Readings: Yoga Bears, Relative or absolute?, OTM puts
- Wall Street Journal: Yoga Bears: It’s No Stretch to Say Traders Are Taking Deep Breaths
Billionaire fund managers Paul Tudor Jones and William Gross both practice Ashtanga, an active form of yoga that involves flowing through a set series of poses. Bond-fund guru Mr. Gross, a founder of Pimco, does yoga five days a week and says some of his best ideas come when he is standing on his head, or sirsasana, supported by the forearms on the floor.
D.E. Shaw, a $39 billion New York hedge fund known for using complex computer models, recently started offering hourlong yoga classes at the office.
Finance “is the antithesis of what yoga is about in terms of inner peace,”
Given the volatility in our markets this month, we too need some Yogic relaxation. 
- Economist: A time for pruning
Now hedge funds are trying to market themselves to pension funds and endowments. What those clients want is a controlled balance between risk and reward, and a return that is not correlated with conventional stockmarkets. Given that the S&P 500 index lost 12.8% over the first half, hedge-fund managers kept that promise.
. . . the assets of the 100 largest funds rose from 47% of the industry in 2002 to 66% in 2007, according to GAM, an asset manager. Just as no-one used to get fired for buying IBM computers, no one can be blamed for picking funds run by big managers such as Highbridge or D.E. Shaw.
In the first quarter of the year, the number of individual hedge funds in existence fell slightly (from 7,634 to 7,601); more funds gave up the ghost than were created. But a net 110 funds-of-funds came into existence.
- A portfolio that is long (short) the tenth of stocks with the least (most) pronounced option volatility smirks, rebalanced weekly, generates a risk-adjusted (market, size, book-to-market) annual return of about 15% before transaction costs.
- Firms with steepest option volatility smirks tend to have the worst earnings shocks the next quarter.
- Results are consistent with an interpretation that: (1) informed traders with bad news prefer OTM put options; and, (2) the stock market is slow to incorporate the information they reveal.
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