthy…

“Rather than being blinded by short-term gains (or losses), try to focus instead on the big picture. Do your holdings align with the qualities you’ve laid out in your investment policy statement (above)? Is your portfolio as streamlined as it can be, or can you identify redundancies?“

In last week’s blog post, How Strong is Your House? Building Resilient Portfolios, we discussed how important it is to build an all-weather portfolio. Part of building a resilient portfolio is incorporating true diversifiers, such as managed futures, which offer little to no correlation to the broad markets.

Our favorite reads of the week and the quotes that make them worthy…

“Building a diversified portfolio is a classic way to manage the risk associated with any individual asset class—something that is all the more critical now, as there seem to be more risks tied to nearly every class. The options stretch all the way from the classic—cash and gold—to new alternatives that are becoming more accessible to individuals.”

You may or may not recognize this photo; it was taken after Hurricane Michael hit Florida in October of this year. After the storm, a picture of this house kept appearing in various news articles because it was one of the only homes still standing in the hardest hit area—Mexico Beach, Florida.

Our favorite reads of the week and the quotes that make them worthy…

“Despite this, there is still one anomaly that will likely never go away: human nature. Fear, greed, and every other emotion in between will plague markets now and centuries hence.”

After a somewhat calm third quarter, October and November have been rattled by 24 changes of at least 1% up or down in the S&P 500 Index. (For reference there was not a single 1% move up or down during the third quarter.) This uncertainty once again reminds advisors and investors that they should consider shifting their portfolios from participation mode to preservation mode.

Our favorite reads of the week and the quotes that make them worthy…

“This doesn’t mean diversification is dead or broken, just that nothing works all the time in the markets. This doesn’t mean risk is not being rewarded in the markets, just that risk still exists in the short-term when investing in long-term assets.”

The holiday season is upon us, and with that, many of us will be hitting the out of office button for a break. Whether you are heading to the airport for a holiday trip or having a stay-cation, it’s a good time to do some reading. So, we asked our 361 team for some recommendations to add to your shopping cart.

Our favorite reads of the week and the quotes that make them worthy…

“If you fell asleep in 1945 and woke up in 2018 you would not recognize the world around you. The amount of growth that took place during that period is virtually unprecedented.”

The intent is always good, but sometimes it comes with unintended consequences, this is the lesson from the well-known Cobra Effect. Dating back to the British rule of colonial India, the British government tried to reduce the number of venomous cobra snakes in the country by offering a bounty for every dead cobra. While their intentions were positive, their efforts backfired, when people began breeding cobra to collect a bounty later. When the program sponsors got wind of this, the program was canceled causing breeders and would-be bounty collectors to release their snakes further increasing the cobra population.

Our favorite reads of the week and the quotes that make them worthy…

“If you do what everyone else is doing, you shouldn’t be surprised to get the same results everyone else is getting.”

“It was almost like being caught in an earthquake where you’re half in shock. There’s a sense of incredible disbelief.”

For some readers, that quote may ring true for various times throughout the history of the market, but for me, it refers to October 19, 1987…also known as Black Monday.

Our favorite reads of the week and the quotes that make them worthy…

“While there is no single indicator that can predict market turns on its own, here are six things analysts and investors are watching to see if the next bear market, typically defined as a 20% decline from a recent peak, is around the corner.”

Domestic equity markets have not performed well in October. Through Monday October 29, the S&P 500 Index is down 9.36%, and the smaller-capitalized Russell 2000 Index is down 12.92%, on a price return basis. These declines have occurred against the backdrop of what appears to be—at least on the surface—a strong third quarter earnings season.

Our favorite reads of the week and the quotes that make them worthy…

“For investors, too, figuring out what other people are likely to do, and then persisting in doing the opposite, is the best way to come out ahead in the long run.”

The Fall has ushered in both unpredictable weather and unpredictable volatility. While protection from adverse market events is best if in place prior to volatility spikes, it’s not too late to batten down the hatches.

Our favorite reads of the week and the quotes that make them worthy…

“Picking an investment strategy or philosophy is easy…But sticking with a strategy or philosophy is often unbearable for many because the temptation always exists to tinker, trade, or completely alter the way you manage money.”

Consecutive quarters of record-breaking earnings strength haven’t improved the mood among Wall Street analysts. That negative sentiment spoiled an otherwise healthy backdrop for active managers in the third quarter.

Our favorite reads of the week and the quotes that make them worthy…

“Last week was a good reminder that there is no ironclad law that rates and equities can’t sell-off at the same time.” 

We’ve been expecting interest rates to continue to rise for quite some time as the Fed shifts away from their quantitative easing policy. However, markets have recently been spooked by Fed Chair Powell’s comments last week that “we’re a long way from neutral at this point, probably” indicating that additional rate hikes are coming. Rising interest rates can be scary, but there are some treats to be found if you look carefully.

Our favorite reads of the week and the quotes that make them worthy…

“As memories of the crisis fade as the economy recovers, we find the seeds of the next crisis are already being planted.”

For 10 years, alternatives managers have used the financial crisis as a rallying cry; the penultimate example of how far markets can fall, and how alternatives can cushion the blow.

Our favorite reads of the week and the quotes that make them worthy…

“Yes, black swans exist, but, like the actual bird, never forget: most swans are white.”

In a previous post, we discussed how the interactions between security analysts and the companies they follow often lead to a biased measure of consensus expectations. Here, we focus on what the term consensus implies, what it does not explain, and how it relates to earnings surprises.

Our favorite reads of the week and the quotes that make them worthy…

“In the end, we cannot control our luck—good or bad—but we can control our effort and preparation.”

We recently sat down with Harin de Silva, Ph.D., CFA, President and Portfolio Manager at Analytic Investors, sub-advisor of the 361 Long/Short Equity strategies, to discuss low-volatility equity investing. Specifically, why a dynamic approach to investing is necessary given potential fluctuations in factors that can be present in global equity markets.

Our favorite reads of the week and the quotes that make them worthy…

“Worse, many investors—individuals and professionals alike—take their own current emotions as indicators of the market’s future moves.”

361 Capital was very proud to sponsor and organize the 2018 9/11 Heroes Run this past Sunday benefiting the Travis Manion Foundation (TMF). Travis Manion was a Marine who lost his life in the war against terrorism. The Travis Manion Foundation helps veterans, families, and communities through various character building, mentorship, and empowerment programs.

It’s football season—and we’re excited to cheer on our hometown Denver Broncos. As we’ve all observed in the August preseason games, NFL coaches have been testing their teams and making roster changes to ensure that they have the best offense and strongest defense on the field when the regular season begins. Investors should be doing the same and evaluating their portfolios so they’re ready for whatever conditions lie ahead.

We’ve written in the past about the long/short equity category and how the recent performance of several of these strategies has a lot to do with the fact they have high beta relative to the category, and lots of leverage. Today, we wanted to write about something else that has been slowly affecting the way performance of the category has looked relatively, and becomes even more impactful when Q3 2018 comes to an end.

We have all heard of the virtues of diversification, learned about them in school, and have Markowitz’s quote (“the only free lunch in finance”) tattooed on us. But since 2010, in one of the strongest bull markets ever (we can debate when a bull market starts at a later time), does it still make sense to diversify your portfolio?

Morningstar recently published a paper titled “Liquid Alternatives Have Yet to Prove They Belong in Portfolios.” We have concerns with the analysis on multiple levels.

In a recent piece, KKR’s Henry McVey said the following:

“Simply stated, we don’t want to own long-duration government bonds when governments around the world have shifted their tool kits from monetary stimulus to fiscal…

Like a popular diet plan, the term “risk-budgeting” is often discussed, and generally understood, but rarely followed in practice, it seems. However, just as Father Time will wield his will on all of our metabolisms, the markets will not be as forgiving at some point in the future…maybe even soon.

Earnings season is in full swing. This is the time each quarter when analysts and investors hear from company management regarding the past three months and gauge what that means for the future. Stock prices move based on how the company’s performance is viewed against what was expected. How financial results are judged relative to expectations provides insight into a behavioral anomaly that permeates the market.

Companies are shattering earnings expectations at a record clip…but Wall Street analysts appear skeptical the trend can continue.

As temperatures rise, sticky popsicle hands grapple for their pool towels and the markets continue to fluctuate like the ocean waves, now may be a great time to refresh your alternatives knowledge.

I’m going to start with the assumption that if the title of this blog caught your eye, you probably already allocate to one or more long/short equity managers. And with that, I’m going to skip over the general arguments for long/short equity strategies, except to say that if you do use long/short equity, it is likely in part due to where we sit in the market cycle in terms of valuations (high), interest rates (low and rising), margin levels (high and likely to be falling), and Fed policy (it’s becoming less accommodative).

The market fireworks that started in February have continued well into June with the S&P 500 rising or falling greater than 1% for 39 days so far in 2018 (through June 30). And that’s more than double the number of days that experienced this movement in all of 2017.

Lately we’ve fielded a lot of questions about fund fees. It seems both advisors and clients alike are finding fee disclosure confusing and there’s a lack of clarity around what investors are actually paying. This can become even more of a challenge for long/short equity funds.

In his most recent missive, “Investing Without People”, Oaktree’s Howard Marks takes on quantitative investing. We look forward to reading Mr. Marks’ memos, as they are packed with valuable insights from a venerable career. But in this case, the questions he poses are all too familiar & in my opinion, exhibits faulty logic.

For the next month, the global financial markets will take a back seat while trading desk monitors test their green hues. Knowing where interests will be focused, we created our own World Cup Challenge & while I won’t be able to win, I made my own picks…

Summer is upon us, and with that, many of us will be hitting the out of office button for a mid-year break. Whether you are heading to the beach with your family or having a stay-cation, it’s a good time to do some summer reading. So, we asked our 361 team for some recommendations to add to your shopping cart.

In January, we discussed how analyst sentiment was at a six-year high as of the end of 2017. Here, we take a look at the small cap universe and see if that feeling has endured, or if analysts have reined in their expectations.

With the return of volatility this year, we’ve noticed that many people immediately put alternative funds under the microscope to determine if they lived up to expectations. I recently wrote an article for Investment Advisor’s May issue discussing how many quickly concluded—incorrectly I might add—that alternative funds failed.

The only thing different about spikes in volatility this year might be the shorter time investors have to capitalize on them. Volatility has often risen sharply following unusually calm markets, but over the past decade the time in which the VIX reverts to normal levels after a spike has been shrinking.

While the term “alpha” is widely used, in our experience, it’s not particularly well understood. Alpha, properly defined, is return in excess of what could have been expected given the risks assumed to generate the returns. Notice that this is not strictly outperformance relative to a benchmark, but rather, its relative performance given the level of risk taken.

After a somewhat rocky first quarter in equity markets, we saw an uptick of advisors searching for long/short equity strategies. We looked at some of the top performers in the category over the 3-year time frame and were surprised to see that some had outperformed the S&P 500 Index and/or MSCI World Index. This piqued our interest, so we decided to dig in.

We have talked about the VIX Index before, and have shown that it is predictive of future VIX levels, but is it predictive of future equity returns? First, we’ll see if there is a relationship between the VIX and S&P 500 price returns on the same day. The below analysis uses data from 1/1/1990 through 3/31/2018, with both daily and monthly periodicity.

The Boston Marathon, also known as Marathon Monday, is a big day for many of us runners here at 361 Capital—whether we’re racing, supporting friends and family or simply watching for the love of the sport. This year was as exciting as ever as, for the first time since 1985, an American woman claimed the Boston Marathon title.

Lately, Value has not been very valuable within small cap stocks. Save for a couple of weeks last December, the Russell 2000 Value Index (RUJ) has underperformed its Russell 2000 Growth Index counterpart (RUO) on a rolling 13-week basis since February 2017.

Active managers were able to ring in the new year with some of the most favorable market conditions for stock picking on record. Spiking correlations in the first quarter have officially spoiled the party.

It’s Masters week…one of the most historic and watched sporting events in the world. The game of golf is a complex sport. As I sit and watch these guys try to read every little nuance of the green (break, speed, grain, etc.) before hitting their putts, I’m reminded of the painstaking due diligence process investment professionals go through when selecting a manager.

There has been talk about the performance of hedge funds, and in particular CTAs/Managed Futures funds, in February when markets sold off for the first time in recent memory. People seem to be surprised that these strategies posted negative returns in February, while the S&P 500 was down 3.69%. I’d like to address why such a focus and such expectations are unjustified.

This year’s NCAA tournament has seen its fair share of upsets. For example; a #11 seed made the final four—only the fourth time in tournament history. As I contemplated the implications on my bracket, my mind drifted off to what this suggests about investing, particularly in the Small Cap space.

In early February, volatility, long absent, made a comeback, as global equity markets sold off and the VIX experienced its largest one day move ever, jumping 116% on the 5th. This was prompted in part by rising inflation fears that pushed bond yields higher around the globe. So, where does that leave us?

Villanova over Georgetown in 1985, Bucknell over Kansas in 2005…NCAA Tournament history is littered with upsets. It’s how March Madness got its name. If you’re trying to win a bracket, we suggest you embrace the madness and try to call several upsets this year.

Over the past decade or so, the asset management and advisory businesses have become far more challenging. The forces of creative destruction have been hard at work, calling into question both the value add and fees charged by investment professionals at all levels.

Looking to win your office’s March Madness pool this year? Nothing busts a bracket quicker than letting behavioral biases guide the selection process. Use these 10 tips to remove behavioral biases from your picks.

Sports are a big part of the culture at 361 Capital, in my free time, I coach a youth soccer team. As soccer season draws near, I am gearing up for rain-soaked practices and at least seven rescheduled games due to late snow storms here in Colorado. As I reflected on being a coach, I recognize the parallels between soccer and managing a portfolio.