Wednesday, March 8, 2017

Scarcity: "Nothing is New: 500 year old economic theory works great for hedgefund"

From MetaFilter:
500 years ago, the School of Salamanca to the west of Madrid, reformulated the concept of natural law; stating that all humans have the same nature and the same rights to life and liberty. This was dismissed as a novelty (particularly in light of the views of Europeans towards the indigenous people of the Americas). But this post is not about their take on ius gentium (rights of peoples). This post is about a 500 year old concept that a hedge fund in 2017 is using to achieve the best returns of it's peers.

In the 1540's, Martín de Azpilcueta and Luis de Molin examined the value of metals and materials arriving from the Americas, and ended up defining the properties of scarcity, where rare materials derive some of their value in part because they are rare. Radical because this overwrote the (then) current working theory that material value derived primarily from the labor or cost of production, this then led to the definition of and defense of the free market, where the fair price of a good is determined by supply and demand. However "free markets" have existed as long as mankind has traded with one another, Humans introduced coinage sometime in 2000BC, and paper money in the Tang Dynasty. The School of Salamanca explicitly linked the value of the coins themselves in part based on scarcity rather than the amount of goods said coins can purchase....MORE
Leading to:  

This Hedge Fund Topped Rivals With Mix of Algorithms and 16th-Century Theory
  • First Quadrant-run fund jumps 9.6% in past year, beating peers
  • Firm model is inspired by concept of purchasing power parity
The market turbulence leading investors to flee hedge funds around the world is providing a measure of vindication for one asset manager.

First Quadrant LP, which manages $11 billion in foreign-exchange strategies, relies on computer models that crunch data such as interest-rate differentials and equity valuations to identify currencies’ fair value and determine entry and exit points. The $1 billion Absolute Return Currency Fund it runs out of Pasadena, California, for John Hancock Investments has returned 9.6 percent in the past year, topping 13 rivals tracked by Bloomberg.
The success marks a turnaround from 13 months ago, when the fund logged its steepest daily drop on record after the Swiss National Bank’s shock decision to abandon the franc’s cap against the euro. First Quadrant’s fair-value model benefits from the current environment of risk aversion and heightened volatility. It’s based on a theory with roots in Renaissance Spain that asserts currencies will eventually adjust so their purchasing power equalizes. The yen, about 20 percent undervalued according to Deutsche Bank AG analysis, has climbed 5.6 percent against the dollar in 2016 amid concern global growth is stalling.

“In terms of periods of time when fair value works the best, at least our version of it, is in times of stress,” said Jeppe Ladekarl, who manages the Absolute Return Currency Fund with Dori Levanoni. “In this particular period of time we have had markets that traded quite well along the lines of fair value. The yen is one of them.”

The fund has been betting on the dollar, euro and yen against a basket of equally weighted currencies. The three have all gained versus their other major peers this year, according to data compiled by Bloomberg.

A First Quadrant fund that uses a similar model and allows higher levels of volatility has gained 14 percent in 2016, according to a Citigroup Inc. platform that tracks the performance of currency-focused hedge funds....MUCH MORE