Thursday, December 19, 2013

Buffett's Alpha Redux (BRK.b)

From FT Alphaville:

The Buffett difference, derivatives edition
Actual new information about the great man and his methods is rare indeed. Warren Buffett is the investment equivalent of Churchill, endlessly dissected but forever in the context of a history he wrote himself — the annual letters to the shareholders of Berkshire Hathaway.

However Pablo Triana, Professor at ESADE business School, has shed some new light on the way the Sage has made money when it comes to his large but non mass-destructive portfolio of derivatives.

The piece adds to the work in a paper first published last year, Buffett’s Alpha, that found America’s favourite billionaire had built his empire on a combination of leverage and good stock selection.
That leverage, about 1.6 to one on average, came through the use of “float”, the capital collected by Berkshire’s extensive insurance operations in premiums which Mr Buffet is then free to invest.

What Triana has looked at is the funding side of things, in particular the premiums paid against a series of very large derivative contracts that Berkshire wrote in the last decade — mainly some long-dated put options against international stock indices, credit default swaps on US corporate credits, and insurance against very long-dated municipal bonds....MUCH MORE
The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)
Buffett's Alpha or How To Generate Better Risk Adjusted Returns Than Anyone Else in the Biz (BRK)
Warren Buffet: The King of Leveraged Low Beta (BRK.B)